FROM: The Korea Herald

[The Korea Herald - Apr. 19, 2013]   

It is often said that Asia is on the cusp of entering a “golden age” of natural gas as a commercial energy source. The rapid growth of natural gas in Asia reflects efforts to improve energy security and curb environmental problems caused by oil and coal. But the future role of gas in the region will depend on whether a market-based pricing system is introduced based on supply and demand conditions.

The Asian natural gas market is the fastest-growing gas market in the world. The supply of natural gas, which mainly involves liquefied natural gas, or LNG, in the case of Korea, Japan and Taiwan, is dominated by long-term contracts that link the price of gas to that of oil. The long-term LNG contracts are seen as necessary both to ensure the secure delivery of supplies and help finance the huge investments required for gas projects.

The disadvantage of this system, however, is that it has kept Asian gas prices much higher than in other parts of the world. Natural gas prices in the U.S., for example, are only one-quarter of those in Korea. There are concerns that the current pricing system could harm the competitiveness of the region’s economies. It also threatens to limit the expansion of natural gas in the energy mix, although gas is a more cost-efficient energy source than oil, and environmentally cleaner than either oil or coal. 

The International Energy Agency recently proposed that a trading hub should be established in Asia to help promote the transparency of natural gas pricing to better reflect local supply and demand conditions. Such a move would create a more integrated natural gas market in Asia in which efficient price signals would bolster the region’s competiveness. However, such a plan can only succeed if regional governments are willing to take a more “hands off” approach on price regulation, the IEA added.

A trading hub would not replace the current system but complement it. The goal would be to encourage the trading of short-term volumes that meet sudden changes in demand and prices. A competitive spot market would accelerate the increased use of LNG by Asian customers by encouraging a more flexible pricing structure.

As the world’s second-largest LNG importer, Korea could play a vital role in this regard. The conditions for establishing a regional trading hub are improving. Asia has more gas reserves than those for oil, with Southeast Asia and Australia being the main suppliers. New gas reserves are being explored in China and India. This reduces the region’s dependence on Middle Eastern oil and its vulnerability to oil price shocks.

There is plenty of room for further growth in natural gas use in Asia. Natural gas only accounts for 10 percent of the total energy mix in Asia, while it makes up around 23 percent globally. 

Future global trends will likely result in a fall in LNG prices. More gas supplies are being discovered and developed in Asia, with a resulting increase in facilities to ship LNG to regional customers. The shale gas boom in the U.S. will reduce expected American demand for LNG, further easing price pressure and changing LNG’s current profile in Asia as a marginal and high-cost fuel that is affordable for only the richest economies.

The prospect of ample LNG supplies supports the evolution of a more flexible LNG contract price structure encouraged by the development of one or more regional trading hubs.

LNG must still meet the challenge of competing against cheaper coal as the Asia’s main fuel. But rising coal use in China and India is contributing to growing air pollution, environmental damage and declining health standards, forcing Beijing and New Delhi to consider reducing their dependence.

Given these circumstances, the prospects for LNG in Asia look promising as long as the conditions for a competitive natural gas market in Asia are established, including pricing structure reforms. There must also be an expansion of the LNG supply chain, including LNG regasification facilities and shipping capacity, which will provide more opportunities to trade LNG at short notice and provide guarantees for secure supplies at the same time. There are encouraging developments in this regard, with plans to build more than 50 LNG terminals in Asia over the next decade.

The development of competitive regional natural gas markets and a flexible pricing structure will take time. But it will provide Korea with the opportunity to help Asia adapt to global trends in the natural gas sector if the government is willing to embrace pricing competition.

The shale gas revolution and its impact on global natural gas trends will be a main topic at the 2013 World Energy Congress in Daegu. I believe the views to be aired at the Congress could represent a first important step for Korea to promote itself as a future natural gas trading hub for Asia. I look forward to the government and the private sector cooperating to achieve this goal.


By Younghoon David Kim