Asian Gas Hub

PARTNER COUNTRY SERIES
Developing
a Natural Gas
Trading Hub
in Asia
Obstacles and
Opportunities
PARTNER COUNTRY SERIES
Developing
a Natural Gas
Trading Hub
in Asia
Obstacles and
Opportunities
Warner ten Kate
Lszlo Varr, Anne-Sophie Corbeau
INTERNATIONAL ENERGY AGENCY
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rlclng naLural gas ................................................................................................................... 10
rlclng naLural gas ln Aslaaclflc ............................................................................................ 13
1he raLlonale for gasLogas prlclng ln Aslaaclflc.................................................................. 17
G< 1H" 50'*(E*7'8'7 (*,-.*$ )*0 ;*.9", <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< GF
Aslaaclflc supplydemand balance ....................................................................................... 20
naLural gas demand by secLor ln Aslaaclflc .................................................................. 21
naLural gas Lrade ln Aslaaclflc ...................................................................................... 22
LnC Lrade ln Aslaaclflc .................................................................................................. 23
naLural gas plpellnes ln Aslaaclflc ................................................................................ 23
LnC supply chaln flexlblllLy ln Aslaaclflc ....................................................................... 27
naLural gas prlce developmenL ln Aslaaclflc ........................................................................ 29
1owards a reglonal lnLerconnecLed markeL? .......................................................................... 31
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8equlremenLs for a funcLlonlng naLural gas markeL ............................................................... 32
lnsLlLuLlonal requlremenLs Lo creaLe a wholesale naLural gas markeL ............................ 33
SLrucLural requlremenLs Lo creaLe a wholesale naLural gas markeL ................................ 33
CreaLlng a naLural gas prlce: from hub Lo markeL ................................................................... 33
1radlng plaLforms: physlcal versus vlrLual hubs .............................................................. 36
Merglng physlcal and vlrLual naLural gas Lrade ............................................................... 37
ConLracLual consequences? .................................................................................................... 42
lacLors lnfluenclng prlclng ............................................................................................... 42
Pubs as a source of flexlblllLy ln naLural gas markeLs ............................................................. 44
rlce lnLeracLlon wlLh oLher gas markeLs ................................................................................ 43
lmpllcaLlons for Aslaaclflc ............................................................................................. 47
MarkeL maLurlLy: when ls a llquld gas markeL Lruly llquld? .................................................... 48
SeLLlng Lhe pace of change: Lhe role of a regulaLor ......................................................... 49
A LransparenL and compeLlLlve prlce for naLural gas .............................................................. 30
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erspecLlves: consumers ln Aslaaclflc .................................................................................. 31
!apan ................................................................................................................................ 32
1he 8epubllc of korea ...................................................................................................... 33
Chlna ................................................................................................................................ 37
Slngapore ......................................................................................................................... 60
CreaLlng compeLlLlon ln Aslaaclflc naLural gas markeLs ....................................................... 63
CbsLacles ln upsLream LnC supply flexlblllLy? ........................................................................ 64
LnC conLracL sLrucLure .................................................................................................... 66
erspecLlves for change ln conLracLs ............................................................................... 71
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LnC as a llnk beLween markeLs? ...................................................................................... 74
A shock Lo Lhe sysLem? .................................................................................................... 74
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S')-." D T rlce formaLlon of naLural gas consumpLlon ln Lhe world and Aslaaclflc 200310 ..... 11
S')-." G T rlclng mechanlsms ln global naLural gas Lrade, 200310 ........................................... 12
S')-." I T MarkeLbased prlclng ln gas Lrade ln norLh Amerlca, Lurope and Aslaaclflc ........... 13
S')-." L T Aslaaclflc prlclng mechanlsms for naLural gas Lrade (plpellne and LnC) ................. 13
S')-." = T Average !apanese LnC lmporL prlces and prlce range ................................................ 13
S')-." A T Share of oll and gas ln elecLrlclLy generaLed ln !apan, 19902011 .............................. 17
S')-." O T !apanese longLerm and spoL volumes lmporL, 201012 ............................................. 18
S')-." C T naLural gas demand ln Aslaaclflc, 19902017 .......................................................... 20
S')-." U T Aslaaclflc naLural gas consumpLlonproducLlon forecasL, 19902017...................... 21
S')-." DF T SecLoral demand for naLural gas ln Aslaaclflc, 200017 ............................................ 22
S')-." DD T lpellne and LnC Lrade ln Aslaaclflc, 200017 .......................................................... 23
S')-." DG T lorecasLed growLh ln LnC Lrade ln !apan, Chlna, lndla and ASLAn naLlons, 201117 ... 24
S')-." DI T LnC lmporL lnLo !apan, korea, Chlna, Chlnese 1alpel and lndla, 200712 ................... 24
S')-." DL T ALlanLlc LnC dellvered lnLo !apan, korea and Chlnese 1alpel aL lmporL prlce, 200712 ... 23
S')-." D= T 8egaslflcaLlon operaLlonal, under consLrucLlon and planned ln Aslaaclflc, 200017 ..... 27
S')-." DA T 8eglonal gas prlces and !apan Crude CockLall, 200712 ............................................... 30
S')-." DO T lncreaslng compeLlLlon ln a naLural gas markeL ........................................................... 33
S')-." DC T CreaLlng a compeLlLlve wholesale naLural gas markeL ................................................. 33
S')-." DU T 8llaLeral, C1C and cenLral Lradlng and Lransparency on spoL and fuLures markeLs .... 37
S')-." GF T A schemaLlc C1C LransacLlon ........................................................................................ 38
S')-." GD T A schemaLlc flnanclal LransacLlon on a naLural gas exchange ...................................... 38
S')-." GG T Shlpper and flnanclal parLy acLlvlLy on Lhe spoL and fuLures markeL .......................... 39
S')-." GI T roducLs Lraded on Lhe curve" ................................................................................... 41
S')-." GL T MarkeL developmenL, conLracL duraLlon and markeL maLurlLy ................................... 44
S')-." G= T Sale of flexlblllLy servlces Lhrough vlrLual hubs ln Lurope ........................................... 43
S')-." GA T rlce developmenL ln Lhe ALlanLlc 8asln, 200312 ....................................................... 47
S')-." GO T Long and shorLLerm conLracLed LnC ln Lhe world and Aslaaclflc, 200711 ........... 64
S')-." GC T ShorLLerm conLracLed LnC ln Lhe world and Aslaaclflc, 200711 ............................ 63
S')-." GU T LongLerm conLracLed LnC dellvered lC8 or uLS ln 2011 ........................................... 69
S')-." IF T ConsLrucLlon cosLs for varlous LnC pro[ecLs ................................................................ 73
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1*4$" D T LnC spoL cargoes dellvered ln !apan, korea and Chlnese 1alpel, 2007C1 2012 ........... 14
1*4$" G T LnC lmporL lnLo !apan: aL !CC parlLy, hlsLorlcal average and average spread of dellverles .. 16
1*4$" I T lnLra and lnLerreglonal plpellne(s) ln Aslaaclflc .......................................................... 26
1*4$" L T CompeLlLlve markeL requlremenLs ln selecLed counLrles ................................................ 63
R'0, %8 4%?"0
V%? D T CLher parLles lnvolved ln naLural gas hub developmenL ................................................... 40
