PARTNER COUNTRY SERIES. Developing a Natural Gas Trading Hub in Asia. Obstacles and Opportunities

Transcription

1 PARTNER COUNTRY SERIES Developing a Natural Gas Trading Hub in Asia Obstacles and Opportunities

2 PARTNER COUNTRY SERIES Developing a Natural Gas Trading Hub in Asia Obstacles and Opportunities Warner ten Kate Lászlo Varró, Anne-Sophie Corbeau

3 INTERNATIONAL ENERGY AGENCY The International Energy Agency (IEA), an autonomous agency, was established in November Its primary mandate was and is two-fold: to promote energy security amongst its member countries through collective response to physical disruptions in oil supply, and provide authoritative research and analysis on ways to ensure reliable, affordable and clean energy for its 28 member countries and beyond. The IEA carries out a comprehensive programme of energy co-operation among its member countries, each of which is obliged to hold oil stocks equivalent to 90 days of its net imports. The Agency s aims include the following objectives: Secure member countries access to reliable and ample supplies of all forms of energy; in particular, through maintaining effective emergency response capabilities in case of oil supply disruptions. Promote sustainable energy policies that spur economic growth and environmental protection in a global context particularly in terms of reducing greenhouse-gas emissions that contribute to climate change. Improve transparency of international markets through collection and analysis of energy data. Support global collaboration on energy technology to secure future energy supplies and mitigate their environmental impact, including through improved energy efficiency and development and deployment of low-carbon technologies. Find solutions to global energy challenges through engagement and dialogue with non-member countries, industry, international organisations and other stakeholders. OECD/IEA, 2013 International Energy Agency 9 rue de la Fédération Paris Cedex 15, France Please note that this publication is subject to specific restrictions that limit its use and distribution. The terms and conditions are available online at Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Japan Korea (Republic of) Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom United States The European Commission also participates in the work of the IEA. IEA member countries:

4 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities Tableofcontents Acknowledgements...5 Executivesummary...6 Introduction NaturalgaspricinginAsiaPacific...10 Pricingnaturalgas...10 PricingnaturalgasinAsiaPacific...13 TherationaleforgastogaspricinginAsiaPacific TheAsianPacificnaturalgasmarket...20 AsiaPacificsupplydemandbalance...20 NaturalgasdemandbysectorinAsiaPacific...21 NaturalgastradeinAsiaPacific...22 LNGtradeinAsiaPacific...23 NaturalgaspipelinesinAsiaPacific...25 LNGsupplychainflexibilityinAsiaPacific...27 NaturalgaspricedevelopmentinAsiaPacific...29 Towardsaregionalinterconnectedmarket? Creatingaliquidnaturalgastradinghub...32 Requirementsforafunctioningnaturalgasmarket...32 Institutionalrequirementstocreateawholesalenaturalgasmarket...33 Structuralrequirementstocreateawholesalenaturalgasmarket...35 Creatinganaturalgasprice:fromhubtomarket...35 Tradingplatforms:physicalversusvirtualhubs...36 Mergingphysicalandvirtualnaturalgastrade...37 Contractualconsequences?...42 Factorsinfluencingpricing...42 Hubsasasourceofflexibilityinnaturalgasmarkets...44 Priceinteractionwithothergasmarkets...45 ImplicationsforAsiaPacific...47 Marketmaturity:whenisaliquidgasmarkettrulyliquid?...48 Settingthepaceofchange:theroleofaregulator...49 Atransparentandcompetitivepricefornaturalgas PerspectivesonAsiangashubdevelopment...51 Perspectives:consumersinAsiaPacific...51 Japan...52 TheRepublicofKorea...55 China...57 Singapore...60 CreatingcompetitioninAsiaPacificnaturalgasmarkets...63 ObstaclesinupstreamLNGsupplyflexibility?...64 LNGcontractstructure...66 Perspectivesforchangeincontracts...71 Page 3

5 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA2013 Page 4 LNGasalinkbetweenmarkets?...74 Ashocktothesystem?...74 Conclusion:chickenoregg?...75 Acronyms,abbreviationsandunitsofmeasure...78 References...80 Listoffigures Figure1 PriceformationofnaturalgasconsumptionintheworldandAsiaPacific Figure2 Pricingmechanismsinglobalnaturalgastrade, Figure3 MarketbasedpricingingastradeinNorthAmerica,EuropeandAsiaPacific...13 Figure4 AsiaPacificpricingmechanismsfornaturalgastrade(pipelineandLNG)...13 Figure5 AverageJapaneseLNGimportpricesandpricerange...15 Figure6 ShareofoilandgasinelectricitygeneratedinJapan, Figure7 Japaneselongtermandspotvolumesimport, Figure8 NaturalgasdemandinAsiaPacific, Figure9 AsiaPacificnaturalgasconsumptionproductionforecast, Figure10 SectoraldemandfornaturalgasinAsiaPacific, Figure11 PipelineandLNGtradeinAsiaPacific, Figure12 ForecastedgrowthinLNGtradeinJapan,China,IndiaandASEANnations, Figure13 LNGimportintoJapan,Korea,China,ChineseTaipeiandIndia, Figure14 AtlanticLNGdeliveredintoJapan,KoreaandChineseTaipeiatimportprice, Figure15 Regasificationoperational,underconstructionandplannedinAsiaPacific, Figure16 RegionalgaspricesandJapanCrudeCocktail, Figure17 Increasingcompetitioninanaturalgasmarket...33 Figure18 Creatingacompetitivewholesalenaturalgasmarket...33 Figure19 Bilateral,OTCandcentraltradingandtransparencyonspotandfuturesmarkets...37 Figure20 AschematicOTCtransaction...38 Figure21 Aschematicfinancialtransactiononanaturalgasexchange...38 Figure22 Shipperandfinancialpartyactivityonthespotandfuturesmarket...39 Figure23 Productstraded onthecurve...41 Figure24 Marketdevelopment,contractdurationandmarketmaturity...44 Figure25 SaleofflexibilityservicesthroughvirtualhubsinEurope...45 Figure26 PricedevelopmentintheAtlanticBasin, Figure27 LongandshorttermcontractedLNGintheworldandAsiaPacific, Figure28 ShorttermcontractedLNGintheworldandAsiaPacific, Figure29 LongtermcontractedLNGdeliveredFOBorDESin Figure30 ConstructioncostsforvariousLNGprojects...73 Listoftables Table1 LNGspotcargoesdeliveredinJapan,KoreaandChineseTaipei,2007Q Table2 LNGimportintoJapan:atJCCparity,historicalaverageandaveragespreadofdeliveries..16 Table3 Intraandinterregionalpipeline(s)inAsiaPacific...26 Table4 Competitivemarketrequirementsinselectedcountries...63 Listofboxes Box1 Otherpartiesinvolvedinnaturalgashubdevelopment...40 Box2 TheJapan/KoreaMarker...67

6 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities Acknowledgements Theauthorofthisreportwouldliketothankallthecontributorsandreviewersfortheirinput andcomments. Significant contributions, valuable comments and feedback were received from within the International Energy Agency (IEA), and from a panel of external industry reviewers. In that regard,iofferspecialthankstothijsvanhittersum,karelvanderlingen,colinlyle,juliejiang, JonathanSinton,andDougWoodfortheircarefulreviewandchallengingcommentsthathave considerablyimprovedthequalityofthispaper. WarnertenKate(formerlyIEA)istheleadauthorofthisreport,producedunderthesupervision oflászlovarróandwithcontributionsbyannesophiecorbeau.attheieagas,coalandpower Division (GCP) I would like to thank Lászlo Varró, Head of the Gas, Coal and Power Markets Division,forhisvaluableadvice,unrelentingsupportandextensivediscussiononthetopic.My colleaguesofthegcpgasteamichirofukudaandhideomiito,who,aslngexperts,showedme the way through the liquid maze. Special thanks go to Alexander Antonyuk for rigorously attackingmyassumptions,makingthemeitherstrongerorirrelevant.finally,nothingwouldhave cometogetherifnotfortheinspirationalgasteamleadershipofannesophiecorbeau. IamgratefultoJanetPapeforeditorialwork. CherylHaines,BertrandSadin,AstridDumond,MurielCustodioandAngelaGosmannattheIEA Communication and Information Office (CIO) provided essential support in terms of editing, productionandpublication. Page 5

7 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA2013 Executivesummary Page 6 Natural gas has the potential to improve energy security and economic and environmental performanceintheasianpacificeconomies.howeverexpandingitsrolewilldependonregional marketconditionsthatallowgastocompeteautonomouslyinenergymarketswhicharethemselves connected to global energy markets. The future role of gas in Asia will depend on whether naturalgaspricingistiedmorecloselywithsupplyanddemandfundamentalsintheregion. TheAsiannaturalgas marketisthefastestgrowinggasmarket worldwide,andis expectedto becomethesecondlargestby2015,with790billioncubicmetres(bcm)ofnaturalgasdemand. ThemarketfornaturalgasinAsiaisdominatedbylongtermcontractsinwhichthepriceofgasis linked, or indexed, to that of oil. Developing countries might require longterm contracts to ensure security of supply for their fastgrowing economies, and producers will look to secure returnontheirconsiderableinfrastructureinvestments. Inrecentyears,thishashelpedkeepAsiangaspricesmuchhigherthanthoseinotherpartsof the world, leading to competitiveness concerns and serious questions about whether such a systemcanlast.inordertoexpanditsmarketshare,naturalgashastobecompetitivewithinthe energymixoftheregionorcountrywhereitisdelivered.inasia,however,currentconstraints includetheregion slackofbothatradinghubtofacilitatetheexchangeofnaturalgas,andthe developmentofatransparentpricesignaltosteerinvestmentsinnaturalgasinfrastructures. Theconfidenceinthelegitimacyandtransparencyofnaturalgaspricinggeneratedonanatural gashubiscrucialforinvestmentdecisionsinsuchacapitalintensiveindustry.thisconfidence canbederivedtoalargeextentfromtheinstitutionalandstructuralrequirementsputintoplace, but ultimately it lies in the longterm resolve of government to allow markets to determine naturalgaspriceswithminimalinterferencefromshorttermpoliticalconsiderations. To successfully develop a reliable natural gas price in the AsianPacific region would require a competitivenational/regionalmarket,whichwouldthenneedtomeetasetofinstitutionaland structural requirements to create the market confidence to attract new participants (namely financials) and to encourage market players to use a trading hub for the balancing of their portfolios. A handsoff governmentapproachisnecessary.thiswouldinvolveseparatingtransportfrom commercialactivities,pricederegulationatthewholesalelevel,sufficientnetworkcapacityand nondiscriminatoryaccess,andacompetitivenumberofmarketparticipantswiththeinvolvement offinancialinstitutions. ProspectsforacompetitivewholesalenaturalgasmarketinAsiaarelimited.Eveninthemost mature AsiaPacific markets, the basic requirements for a wholesale market are missing, as governmentscontinuetoemphasisesecurityobjectivesovereconomicones.oftheasiapacific economies reviewed in this paper, Singapore seems the candidate best suited to develop a competitivenaturalgasmarketandtradinghubinthemediumterm. AuniquecharacteristicofthenaturalgastradeinAsiaPacificisthelimitedamountofnaturalgas thatistradedviapipelines,andtheregion sgrowingdependenceonthegloballiquefiednatural gas(lng)supplychain.thatgloballngmarkethasbecomedecidedlymoreshorttermoriented and flexible over the past decade a result of the expansion of global LNG production, the emergenceofglobalportfolioplayersandenhancedcompetitionintheatlanticbasin. AndyettheseAtlanticBasindevelopmentshavehadalimitedimpactonsupplyflexibilityinthe AsiaPacificregion.AcompetitivenaturalgasmarketinAsiawouldneedanevenmoreflexible LNG supply than is currently in place. This will require a continued expansion of shipping

8 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities availability and thirdparty access (TPA) to regasification terminals in the AsiaPacific region. Furthermore,itwouldinvolverelaxingdestinationclausesinLNGsupplycontractsthatallowfor marketsegmentationandstiffentheoverallsupplychain.anysuchmodificationofthecontract structuremustproperlyincorporateaspectsthatpreserveinvestmentsecurity. In the AsiaPacific region, competitive natural gas markets and a reliable gas price will not developovernight,andwillnotnecessarilyleadtolowerprices.however,suchadevelopment willallowmarketplayersinasiapacificeconomiestoincreaseportfolioflexibilityasnaturalgas marketsinthisregioncontinuetomature. Governmentsintheregionwillneedtosignaltheirwillingnesstofacilitatecompetitionfurther downstream.singaporeaneffortstodevelopacompetitivenaturalgasmarketandcomplementary tradinghubmightbeconsideredsmallrelativetothesizeoftheentireasiapacificnaturalgas market. However, the example of an alternative market model which is able to adapt global supplychangestotheregionalmarketwouldbeapowerfulone. Page 7

