Analysis of Japan's LNG Import Spot Price: what are the implications to domestic gas pricing in Indonesia?

Gas export to Japan has become an important source of revenue for Indonesia since the 1970s. Traditionally, the gas was priced with linkage to the oil price. However, changes in the market during the early 2010s has put pressure to this traditional pricing mechanism. Using the Vector Auto-regression (VAR) approach, this research aims to understand whether the spot LNG import pricing in Japan is moving away from JCC linkage or not, and the extent of the change if there is any. LNG price analyzed in this research is the Japanese spot cargo import price, published by the Japanese Ministry of Economy, Trade and Industry from March 2014 to November 2017. The Japanese LNG spot price was regressed against US Henry Hub (HH) and UK NBP gas hub prices, Japan Customs-Cleared (JCC) crude oil price, and Japan imported coal price in the same period.The historical decomposition of the VAR model suggests that the spot LNG price in Japan were increasingly affected by US Henry Hub and UK NBP gas prices, while the effect of JCC crude oil price is weaker, and Japanese imported coal having no significant effect towards Japanese spot LNG price. The impact of mature gas hub prices is also dynamic: HH is showing stronger effect in the mid 2016, then it changed to the domination of NBP in mid 2017.The result further indicates the increasing connectivity of gas price around the world, with US and UK price affecting Japanese gas price through spot LNG trade. Due to the demand condition in Japan and East Asian market in general, the continuation of US/European gas hub price effect is likely to happen until early 2020s, as the slight deficit in this region might be fulfilled by spot LNG import. Under the new domestic gas pricing regulation in Indonesia, the continuation of NBP impact towards gas pricing in Japan might reduce the price to the level at which fulfilling the increasing domestic gas demand is more efficient than exporting LNG.