IEA puts weight behind Asian gas spot market
Providing an alternative to traditional oil-linked pricing and cutting high cost paid for LNG is very important, says International Energy Agency's director
It is of utmost importance that Asia develops an efficient regional gas spot market to provide an alternative to traditional oil-linked pricing and cut the high cost paid for its imported liquefied natural gas (LNG), Maria van der Hoeven, executive director of the International Energy Agency (IEA), said.
Despite the big volume of gas consumption and trade, one fundamental thing is missing in the region; trading hubs, where natural gas would be priced not in relation to oil but depending on regional supply and demand fundamentals, van der Hoeven told the Singapore International Energy Week (SIEW) 2012.
Asia is the second-biggest gas consuming region in the world, but buyers pay the highest prices in the world for LNG imports as Asia lacks an efficient market. There has to be an alternative to oil-indexation and that is the regional development of a spot gas market, she said.
She highlighted the huge disparity in international prices, with LNG landing in Japan this past summer at $18/million per British thermal unit (Btu), compared with gas prices in the US trading at $3/m Btu and in Europe at $10-12/m Btu.
Top Asian LNG consumers, especially the world’s biggest importer Japan, have been pushing more aggressively to scrap oil-linked gas prices as surging import prices threaten economic growth. And the considerable pricing gap is worrying both Europe and Asia, said van der Hoeven.
“It’s in the interest of the economy to have a spot market and to get there as soon as possible, not in a matter of decades,” she said.
But the major LNG producers are increasingly adamant that LNG prices will be linked to oil for decades to come.
Oil-indexed prices are here for the long-term and there is more to pricing than US Henry Hub spot prices, BG Group’s executive director, Martin Houston, told the conference. He added it will be many decades before we see gas as a globally traded commodity, as unlike crude, LNG and gas are not freely traded. Prices are set by energy competition or energy choices and gas markets are local and regional, he stressed.
However, Europe is starting to develop gas-to-gas pricing on trading hubs, with some progress in the UK and on the European continent, but Asia is lagging, said van der Hoeven.
The IEA believes the structural and institutional changes needed in Asia are: established rules for third-party access and an independent tariff regulator; non-discriminatory access to pipelines, overseen by transmission operations, which are transparent and unbiased; and the introduction of a large number of market participants, including financial institutions.
Singapore aims to be part of the solution. The city is building an LNG trading hub, which it hopes will shake up Asia’s gas-trading dynamics, offering the region greater volumes at a cheaper price.
The country’s maiden LNG terminal is due online in the second quarter of 2013, and the island nation is pushing ahead with aggressive expansion plans.
Other hubs, particularly in China, may in future provide liquidity on a greater scale. But Singapore’s advanced progress is a milestone for Asian gas and there are a number of advantages that would make it possible for Singapore to be first in the market, said van der Hoeven.
The prospect of a more fluid LNG market could provide more options across the Asia Pacific basin.
Thailand, Malaysia and Indonesia are all newcomers to the LNG market, opening new import terminals over the past year. Vietnam and the Philippines are also looking to join the LNG importers club in the next couple of years.
A second wave of LNG supply will be coming online starting in 2015, from countries such as Australia, Papua New Guinea, as well as Indonesia, and later from North America, said van der Hoeven.
But competition for these new supplies will be fierce – from mature markets such as Japan and South Korea, but also from emerging markets, like China and India.
However, despite the great optimism for LNG exports from sections of the US, East Africa and Canada, BG Group believes the world will remain supply challenged.
By 2025, the industry needs to develop another 175m tonnes a year (t/y) of production beyond that which is currently being built today, noted Houston. That’s equivalent to the size of the industry in 2009, which took 45 years to develop.
At current cost levels the liquefaction alone to support that will cost $200bn. On a global basis, gas supplies needed to meet 2020 demand will cost $2.3 trillion, he added.
But supply schemes are getting more difficult to develop as rising costs, environmental concerns and industrial relations plague projects.
However, the sector did manage to deliver over 120m t/y of capacity from 2006-2012. But most of that was down to just two places, Qatar and Australia.
That option does not necessarily sit before us today and it’s not clear that the speed of growth can be replicated in the new geographies, said Houston.
“Many people talk about the world being awash with LNG, but I am much more cautious.”