GGP: Asian LNG Hubs: Too Important to Fail? [Op-Ed]
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.
October 15, 2017
The emergence of liquefied natural gas (LNG) hubs in Asia could be a game-changer for the region’s future energy mix, global energy security, infrastructure investment as well as the environment.
The upcoming LNG Producer-Consumer Conference this week in Tokyo is a golden opportunity for countries to show off their recent efforts toward developing a global (LNG) market. These include expanding LNG hub-based pricing, which could stimulate regional gas demand from emerging importers, and encouraging policies to progress coal-to-gas switching in large, heavily-polluted Asian cities. The Indian government has just announced that it will launch a natural gas trading platform early next year, while Japan and India have also broadcasted last week that they will cooperate to promote a flexible and open LNG market.
However, these messages will amount to little more than posturing unless Asian global gas players decide to press ahead with regional hubs rather than getting distracted by short-term market opportunities that slow them down. The 2014-2017 low oil price environment and the return of competitive oil-indexed LNG prices in Asia have removed the urgency for buyers to diversify away from oil-indexed pricing and bring hub-based formulas to the region.
As Brent crude prices have plummeted since mid-2014, oil-indexed gas prices have dropped ~40% in two years. As a result, Asian buyers have entered into competitive LNG contracts that are indexed to oil – adhering to traditional price formulas. More than 11 million tons in new oil-indexed contracts have already been signed so far in 2017.
But LNG stakeholders -- which include governments, industry, and lenders -- should not be lulled into complacency by short-term considerations, especially since oil prices are likely to spike again sometime in the future. Instead they should keep their focus pinned on regional hubs to help importers capture more competitive and transparent pricing systems. That would also enable exporters to trade more easily in the global market with new and smaller buyers. It has the added benefit of facilitating sales of their surplus and uncommitted spot volumes at a time of supply glut.
The emergence of LNG hubs in Asia has become credible with the ongoing transformation of the global LNG market that started three years ago. Favorable conditions such as a rapid growth in LNG supplies, rising volumes of flexible spot supplies, and the increase in the number of market players have led to more serious steps to create one or several regional hubs. Establishment of a trading center in Asia would go hand-in-hand with futures contracts that have developed as pricing benchmarks for LNG spot trading, long-term contracts and hedging. Asian LNG hub initiatives would differ from existing hubs in the US or Europe by generating liquidity through increased LNG flows within the region, rather than through gas pipeline integration or domestic production.
Several natural gas hub initiatives in Asia are underway in Singapore, Shanghai, Tokyo. Each one is at a different stage, facing unique challenges and with varying chances for success. The main premise behind a regional Asian LNG hub is that an Asian market-based reference price would put the industry in a better position to confidently trade or hedge LNG or invest in new LNG infrastructure projects. This new hub-based Asian LNG price benchmark will be driven by regional gas market fundamentals, as an alternative or complement to oil-indexed LNG prices that are still prevalent in Asia. It could make competitive and transparent LNG prices a permanent feature of the market.
Taking a more laser focus on LNG hub developments would also help Asia reap broader benefits, which is driving the strong support from Asian governments. Three main benefits of this approach include energy security, as a trusted hub contributes to a more liquid and better functioning market; a genuine Asian LNG price marker that helps resolve the current investment paralysis, paving the way for decisions to build new liquefaction plants which could transform LNG project finance; and more affordable and accessible LNG that strengthens the environmental prerogative to favor cleaner gas over coal and fuel oil in the power sector and polluted cities.
If Asia’s LNG hub initiatives succumb to failure, the current status quo for Asian LNG pricing will continue, at the risk of darkening LNG’s future as the appropriate fuel in Asia at a time of energy transition, demand uncertainty, and environmental degradation. With Asia serving as the engine for global LNG demand growth, the resolution of the Asian LNG pricing issue would transform not only Asia, but also the outlook for global LNG markets.
Leslie Palti-Guzman is Director Global Gas at Rapidan Energy Group, and a non-resident follow at Columbia University’s Center on Global Energy Policy
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.