9 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA2013 Introduction Page 8 Globalnaturalgasdemandisexpectedtocontinuetogrowrapidly,outperformingallotherfossil fuels. Global demand is fuelled by the economic growth of emerging economies (aided by air quality concerns), notably China, and to a lesser extent India. In the short to medium term, regionalgasdemandisalsoboostedbytheaftermathofthefukushimadaiichinuclearaccident, as gas is one of the key available energy sources to replace nuclear power generation in the Japaneseelectricitymix. In recent years, significant revisions in global natural gas resource estimates have alleviated concerns about the longterm availability of natural gas in both developed and developing economies. As a result of the exponential growth of United States shale gas production, new globallngliquefactioncapacityandtheimpactoflowerdemandduetotheeconomiccrisis,a gapemergedin2009betweenspotprices(thepricesatwhichthegascanbeboughtorsoldata specifiedtimeandplace)intheunitedstatesandunitedkingdomontheoneside,andoillinked gaspricesprevailinginasiapacific 1 andeurope,ontheother. Asof2012,naturalgaspricesintheUnitedStatesremainedatlowlevelsofaroundUSD3per millionbritishthermalunits(mbtu);europeanspotprices,albeitthreetofourtimeshigherthan thoseintheunitedstates,arestillatadiscounttoeuropeanlongtermcontractprices,while prices in Japan peaked at a level considerably higher than those in Europe. This is raising the question,bothineuropeandasia,oftheappropriatewaytopricenaturalgas. TheEuropeanUnionhassoughttoanswerthisquestionthroughthedevelopmentofalternative pricingmechanismsviagastogaspricingongastradinghubs.europehasaliquidtradinghubin the United Kingdom, the National Balancing Point (NBP), and more recently developed some trading hubs in continental Europe, notably the Title Transfer Facility (TTF) in the Netherlands andnetconnectgermany(ncg)ingermany.however,nosuchdevelopmentshavetakenplace intheasiapacificeconomiessofar. AkeychangeformanyindividualnaturalgasmarketsinAsiaPacificisthegrowingrelianceon imports, in particular, LNG imports. Aside from Japan, the Republic of Korea and Chinese Tapei, importinglngisarelativelynewphenomenonforasiancountries:indiastartedin2005,chinain 2006, Thailand in 2011, and Indonesia and Malaysia in Additionally, a few other Asian countriesareexpectedtobecomelngimportersthisdecade. TogrowandconsolidatetheroleofnaturalgasintheAsiaPacificregion,naturalgaswillhaveto be competitive on price, notably against coal. Simultaneously, countries should continue to attract new sources of supply, which are likely to be more expensive. AsiaPacific natural gas exportershavehistoricallyreliedonlongterm,oilindexedcontractstoselltheirproduction.this makesnaturalgaspricesintheasiapacificregionlargelydependentonoilmarketfactors. Expanding the role of natural gas, and thereby improving the energy security, economic and environmentalperformanceoftheseeconomiesinthelongrun,willdependonmarketconditions. Thesemustallowgastocompeteautonomouslyinlocalenergymarketsconnectedtotheglobal marketthroughapricingsysteminasiathatiscompatiblewithregionalgassupplyanddemand. This paper will focus on the obstacles and opportunities for the AsiaPacific economies to establishnaturalgastradinghubsthatallowfornaturalgaspricestoreflectlocaldemandand supply.inthefirstchapter,pricingmechanismsfornaturalgasareexplainedandcurrentregional 1 AsiaPacific in this Information Paper is defined as NonOECD Asia, China including the Hong Kong area, and OECD Asia Oceania minusisrael. Alphabetically, these are as follows: Australia, Bangladesh, Brunei Darussalam, Chinese Taipei, India, Indonesia,Japan,Korea,Malaysia,Myanmar,NewZealand,Pakistan,China,thePhilippines,Thailand,Vietnam,and other.

10 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities trendsaresetinaglobalperspective.theoutlookforthenaturalgasmarketintheasiapacific region is discussed in Chapter2. In Chapter3, the process of developing a trading hub and a transparentnaturalgaspriceissetout.thischapterexplainsbasicrequirementsneededtocreate acompetitivewholesalenaturalgasmarket,thesubsequentroleofahubinsuchacompetitive market, and the respective roles for government and market parties in such a transformative process.finally,chapter4analysestheperspectivesforselectednaturalgasmarketsinasiaand thegloballngsupplychaintocreateandsupportacompetitivenaturalgasmarket. Page 9

11 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA NaturalgaspricinginAsiaPacific Pricingnaturalgas Page 10 Broadlyspeaking,therearetwowaystoestablishawholesalepricelevelfornaturalgas:either viamarketbasedpricingorthroughpriceregulation. The marketbased way implies that the price of natural gas is determined by supplydemand forcesinamarketthatisnotnecessarilythenaturalgasmarket.infact,indexationtoanother commodity(oil,coal,oilproductsorelectricity)willallowsupply/demandfactorsinothermarkets to set the wholesale price of natural gas. The exact wholesale price of natural gas varies by contract,sincecontractconditionscansetafloor,cap,timelagornone/alloftheaboveforthe priceofnaturalgasforaperiodofdelivery.mostimportant,however,inpricingthe economic way is that the price development of natural gas over time is being determined by market participantsratherthangovernmentregulation. 2 TheInternationalGasUnion(IGU)hasidentifiedthreemajormarketbasedpricingmechanisms, coveringoecdandnonoecdmarkets(igu,2012).thesemechanismsare: oil(product)indexation,wherebygaspricesarelinkedtootherfuelprices(mostlyoilorrefined products,sometimescoal); gastogascompetition,indicatinganindexationtospotpricesthatreflectsupplyanddemand fornaturalgasinamarket;and netbackfromfinalproduct,whichrefersmostlytocontractswherethegaspriceislinkedto thepriceofammonia. 3 Governmentregulationisabletosetnaturalgasprices(priceregulationispossibleateverylevel ofthenaturalgasvaluechain:wellhead,wholesale,citygateordifferentiatingbetweenvarious segmentsofconsumers)atalevelrequiredtosuitthegovernment sdomesticpolicyobjectives. Inherently,priceregulationofnaturalgastomeetdesiredpolitical,social,economicorenvironmental outcomeswillleadtolesstransparentpricesignalsandanunstableinvestmentclimateforthe future,asgovernmentpolicyobjectivescan(easily)change. Frequently, but not necessarily, gas price regulation will lead to belowcost prices for certain segmentsofconsumers.thisismostlikelytooccurinnaturalgasproducingcountries.insuch cases,itisverydifficult(ifnotundesirableforaregulator)toregulatepricelevelstoaccurately reflectgas svalueinanationaleconomy.thismismatchfrequentlyresultsin(unintended)distortions intheusageofnaturalgas,whichlimitefficienteconomicdevelopment.aclearconsequenceof belowmarketpricingofnaturalgasistheinefficientuseoftheresource.thispotentiallylimits exportrevenues(throughincreaseddomesticdemand)foraproducercountry;or,itcouldincrease importexpendituresforaconsumercountrythroughhigherdomesticdemand. TheIGUhasidentifiedfivemajorgovernmentregulatedpricingmechanisms,coveringOECDand nonoecdmarkets(igu,2006).thesemechanismsare: 2 Governmentscaninfluencepricelevelsbyregulatingthenaturalgasmarketsasawhole,butthepricelevelthatwillderive fromtheseregulationsisnotaseasilydeterminedasthroughdirectpriceregulation. 3 Netbackpricingofnaturalgasofafinalproduct(suchasammonia)isperhapsthemoststraightforwardwaytocoupleprice developmentsofnaturalgastopricedevelopmentsinanothermarket,butcompletelydisregardsdevelopmentsinthenatural gasmarketitself.thisisfrequentlythecasewhencostsofnaturalgas(feedstock)representaconsiderableshareofthecost oftheendproduct,therebyguaranteeingaprofitmarginonthesaleoftheendproduct.alternatively,thenetbackapproach canbeusedtodeterminethepricelevelbeforeindexingittootherproducts.