V%? G T 1he !apan/korea Marker .................................................................................................... 67
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naLural gas has Lhe poLenLlal Lo lmprove energy securlLy and economlc and envlronmenLal
performance ln Lhe Aslanaclflc economles. Powever expandlng lLs role wlll depend on reglonal
markeL condlLlons LhaL allow gas Lo compeLe auLonomously ln energy markeLs whlch are Lhemselves
connecLed Lo global energy markeLs. 1he fuLure role of gas ln Asla wlll depend on wheLher
naLural gas prlclng ls Lled more closely wlLh supply and demand fundamenLals ln Lhe reglon.
1he Aslan naLural gas markeL ls Lhe fasLesLgrowlng gas markeL worldwlde, and ls expecLed Lo
become Lhe secondlargesL by 2013, wlLh 790 bllllon cublc meLres (bcm) of naLural gas demand.
1he markeL for naLural gas ln Asla ls domlnaLed by longLerm conLracLs ln whlch Lhe prlce of gas ls
llnked, or lndexed, Lo LhaL of oll. ueveloplng counLrles mlghL requlre longLerm conLracLs Lo
ensure securlLy of supply for Lhelr fasLgrowlng economles, and producers wlll look Lo secure
reLurn on Lhelr conslderable lnfrasLrucLure lnvesLmenLs.
ln recenL years, Lhls has helped keep Aslan gas prlces much hlgher Lhan Lhose ln oLher parLs of
Lhe world, leadlng Lo compeLlLlveness concerns and serlous quesLlons abouL wheLher such a
sysLem can lasL. ln order Lo expand lLs markeL share, naLural gas has Lo be compeLlLlve wlLhln Lhe
energy mlx of Lhe reglon or counLry where lL ls dellvered. ln Asla, however, currenL consLralnLs
lnclude Lhe reglon's lack of boLh a Lradlng hub Lo faclllLaLe Lhe exchange of naLural gas, and Lhe
developmenL of a LransparenL prlce slgnal Lo sLeer lnvesLmenLs ln naLural gas lnfrasLrucLures.
1he confldence ln Lhe leglLlmacy and Lransparency of naLural gas prlclng generaLed on a naLural
gas hub ls cruclal for lnvesLmenL declslons ln such a caplLallnLenslve lndusLry. 1hls confldence
can be derlved Lo a large exLenL from Lhe lnsLlLuLlonal and sLrucLural requlremenLs puL lnLo place,
buL ulLlmaLely lL lles ln Lhe longLerm resolve of governmenL Lo allow markeLs Lo deLermlne
naLural gas prlces wlLh mlnlmal lnLerference from shorLLerm pollLlcal conslderaLlons.
1o successfully develop a rellable naLural gas prlce ln Lhe Aslanaclflc reglon would requlre a
compeLlLlve naLlonal/reglonal markeL, whlch would Lhen need Lo meeL a seL of lnsLlLuLlonal and
sLrucLural requlremenLs Lo creaLe Lhe markeL confldence Lo aLLracL new parLlclpanLs (namely
flnanclals) and Lo encourage markeL players Lo use a Lradlng hub for Lhe balanclng of Lhelr
porLfollos.
A handsoff" governmenL approach ls necessary. 1hls would lnvolve separaLlng LransporL from
commerclal acLlvlLles, prlce deregulaLlon aL Lhe wholesale level, sufflclenL neLwork capaclLy and
nondlscrlmlnaLory access, and a compeLlLlve number of markeL parLlclpanLs wlLh Lhe lnvolvemenL
of flnanclal lnsLlLuLlons.
rospecLs for a compeLlLlve wholesale naLural gas markeL ln Asla are llmlLed. Lven ln Lhe mosL
maLure Aslaaclflc markeLs, Lhe baslc requlremenLs for a wholesale markeL are mlsslng, as
governmenLs conLlnue Lo emphaslse securlLy ob[ecLlves over economlc ones. Cf Lhe Aslaaclflc
economles revlewed ln Lhls paper, Slngapore seems Lhe candldaLe besL sulLed Lo develop a
compeLlLlve naLural gas markeL and Lradlng hub ln Lhe medlum Lerm.
A unlque characLerlsLlc of Lhe naLural gas Lrade ln Aslaaclflc ls Lhe llmlLed amounL of naLural gas
LhaL ls Lraded vla plpellnes, and Lhe reglon's growlng dependence on Lhe global llquefled naLural
gas (LnC) supply chaln. 1haL global LnC markeL has become decldedly more shorLLerm orlenLed
and flexlble over Lhe pasL decade - a resulL of Lhe expanslon of global LnC producLlon, Lhe
emergence of global porLfollo players and enhanced compeLlLlon ln Lhe ALlanLlc 8asln.
And yeL Lhese ALlanLlc 8asln developmenLs have had a llmlLed lmpacL on supply flexlblllLy ln Lhe
Aslaaclflc reglon. A compeLlLlve naLural gas markeL ln Asla would need an even more flexlble
LnC supply Lhan ls currenLly ln place. 1hls wlll requlre a conLlnued expanslon of shlpplng
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avallablllLy and LhlrdparLy access (1A) Lo regaslflcaLlon Lermlnals ln Lhe Aslaaclflc reglon.
lurLhermore, lL would lnvolve relaxlng desLlnaLlon clauses ln LnC supply conLracLs LhaL allow for
markeL segmenLaLlon and sLlffen Lhe overall supply chaln. Any such modlflcaLlon of Lhe conLracL
sLrucLure musL properly lncorporaLe aspecLs LhaL preserve lnvesLmenL securlLy.
