What are the main challenges and dynamics of LNG in Asia?
Before discussing specifically Asia, I’d like to remind here that expected growth in LNG trade is above the expected growth in other commodities, according to the consultants like IHS. (2015-2025/ CAGR worldwide; oil = 1.1% ; gas = 2.0%; coal = 0.7%; LNG = 4.7%).
Growth in LNG trade is still expected to come from Asia, especially from non-OECD countries. Within this group we can distinguish on one hand countries with growing energy needs like China or the Indian sub-continent and the on the other hand countries that used to export gas but that are becoming importers like Indonesia and Malaysia.
For countries with increasing energy demand, gas and LNG should play an increasing role in order to satisfy these needs in a sustainable way, especially as an energy of transition away from oil and oil products.
China incremental LNG import between 2015 and 2025 should reach 30 Mt (+12% pa), while in India the incremental LNG demand should grow by over 6% pa.
Other countries, with smaller volumes but high growth rate will also contribute to the expected growth in LNG demand. I’m thinking of Thailand (+6 Mt of incremental imports) or Singapore, while Pakistan and Bangladesh might play a greater role in the LNG trade.
For countries that used to be oil and gas exporters, Indonesia should import 10 Mt in 2025 (against 3 Mt in 2015), and Malaysia should experience a similar trend.
In the region, the LNG market is distorted by major uncertainties. In Japan and Korea for example, the impact of deregulation and nuclear restarts, coupled with an increase in renewables power generation are affecting the incumbents. So buyers now prefer shorter contracts, more flexibility, more diversification in indexes. But the demand is still there and for long. It is just a matter of having the right product and the right contract.
How can LNG producers help Asian buyers achieve their need for more contract flexibility?
LNG contracts intend to align interest of both buyers and sellers. LNG producers need visibility for their investment whereas buyers are looking for increasing flexibility in order to follow their sometimes volatile and uncertain demand. That’s where portfolio players bring value to the market. Portfolio players can reconcile buyers and sellers expectations by pooling different sources of supply and different customers and by providing innovative solutions on pricing, flexibility.
What are the key requirements to create a natural gas trading hub in Asia?
The key requirements to create a LNG hub could be
Regulatory measures that favor the opening of national markets to competition and notably an effective third party access to regas terminal);
Sufficient volumes traded in order to bring depth in the physical market;
Transparent pricing systems
A minimum numbers of market participants on both side (buy / sell);
An attractive financial place
Most of the LNG players anticipate the LNG market will be comfortably supplied for the next decade. This period might seem the ideal window to develop a LNG hub in Asia. Many countries in Asia are now competing to offer hubs that offer the required transparency, market liquidity with adequate systems and regulatory environment: Tokyo, Shanghai, Singapore. Singapore is also very pushy in this matter: customers could be allowed to import up to 10% of their annual LNG intake from the international spot market for domestic use and the SGX exchange is now promoting various indexes to trade LNG and to hedge positions. Japan is also promoting new indexes and I have no doubt other will follow.
Besides the location question, it seems a lot of buyers are now interested in such hubs that would provide a price reference independent of oil and reflecting the Asian LNG fundamentals, as happened in Europe.
Comparison of natural gas pricing index: What is more attractive in the market today - US Henry Hub, JCC or cocktail price?
There is no generic answer to this question. The attractiveness of an index mostly depends on the buyer and on its final market for gas.
For buyers for which gas has to gain market share against oil products, JCC is an interesting index, all the more interesting that crude oil prices are low today. Other buyers are more interested in indexes diversification and would prefer Henry Hub.
For buyers, European market prices could be seen as a proxy or an indicator for a yet-to-come Asian LNG hub, which such Asian indexes are developed.
Of course, hybrid prices made of various indexes and references, could result from a compromise between buyers and sellers’ expectations and provide the required diversification.