12 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities Regulationcostofservice(RCS)coversthepriceofservice,includinginvestmentandafair return.suchpriceswouldbepublishedbytheregulatororministryandaimatrecoveringthe wellheadprice. Socialandpoliticalregulation(SPR),wherebythepriceissetbyministriesonanadhocbasis dependingonperceivedsocialneeds,supply/demandbalanceorgovernmentrevenueneeds. Thismeansnaturalgaspricescanincrease(ordecrease)verysharply,independentlyofany specificdevelopmentinthegasmarket. Regulation below cost (RBC), where the price does not cover the basic production and transmissionprice,reflectingsubsidies.thisgenerallyhappensonlywhenthegascompanyis stateowned,andismorelikelywhennaturalgasisassociatedwithoilproductionthatprovides thebulkofthegovernment srevenues(ineffectoilprovidesasubsidyongasconsumption). Bilateralmonopoly(BM),referringmostlytobilateralagreementswithinformerSovietUnion countries,wherepricesareagreedonayearly/multiyearbasisbetweenthegovernmentsof twocountries. Noprice(NP),occasionallyusedbyproducersforinternalconsumption. This paper will focus on the perspectives for marketbased price formation in the AsiaPacific region;itisthereforerelevanttocomparetheshareofmarketbasedpriceformationwiththatof otherregions.researchbytheiguhasshownthatthroughtheperiod200510,globalnatural gaspricingwasslightlydominatedbymarketbasedgasprices.in2010,thepricelevelof63%of allwholesalenaturalgassoldgloballywasdeterminedbymarketforces.thisdominantsharefor marketbasedpriceformationisprimarilytheresultofthedominanceofgastogaspricinginthe NorthAmericannaturalgasmarket,whichcomprised25%ofglobalgasdemandin2010. Page 11 Figure1 PriceformationofnaturalgasconsumptionintheworldandAsiaPacific, bcm % 55% 60% 63% 500 Sources:IGU,2006;IGU,2008;IGU,2010;IGU2012. In other markets, most notably the Middle East, Africa and the Former Soviet Union (FSU), price formation was dominated by regulatory preferences throughout World Market 51% Regulated 53% 50% AsiaPacific 52%

13 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA2013 Page 12 In the AsianPacific region government regulations to a large extent continue to determine naturalgasprices. 4 Globally,marketbasedpricingmechanismsarebasedonoilindexationorgastogascompetition. The netbackfromfinalproduct pricemechanismisusedforlessthan1%ofglobalgasconsumption, andisnotusedininterregionalnaturalgastrade.participationbymarketpartiesininternational gas trade (either by pipeline or LNG) exposes market areas to different price concepts and signals. This gives both consumers and producers an incentive to adapt price mechanisms in responsetopressuretoaligndomesticpriceswithimportprices(igu,2012). Overtheperiod200510,theglobaltradeofnaturalgas,bothtransportedbypipeandLNG,was predominantly priced on the basis of oil indexation. Although oil indexation has continued to declineasapricingmechanisminnaturalgastrade,thepriceof65%ofglobalgastradein2010 wasstillindexedtooil. Figure2 Pricingmechanismsinglobalnaturalgastrade, bcm % 68% 69% 65% Sources:IGU,2006;IGU,2008;IGU,2010;IGU,2012. InEuropeandAsiaPacific(andindeed,globally),oilindexationisthedominantpricemechanism fortradedgas,althougheuropecontinuestoshifttowardsmoregastogasbasedprices.yetall NorthAmericangasispricedonagastogasbasis,andin2010NorthAmericacomprised14%of global natural gas trade. European markets are also moving in this direction, owing to a continuedincreaseintradethroughcontinentaleuropeangashubs,asmarketconfidenceinthe pricesetting ability of these hubs has increased. Moreover, the European longterm supply contracts (from Russia, Norway and the Netherlands) are being adjusted to index part of the volumeongastogascompetitionratherthanoil(cera,2009b). Traditionally,naturalgastradeinAsiahasbeendominatedbyoilindexedpricing,withashareof 88% of natural gas traded in the region in No significant changes in this trend can be observedthroughout In the IGU s Wholesale Gas Price Formation, the AsiaPacific region consists of the combined IGU Asia and AsiaPacific regionsencompassing:afghanistan,australia,bangladesh,brunei,chinahongkongregion,chinesetaipei,india,indonesia, Japan,Myanmar,Malaysia,NewZealand,Pakistan,China,thePhilippines,Singapore,Korea,Thailand,andVietnam World Gastogascompetition 95% 84% Oilindexation 88% AsiaPacific 88%

