IEA report sees scope for transformation of Asia-Pacific natural-gas market

Asia is expected to become the world’s second-largest gas market by 2015. And yet this market is dominated by long-term contracts in which the price of gas is linked, or indexed, to that of oil. In recent years, this has helped keep Asian gas prices much higher than those in other parts of the world, leading to serious questions about the sustainability of the system and its effects on Asian competitiveness.

In a new report, the International Energy Agency shows how the Asia-Pacific region’s natural-gas market can evolve from one in which prices are linked to oil to one featuring a more competitive and dynamic network of trading hubs in which prices better reflect local gas demand and supply.

The report, Developing a Natural Gas Trading Hub in Asia, was released today at a conference in Tokyo sponsored by the Institute of Energy Economics, Japan (IEEJ). It shows what would be necessary to create a more integrated natural gas market in the Asia-Pacific region in which price signals are more effective and yield benefits for Asian competitiveness.

“Natural gas has the potential for improving energy security and yielding economic and environmental benefits in Asian-Pacific countries,” said IEA Executive Director Maria van der Hoeven as she presented the report in Tokyo. “Asia is already home to the world’s fastest-growing gas market. But expanding the role of gas in Asia will depend on regional market conditions that allow the fuel to compete autonomously in local energy markets that are themselves connected to global energy markets. The future role of gas in Asia will depend considerably on how the pricing of natural gas is tied to the fundamentals of supply and demand in the region.”

Long-term contracts can play a beneficial role in providing investment security, but their current pricing does not accurately reflect gas market fundamentals or the competitiveness of gas relative to other fuels. Moreover, without a competitive spot market for natural gas, there is little incentive and little scope to change current commercial practices. This leaves both consumers and producers with insufficient room to explore different options, and limits the degree to which natural gas can serve as a flexible source of energy for both growing and mature economies.
Among the report’s key findings and recommendations are the following:

• Current market structures discourage gas consumption and impact Asian competitiveness vis-à-vis more flexible markets in the US and even Europe;
• OECD experience suggests that the single biggest obstacle for an effective gas market is a lack of infrastructure access;
• The role of governments must change: Instead of focusing on price regulation along the value chain, governments must maintain and supervise competitive market conditions;
• Credible state commitment to regional gas market competition can instill confidence, encourage new market participants, and promote the use of transparent hubs to balance producer portfolios;
• Transport and commercial activities should be separated and prices deregulated at the wholesale level;
• Singapore holds the best initial prospects for gas hub development, with Japan, Korea, and China as likely competitors in the future.

“The prospects are there, but even the prime candidates will need to do more,” said Ms. Van der Hoeven. “China’s fast-growing domestic gas network is still underdeveloped, and the entire production chain remains heavily regulated. Singapore’s small domestic market means that to grow as a hub it must rely on re-exports, which are hindered by regulation. Last but not least, Japan has a great potential to act as a hub, but it will have take some important steps. Domestically, that means improving infrastructure access and further developing its domestic power market. But externally, it also means engaging with exporters to affect the terms of gas contracting so as to improve efficiency while maintaining energy security. The LNG producer-consumer dialogue initiated recently by Japan can be effective to facilitating that engagement.”

Click here to download Developing a Natural Gas Trading Hub in Asia for free‌.

Click here and here to see interviews with IEA experts about the report.