ln Lhe Aslaaclflc reglon, compeLlLlve naLural gas markeLs and a rellable gas prlce wlll noL
develop overnlghL, and wlll noL necessarlly lead Lo lower prlces. Powever, such a developmenL
wlll allow markeL players ln Aslaaclflc economles Lo lncrease porLfollo flexlblllLy as naLural gas
markeLs ln Lhls reglon conLlnue Lo maLure.
CovernmenLs ln Lhe reglon wlll need Lo slgnal Lhelr wllllngness Lo faclllLaLe compeLlLlon furLher
downsLream. Slngaporean efforLs Lo develop a compeLlLlve naLural gas markeL and complemenLary
Lradlng hub mlghL be consldered small relaLlve Lo Lhe slze of Lhe enLlre Aslaaclflc naLural gas
markeL. Powever, Lhe example of an alLernaLlve markeL model whlch ls able Lo adapL global
supply changes Lo Lhe reglonal markeL would be a powerful one.
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Clobal naLural gas demand ls expecLed Lo conLlnue Lo grow rapldly, ouLperformlng all oLher fossll
fuels. Clobal demand ls fuelled by Lhe economlc growLh of emerglng economles (alded by alr
quallLy concerns), noLably Chlna, and Lo a lesser exLenL lndla. ln Lhe shorL Lo medlum Lerm,
reglonal gas demand ls also boosLed by Lhe afLermaLh of Lhe lukushlma uallchl nuclear accldenL,
as gas ls one of Lhe key avallable energy sources Lo replace nuclear power generaLlon ln Lhe
!apanese elecLrlclLy mlx.
ln recenL years, slgnlflcanL revlslons ln global naLural gas resource esLlmaLes have allevlaLed
concerns abouL Lhe longLerm avallablllLy of naLural gas ln boLh developed and developlng
economles. As a resulL of Lhe exponenLlal growLh of unlLed SLaLes' shale gas producLlon, new
global LnC llquefacLlon capaclLy and Lhe lmpacL of lower demand due Lo Lhe economlc crlsls, a
gap emerged ln 2009 beLween spoL prlces (Lhe prlces aL whlch Lhe gas can be boughL or sold aL a
speclfled Llme and place) ln Lhe unlLed SLaLes and unlLed klngdom on Lhe one slde, and ollllnked
gas prlces prevalllng ln Asla aclflc
1
and Lurope, on Lhe oLher.
As of 2012, naLural gas prlces ln Lhe unlLed SLaLes remalned aL low levels of around uSu 3 per
mllllon 8rlLlsh Lhermal unlLs (M8Lu), Luropean spoL prlces, albelL Lhree Lo four Llmes hlgher Lhan
Lhose ln Lhe unlLed SLaLes, are sLlll aL a dlscounL Lo Luropean longLerm conLracL prlces, whlle
prlces ln !apan peaked aL a level conslderably hlgher Lhan Lhose ln Lurope. 1hls ls ralslng Lhe
quesLlon, boLh ln Lurope and Asla, of Lhe approprlaLe way Lo prlce naLural gas.
1he Luropean unlon has soughL Lo answer Lhls quesLlon Lhrough Lhe developmenL of alLernaLlve
prlclng mechanlsms vla gasLogas prlclng on gas Lradlng hubs. Lurope has a llquld Lradlng hub ln
Lhe unlLed klngdom, Lhe naLlonal 8alanclng olnL (n8), and more recenLly developed some
Lradlng hubs ln conLlnenLal Lurope, noLably Lhe 1lLle 1ransfer laclllLy (11l) ln Lhe neLherlands
and neL ConnecL Cermany (nCC) ln Cermany. Powever, no such developmenLs have Laken place
ln Lhe Aslaaclflc economles so far.
A key change for many lndlvldual naLural gas markeLs ln Aslaaclflc ls Lhe growlng rellance on
lmporLs, ln parLlcular, LnC lmporLs. Aslde from !apan, Lhe 8epubllc of korea and Chlnese 1apel,
lmporLlng LnC ls a relaLlvely new phenomenon for Aslan counLrles: lndla sLarLed ln 2003, Chlna ln
2006, 1halland ln 2011, and lndonesla and Malaysla ln 2012. AddlLlonally, a few oLher Aslan
counLrles are expecLed Lo become LnC lmporLers Lhls decade.
1o grow and consolldaLe Lhe role of naLural gas ln Lhe Aslaaclflc reglon, naLural gas wlll have Lo
be compeLlLlve on prlce, noLably agalnsL coal. SlmulLaneously, counLrles should conLlnue Lo
aLLracL new sources of supply, whlch are llkely Lo be more expenslve. Aslaaclflc naLural gas
exporLers have hlsLorlcally relled on longLerm, olllndexed conLracLs Lo sell Lhelr producLlon. 1hls
makes naLural gas prlces ln Lhe Aslaaclflc reglon largely dependenL on oll markeL facLors.
Lxpandlng Lhe role of naLural gas, and Lhereby lmprovlng Lhe energy securlLy, economlc and
envlronmenLal performance of Lhese economles ln Lhe long run, wlll depend on markeL condlLlons.
1hese musL allow gas Lo compeLe auLonomously ln local energy markeLs connecLed Lo Lhe global
markeL Lhrough a prlclng sysLem ln Asla LhaL ls compaLlble wlLh reglonal gas supply and demand.
1hls paper wlll focus on Lhe obsLacles and opporLunlLles for Lhe Aslaaclflc economles Lo
esLabllsh naLural gas Lradlng hubs LhaL allow for naLural gas prlces Lo reflecL local demand and
supply. ln Lhe flrsL chapLer, prlclng mechanlsms for naLural gas are explalned and currenL reglonal