14 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities Figure3 MarketbasedpricingingastradeinNorthAmerica,EuropeandAsiaPacific Page 13 bcm % 84% 77% 67% % 84% 88% 88% NorthAmerica Europe AsiaPacific Gastogascompetition Oilindexation Sources:IGU,2006;IGU,2008;IGU,2010;IGU,2012. PricingnaturalgasinAsiaPacific In2010,justoverhalf(52%)ofthenaturalgasconsumedintheAsiaPacificregionwaspricedon marketbased price formation mechanisms. The majority (67%) of this marketbased gas was imported(pipelinesorlng),while33%wasdomesticallyproduced. NaturalgastradeinAsiaPacificispricedthrougheitheroilindexationorgastogascompetition. Allpipelinetradedvolumesofgasarepricedwithalinktotheoilmarket,whilesomegastogas competitionhasstartedtoemergeinlngtradinginasia(figure4). Figure4 AsiaPacificpricingmechanismsfornaturalgastrade(pipelineandLNG) Sources:IGU,2006;IGU,2008;IGU,2010;IGU,2012. Most gastogas competition pricing in AsiaPacific is LNG spot trade. However, one can argue thatthepriceforspotcargoesinthegloballngmarketisnotnecessarilysetthroughgenuine bcm Pipeline Gastogascompetition 95% 81% Oilindexation LNG 87% 86%

15 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA2013 Page 14 gastogascompetition,as70%ofgloballngimportsin2010wereoilindexed.inaddition,onlya limitedamount(18%)oflngisdeliveredinmarketswithagenuinecompetitivewholesalegas market(e.g.intheunitedkingdomandtheunitedstates)andpricedataleveldeterminedby supply/demandfactors. ThismeansthatthepriceforspottradedLNGinAsiaisnotbasedonsupply/demandintheAsia Pacificregion.Instead,theoilindexedgaspricesetsareferencepricelevelwhichmarketconditions thenmodify.thosemarketconditionsaredeterminedbytherelationshipbetweenabuyeranda seller,theavailabilityofsurplusgasinthelngsupplychain,andthebuyer sneedforthegas. ThesemarketconditionsshifttheLNGspotpriceaboveorbelowtheoilindexedlevel. Inthisregard,theLNGspotpriceinAsiaisnotonethatisrealisedthroughmarketcompetitionin theangloamericansense.asasiahasnotrading hubtofacilitategastogascompetition,the term spotpurchase signifiesthepurchaseofasinglecargothatcanvaryinsize,andthatwillbe lifted inarelativelyshorttimeframe,usuallylessthanoneyearinthefuture. 5 WhileinNorth Americatherearenooilindexedvolumesthatinfluencethespotmarket. The sale of an LNG spot cargo is frequently negotiated without reference to other sources of naturalgas,becausethemainasianlngimportingeconomieshavenoconnectiontopipeline naturalgas.spotcargoesaregenerallypricedaboveorbelowalongterm,oilindexedlngprice intheimportingmarket,thepricelevelofwhichdependsonglobalmarketdemandforoilrather thanregionalsupply/demandfornaturalgas. Asaresult,spotLNGhasfrequentlybeenmoreexpensivethantheoilindexedcargoesbought underlongtermcontractsintheasianregion.overtheperiod2007toq12012,japan,korea and Chinese Taipei have frequently paid a spot premium compared to their longterm supply contracts;onaverage,77%oftheimportedspotcargoeswerepricedabovelongtermcontracts (Table1). ThecurrentoilindexationintheAsiaPacificgastradeistheresultofhistoricaldevelopmentsand contract negotiations between suppliers and, originally, Japanese customers. In 1969 the first LNGsupplycontractwassignedthatmadevolumesavailablefromAlaskaintheUnitedStates. Thefirst15to20yearLNGsupplycontracts(BruneiandAbuDhabistartedtodeliverLNGto Japanaswell)adoptedafixedpricesettingthatvaluedLNGataroundUSD0.5/MBtu.Initially, thelngpricewassetatapremiumversuscrude oil;andwasthenprogressivelyraisedasoil pricesroseduringthe1970s. Table1 LNGspotcargoesdeliveredinJapan,KoreaandChineseTaipei,2007Q12012 Spot cargoes Spot price bcm % LNG import > long-term < long-term Japan % 74% 26% Korea % 83% 17% Chinese Taipei % 71% 29% Total % 77% 23% Note:spotcargoesforJapanoriginatefromAlgeria,Egypt,EquatorialGuinea,Nigeria,Norway,Peru,Trinidad,Yemenandreexported cargoesfromnonproducingnations.spotcargoesforkoreaoriginatefromtheunitedarabemirates,algeria,brunei,egypt,nigeria, Norway, Peru, Qatar, Trinidad, the United States and reexported cargoes from nonproducing nations. Spot cargoes for Chinese Taipei originate from the United Arab Emirates, Algeria, Brunei, Egypt, Equatorial Guinea, Norway, Oman, Peru, Russia, Trinidad, UnitedStates,Yemen,andreexportedcargoesfromnonproducingnations. Sources:customsdataJapan,KoreaandChineseTaipei. 5 Thisqualificationof spotpurchaseandshorttermlngtrade isderivedfrominternationalgroupofliquefiednaturalgas Importers(GIIGNL).

16 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities Subsequently,thefirstLNGsupplycontractsignedbetweenIndonesiaandJapanintroducedoil indexation. Initially, this would establish a link with the average oil price or the government selling price (GSP) of Indonesia s crude oil sales. However, near the end of the 1980s, Saudi Arabiaintroducednetbackpricingforitsoilexports;thisreducedIndonesia sgspandconsequently, thepriceoflngexportedtojapan.therefore,itwasinthelngproducer sinterestthattheoil indexed price would be determined in the market where the LNG would be delivered; the JapaneseCustomCleared(JCC)priceprovidedthatrequirement. 6 WhenKorea(1985)andChineseTaipei(1990)startedtoimportLNG,theirsupplycontractswere alsolinkedtothejcc,makingthisthedominantoilmarkerintheregion.thedeclineinoilprices duringthe1980sledtotheintroductionofscurvepricingformulas.scurveformulasareusually establishingalinearrelationshipbetweenthepriceofgasandoilaslongasoilpricesstaywithin apredeterminedrange.whentheoilpricemovesoutofthisrange,therelationshipbetweenthe priceofoilandtheresultinggaspriceweakens,thereforereducingtheriskoflowoilpricesfor producers, but also introducing protection against high oil prices for consumers. 7 As the first Scurve contracts were developed to protect producers (and their upfront investments in LNG infrastructure),atanaverageoilpricebelowusd20/bblduringtheperiod198599,thisresulted inmoreexpensivelngthantheenergyequivalentinoil. Figure5 AverageJapaneseLNGimportpricesandpricerange Page USD/MBtu Source:Japanesecustoms. During the 2000s, oil prices increased significantly, but Scurves protected LNG buyers against this increase, reducing the price of LNG imports on a calorific basis in relation to that of oil. Despitetherenegotiationoflongtermcontractsduringthefirstpartofthedecade,arapidrise inoilpricesresultedinlongtermlngpriceslowerthantheiroilequivalent.however,theadditional import of spotmarketed cargoes would frequently be above prices equal to the calorific oil equivalent(figure5). 6 TheJCCisalsofrequentlyreferredtoastheJapanCrudeCocktail. 7 ForanintroductiontoLNGpricingandtheScurvesee:Flower(2008). PricerangeLNGpurchase LNGatJCCparity JapanLNGaverage

