Asian gas hub
Rising liquidity in LNG derivatives has important implications for the evolution of an Asian gas hub. It suggests the Asian gas market will develop differently to the US and Europe, even if the emergence of a dominant Asian gas hub appears to make sense as a counter point to its US and European equivalents.
This should not be surprising because the Asian gas market is much more fragmented than the gas markets of the US and Europe, spanning multiple unconnected national markets as different stages of liberalisation and with very different regulatory regimes. The concept of an ‘Asian’ gas market only really makes sense if thought of in terms of LNG trade because it is LNG that can be arbitraged between Asian national markets, as well as between the Atlantic and Pacific basins. In Europe and the US, LNG is an adjunct to existing markets based around pipeline supply.
There are nonetheless three main contenders hoping to fill the role of Asian gas hub – Singapore, Japan and China.
Singapore has a cluster of trading companies, a well-developed financial community and an open liberalised market. It could provide independent regulation and arbitration and non-discriminatory third-party access to infrastructure, but it is a small market in physical terms. It has no domestic gas production to speak of and consumed 12.3bn m3 of gas in 2018, sourced primarily by pipeline from Indonesia, as LNG and a smaller proportion by pipeline from Malaysia.
Japan also has strong advantages but also some important disadvantages, first among which is that its gas market, while large, is not well integrated. Pipelines connect import points with local markets rather than forming a national gas system. In addition, the Japanese market is not expected to grow over the long term as the expansion of renewable energy sources and the return of nuclear reactors eats into gas’ share of power generation.
Japan also has no significant gas production of its own and no international interconnections for pipeline gas trade. The Japanese market is going through a process of liberalisation, and liquid gas hubs have historically emerged after rather than before liberalisation, but this may not be enough to foster anything more than localised gas trade at the wholesale level.
China offers much more in terms of both interconnections and market growth. Gas demand, including for LNG, is rising rapidly and the country is expected to overtake Japan as the largest market for LNG imports globally. Chinese LNG imports grew by 38.8% in 2018.
It also has multiple international interconnections, receiving pipeline gas from Myanmar, Central Asia and by the end of this year, if the Power of Siberia pipeline is completed on time, from Russia. It is also a major producer of gas in its own right; China produced 161.5bn m3 of gas in 2018, while consuming 283bn m3, importing 73.4bn m3 as LNG and 47.9bn m3 by pipeline, according to BP data.
However, the Chinese market remains dominated by large state companies and third party-access to infrastructure is limited, not just at LNG terminals but inland. The Chinese market is insufficiently liberalised to support the development of a regional gas hub, while concerns about market access, the continuity of energy policy and availability of independent arbitration also detract from its suitability.
Derivatives solution
The lack of an obvious candidate creates a vacuum which LNG derivatives hope to fill, but there is more to their potential for success.
LNG is the glue which binds fragmented Asian gas markets together and the primary means of price transmission. Access to domestic gas infrastructure, such as import terminals, storage and pipelines is not necessary for a commodity delivered by ship because there is no system balancing requirement. LNG carriers are the LNG market’s transportation system and the market for LNG carriers is open.
Even if the end markets lack liberalisation, there is sufficient diversity of buyers from multiple national markets to create active competition in wholesale LNG trade in Asia.
There is also no problem with a lack of a specific physical delivery point as Henry Hub, the NBP and TTF show – they are all systems rather than individual points for delivery.
As LNG supply becomes more flexible and less tied to oil indexation, and as markets like Japan liberalise their domestic markets, creating direct price risk between local and international markets for importers, the need to hedge LNG sales and purchases grows.
Asian gas markets – Japan, South Korea, Taiwan — are dominated by LNG trade. The newer participants – China, India, Pakistan and Bangladesh – import or will import enough LNG to make the Asian price of LNG a key element of domestic pricing.
Phone:
Email: