Developing a natural gas trading hub in Asia: obstacles and opportunities
Natural gas has the potential to improve energy security and economic and environmental performance in the Asian-Pacific economies. However, expanding its role will depend on regional market conditions that allow gas to compete autonomously in energy markets, which are themselves connected to global energy markets. The future role of gas in Asia will depend on whether natural gas pricing is tied more closely with supply and demand fundamentals in the region.
The Asian natural gas market is the fastest-growing gas market worldwide, and is expected to become the second largest by 2015, with 790 billion m3 of natural gas demand.
The market for natural gas in Asia is dominated by long-term contracts in which the price of gas is linked, or indexed, to that of oil. Developing countries might require long-term contracts to ensure security of supply for their fast-growing economies, and producers will look to secure return on their considerable infrastructure investments.
In recent years, this has helped keep Asian gas prices much higher than those in other parts of the world, leading to competitiveness concerns and serious questions about whether such a system can last. In order to expand its market share, natural gas has to be competitive within the energy mix of the region or country where it is delivered. In Asia, however, current constraints include the region’s lack of both a trading hub to facilitate the exchange of natural gas, and the development of a transparent price signal to steer investments in natural gas infrastructures.
The confidence in the legitimacy and transparency of natural gas pricing generated on a natural gas hub is crucial for investment decisions in such a capital-intensive industry. This confidence can be derived to a large extent from the institutional and structural requirements put into place, but ultimately it lies in the long-term resolve of government to allow markets to determine natural gas prices with minimal interference from short-term political considerations.
To successfully develop a reliable natural gas price in the Asia-Pacific region would require a competitive national/regional market, which would then need to meet a set of institutional and structural requirements to create the market confidence to attract new participants (namely financials) and to encourage market players to use a trading hub for the balancing of their portfolios.
A ‘hands-off’ government approach is necessary. This would involve separating transport from commercial activities, price deregulation at the wholesale level, sufficient network capacity and non-discriminatory access, and a competitive number of market participants with the involvement of financial institutions.
Prospects for a competitive wholesale natural gas market in Asia are limited. Even in the most mature Asia-Pacific markets, the basic requirements for a wholesale market are missing, as governments continue to emphasise security objectives over economic ones. Of the Asia-Pacific economies reviewed in this paper, Singapore seems the candidate best suited to develop a competitive natural gas market and trading hub in the medium term.
A unique characteristic of the natural gas trade in Asia-Pacific is the limited amount of natural gas that is traded via pipelines, and the region’s growing dependence on the global liquefied natural gas (LNG) supply chain. That global LNG market has become decidedly more short-term oriented and flexible over the past decade – a result of the expansion of global LNG production, the emergence of global portfolio players and enhanced competition in the Atlantic Basin.
And yet these Atlantic Basin developments have had a limited impact on supply flexibility in the Asia-Pacific region. A competitive natural gas market in Asia would need an even more flexible LNG supply than is currently in place. This will require a continued expansion of shipping availability and third-party access (TPA) to regasification terminals in the Asia -Pacific region.
Furthermore, it would involve relaxing destination clauses in LNG supply contracts that allow for market segmentation and stiffen the overall supply chain. Any such modification of the contract structure must properly incorporate aspects that preserve investment security.
In the Asia-Pacific region, competitive natural gas markets and a reliable gas price will not develop overnight, and will not necessarily lead to lower prices. However, such a development will allow market players in Asia-Pacific economies to increase portfolio flexibility as natural gas markets in this region continue to mature.
Governments in the region will need to signal their willingness to facilitate competition further downstream. Singaporean efforts to develop a competitive natural gas market and complementary trading hub might be considered small, relative to the size of the entire Asia-Pacific natural gas market. However, the example of an alternative market model that is able to adapt global supply changes to the regional market would be a powerful one.
Written by the International Energy Agency (IEA).
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