17 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA2013 Page 16 After2004,LNGproducerstriedthroughnegotiationstoraiseorabolishtheScurve(Miyamoto, IshiguroandYamada,2009).CurrentlythediscussioninlongtermLNGsupplycontractsfocuses onthe slope inanlngpriceformula,basicallydetermininglngpricesatacertainpercentage ofthejccprice(plusorminusaconstant).asaconsequenceofincreasingoilprices,increased availability of spotmarketed LNG on global markets, the rigidity of longterm LNG supply contracts and additional gas demand shocks (primarily, the Fukushima accident in 2011), LNG spotpriceshavebecomemorevolatilesince2004. AlthoughoilandLNGpricesdivergedconsiderably,theoverallmovementoftheLNGpriceisstill comparablewithoilprices.theincreasedimportofspotpurchasedlng,however,hasincreased thepricespread,makinglnganincreasinglyvolatilecommodity. Table2 LNGimportintoJapan:atJCCparity,historicalaverageandaveragespreadofdeliveries USD/MBtu LNG at JCC parity Japanese LNG import price Average spread Spread % % % % % % % % % % % % Source:Japanesecustoms. Onaverage,thepricespreadbetweenmonthlyLNGimportsduringayearhasincreasedsince 2004.Asaconsequenceofthefinancialcrisis,spreadsbetweenvariousLNGsuppliesforJapan peakedatusd11.16/mbtuin2008.thisequatedtoaround85%oftheaverageimportpricefor Japanese LNG that year. Although the differential in price between various LNG imports has decreased somewhat in the following years, it remained over 50% of the average LNG import pricethrough Thisdoesnotnecessaryimplythatspotpurchasedcargoesarealwaysmoreexpensivethanoil indexed LNG imports (as seen in Table 1). 8 The price formulas in longterm supply contracts generallysettheaveragepriceoflngatalevelbelowtheleveloftheoilequivalent,butare responsive to the relative changes in the oil price through time. Asian longterm contracts for naturalgastradedviapipelineshaveasimilaroilindexedpricemechanism,althoughtheoverall pricelevelisgenerallylowerthanlng. Currently,then,thelackofacompetitivenaturalgasmarketintheAsiaPacificregionhindersthe development of a price reflecting appropriate supply and demand criteria. 9 Consequently, the price of natural gas in the AsiaPacific region is set by LNG buyers and based on a different market (oil). Oilindexed LNG contracts set a price benchmark, while spot LNG is imported at increasinglydivergingpricesrelativetotheoilindexedbenchmark.underthesecircumstancesit 8 In2011,thevolumeimportedasspotcargoesinJapanwasgenerallypricedbelowoilindexedlongtermcontracts(IEA,2012a). 9 AnalternativeJapan/KoreaMarkerdoesexistandisdiscussedinBox2inChapter4.

18 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities isdifficultifnotimpossibleforbothlongtermlngandspotlngpricestoreflecttheaccurate marketvalueofnaturalgasinthevariousdevelopinganddevelopedeconomiesinasia. TherationaleforgastogaspricinginAsiaPacific As LNG did not have a market in Asia, the original rationale for oil indexation in Asian LNG contracts,muchlikeintheeuropeangasmarket,wastolookforitsreplacementvalue.injapan, LNGwasseenasanalternativeforoilthatwasstillprominentlyusedinpowergeneration.On thesupplyside,theorganisationofpetroleumexportingcountries(opec)agreedin1980onan LNGexportpolicythatexplicitlyaimedatcalorificparitywithoilprices.Morerecently,in2011, the Gas Exporters Country Forum (GECF) also endorsed oil indexation as the preferred pricing schemetotradenaturalgas(gecf,2012). AlinktoagloballytradedcommoditysuchasoilgivesinvestorsinLNGliquefactionplantsand transportinfrastructuretheabilitytohedgerevenuesoverlongerperiodsoftimeandtherefore provides a secure flow of revenues. The global oil market is generally perceived with a high degree of confidence with regard to its lower probability for price manipulation and lower volatilitycomparedtonaturalgas(g20,2011).onthedownstreamside,mostoftheinitiallng buyerswereregulatedutilities,whichenabledthemtoshiftmarketrisktotheirendconsumers (Jensen, 2004). Oil indexation was therefore initially readily accepted by both producers and consumersasoneofthekeyprinciplesunderpinninglongtermlngsupplycontracts. Timeshavechanged,however.AlthoughfurtherinvestmentinLNGproductioncapacityneedsto beproperlyfacilitated,naturalgasalsoneedstobecompetitivewithintheendusermarket.oil islessandlesstheprimarycompetitortonaturalgasintheasiapacificregion. Page 17 Figure6 ShareofoilandgasinelectricitygeneratedinJapan, % 35% 30% 25% 20% 15% 10% 5% 0% Note:unlessotherwisestated,allmaterialinfiguresandtablesderivesfromIEAdataandanalysis. Source:IEA,2012c. Gasfiredpowergeneration Oilfiredpowergeneration Takethefollowingasanexample:intheJapaneseenergymix,oilhaslostitsdominantsharein power generation to natural gas, coal and (until the Fukushima accident) nuclear power. This

