To get most from transforming LNG markets, Asian governments must embrace reforms

Asian governments must reform their natural gas markets if the region is to see an expansion in liquefied natural gas (LNG) supply to meet its rapidly growing demand, according to a new report from the International Energy Agency (IEA) published today. The report specifies that limited flexibility and pricing issues are the main challenges to overcome in the development of a more efficient market.

The IEA has previously highlighted the need for more transparent and efficient markets in Asia, where gas prices are four times those in North America – and can be as high as five times in winter – but the issue is becoming more acute as the region’s gas demand rises and as the LNG market becomes increasingly globalised. Some 150 billion cubic metres (bcm) in new LNG supplies, led by several projects in Australia, are expected to become available between now and 2020. In that same period, Asian gas demand is forecast to grow by around 250 bcm.

“The advent of new LNG supplies represents a golden opportunity for Asia, but first the region’s governments must address the rigid and illiquid markets that undermine affordability and accessibility for consumers,” said IEA Executive Director Maria van der Hoeven as she presented the new report, The Asian Quest for LNG in a Globalising Market, at the LNG Producer-Consumer Conference in Tokyo. “For gas to be a sustainable contributor to energy security in the region, Asia must look to reforms.” 

High prices have become unsustainable for consuming countries in Asia, and the problem is even more acute for those countries that have regulated low end-user prices. The process of lowering costs for LNG, however, will not be swift nor will it be simple, as the LNG supply chain is capital- and energy-intensive.

The IEA report offers recommendations for both governments in consuming countries and LNG producers on how to develop an LNG market in Asia that efficiently balances supply and demand while optimising trade flows. It says governments should provide effective, open, third-party access to infrastructure, which would form the basis for the development of gas trading hubs in Asia. In this regard, Singapore is leading by example, with the first open-access, multi-user LNG terminal in Asia. The report encourages governments to embrace pricing reform, with less intervention in wholesale prices. Instead, governments should encourage the natural development of competitive pricing in order for gas to be a sustainable contributor to energy security in the region.

The report calls on gas producers to embrace the idea of reforms even though these will require modifying long-standing business models. Without reforms, producers risk losing market share to alternatives: gas must be in a position to compete against cheaper coal and low-carbon electricity sources such as nuclear and renewables. The report also calls for gas producers to improve their project management and execution, noting that recent cost overruns on large LNG projects were hindering the ability of gas to compete.