Trading places

Utilities Unbundled - Issue 14

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An Asian gas trading hub could bring competitive pricing to the region's natural gas, but is it just a pipe dream?

“Without firm government commitment to a regional hub, Asian buyers can expect to continue to buy LNG based on oil indexation well into the future.”

— Anne-Sophie Corbeau, IEA

Asia's natural gas sector is tipped to be the world's second biggest by 2015, according to the recent International Energy Agency (IEA) report, Developing a Natural Gas Trading Hub in Asia: Obstacles and Opportunities.

But Asian utilities are currently paying up to five times more for their gas than other countries, due to long-term, oil-indexed contracts. Calls are growing to consider a regional trading hub, with speculation focused on Singapore as the most likely location, followed by Japan, Korea and China.

Figure 1: Potential locations for an Asian gas trading hub

Flexibility and transparency

Anne-Sophie Corbeau, Senior Gas Expert at the IEA, says that market-led natural gas prices would:

  • Offer both buyers and suppliers more flexibility
  • Bring transparency and legitimacy to the sector
  • Attract more investment

However, she cautions against unrealistic expectations on pricing. “The creation of a hub will not automatically lower prices – sometimes spot prices will be higher than an oil-linked gas price, simply because the market in Asia is very tight. But it would offer an alternative to oil indexation,” says Corbeau.

Until then, the best course for Asian utilities is to seek pricing based on the US Henry Hub benchmark.

“Hands off” from government

Prospects for an Asian hub remain limited unless governments prioritize economic progress over state control. Corbeau cites “government willingness” as the biggest obstacle to a regional hub.

“To really see a liberalized gas market we need governments to shift from direct policymaking and market involvement to a role of monitoring the market, and put in place an independent regulator or anti-trust agency,” says Corbeau.

It would also require “unbundling” the natural gas market – separating transport from commercial activities, price deregulation at a wholesale level, and allowing non-discriminatory access.

To be successful, the hub would need sufficient network capacity and a competitive number of participants, including financial institutions.

Time and trust

Building a natural gas trading hub in Europe took a decade. Despite the advantage of learning from this experience, an Asian hub is likely to take just as long to overcome significant obstacles.

A new Asian hub that generates natural gas pricing based on true supply and demand factors could help gas stand its ground against competing energy sources, particularly coal, and ensure its future in the region's energy mix.

But, as Corbeau says, “Time and trust is essential to the establishment of any hub. Without firm government commitment to a regional hub, Asian buyers can expect to continue to buy LNG based on oil indexation well into the future.”

For more information, please contact Duncan Coneybeare.

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