1
Aslaaclflc ln Lhls lnformaLlon aper ls deflned as nonCLCu Asla, Chlna lncludlng Lhe Pong kong area, and CLCu Asla
Cceanla mlnus lsrael. AlphabeLlcally, Lhese are as follows: AusLralla, 8angladesh, 8runel uarussalam, Chlnese 1alpel, lndla,
lndonesla, !apan, korea, Malaysla, Myanmar, new Zealand, aklsLan, Chlna, Lhe hlllpplnes, 1halland, vleLnam, and oLher".
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 9
Lrends are seL ln a global perspecLlve. 1he ouLlook for Lhe naLural gas markeL ln Lhe Aslaaclflc
reglon ls dlscussed ln ChapLer 2. ln ChapLer 3, Lhe process of developlng a Lradlng hub and a
LransparenL naLural gas prlce ls seL ouL. 1hls chapLer explalns baslc requlremenLs needed Lo creaLe
a compeLlLlve wholesale naLural gas markeL, Lhe subsequenL role of a hub ln such a compeLlLlve
markeL, and Lhe respecLlve roles for governmenL and markeL parLles ln such a LransformaLlve
process. llnally, ChapLer 4 analyses Lhe perspecLlves for selecLed naLural gas markeLs ln Asla and
Lhe global LnC supply chaln Lo creaLe and supporL a compeLlLlve naLural gas markeL.

