Natural gas trading hub could come to Asia

A report released by the International Energy Agency recommends developing a natural gas trading hub in Asia as a step toward establishing a gas market in which prices better reflect local gas demand and supply.

The Paris-based agency released the report  in Tokyo at a conference sponsored by the Institute of Energy Economics, Japan, and focused on the benefits to Asia of a more competitive natural gas market.

It recommended Singapore as the best place for initial development as a gas hub, with Japan, Korea and China likely prospects for future development.

The agency notes that Asia is expected to become the world’s second-largest gas market by 2015, but said its economic growth is hampered by natural gas markets dominated by long-term contracts linked to the price of oil, which keep the price higher than that in much of the rest of the world.

While oil is traded on a global market, gas is traded regionally in the United States and many other countries.

International Energy Agency Executive Director Maria van der Hoeven said that although natural gas has the potential to improve energy security and yield economic and environmental benefits for Asian-Pacific countries, expanding the role of gas in Asia will depend on regional market conditions that allow the fuel to compete autonomously in local 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,” she said in a statement.

One argument U.S. natural gas producers have made for exporting liquefied natural gas is the demand in Asian markets.

The U.S. Department of Energy is reviewing applications to export 22.6 billion cubic feet of natural gas per day to countries that do not have free-trade agreements with the United States.

The export issue is politically volatile because chemical plants and manufacturers that use natural gas for fuel and as a raw material benefit from low U.S. prices, sometimes just a fourth of prices  in some European and Asian countries.

Natural gas producers want to export gas because they say U.S. prices — driven by the surge in domestic production — are too low to sustain drilling.

The International Energy Agency report found that while long-term contracts can play a beneficial role in offering investment security, their current pricing doesn’t reflect gas market fundamentals or the competitiveness of gas relative to other fuels.

And without a competitive spot market for natural gas, it said, countries have little incentive to change current practices.

Current market structures discourage gas consumption and affect Asian competitiveness, according to the report, which suggests that governments should maintain and supervise competitive market conditions instead of focusing on price regulation.