Gas and LNG trading hubs, hub indexation and destination flexibility in East Asia

Abstract

In the East Asian gas markets, issues like gas trading hubs, hub indexed pricing, and destination flexibility are being debated. This paper examines the impact of a change in East Asia's pricing benchmark and contract flexibility on the regional and global gas markets. The paper uses the Nexant World Gas Model, a linear program with global cost minimization as the objective. To our knowledge, this study on hub competition, price benchmark change and contract flexibility improvement in East Asia will be a first in the literature and have real policy relevance. The results show that both price benchmark change and contract flexibility improvements will create an overall positive effect on the world and East Asia importers, but the impacts are different among exporters and importers. However, there is no evidence of competition among different benchmark hubs and destination restrictions cause the "Asia Premium". It implies that removal of destination clauses has higher priority than the change to hub indexation for Japan, Korea and Chinese Taipei, but both should be treated equally in China. The study also suggests that East Asian importers should cooperate among themselves and with exporters to facilitate the hub creation and contract changes in East Asia.

Oil indexation, market fundamentals, and natural gas prices: An investigation of the Asian premium in natural gas trade

“…In order to replace oil indexation, the International Energy Agency (IEA 2013(IEA , 2014) and many researchers Variam, 2016, 2017;Stern, 2014Stern, , 2016Tong et al, 2014) call for the creation of East Asian gas trading hubs to generate benchmark prices to reflect East Asia's own regional market fundamentals as an alternative to oil indexation. Shi and Variam (2016) and Stern (2016) both encourage cooperation among Asian consumers to help in the transition to hub pricing.…”

“…It is particularly common in the era that followed the global financial crisis (GFC) in 2008, when prices for liquefied natural gas (LNG) became significantly higher in Asia than gas prices in the other two markets. Motivated by the Asian premium and the development of hub-indexed pricing in the United States and Europe, East Asia is gearing up to change its dominant oil indexation in its long-term contracts to more flexible, hub-indexed prices for LNG and gas imports (Shi and Variam, 2016).…”

“…Oil indexation exogenously sets gas prices and thus differentiates East Asian gas economies from standard market economies (Shi and Variam, 2017). Commercial arrangements, such as destination clauses, further limit arbitrage opportunities in natural gas markets (Shi and Variam, 2016). Therefore, prices on the three markets may not be comparable.…”

Reforming the Eastern Australian gas market

“…Our study of the Eastern Australian gas market is important because several Asia and Pacific countries are seeking to establish gas markets where prices are determined by local supply and demand fundamentals. Indeed, efforts are underway to both liberalise markets and establish gas trading hubs (IEA, 2013;EIA, 2017;Shi & Variam, 2016). Here, we show the formidable challenges of establishing a competitive gas market even in an established market economy with open and competitive energy markets, such as Australia.…”

Qatar's LNG: Impact of the Changing East‐Asian Market

“…17 The importance of this undertaking should not be underestimated; such trading hubs have the potential for securing lower prices, capitalizing on re-export, and facilitating the development of a move towards spot-market trading for LNG. 18 There is an inclination towards the development of other market hubs, aggravated by the United States as an LNG exporter. The addition of Japan's JERA and Singapore's SGX LNG Index Group -as well as efforts by Malaysia -underlines that new energy hubs are emerging to allow for a more competitive market across the region.…”