The world’s fastest-growing natural gas market, Asia, is expected to be its second-largest two years from now; however, for the benefits of gas to be realized and for the market to develop fully, Western-style regulatory and trading practices will have to come into play, according to a new report from the International Energy Agency (IEA).

“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 Tuesday. “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.

“The 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.”

The report, “Developing a Natural Gas Trading Hub in Asia,” was released at a conference sponsored by the Institute of Energy Economics, Japan.

Asian consumers of global liquefied natural gas (LNG) have grown increasingly restless over the high prices they pay for the fuel relative to natural gas prices in the United States and Europe (see Daily GPI, Oct. 11, 2012). The pushback to oil-indexed pricing has been seen as a threat to at least some North American projects that would export LNG to Asia (see Daily GPI, Jan. 23; Oct. 31, 2012). In early February, Tokyo Electric Power Co. announced its first-ever long-term contract for LNG indexed to the Henry Hub (see Daily GPI, Feb. 8).

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, the IEA report said. “Moreover, without a competitive spot market for natural gas, there is little incentive and little scope to change current commercial practices. 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 mature economies.”

Gas markets as they exist in Asia today discourage gas consumption and place the region at a competitive disadvantage to the United States and Europe where markets are more flexible, IEA found. The agency cited a finding by the Organisation for Economic Co-operation and Development that the single biggest obstacle to an effective gas market is a lack of infrastructure access.

Additionally, Asian governments should focus on supervising competitive market conditions rather than price regulation, IEA said. A “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,” IEA said.

Gas transport and commercial activities should be separated and prices should be deregulated at the wholesale level, IEA said. According to the agency, Singapore offers the best prospects for now for the development of a gas hub. Japan, Korea and China are likely to be competitors in the future, IEA said.

“The prospects are there, but even the prime candidates will need to do more,” said Van der Hoeven. “China’s fast-growing domestic gas network is still underdeveloped, and the entire production chain remains heavily regulated. Singapore’s small domestic market means that to grow as a hub it must rely on re-exports, which are hindered by regulation.

“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.”

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