!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 10
D< +*,-.*$ )*0 &.'7'() '( 50'*E*7'8'7
E.'7'() (*,-.*$ )*0
8roadly speaklng, Lhere are Lwo ways Lo esLabllsh a wholesale prlce level for naLural gas: elLher
vla markeLbased prlclng or Lhrough prlce regulaLlon.
1he markeLbased way lmplles LhaL Lhe prlce of naLural gas ls deLermlned by supplydemand
forces ln a markeL LhaL ls noL necessarlly Lhe naLural gas markeL. ln facL, lndexaLlon Lo anoLher
commodlLy (oll, coal, oll producLs or elecLrlclLy) wlll allow supply/demand facLors ln oLher markeLs
Lo seL Lhe wholesale prlce of naLural gas. 1he exacL wholesale prlce of naLural gas varles by
conLracL, slnce conLracL condlLlons can seL a floor, cap, Llme lag or none/all of Lhe above for Lhe
prlce of naLural gas for a perlod of dellvery. MosL lmporLanL, however, ln prlclng Lhe economlc"
way ls LhaL Lhe prlce developmenL of naLural gas over Llme ls belng deLermlned by markeL
parLlclpanLs raLher Lhan governmenL regulaLlon.
2

1he lnLernaLlonal Cas unlon (lCu) has ldenLlfled Lhree ma[or markeLbased prlclng mechanlsms,
coverlng CLCu and nonCLCu markeLs (lCu, 2012). 1hese mechanlsms are:
%'$ W&.%2-7,X '(2"?*,'%(, whereby gas prlces are llnked Lo oLher fuel prlces (mosLly oll or reflned
producLs, someLlmes coal),
)*0,%)*0 7%;&",','%(, lndlcaLlng an lndexaLlon Lo spoL prlces LhaL reflecL supply and demand
for naLural gas ln a markeL, and
(",4*79 8.%; 8'(*$ &.%2-7,, whlch refers mosLly Lo conLracLs where Lhe gas prlce ls llnked Lo
Lhe prlce of ammonla.
3

CovernmenL regulaLlon ls able Lo seL naLural gas prlces (prlce regulaLlon ls posslble aL every level
of Lhe naLural gas value chaln: wellhead, wholesale, clLy gaLe or dlfferenLlaLlng beLween varlous
segmenLs of consumers) aL a level requlred Lo sulL Lhe governmenL's domesLlc pollcy ob[ecLlves.
lnherenLly, prlce regulaLlon of naLural gas Lo meeL deslred pollLlcal, soclal, economlc or envlronmenLal
ouLcomes wlll lead Lo less LransparenL prlce slgnals and an unsLable lnvesLmenL cllmaLe for Lhe
fuLure, as governmenL pollcy ob[ecLlves can (easlly) change.
lrequenLly, buL noL necessarlly, gas prlce regulaLlon wlll lead Lo belowcosL prlces for cerLaln
segmenLs of consumers. 1hls ls mosL llkely Lo occur ln naLural gas produclng counLrles. ln such
cases, lL ls very dlfflculL (lf noL undeslrable for a regulaLor) Lo regulaLe prlce levels Lo accuraLely
reflecL gas's value ln a naLlonal economy. 1hls mlsmaLch frequenLly resulLs ln (unlnLended) dlsLorLlons
ln Lhe usage of naLural gas, whlch llmlL efflclenL economlc developmenL. A clear consequence of
belowmarkeL prlclng of naLural gas ls Lhe lnefflclenL use of Lhe resource. 1hls poLenLlally llmlLs
exporL revenues (Lhrough lncreased domesLlc demand) for a producer counLry, or, lL could lncrease
lmporL expendlLures for a consumer counLry Lhrough hlgher domesLlc demand.
1he lCu has ldenLlfled flve ma[or governmenLregulaLed prlclng mechanlsms, coverlng CLCu and
nonCLCu markeLs (lCu, 2006). 1hese mechanlsms are:

