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LNGEmergingasDisrupterofGlobalEnergyMarkets

CreatedonTuesday,11October201603:33
(ImageCourtesy:PetronetLNG)
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Trading,pricingandtaxationofLiquefiednaturalgas(LNG)aregrabbingeyeballsacrosstheglobeinspitecrudepricefallledcommodities
slump.
BothLNGimportingandexportingnationshaveeithercraftedorarepreparingstrategiestomakethebestoutofexpandingglobalLNG
market.
TheageofthecurrentLNGmarketisjustdawning,saysJapan,theworldslargestLNGimporterinitsLNGstrategyannouncedinMay2016.Thestrategylistsboth
internalandglobalreformstomakeLNGmarketscompetitiveandfairtoallstakeholders.
EuropeanUnion(EU)tooisgearinguptoshapeglobalLNGmarkettobeefupitsenergysecurity.
A larger and more liquid global LNG market presents an opportunity for the EU. However the globalisation of the LNG market also has an important foreign policy
dimension:asamajorimporterofLNG(thesecondlargestafterJapan),theEUhasakeeninterestinpromotingfree,liquidandtransparentLNGmarketsaroundthe
world,saysEuropeanCommissions(ECs)strategyforLNGandgasstorageunveiledinFebruary2016.
AccordingtoInternationalGasUnion's(IGUs)WorldLNGReport2016,totalLNGtradereached244.8milliontonnesin2015,up4.7MTfrom2014.Thedeclineinoil
pricesandgrowingweaknessinPacificdemandledallglobalLNGpricemarkerstofallin2015,fromanaverage$15.60/MMBtuin2014to$9.77/MMBtuin2015.
ThenumberofLNGimportingcountrieshasincreasedfrom13in2000to29in2014.Thenumberofexportingcountriesgrewfrom12to19duringtheperiod,says
Australia'sgasmarketreport2015publishedinMarch2016.
Thenumberonbothcountswouldincreaseinthecomingyears,therebyenhancingprospectsforwideninganddeepeningofLNGmarkets.
AccordingtoBPEnergyOulook2016,By2035,LNGisexpectedtosurpasspipelineimportsasthedominantformoftradedgas.ThegrowingimportanceofLNGtradeis
likelytocauseregionalgaspricestobecomeincreasinglyintegrated,itsays.
LNGscatapulttothecentrestageofglobalenergydynamicsisdrivenbyseveralfactors.Afewmajorare:growingquestforclimatechangemitigationforwhichLNG
servesascleanfuel&feedstockrealizationthatLNGhelpsdiversifyandstrengthennationalenergysecurityandrecognitionofLNGasamajorvehicleforcreationof
wealth,jobsandtaxrevenue.
Withalongandcapitalintensivevaluechain,LNGoffersatleastfivedistincttaxationopportunityrightfromproductionofgasinexportingcountrytodeliveryofgasinthe
importingcountry.EnhancedavailabilityofLNGfacilitatesincreaseintaxrevenuethataccruesfromtaxationofgasbasedmanufacturedproductsandservices.
CertainothernotablecausespropellingLNGtradeare:shaleoilandgasrevolutionintheUnitedStatesandtheresultingsnappingthedirectcorrelationbetweencrude
andgaspricesspurtindiscoveryofconventionalandnonconventionalsourcesinseveralregionsacrosstheglobeemergenceoffloatingregasificationterminalsas
cheaper,shortgestationalternativestoonshoreterminalsforreceiptofshippedLNGandgradualdevelopmentofLNGmarketinghubsfacilitatedbynewterminalsand
pipelinesincertaingasmarkets.
