IEA eyes Singapore as Asia natural gas trading hub


TOKYO -- In order to ease Asia's high natural gas prices, the region should work to develop a trading hub and facilitate a market in which they better reflect supply and demand fundamentals, the chief of the International Energy Agency said Tuesday.

Governments in the region need to work to allow markets to decide natural gas prices with minimal interference and through price deregulation, while also meeting institutional requirements to attract new market participants, Maria van der Hoeven, IEA executive director, told a Tokyo conference.

Her remarks come at a time when most sales of liquefied natural gas in Asia are through term contracts as long as 20 years, indexed to crude-oil prices. Asian gas demand is soaring and more supply options are opening, and this is driving demand for shorter-term, more flexible arrangements.

"A key to improving functionality in the Asian gas market, that's to develop an Asian hub," she said, explaining how Asian gas prices have remained much higher than those in Europe or the US.

An IEA report released Tuesday said that while the system now could be beneficial in providing investment security, it didn't reflect the fundamentals and competitiveness of gas within the energy mix of mature economies where the gas is consumed.

Singapore seemed to be most suited in Asia to develop a competitive natural gas market and trading hub in the medium term, the report said, with Japan, Korea and China likely competitors in future.

As of late last year, at least 14 companies had set up LNG trading or marketing desks in Singapore, including BP, BG Group, Gazprom, Shell, Vitol and GDF Suez.

"Crude-oil-based pricing is irrelevant now," said Toshiaki Koizumi, fuel department general manager of Japanese utility Tokyo Electric Power Co., or Tepco, a major LNG buyer.

"Crude-oil is not necessarily a good global benchmark. Its prices are sometimes manipulated by speculators and do not reflect supply-demand situation properly," he told The Wall Street Journal recently.

"The Asian natural gas market is the fastest-growing gas market worldwide, and is expected to become the second-largest by 2015, with 790 billion cubic meters of natural gas demand," the IEA said.

Among new entrants to Asia's gas markets in coming years will be suppliers selling US and Canadian gas, available due to technology that has unlocked huge reserves trapped in shale rock.

A string of LNG export terminals are being planned in North America where spot market gas prices are as much as four times lower than prices offered by suppliers in Asia and Australia.

Japan is the world's largest buyer of LNG, followed by South Korea. Energy and trading companies from both have been among a rush of investors pouring money into North American shale projects in the past two years.

Existing suppliers of LNG to Asia markets such as Chevron, which is leading the development of two huge LNG terminals on Australia's northern coast, have said that for them to underpin such projects, they need certainty on future revenues, and that this is reflected in the present pricing system.

Japan's demand for natural gas has soared following the shut-down of its nuclear reactors after the March 2011 Fukushima nuclear disaster. Ms. van der Hoeven said while Japan had well-developed infrastructure and financial markets for LNG, its segmented and monopolized electricity market was a hindrance in introducing a wholesale natural gas market.

"Japan has great potential to act as a hub, but it needs to take important steps, improving infrastructure and further developing its domestic power market," she said.

Tepco's Mr. Koizumi said a number of different gas pricing options could be considered, including basing contracts on benchmark US Henry Hub spot market price, the National Balancing Point, or NBP, used in the UK and a Japan/Korea reference price being suggested by a pricing agency.

Last November, Japan's Kansai Electric Power Co. made a preliminary agreement with a BP unit in Singapore to buy about 500,000 tpy of LNG linked to Henry Hub for 15 years starting in 2017.

Ryu Si-ho, a researcher at Korea Gas Corp., said he knew of discussions going on over a partial introduction or a change to a spot-based system in place of long-term contracts indexed to oil.

But any change isn't likely in the near future, he said, adding that it isn't easy to renegotiate pricing of existing long-term contracts with suppliers.

Dow Jones Newswires

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