2
CovernmenLs can lnfluence prlce levels by regulaLlng Lhe naLural gas markeLs as a whole, buL Lhe prlce level LhaL wlll derlve
from Lhese regulaLlons ls noL as easlly deLermlned as Lhrough dlrecL prlce regulaLlon.
3
neLback prlclng of naLural gas of a flnal producL (such as ammonla) ls perhaps Lhe mosL sLralghLforward way Lo couple prlce
developmenLs of naLural gas Lo prlce developmenLs ln anoLher markeL, buL compleLely dlsregards developmenLs ln Lhe naLural
gas markeL lLself. 1hls ls frequenLly Lhe case when cosLs of naLural gas (feedsLock) represenL a conslderable share of Lhe cosL
of Lhe end producL, Lhereby guaranLeelng a proflL margln on Lhe sale of Lhe end producL. AlLernaLlvely, Lhe neLback approach
can be used Lo deLermlne Lhe prlce level before lndexlng lL Lo oLher producLs.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 11
Q")-$*,'%( 7%0, %8 0".#'7" (8CS) covers Lhe prlce of servlce, lncludlng lnvesLmenL and a falr
reLurn. Such prlces would be publlshed by Lhe regulaLor or mlnlsLry and alm aL recoverlng Lhe
wellhead prlce.
Y%7'*$ *(2 &%$','7*$ .")-$*,'%( (S8), whereby Lhe prlce ls seL by mlnlsLrles on an adhoc basls
dependlng on percelved soclal needs, supply/demand balance or governmenL revenue needs.
1hls means naLural gas prlces can lncrease (or decrease) very sharply, lndependenLly of any
speclflc developmenL ln Lhe gas markeL.
Q")-$*,'%( 4"$%: 7%0, (88C), where Lhe prlce does noL cover Lhe baslc producLlon and
Lransmlsslon prlce, reflecLlng subsldles. 1hls generally happens only when Lhe gas company ls
sLaLe owned, and ls more llkely when naLural gas ls assoclaLed wlLh oll producLlon LhaL provldes
Lhe bulk of Lhe governmenL's revenues (ln effecL oll provldes a subsldy on gas consumpLlon).
V'$*,".*$ ;%(%&%$@ (8M), referrlng mosLly Lo bllaLeral agreemenLs wlLhln former SovleL unlon
counLrles, where prlces are agreed on a yearly/mulLlyear basls beLween Lhe governmenLs of
Lwo counLrles.
+% &.'7" (n), occaslonally used by producers for lnLernal consumpLlon.
1hls paper wlll focus on Lhe perspecLlves for markeLbased prlce formaLlon ln Lhe Aslaaclflc
reglon, lL ls Lherefore relevanL Lo compare Lhe share of markeLbased prlce formaLlon wlLh LhaL of
oLher reglons. 8esearch by Lhe lCu has shown LhaL Lhrough Lhe perlod 200310, global naLural
gas prlclng was sllghLly domlnaLed by markeLbased gas prlces. ln 2010, Lhe prlce level of 63 of
all wholesale naLural gas sold globally was deLermlned by markeL forces. 1hls domlnanL share for
markeLbased prlce formaLlon ls prlmarlly Lhe resulL of Lhe domlnance of gasLogas prlclng ln Lhe
norLh Amerlcan naLural gas markeL, whlch comprlsed 23 of global gas demand ln 2010.
S')-." D - E.'7" 8%.;*,'%( %8 (*,-.*$ )*0 7%(0-;&,'%( '( ,H" :%.$2 *(2 50'*E*7'8'7P GFF=DF

Sources: lCu, 2006, lCu, 2008, lCu, 2010, lCu 2012.

ln oLher markeLs, mosL noLably Lhe Mlddle LasL, Afrlca and Lhe lormer SovleL unlon
(lSu), prlce formaLlon was domlnaLed by regulaLory preferences LhroughouL 200310.

0
300
1 000
1 300
2 000
2 300
3 000
3 300
2003 2007 2009 2010 2003 2007 2009 2010
World Aslaaclflc
b
c
m
MarkeL 8egulaLed
==Z
AIZ
AFZ
==Z
=GZ
=FZ =IZ =DZ
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 12
ln Lhe Aslanaclflc reglon governmenL regulaLlons Lo a large exLenL conLlnue Lo deLermlne
naLural gas prlces.
4

Clobally, markeLbased prlclng mechanlsms are based on oll lndexaLlon or gasLogas compeLlLlon.
1he neLback from flnal producL" prlce mechanlsm ls used for less Lhan 1 of global gas consumpLlon,
and ls noL used ln lnLerreglonal naLural gas Lrade. arLlclpaLlon by markeL parLles ln lnLernaLlonal
gas Lrade (elLher by plpellne or LnC) exposes markeL areas Lo dlfferenL prlce concepLs and
slgnals. 1hls glves boLh consumers and producers an lncenLlve Lo adapL prlce mechanlsms ln
response Lo pressure Lo allgn domesLlc prlces wlLh lmporL prlces (lCu, 2012).
Cver Lhe perlod 200310, Lhe global Lrade of naLural gas, boLh LransporLed by plpe and LnC, was
predomlnanLly prlced on Lhe basls of oll lndexaLlon. AlLhough oll lndexaLlon has conLlnued Lo
decllne as a prlclng mechanlsm ln naLural gas Lrade, Lhe prlce of 63 of global gas Lrade ln 2010
was sLlll lndexed Lo oll.
S')-." G - E.'7'() ;"7H*('0;0 '( )$%4*$ (*,-.*$ )*0 ,.*2"P GFF=DF