Amidst such market dynamics, free LNG trade has become a pivot of negotiations between the United States and the European Commission over finalization of
TransatlanticTradeandInvestmentPartnership(TTIP).
ThisisevidentfromrecentlyleakeddocumentsonhardbargainingoverTTIP.
AccordingtoECDirectorateGeneralforTrade'sleakedletterdated20June2016onEUsproposalforaChapteronEnergyandRawmaterialsinTTIP,thePartiesmust
agreeonalegallybindingcommitmenttoeliminateallexistingrestrictionsontheexportofnaturalgasintradebetweenthemasofthedateofentryintoforceofthe
Agreement.
On24thAugust,USVicePresidentJoeBidenstatedinLatvia:Wevemovedfromanticipatingmassiveimportsofliquefiednaturalgastobecomingtheworldsfastest
growingexporter.Forthefirsttime,gasfromtheUnitedStatesisbeingusedhereinEurope.AndeverycountryinEuropecannowbuythatAmericanresource.
AmericanLNGwouldhelpEuropereduceitsdependenceonpipedgassuppliesfromRussiaandmakegaspricingcompetitiveintheContinent.
As put by AmericanPetroleumInstitutes (APIs) Executive Director for Market Development Marty Durbin, Americas growth in natural gas production means that
through LNG exports we can give our allies stability and security in the global natural gas market. Americas shale revolution is growing our economy, spurring
environmentalimprovementsandstrengtheningourownenergysecurity.U.S.LNGwillgiveouralliesanopportunitytoachievethosesomegoals.
ThissentimentfindsaechoinaPolicyBrieftitledTheStrategicRoleofNaturalGasTradeinTransatlanticRelationsreleasedbyWashingtonbasedGermanMarshall
FundoftheUnitedStates(GMF)inApril2016.
It says: Natural gas trade between the United States and Europe offers enormous strategic, commercial, and environmental opportunities. Realizing that potential
requirespolicychangesonbothsidesoftheAtlantic.
JapansMinistryofEconomy,TradeandIndustry(METI)toohasdefinedagendaforreforms.InitsLNGstrategy,METIhasidentifiedremovalofrestrictiveclauseinLNG
shippingcontractsthatareconstrainingdevelopmentofmarkets.
AsputbyitsLNGstrategy,ConventionalLNGcontractsusuallycontainadestinationclausethatsomewhatrestrictsdestinationsoftherelevantLNGcargoesandthis
practicehashinderedfreeLNGtrade.Thishaslongbeencriticizedasproblematic,asinEurope,forexample,whereEuropeanCommissionconfirmedthatterritorial
restrictionsinfringeECTreatyundercertaincircumstances.
METIhasalsopointedouttheconstraintsimposedbydestinationclausesinLNGcontractsatLNGProducerConsumerConferencemeetingsandonotheroccasions,
andtherecognitionhasbeensharedatG7EnergyMinistersmeetingsandG7Summitmeetings,itadds.
METIbelievesthateasingoreliminationofdestinationclausesisindispensableforachievingaflexibleandliquidLNGmarket.Itwillthuscontinuetostriveforreformsat
G7meetingsandLNGProducerConsumerConferencemeetings.ItintendstostrengthencollaborationwithmajorLNGconsumerstopressforglobalLNGreforms.
AmajorreformproposalcallsforchangesinLNGpricingprocess.METIhaspointedoutthatLNGwasoftenlinkedtocrudepriceinfixedtermcontractsoverthedecades.
SuchLinkupisnolongernecessarilyjustifiableduetodiversifieduseofLNG.

