IEA report sees scope for
transformation of Asia-Pacific natural-gas market
Amid region’s growing reliance on imports, Developing a Natural Gas
Trading Hub in Asia identifies obstacles and opportunities for
establishing a gas market that reflects supply-demand fundamentals
26 February 2013 - 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
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.
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
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
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 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
Singapore’s small domestic market means
that to grow as a hub it must rely on re-exports, which are hindered by
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.”
About the IEA
The International Energy Agency is an autonomous organisation which works to
ensure reliable, affordable and clean energy for its 28 member countries and
Founded in response to the 1973/4 oil
crisis, the IEA’s initial role was to help countries co-ordinate a collective
response to major disruptions in oil supply through the release of emergency oil
stocks to the markets.
While this continues to be a key aspect of
its work, the IEA has evolved and expanded. It is at the heart of global
dialogue on energy, providing reliable and unbiased research, statistics,
analysis and recommendations.