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Asia must reform natural gas markets

LNG Industry,

Asian governments must reform their natural gas markets if the region is to see an expansion in LNG supply to meet its rapidly growing demand, according to a new report from the International Energy Agency (IEA).

The report, The Asian Quest for LNG in a Globalising Market, specifies that limited flexibility and pricing issues are the main challenges to overcome in the development of a more efficient market.

Transparent markets

The IEA has previously highlighted the need for more transparent and efficient markets in Asia, where gas prices are four times those in North America, however the issue is becoming more acute as the region’s gas demand rises and as the LNG market becomes increasingly globalised.

Approximately 150 billion m3 in new LNG supplies, led by several projects in Australia, are expected to become available between now and 2020. In that same period, Asian gas demand is forecast to grow by around 250 billion m3.

New LNG supplies

“The advent of new LNG supplies represents a golden opportunity for Asia, but first the region’s governments must address the rigid and illiquid markets that undermine affordability and accessibility for consumers. For gas to be a sustainable contributor to energy security in the region, Asia must look to reforms,” said IEA Executive Director Maria van der Hoeven.

High prices have become unsustainable for consuming countries in Asia, and the problem is even more acute for those countries that have regulated low end-user prices. The process of lowering costs for LNG, however, will be neither quick nor simple, as the LNG supply chain is both capital- and energy-intensive.

Report recommendations

The IEA report offers recommendations for both governments in consuming countries and LNG producers on how to develop an LNG market in Asia that efficiently balances supply and demand while optimising trade flows. It says governments should provide effective, open, third-party access to infrastructure, which would form the basis for the development of gas trading hubs in Asia. In this regard, Singapore is leading by example, with the first open-access, multi-user LNG terminal in Asia.

The report encourages governments to embrace pricing reform, with less intervention in wholesale prices. Instead, governments should encourage the natural development of competitive pricing in order for gas to be a sustainable contributor to energy security in the region.

Embrace reforms

The report calls on gas producers to embrace the idea of reforms even though these will require modifying long-standing business models. Without reforms, producers risk losing market share to alternatives: gas must be in a position to compete against cheaper coal and low-carbon electricity sources such as nuclear and renewables. The report also calls for gas producers to improve their project management and execution, noting that recent cost overruns on large LNG projects were hindering the ability of gas to compete.

The report can be downloaded for free here.

Adapted from press release by Katie Woodward

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