Asia is the world’s largest consumer of liquefied natural gas (LNG), accounting 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 United Kingdom’s National Balancing Point (NBP), have been a key feature of competitive gas markets in the United States 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.
Currently, no location in Asia has sufficiently developed physical infrastructure or regulatory frameworks to accommodate the creation of a natural gas trading hub, but the governments of Japan, China, and Singapore are each exploring the possibility of establishing an LNG market hub. Given the emergence of the United States as a major LNG supplier and the potential impact on the structure of future LNG trade in Asia, EIA commissioned a contractor study that examines efforts to establish regional LNG trading hubs and price benchmarks in Asia and some of the inherent challenges they face.
Fully established natural gas market hubs, such as the United States’ 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. In comparison, hubs such as 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 (for example, Henry Hub is located in Louisiana, close to natural gas infrastructure on the U.S. 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, there can be significant time between contracting and delivery, 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, which limits transparency, third-party access, and publically 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. In addition, Japan, China, and Singapore have 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. As existing LNG price surveys continue to improve in accuracy and increase their significance as indicators of the market price for LNG and as reliable 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.
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Headline crude prices for the week beginning 19 August 2019 – Brent: US$58/b; WTI: US$55/b
Headlines of the week
A lot of complications arise when a government changes. Particularly if the new government comes in on a mandate to reverse alleged deficiencies and corruption of previous governments. This is amplified when significant natural resources are involved. It has happened in the past – when Iran nationalised its oil industry by kicking out BP – and it could happen again in the future – in Guyana where the promise of oil riches in the hands of foreign firms has already caused grumbles. And it is also happening right now in Papua New Guinea, as the new government led by Prime Minister James Marape took aim at the Papua LNG deal.
Negotiated by the previous government of Peter O’Neill, the state’s new position that is the current gas deal is ‘disadvantageous’ to country. A complex set of manoeuvres – accusing O’Neill of multiple levels of corruption – led to a proposed vote of no confidence and an eventual resignation. With the departure of O’Neill, public opinion on the Papua LNG project (as well as the PNG LNG project) switched from being viewed as a boon to the economy to one of unequal terms that would not compensate the nation fairly for its resources.
So, despite a previous assurance in early August that the new government of Papua New Guinea would stand by the previous gas deal agreed with the Papua LNG stakeholders in April, Marape sent a team led by the Minister of Petroleum Kerenga Kua to Singapore to renegotiate with the project’s lead operator Total.
As the meeting was announced, suggestions pointed to a hardline position by Papua New Guinea… that they could ‘walk away from a new deal’ if the new terms were not acceptable. In a statement, Kua stated that the negotiations could ‘work out well or even disastrously’. From Total’s part, CEO Patrick Pouyanne said in July that he expected the government to respect the gas deal while Oil Search stated that it was seeking ‘further clarity on the state’s position’. The gas deal covers framework of the Papua LNG project, which was scheduled to enter FEED phase this year with FID expected in 2020, drawing gas from the giant onshore Elk-Antelope fields ahead of planned first LNG by 2024. So, the stakes are high.
With both sides locked into their positions, reports from Singapore suggested that the negotiations broke down into a ‘Mexican standoff’. No grand new deal was announced, and it can therefore be inferred that no progress was made. There is a possibility that PNG could abandon the deal altogether and seek new partners under more favourable terms, but to do so would be a colossal waste of time, given that Papua LNG is nearing a decade in development. Total and ExxonMobil have already raised the possibility of legal moves if the deal is aborted, with compensation running into billions – billions that the PNG government will not have unless the Papua LNG project goes ahead.
But the implications of the deal or no-deal are even wider. The PNG state has already stated that it will look at the planned expansion of the PNG LNG project (led by ExxonMobil and Santos) next, which draws from the P’nyang field. Renegotiation of the current gas deals in PNG may have populist appeal but have serious implications – alienating two of the largest oil and gas supermajors and two of PNG’s largest foreign investors could lead to a monetary gap and a mood of distrust that PNG may be unable to ever fill. Hardline positions are a good starting position, but eventual moderation is required to ever strike a deal.
Papua LNG Factsheet: