The US Energy Information Administration (EIA) says growing LNG trade could support the development of an Asian LNG benchmark.
Asia has long been the world’s largest consumer of LNG, accounting for three-quarters of global LNG trade. Much of the fresh LNG that will come onto the market over the next five years will be from the US and Australia, which is likely to mean more spot and short term volumes, frequently linked to benchmark gas prices – rather than the crude links that dominate legacy term contracts. This should facilitate the sort of trading that could lead to development of a benchmark price.
Gas market hubs, such as US Henry Hub and the UK’s NBP, have been a key feature of competitive gas markets in the US and Europe, says the EIA, helping liquidity and determination of a price that reflects underlying supply and demand. They are also used to price large volumes of contracted gas linked to the benchmarks.
But both are land based gas benchmarks, and so far there is no price hub for LNG anywhere in the world. LNG-based hubs present a number of challenges, including large shipments that are difficult to store. The EIA says that currently, no location in Asia has sufficiently developed physical infrastructure or regulatory frameworks, although the governments of Japan, China, and Singapore have indexed prices and are each exploring the possibility of establishing an LNG market hub.
In 2016, the Japanese government developed a comprehensive strategy to liberalize its domestic gas market and launched major initiatives to encourage private-sector participation in the development of an LNG trading hub and a pricing index. Singapore also has a competitive market, and is an established trading hub for other commodities – notably oil. China is also liberalizing gas markets, especially in coastal cities, and may have an advantage in terms of the eventual scale of its domestic market.