19 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA2013 Page 18 development has significantly redressed LNG s competitive environment in power generation fromoildominatedtodirectlycompetingwithoil,coalandnuclearpower.oilhasmaintainedits dominantshareinjapan stotalprimaryenergysupplythroughitsroleintransport(currentlyalso strengthened by the use of oil to replace nuclear power generation, but this is likely to be temporary),adevelopmentnotspecificallyjapanese,butglobal. Linkingthepriceofnaturalgastooilonaccountofendusercompetitionmakeslittlesensewhen oil does not directly compete with natural gas (Jensen, 2011). Yet, in developing natural gas markets,oilindexed contractshavebeenthebackboneformarketdevelopment (asdescribed above).thesecontractsarelikelytocontinuetodominateinthedevelopingeconomiesinasia, asconsiderationsotherthanprice(environmentalfactorsandsecurityofsupply)arefrequently morerelevantforcompaniesandpolicymakers,andanalternativenaturalgaspriceisgenerally notavailableintheseeconomies. However,formaturenaturalgasmarkets,thelimitsofoilindexationasapricesettingmechanism forlngbecameclearin2011,whenjapanneededanincreasingamountoflngtosatisfypower demandafterthefukushimaaccident.japanesespotcargopurchasesincreasedtorecordlevels, andalthoughaveragelngimportpricesdidthesame,thiswasnotanimmediateconsequence ofsupplyanddemandonthegloballngmarket. MostoftheadditionalvolumeofspotLNGpurchasedbetweenJanuary2011andApril2012was pricedbelowlongterm,oilindexedvolumes(andlongtermlngexportersthatbenchmarkspot cargoestooil)(iea,2012a).asaconsequence,theselowerpricedspotsupplies(from,among others,nigeriaandequatorialguinea),reducedtheaveragepriceofacubicmetreoflng,despite recorddemand.consequently,theriseinlngpriceswasmainlycausedbythesimultaneousrun upinoilpricesduring2011(asaconsequenceofthearabspringinnorthafricaandissueswith Iran)ratherthantheincreaseinJapanesedemand. Figure7 Japaneselongtermandspotvolumesimport, % 16% 14% 12% bcm % 8% 6% 4% 2% 0% Source:Japanesecustoms. Spot% JapanimportLNGlongterm JapanimportLNGspot While consuming nations might see a need for longterm contracts to ensure supply security (although this ultimately depends on the physical availability of gas), producers generally use these contracts to secure financing and a return on investment. For developing natural gas markets,oillinkageisfrequentlyreadilyacceptedbybothproducersandconsumersasapricing

20 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities mechanism, for lack of a reliable alternative. A developing gas market is initially unable to generate a reliable natural gas price, as the infrastructure investments required to develop a marketwillsettheseatanuncompetitivelevel. However,inmaturenaturalgasmarkets,oilpricelinkageisaweakinstrumentforgeneratinga competitiveprice.sincetheinitialinfrastructureinvestmentsinmanymaturegasmarketshave depreciated,governmentsmightwishtointroducemorecompetitionthroughtheseparationof networksandsupplyactivitiesinthenaturalgassector.thisprocessseparatesprocurementcosts fromdistributioncostsinthewholesalenaturalgasprice,allowinginfrastructureinvestmentsto befinancedonthebasisofaservicefeefordeliveryofthecommoditytocustomers. Simultaneously,thenaturalgaspriceresultingfromcompetitionwillincreasetransparencyinthe gasmarketbecausecommodityandtransportcapacityarepricedseparately,atlevelsreflecting theirrespectivesupply/demandbalance.whenanaturalgasmarketisproperlysetup,theresulting price will reveal inefficiencies or bottlenecks in the supply chain (which beforehand were only known to vertically integrated monopolies), allowing for efficient accommodation of these bottlenecks throughfinancialincentives.theintroductionof competitionthusallowsformore efficientprocurementanddistributionofnaturalgasbycompaniesthroughoutthevaluechain. Oil indexation simply cannot deliver the increased transparency and information required in a maturenaturalgasmarket.aspriceincentivestogenerateinvestments(orchangeconsumer/ producer behaviour) are generated in a market that has very limited interaction with the gas market,itwillbeincreasinglydifficultfornaturalgascompaniestoefficientlysupplycustomers asamarketmatures. Introduction of competition in natural gas markets will generate price signals different from thosegeneratedbytheoilmarket.acompetitivenaturalgaspricewillnotmeanthatnaturalgas isautomaticallypricedlowerthanequivalentoilindexedvolumes.whenproperlysetup,itwill meanthatanaturalgasmarketwillpricenaturalgasatitsrelativevalueinaspecificenergymix, providingcustomerswithareliable,flexibleandlowcarbonsourceofenergy.however,before turning to the ways in which a competitive natural gas trading hub can be created, the next chapterwillfocusontheoutlookfortheasiapacificnaturalgasmarket. Page 19

21 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA TheAsianPacificnaturalgasmarket Page 20 TheAsianPacificnaturalgasmarketiscomplexandfragmented.Itiscertainlynotageographically definedmarket:itisnothighlyinterconnectedbyhighpressurepipelines,liketheeuropeanand North American natural gas markets. The main natural gasconsuming countries in AsiaPacific are:china,japan,india,korea,thailand,indonesia,malaysia,pakistan,bangladeshaustraliaand ChineseTaipei.Thesecountrieseachconsumedover10bcmofnaturalgasin2011. The region has three separate markets with have their distinct dynamics. First there are the mature,wellestablishedmarketsofjapan,koreaandchinesetaipei,whichareisolated,mainly supplied by LNG and have limited scope for further growth. 10 Second, the emerging giants, China and India, which will develop considerable natural gas demand supplied through both pipeline and LNG. 11 Third, the area of SouthEast Asia, which consists of several large LNG producers(malaysia,indonesiaandbrunei)andrapidlygrowingeconomiesinterconnectedtoa limitedextentbypipelines. AsiaPacificsupplydemandbalance Since1990,thenaturalgasmarketintheAsiaPacificregionhasundergoneremarkablegrowth, toabout560bcmin2010.naturalgasconsumptionhasgrownbymorethan250%since1990, representinganaverageyearonyearincreaseof6%forovertwodecades.japaneseconsumption representedthemainstayofasiannaturalgasdemand,especiallyinlng,until2010,whenchina surpassedjapanasthelargestnaturalgasmarketinasia. Figure8 NaturalgasdemandinAsiaPacific, bcm OtherAsiaPacific Bangladesh Thailand Pakistan Australia Malaysia Indonesia ChineseTaipei Korea India China(incl.HongKong) Japan Note: Other AsiaPacific in this graph consists of: Brunei Darussalam, Mongolia, Myanmar, Nepal, New Zealand, Korea, the Philippines,Singapore,SriLanka,Vietnam,andother. Sources:IEA,2011b;IEA,2012a. 10 ThefullimpactoftheFukushimaaccidentonfuturepowersectordemandinthematuregasmarketofJapan(butalso Korea and Chinese Taipei) is still unclear. Natural gas is generally well placed to speedily replace generation capacity if needed,asithasconsiderablylowercapitalexpendituresthancoalfiredgenerationandoffshorewindgeneration. 11 Indian pipeline connections with either Iran or Turkmenistan have been discussed in the past, but prospects for these pipelineconnectionsremainveryunclearbecauseofgeopoliticaltensionsanduncertaintiesovereconomicviability.

