Asia will absorb nearly half of new global gas demand to 2018, including 80% of incremental LNG imports
15 July 2014
Asian gas markets are multifaceted. Some are mature such as Japan and Korea, others are emerging giants such as China and India, and still others are rapidly developing ones, such as in Southeast Asia.
But regardless of their degree of maturity and size, most of these markets will need to import more gas, as domestic production (when relevant) cannot keep up with rising consumption.
Asia will represent almost half of global incremental gas consumption over the medium term (2012-18), and half of this increase will need to be met by additional imports. Because of the region’s geographical specificities, liquefied natural gas (LNG) is expected to play an ever larger role in filling that gap, with Asia absorbing 80% of incremental LNG imports. Japan, Korea and Chinese Taipei have been importing LNG for decades, but other countries are relatively new to the game. China and India started in 2005-06, while various Southeast Asian countries began only over the past three years.
A changing market with old pricing
Global LNG markets are facing unprecedented uncertainties due to growing pressures on the current pricing system that is based on oil indexation.
Oil indexation had remained relatively unchallenged in Asia since it started some 40 years ago, with countries such as Japan willing to pay a premium compared with other countries to guarantee security of gas supplies. Japan paid USD 0.8 per million British thermal units (MBtu) more than Germany for gas in 2003-04.
But oil indexation in LNG contracts has generated particularly high prices over the past few years. Over 2012, Japan’s premium was USD 5.2/MBtu above the average of the UK National Balancing Point and the German border price. The gap grew as European utilities renegotiated over 2010-12 their long-term contracts to introduce partial spot price indexation. Asian utilities have done no such renegotiation, at least not in terms of including spot indexation in existing contracts.
Besides, after the Fukushima Daiichi accident led to a halt of nuclear power in Japan, utilities there had to hunt for LNG supplies, which made it difficult for them to bargain on prices.
The shale gas (and shale oil) revolution in North America has already profoundly changed global gas markets by lowering Henry Hub gas prices, which serve as US benchmarks, changing expectations in terms of LNG flows and triggering renegotiation of contracts’ prices in Europe. Consuming countries, in particular in Asia, are increasingly focused on lowering prices, and a solution could be to include Henry Hub indexation in future supply contracts rather than the traditional crude oil indexation.
Asia may not be able to get prices as low as those in Europe, given that the region is on average farther from key producers – notably the largest one, Qatar, but also the Gulf of Mexico projects in the United States. The example of Japan is the most visible, but except for a few legacy contracts, Asian countries are all paying high costs for imported LNG, with the 2012 price for the region at about USD 15/MBtu.
Options that could close Asia’s premium
Using Henry Hub indexation rather than oil is the only credible medium-term way to change the pricing indexation. Based on current Henry Hub prices of about USD 4/MBtu and on the formulae adopted by exporters, LNG can be delivered to Asian markets at about USD 11/MBtu, significantly below current prices.
But Henry Hub dynamics differ significantly from those in Asia, which means that producers are reluctant to accept its prices as an alternative to oil indexation. Then there are the current low levels and volatility of Henry Hub prices.
All Asian countries have expressed high interest in a longer-term alternative: developing a natural gas trading hub in Asia. Recent trends have been encouraging, and such a hub would change the way LNG is marketed and traded, introducing increasing flexibility. As the IEA highlighted in previous work, the lengthy transition would require substantial transformation of Asian gas markets, such as a hands-off government approach to energy issues, third-party access to infrastructure and wholesale price liberalisation
This article by Anne-Sophie Corbeau, until 2014 the IEA Senior Gas Analyst, originally appeared in IEA Energy: The Journal of the International Energy Agency. Through the end of 2014, the IEA regularly produced IEA Energy, but analysis and views contained in the journal are those of individual IEA analysts and not necessarily those of the IEA Secretariat or IEA member countries, and are not to be construed as advice on any specific issue or situation. Click here to read issues of IEA Energy.
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