25 years at the frontier of innovations in energy

28 - 30 September 2021


Published on 28 July 2017 by Maria Danilova



The launch of large capacity of new export LNG projects in various countries, such as Australia, USA and Russia, will inevitably lead to changes the way LNG is traded in the global market. Demand exceeded supply and the surplus of LNG is expected to lead to the formation of buyers’ market.

The consequence of oversupply will be a change in the LNG pricing formulas. This process will be especially painful in the Asia-Pacific region. The prices of majority of LNG long-term contracts in the Asia Pacific region are linked to crude oil. Major importers of the commodity intend to have liquid LNG exchange and hubs.

We can raise such question: who will take on the role of regional LNG hub? So far there are three contenders: Japan, Singapore and China. In all these countries in recent years, experiments of launching exchanges and hubs have been under way. The initial results show that China turns out to be the winner in a race to become "home of Asian LNG hub".


Jinsok Sung

Russian State University of Oil and Gas(National Research University)


The international gas trade in the East Asian market is largely based on bilateral long-term contracts. Countries in the region, with exception of China, have little or no own production. Therefore, they are forced to focus on stable supply of natural imports.

As Japan, South Korea and Taiwan do not have access to pipeline infrastructure for natural gas imports, they depend on liquefied natural gas for the supply of natural gas. These countries concluded long-term LNG supply contracts for 20-30 years. The prices for such contracts are indexed to crude oil prices. Crude oil indexation was introduced by Japanese companies in the 1970s in order to replace crude oil with cleaner natural gas in the country's energy balance. In addition to environmental considerations, the transition to gas was driven to ensure energy security to reduce dependence on crude oil after the oil shock in 1970’s.[1]

Japanese companies indexed LNG imports price at discount by calorific value to the average monthly price of crude oil imports to Japan (it was called JCC - Japan Crude Cocktail). When South Korea and Taiwan began importing LNG (in 1986 and 1990, respectively), they also adopted this formula.

China is in different situation. Unlike neighboring countries, it has significant volumes of its own natural gas production. Nevertheless, this is not enough to meet guarantee natural gas demand. Moreover, demand for hydrocarbon in China has grown dramatically as a result of rapid economic growth and cannot be met by its own production. As a result, China began to import LNG in 2006, and pipeline gas in 2009.


It's time for hubs


Although majority of LNG supplies to Asia Pacific region is based on long-term contracts, gas deficit that occurs during the peak consumption period is met by spot LNG import. South Korea has traditionally increased spot LNG imports during winter to meet domestic demand for heating in the residential sector. Japan has significantly increased the purchase of spot LNG in order to compensate for the fall in electricity generation at nuclear power plants after they gradually stopped operation following the accident at the Fukushima-1 nuclear power plant.

The first LNG cargo from the United States arrived in China in 2016 and Japan - in 2017.The prices of American LNG are linked to Henry Hub (a physical gas hub located in Louisiana). As LNG trade in the Asia-Pacific region grew rapidly in the 2010s, there was general consensus that regional natural gas hubs are necessary. While North America and Europe have already developed their physical and virtual hubs, this did not happen in the Asia Pacific region.

In East Asia, LNG trade is more active than anywhere else in the world. But there is still no single liquid regional platform for LNG trades even though natural gas trade is carried out on a number of Asian exchanges. (See "Gas Trading Platforms in the Asia-Pacific Region"). The formation of a regional gas price is crucial to ensure that gas resources are effectively developed and used in the present and in the future.


The first steps


On Singapore Exchange (SGX) in 2014, spot LNG trade began on the platform called SLING (SGX LNG Index Group). The operations can be carried out on three bases: Singapore FOB, Northeast Asia DES and DKI DES (Dubai, Kuwait, India). At SLING, bilateral over-the-counter trade is conducted. After both parties have agreed on transaction, SGX conducts clearing. Futures and swap deals are tied to spot prices. Volume of trades on SGX is relatively small. 2 transactions took place: the first over-the-counter deal with SGX FOB Singapore SLING in July 2015 and the swap deal in January 2016.

Japanese government officially announced in 2016 the policy of de-linkage of LNG price from crude oil prices in favor of LNG pricing mechanism based on the exchange in Tokyo (JOE-Japan Over the Counter Exchange. Subsidiary of TOCOM-Tokyo Commodity Exchange). JOE aims to be an international platform for LNG trades by early 2020’s. The JOE Exchange was established in 2014 and non-deliverable bilateral futures and forwards deals are conducted at JOE. Originally it was a joint company of the Tokyo Commodity Exchange (60%) and Singaporean group GINGA (40%). Since April 2017, JOE has become a 100% subsidiary of TOCOM.

Japanese companies that have sufficiently large volume of long-term contracts that are enough to cover the demand of their customers and have not enthusiastically reacted to the formation of a price on the illiquid, newly created hub where trading activity was very low. The first deal was concluded only a year after the establishment of JOE, in July 2015. (See "Participants in the LNG trade at JOE").

At the same time, Japanese companies support the creation of Japan DES. In 2016, TOCOM began LNG physical trading of Japan DES futures on the NYMEX exchange cleared by CME (the major shareholder of NYMEX). In April 2017, JOE launched a new online site for physical transactions, which will be reflected on Platts JKM spot LNG price assessment.

However, the trade volume of LNG derivatives is small, because the scale of spot liquefied gas trades in global market is not sufficient to create successful LNG hubs.