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10/26/2016

LNGEmergingasDisrupterofGlobalEnergyMarkets

ItisherepertinenttonotethatmarketdynamicshasalreadysnappedthislinkintheUS,whereshalerevolutionhasempoweredgastodislodgecoalasprimaryfuel
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forbaseloadpowergeneration.Incertainmarkets,pipedgasandLNGpricesarecompetingwell.Moreover,emergenceofsurplusLNGregassificationcapacity
isfuellingthegrowthofspotmarketforLNG.
SaysMETI,TheestablishmentofpriceindiceswhichaccuratelyreflectthesupplyanddemandofLNGitselfwillnotonlyfacilitatespottradingbutalsocontributeto
stabilizingimportpricesthroughimmediatelyhelpingtodiversifypriceformulae,whichusedtobemainlylinkedtocrudeoilprices.
Itadds:InordertoestablishpriceindiceswhichreflectthesupplyanddemandofLNGitself,itisnecessarytoincreasespottradingtoenhancethereliabilityofspotprice
indices,andmakeashift,alsoinfixedtermcontracts,toanewsystemlinkedtogaspriceindicesfromthecurrentpricingsystemlinkedtocrudeoilprices.
Australia'sGasMarketReport2015sharessimilarperception.Itsays:Thereisagrowingdesireformoreflexiblecontractingarrangements,andtheglobalLNGtrading
environmenthasbecomeincreasinglymorecomplex.ThegrowingflexibilityinlongtermLNGcontractsoverthepastdecadeisillustratedbytherelaxationofdestination
clausesincontracts,anincreaseintheuseofFOBsalescontractsratherthanDES,andlessoneroustakeorpaycommitments.Bothbuyersandsellersareseekingmore
optionsforpricing,whichuntilrecentlyhasbeendominatedbyoillinkedpricing.Theseoptionsincludelinkagestohubbasedprices,suchastheHenryHubinLouisiana,
andhybridsinvolvingamixofindexesincludingpowergenerationprices.
TheReportpublishedbyAustralia'sDepartmentofIndustry,InnovationandScience,observes:Fortheretobeagoldenageofgas,itwillbeimportantthattheprice
settlesintoaGoldilockszone,ajustrightpricethatencouragesgrowthindemandandthesupplyrequiredtomeetit.Ifpricesaretoohigh,customerswillturntoother
energysourcesandmoderatetheirgasdemand.Ifpricesaretoolow,investorswillnotseeattractivereturnstomotivateinvestmentinfuturecapacity.Wearecurrently
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experiencingpricesinthelattercategory.
Europeangasmarketscontinuetomovetowardsagashubbasedmodelattheexpenseofthetraditionalroleoflongtermbilateralcontracts,notesarecentreportjointly
publishedbyAgencyfortheCooperationofEnergyRegulators(ACER)&CouncilofEuropeanEnergyRegulators(CEER).
ACERCEERAnnualReportontheResultsofMonitoringtheInternalNaturalGasMarketsin2015says:Upstreamproducersareforcedtoincreasinglyincorporategas
hub(price)elementsintheirlongtermcontractspriceindexationformulas.Theyhaveanincentivealsotoactivelytradeonhubsinthehopeofinfluencingpriceformation
asthisaffectstheirbilaterallongtermcontracts.
Keepinginviewpricingtaxationinterface,AsiaPacificEconomicCooperation(APEC),initsreportcaptionedAPECEnergyDemandandSupplyOutlook2016,has
pitchedforgovernmentsintervention.
Itsuggests:Toaccelerategastrade,governmentscouldconsiderreducingtariffsandprovideeconomicincentivestoprivatedevelopersacrossthevaluechainofthe
naturalgasindustry.
Canadalastyeartoedthisinvestmentsimulationstrategy.InFebruary2015,itdecidedtoprovideacceleratedcapitalcostallowancetoLNGplantsandthusforgocertain
potentialincometaxrevenue.SuchtaxincentivesarecrucialtoattractinvestmentsinnewLNGgasificationterminalsacrosstheworldthathavecometohaltin2016due
todepressedLNGprices.
AustralianPetroleumProduction&ExplorationAssociation(APPEA)alsofavoursimprovementininvestmentrelatedtaxincentivetostimulateinvestmentinnewLNG
projects.
InasubmissiontoAustralia'sTaxWhitePaperTaskForceinJune2015,APPEAstated:Theexistingdepreciationprovisionshavebeenanimportantfactorthathas
allowedAustraliatoattracttheinvestmentfundsnecessarytoexpandournaturalgasexportcapabilitytoaworldclassscale.Notonlydotheseprovisionsneedtobe
retained,theyarguablyneedtobefurthershortenedifAustraliaistoattractthenextwaveofinvestmentinthiscriticalexportindustry.
Itis,however,difficulttodiscernapatterninthetaxationofdifferentsegmentsofLNGvaluechain.TaxreliefforestablishedLNGplayersis,thus,hardtocomeby.Theyrun
theriskoftaxedmorebyexportingcountriesbattlingfallinrevenueduetoslumpinpricesofoilandgas.OmanthusdecidedtohikecorporatetaxonLNGfirmsto55%
from15%inMay2016.
KPMGforeseesadditionaltaxcomplexitiesforinternationalinvestorskeepinginviewimminentalignmentoflocaltaxlawswithOECDsBEPSguidelines.
InareporttitledManagingtaxintheLNGandFLNGindustry:Lessonsfromthefrontlines,KPMGnotesthatSometaxissuesarecommontootherinternationaloiland
gasprojects,whileothersareuniquetotheindustryortotheprojectslocation.
ThekeychallengeforallexportingandimportingcountriesistoensurethatanyharshtaxationorabruptwithdrawalofanytaxincentiveatanycomponentofLNGchain
doesnotleadtodemandsupplyimbalances.
LNGstruedisruptivepotentialintheenergymarketscanberealizedonlybyenlightenedpolicyandregulatoryenvironmentacrosstheworld.

Publishedbytaxindiainternational.comon7thOctober2016
http://taxindiainternational.com/columnDesc.php?qwer43fcxzt=MjY1

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