IEA sees big opportunities for Asia-Pacific natural gas market

Asia is expected to become the world's second-largest natural gas market by 2015, even though it is dominated by long-term contracts in which prices are linked to that of oil which keeps prices much higher than those in other parts of the world, according to a new report by the International Energy Agency (IEA).

In the report the IEA shows how the Asia-Pacific region's natural-gas market can evolve from one oil-linked prices, which has raised serious questions about the sustainability of the system and its effects on Asian competitiveness, 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 yesterday 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.

“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,” she said.

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.

The IEA says that 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.

An Asian hub would probably be used for trading liquefied gas stored in tanks, as opposed to gas in its natural state delivered via pipelines, Laszlo Varro, the head of the IEA’s gas, coal and power markets division, told Bloomberg yesterday in Tokyo.

Japan, the world’s biggest user of LNG, has been leading the call to get away from long-term contracts, especially after the nuclear disaster at Fukushima in March 2011 increased the countries reliance on fossil fuels.

Gas buyers in Asia now pay about five times as much as US consumers. They will be stuck with higher costs and insufficient facilities for receiving, processing and transporting LNG as long as governments promote state-owned companies and try to restrict imports, the IEA said. Lower prices in the US and Europe reflect competitive and deregulated markets as much as better access to low-cost supplies, the group said.

Among the IEA report's key findings and recommendations are the following: