Natural Gas (LNG) Pricing Transition and Hubs in East Asia
Xunpeng Shi, PhD
Deputy Head of Energy Economics Division, ESI NUS
President, Chinese Economics Society Australia (CESA)
Outlook on Asian LNG: Market Dynamics and Pricing, IEEJ Roundtable for
SIEW 2016, 27th October, Singapore
Since the late 1980s
2
Source: Poten & Partners
Source: IGU 2014
Asia’s gas pricing transition
Asia – oil-linked LNG market
GoG vs. Oil-Linked Markets
Share of spot trade is growing
% of Spot Trade in Total Imports
Europe – a hybrid market
North America – a spot market
World average: ~31%
Asia Pacific average: ~12%
In Asia Pacific, growth is slower
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2005 2007 2009 2011 2013
World Asia Pacific
Lessons from European hub development
Market liberalization is necessary in creating the competitive markets
Pricing transition for long-term contracts sustains competition and generates liquidity
Political will and regulations safeguard competition environment
Natural factors, such as domestic production and culture matter
Traditional utilities: loss of market shares; financial loss; failure to meet the minimum take-or-pay levels
Renegotiation and breakdown of long-term oil indexed contracts (through arbitration)
3
Source: Shi, X., forthcoming. Development of Europe’s gas hubs: implications for East Asia. Natural Gas Industry B.
4
East Asia’s Quest for Gas/LNG Trading Hubs
Hub indexation
Issues
Destination flexibility
Inter-hub competition (IEA, 2013)
SLInG Prices
Shanghai Hub
Prices Tokyo Hub Prices
•Domestic market liberalization•Unbundling, wholesale competition•10 years+
Gas Hub
•LNG contract flexibility •Destination flexibility, Take-or-Pay•Spot trading
LNG Hub
Regional
Competitive
marketDestination
flexibility
Take or pay
No significant difference between Shanghai hub benchmark and
Tokyo hub benchmark prices
• Spot price: Shanghai hub (S1) vs Tokyo hub (S2)
5
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
2015 2020 2025 2030 2035
USD
/mm
btu Henry Hub
United Kingdom
Japan
China
Source: Shi, X. and Variam, H.M.P., 2016. Gas and LNG trading hubs, hub indexation and destination flexibility in East Asia. Energy Policy 96, 587-596.
6
Hub indexation and destination flexibility is of EA’s interest
*World cost calculated from the output of the optimizer
Gas procurement costs (2015-35), % change from baseline
-25.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
World China Japan Korea Chinese Taipei
S1:Shanghai Hub S3a: Hub - No DS S4a: Oil - No DS
After removal of destination restriction, change
to hub indexation does little more benefits to
EA importers, except China
Source: Shi, X. and Variam, H.M.P., 2016. Gas and LNG trading hubs, hub indexation and destination flexibility in East Asia. Energy Policy 96, 587-596.
Pricing transition has different impact among different LNG exporters
7
-30
-20
-10
0
10
20
30
40
50
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
20
32
20
33
20
34
20
35
Asia Pac Exp Russia Middle East
North America Latin America Africa
Total
Source: Shi, X. and Variam, H.M.P., 2016. Gas and LNG trading hubs, hub indexation and destination flexibility in East Asia. Energy Policy 96, 587-596.
-8
-6
-4
-2
0
2
4
6
8
2015 2020 2025 2030 2035
Asia Pac Exp Russia Middle East
North America Latin America Africa
Total
Hub No-DS vs BaseHub Price vs Base
LNG Exports to Japan, Korea and Chinese Taipei, in bcm
Pricing transition creates winners and losersExample: China’s hub indexation on Australia’ LNG exports
8
• Export revenue for Australia LNG in different scenarios, 2015–35
Exports (bcm) Revenue ($ billion)Baseline Spot Spot, no
TOPBaseline Spot Spot, no
TOPContracted exports
1,251.6 1,250.3 1,072.3 697.0 670.9 601.1
Uncontracted exports
321.2 322.6 368.7 122.3 115.4 140.9
Total exports 1,572.8 1,572.9(0%)
1,441.0(-8.3%)
819.3 786.3(-4.1%)
742.0(-9.4%)
Profit 333.7 299.4(-11.3%)
300.0(-11.1%)
Source: Shi, X., Variam, H.M.P., 2015. China's Gas Market Liberalisation--The impact on China–Australia gas trade, in: Song, L., Garnaut, R., Cai, F., Johnston, L. (Eds.), China's Domestic Transformation in a Global Context. ANU Press, Canberra, pp. 137-174.
Relaxing of Take-or-Pay clauses create further market flexibility
9
-4
-3
-2
-1
0
1
2
3
2015 2020 2025 2030 2035
bc
m
LNG Flows to China - Base vs Low Demand
North America to China
Middle East to China
Southeast Asia to China
Australia to China
North Africa to China-30
-25
-20
-15
-10
-5
0
2015 2020 2025 2030 2035
bc
m
LNG Flows to China - Base vs Scenario 2
North America to China Sub Saharan Africa to China
Middle East to China Southeast Asia to China
Australia to China
Australia
Southeast Asia
Middle East
With TOP Without TOP
Source: Shi, X. , Variam, H.M.P., & Tao, Y, forthcoming. review for publication. Global impact of uncertainties in China’s gas market. Submitted to journal.
China’s LNG import does not response to lower demand scenario
Low oil price period is a window to facilitate the pricing transition
10
0
5
10
15
20
25
197
7M
01
197
8M
01
197
9M
01
198
0M
01
198
1M0
119
82
M0
119
83
M0
119
84
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119
85
M0
119
86
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119
87
M0
119
88
M0
119
89
M0
119
90
M0
119
91M
01
199
2M
01
199
3M
01
199
4M
01
199
5M
01
199
6M
01
199
7M
01
199
8M
01
199
9M
01
20
00
M0
12
00
1M0
12
00
2M
01
20
03
M0
12
00
4M
01
20
05
M0
12
00
6M
01
20
07
M0
12
00
8M
01
20
09
M0
12
010
M0
12
011
M0
12
012
M0
12
013
M0
12
014
M0
12
015
M0
12
016
M0
1
Europe NG
Crude oil, average
HH Spot
LNG, Japan cif
Source: World Bank.
11
Thank you!
Energy Studies Institute29 Heng Mui Keng TerraceBlock A, #10-01Singapore 119620
For enquiries:
Dr. Xunpeng ShiTel: (65) 6516 5360
Email: [email protected]; [email protected]
Brief self introduction
12
President, Chinese Economics Society Australia
(CESA) , http://www.ces-aus.org/
Senior Fellow, Deputy Head of
Energy Economics Division, ESI,
National University of Singaporehttp://esi.nus.edu.sg/
• Meeting the Energy Demands of Emerging Economies
• Implications for Energy and Environmental Markets• 18-21 JUNE 2017 | SINGAPORE
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THE 40th IAEE INTERNATIONAL CONFERENCE
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