As the world’s largest consumer of LNG, Asia accounts for three-quarters of global LNG trade and one-third of total global natural gas trade. However, the region lacks a pricing benchmark that can reliably reflect supply and demand changes in Asia’s natural gas markets.
Natural gas market hubs, such as Louisiana’s Henry Hub or the UK’s National Balancing Point (NBP), have been a key feature of competitive gas markets in the US and Europe. These hubs provide locations—either physical, in the case of Henry Hub, or virtual, in the case of NBP—for trading natural gas and, ultimately, for determining price. The most important hubs have publicly reported price indexes that are benchmarks for the value of natural gas in the larger regional market.
While no location in Asia has sufficiently developed the physical infrastructure or regulatory frameworks to accommodate the creation of a natural gas trading hub, the governments of Japan, China and Singapore are each exploring the possibility of establishing an LNG market hub. Given the emergence of the US as a major LNG supplier, and the potential impact on the structure of future LNG trade in Asia, the US Energy Information Administration (EIA) commissioned a contractor study—ICF International Inc.’s “Perspectives on the development of LNG market hubs in the Asia-Pacific region”—that examines efforts to establish regional LNG trading hubs and price benchmarks in Asia, and the inherent challenges associated with these efforts.
Strategies to overcome the challenges: Fully established natural gas market hubs, such as the US’ Henry Hub, have high liquidity, with a high volume of trades; open access to transport facilities; and transparent price and volume reporting, index pricing and futures contracting. Comparatively, hubs like those in France and Italy have lower trading volumes and less liquidity in forward pricing.
While natural gas hubs in North America and Europe are pipeline-based (e.g., Henry Hub is located in Louisiana, close to natural gas infra-structure on the US Gulf Coast), major countries in Asia rely on LNG as the primary source of natural gas.
LNG-based hubs present a number of challenges compared to pipeline-based hubs. Pipeline hubs rely on continuous flows of natural gas, daily scheduling of receipts and deliveries, standardized natural gas specifications, uniform transportation and contracting rules, and diligent regulatory oversight. In contrast, LNG shipments can be large and difficult to store; significant time between contracting and delivery is possible; and cargoes can differ in LNG specifications. Asian LNG import terminals have limited pipeline interconnectivity, and operate primarily under long-term bilateral contracts between multiple suppliers and buyers. This limits transparency, third-party access and publicly available price benchmarks.
In 2016, the Japanese government developed a comprehensive strategy to liberalize its domestic natural gas market, and launched major initiatives to encourage private-sector participation in the development of an LNG trading hub and a pricing index. Japan, China and Singapore have also established benchmark LNG pricing indexes.
For the next few years, LNG indexes will likely remain the most reliable indicators of natural gas market value in Asia. Existing LNG price surveys will continue to improve in accuracy and increase their significance as indicators of the market price for LNG. As solid hub-based price indexes emerge, indexes will be more reliably used to not only set the pricing for sales and purchase contracts, but also to serve as the basis for greater volumes of futures and derivatives trading.
More information on the development of LNG market hubs in Asia can be found in the EIA's full report.
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