22 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities Since1998,totalnaturalgasproductioninAsiaPacifichaslaggedbehindregionalconsumption. Afewcountries,suchasIndonesiaandMalaysia,werenetexportersprovidingLNGforimport dependentcountriessuchaskoreaandjapan.in2010,naturalgasproductionintheregionfell around93bcmshortofconsumption,ashortfallthatisexpectedtoincreasetoabout200bcmin 2017,despiteaconsiderableincreaseinregionalproduction. Figure9 AsiaPacificnaturalgasconsumptionproductionforecast, Page bcm Sources:IEA,2011b;IEA2012a. DependenceonnaturalgasimportsfromoutsidetheAsiaPacificregionincreasedby12%annually throughout itisexpectedthatthisimportdependencywillgrowby5%annuallyover theperiod therelativelymoderateincreasereflectsincreasinggasproductionprojected for China and Australia. Overall demand in the AsiaPacific region is expected to follow global demandtrends,growingataround3%perannumtoreach875bcmin2017. NaturalgasdemandbysectorinAsiaPacific Fastgrowingdemandfornaturalgaswillleadtogrowthineverynaturalgasconsumingsectorin mostoftheasianpacificeconomies.thepowerandindustrialsectorspredominate,with71%of the region s natural gas consumed in these sectors in Natural gas consumption in the powersectorissettobedominantthroughouttheperiod201117,with44%consumedin2017, downslightlyfrom47%in2010. The residential/commercial sector in AsiaPacific consumed around 110bcm in 2011, which madeitsoverallsharearound17%oftotalnaturalgasconsumption.althoughthisrepresentsa considerableamountofnaturalgas,itisamuchlowersharethantheunitedstates(34%in2009) andeurope(37%in2009).theasiapacificresidentialsectorisforecasttocreateabout18%of regionalnaturalgasdemand(160bcm)in2017(figure10). The main exemptions to this rule are Korea and the developing economy of China, where the residentialsectorsmakeupaconsiderableshareofdemand,asnaturalgasisusedforheatingin the northern parts of the countries. Although demand growth in Korea s residential sector is expectedtobefairlylimited(up2bcmin2017),residentialdemandwillcontinuetocomprise around40%oftotalgasdemand(facts,2012).demandinthechineseresidentialsectorissetto GasconsumptionAsiaPacific GasproductionAsiaPacific IEA2012forecast IEA2012forecast

23 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities OECD/IEA2013 increaseconsiderably,by52bcm(11%annuallyuntil2017),increasing2017residentialdemand toaround33%oftotal.suchgrowthindemand,responsivetoseasonaltemperatures,wouldhave tobeaccommodatedthroughincreasesinseasonalflexibilityinnaturalgassupply(bothlngand pipeline),muchlikethatobservedinothermaturemarketswithsignificantresidentialdemand. Page 22 Figure10 SectoraldemandfornaturalgasinAsiaPacific, bcm Note:othercomprisesusebytheenergyandtransportindustries,andlosses. Sources:IEA,2011;IEA,2012. Althoughdemandfornaturalgasintheresidentialsectorissettoincreaseatafasterpace(6% per year) than demand in the industrial and power sector (5% and 4% per year, respectively) naturalgasconsumptionwillcontinuetobedominatedbyindustryandpowerconsumers,both ofwhichusuallyrequirelittleseasonalflexibility. 12 Demandfromthepowersectorrequiresmore shorttermflexibility,sincegasfiredpowergenerationisfrequentlyusedtobalancetheelectricity networkthroughouttheday.industrialgasdemandisprimarilyresponsivetooveralleconomic growthandsectoralbusinesscycles. NaturalgastradeinAsiaPacific Natural gas trade in this region is growing by 6% per year, which makes it the main driver in globalgrowthprojectionsof5%annuallyovertheperiod whilenaturalgastradeinthe regioniscurrentlydominatedbylng,pipelinenaturalgasissettogrowby15%peryearthrough theperiod Theshareofpipelinetradedgasistoincreasetoabout18%oftotaltradein2017,upfrom11% in2011.pipelinetradeismainlydrivenbyincreasedimportsfromcentralasiaandmyanmarinto 12 Seasonalflexibilityisconsideredlongtermandisusuallyprovidedthroughstorageindepletednaturalfieldswithconsiderable workingvolumethatcanaccommodateseasonaltemperaturerelatedswingsinnaturalgasdemandintheresidentialsector. Thiscontrastswithshorttermflexibility(i.e.withinday,withinweek)whichusuallyinvolvesstorageinsaltcavernsoraquifers withlimitedworkingvolume,buthighsendoutcapacitythatcanaccommodateshorttermswingsindemand/supply. Observed IEA2012forecast Residential/commercial Industry Power Other

24 OECD/IEA2013 DevelopingaNaturalGasTradingHubinAsia ObstaclesandOpportunities China,asnoothernewpipelineinterconnectionsorexpansionsintheregionareunderserious considerationintheregionatthemoment. Figure11 PipelineandLNGtradeinAsiaPacific, Page 23 bcm Sources:IEA,2011a;IEA,2012b. Observed PipelinetradeAsiaPacific LNGtradeAsiaPacific IEA2012Forecast LNGtradeinAsiaPacific ThetwomostmaturenaturalgasmarketsintheAsiaPacificregionareJapanandChineseTaipei; coincidentally, both markets are nearly exclusively supplied by LNG, as local production is practicallynonexistent.in2011,thesetwomaturemarketsconsumed87%ofalllngdelivered intoasia.amarkedshiftindemandforlngisexpected,asmaturemarketssuchasjapanhave limitedpotentialforanincreaseinlngdemand,whiledemandgrowthinchinaandindiaislikely tobeconsiderable. TheASEANnationsthatcurrentlyfunctionasalargesourceofregionalLNGproduction,supplying about66bcmoflngtosatisfybroaderasiapacificdemand,willseeamarkedchangeintheir netexportposition. 13 Inthemediumterm,thenetexportpositionwilldeclineasLNGproduction decreases and regional consumption increases. Thailand started to import LNG in 2012, while Singapore,Vietnam,andthePhilippinesareexpectedtostartimportingLNGwithinthisdecade. Overall,LNGexportcapacityoftheASEANregiontosupplytheAsiaPacificmarketisprojectedto decreaseby18%by2017. Traditionally, the AsiaPacific demand for LNG was satisfied by regionally produced LNG, from Australia as well as ASEAN countries. In the first quarter of 2012, 47% of AsianPacific LNG imports originated from the AsiaPacific region, a level not seen since the 1970s. Despite the forecastincreaseinasianpacificgasdemand,aconsiderableincreaseinaustralianlngproduction 13 MemberstatesoftheAssociationofSouthEastAsianNations(ASEAN)comprise:BruneiDarussalam,Cambodia,Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. Within the ASEAN, Malaysia, Indonesia and BruneiDarussalamarenetLNGexporters.