China burst into the leader


The first platform for LNG futures trades in the Asia-Pacific region was SPEX (Shanghai Petroleum Exchange). It was established in 2006 by Chinese state oil companies (CNPC, Sinopec, CNOOC) for crude oil and petroleum products trades. In 2010, LNG and LPG began to be traded.

Natural gas market in China is developing dynamically. The consumption of natural gas is rapidly increasing as a result of fast economic growth, as well as advantage of natural gas as a cleaner fuel. However, LNG and LPG trades at SPEX experienced a lack of liquidity.

The second LNG exchange in China is SHPGX. AT SHPGX, pipeline, shale gas, LPG and other energy products are traded. Unlike other Chinese exchanges, SHPGX is the first exchange with state support. It was formed within the framework of strategic alliance between Xinhua News Agency and the National Commission for Development and Reforms (NDRC), the influential organization of China's economic planning. SHPGX is officially launched in November 2016, after 16 months of trial operations, which began in July 2015. During the first 10 months of operation, the volume of pipeline gas trading reached 15.4 BCM and LNG - 1.32 BCM.[2] According to the Chinese media, the trading volume of natural gas at the exchange in 2016 reached up to 30 BCM.

The impressive results of SHPGX shows that it has potential to become the most liquid natural gas hub in Asia. This trading platform seeks to position itself as China's natural gas hub such as Henry Hub in the US or NBP in the UK. And over time it can grow into natural gas trading platform in the Asia-Pacific region.


The best candidate


One can hardly disagree with the necessity of liquid LNG trading platform in Asia. Nevertheless, major importers of liquefied gas such as Japan, South Korea, China and India have enough long-term contracts. It is expected that the volume of spot LNG trading will grow as a result of oversupply in the global market and a large volume of FOB based LNG from the US and Australia flowing into market from 2016.

As previously noted, Singapore seeks to become physical hub for LNG trade. However, due to very modest scale of natural gas consumption in the country and its limited growth potential, it is more likely that it will become a regional hub than global one.

Japan plans to delink the price of LNG long-term contract from crude oil price and index LNG price formed on its own exchanges. However, due to significant volume of remaining long-term contracts and current low liquidity at the exchange, this task will take a long time to complete.

South Korea does not aspire to be a global or regional LNG hub or exchange. Even if it had such ambitions, it is very unlikely to happen due to low level of liberalization of domestic natural gas market and lack of competitions in wholesale market. KOGAS is the sole seller in wholesale market in Korea. The existence of such monopolist does not allow any kind of competition and deprives the country of chances of 

creation of any hub or exchange.

Therefore, many considers that China is the most prospective candidate for the role of Asian LNG hub. The SHPGX can take the place of a regional or global trading center not only of LNG, but also of other types of natural gas if their experiment turn out to be successful.


Natural gas trading platform in Asia Pacific region



Exchange/hub (founders)

Traded items

Year of launch


SLING (Singapore LNG Index Group)

SGX – Energy Market Company

Singapore FOB SLING (LNG spot/futures/swap)

North Asia Sling DES (LNG spot - Korea Japan China Taiwan) (swap/futures at the end of 2017)

SGX DKI SLING (Dubai Kuwait India)

SGX 1999

SLING 2015


JOE (Japan Over the Counter Exchange)

TOCOM (100%)

OTC futures and forward

CME Futures DES Japan

Launch of online LNG trading platform which can be reflected on Platts JKC from April 2017

TOCOM 1984

JOE 2014


SPEX (Shanghai Petroleum Exchange)

Shenergy, Petro China, Sinopec, CNOOC, Sinochem

LNG futures


SPEX 2006

(LNG/LPG – с 2010)



Xinhua News Agency, Petro China, Sinopec, CNOOC, Shenergy Group, Beijing Gas Group, ENN Group, Hong Kong and China Gas Co., Ltd. (Towngas), China Gas Holdings Limited and China Huaneng Group.

LNG, unconventional gas (shale gas, CBM), pipeline gas,



Begining of trial period 2015

Official launch 2016



Participants LNG trading at JOE[3]

Electricity companies

Natural gas companies

Trading houses

Energy companies

Financial institutes








The international gas trade in East Asian markets is largely based on bilateral long-term contracts.

In addition to the advantage of natural gas as cleaner fuel, replacement of crude oil to gas at electricity generation in Japan occurred to ensure energy security. China, unlike neighboring countries, has significant volumes of its own gas production. But this is not enough to guarantee natural gas supplies in the long run.

As LNG trade in the Asia-Pacific region grew steadily in the 2010s, there was a general understanding of the necessity for creating natural gas/LNG hubs.

Japanese companies that have large volume of long-term contracts and have not enthusiastically reacted to formation of prices on the illiquid, and newly created hub

Singapore seeks to become the center of physical trades of LNG at reginal and global level. The SHPGX exchange aims to position itself as a natural gas hub in China, and later to become an international platform for pricing hydrocarbon resources in the Asia-Pacific Region.



(1) Цена Энергии. Секретариат Энерго-хартии. 2008
The Pricing of Internationally Traded Gas. The Oxford Institute of Energy Studies. 2012

(2) http://www.chinadaily.com.cn/m/shanghai/lujiazui/2016-11/30/content_27530028.htm

(3) JOE - Need for Reliable Benchmark Price and Hedging Market for Asian LNG Market, Takamichi Hamada, Platts LNG Forum, November 2016


Courtesy of Neftegazovaya Vertical agency.




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