Sources: lCu, 2006, lCu, 2008, lCu, 2010, lCu, 2012.

ln Lurope and Aslaaclflc (and lndeed, globally), oll lndexaLlon ls Lhe domlnanL prlce mechanlsm
for Lraded gas, alLhough Lurope conLlnues Lo shlfL Lowards more gasLogas based prlces. ?eL all
norLh Amerlcan gas ls prlced on a gasLogas basls, and ln 2010 norLh Amerlca comprlsed 14 of
global naLural gas Lrade. Luropean markeLs are also movlng ln Lhls dlrecLlon, owlng Lo a
conLlnued lncrease ln Lrade Lhrough conLlnenLal Luropean gas hubs, as markeL confldence ln Lhe
prlceseLLlng ablllLy of Lhese hubs has lncreased. Moreover, Lhe Luropean longLerm supply
conLracLs (from 8ussla, norway and Lhe neLherlands) are belng ad[usLed Lo lndex parL of Lhe
volume on gasLogas compeLlLlon raLher Lhan oll (CL8A, 2009b).
1radlLlonally, naLural gas Lrade ln Asla has been domlnaLed by olllndexed prlclng, wlLh a share of
88 of naLural gas Lraded ln Lhe reglon ln 2010. no slgnlflcanL changes ln Lhls Lrend can be
observed LhroughouL 200310.

4
ln Lhe lCu's wbolesole Cos ltlce lotmotloo, Lhe Aslaaclflc reglon conslsLs of Lhe comblned lCu Asla and Aslaaclflc
reglons encompasslng: AfghanlsLan, AusLralla, 8angladesh, 8runel, Chlna Pong kong reglon, Chlnese 1alpel, lndla, lndonesla,
!apan, Myanmar, Malaysla, new Zealand, aklsLan, Chlna, Lhe hlllpplnes, Slngapore, korea, 1halland, and vleLnam.
0
200
400
600
800
1 000
1 200
2003 2007 2009 2010 2003 2007 2009 2010
World Aslaaclflc
b
c
m
CasLogas compeLlLlon Cll lndexaLlon
O=Z
A=Z
AUZ
ACZ
CCZ
CCZ
CLZ
U=Z
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 13
S')-." I - [*.9",4*0"2 &.'7'() '( )*0 ,.*2" '( +%.,H 5;".'7*P >-.%&" *(2 50'*E*7'8'7

E.'7'() (*,-.*$ )*0 '( 50'*E*7'8'7
ln 2010, [usL over half (32) of Lhe naLural gas consumed ln Lhe Aslaaclflc reglon was prlced on
markeLbased prlce formaLlon mechanlsms. 1he ma[orlLy (67) of Lhls markeLbased gas was
lmporLed (plpellnes or LnC), whlle 33 was domesLlcally produced.
naLural gas Lrade ln Aslaaclflc ls prlced Lhrough elLher oll lndexaLlon or gasLogas compeLlLlon.
All plpellneLraded volumes of gas are prlced wlLh a llnk Lo Lhe oll markeL, whlle some gasLogas
compeLlLlon has sLarLed Lo emerge ln LnC Lradlng ln Asla (llgure 4).
S')-." L - 50'*E*7'8'7 &.'7'() ;"7H*('0;0 8%. (*,-.*$ )*0 ,.*2" W&'&"$'(" *(2 R+/X


MosL gasLogas compeLlLlon prlclng ln Aslaaclflc ls LnC spoL Lrade. Powever, one can argue
LhaL Lhe prlce for spoL cargoes ln Lhe global LnC markeL ls noL necessarlly seL Lhrough genulne
0
100
200
300
400
300
600
2003 2007 2009 2010 2003 2007 2009 2010 2003 2007 2009 2010
norLh Amerlca Lurope Aslaaclflc
b
c
m
ULZ
OOZ
CLZ
AOZ
CCZ
CCZ
CLZ
U=Z
0
20
40
60
80
100
120
140
160
180
200
2003 2007 2009 2010 2003 2007 2009 2010
lpellne LnC
b
c
m
CAZ
COZ
CDZ
U=Z
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 14
gasLogas compeLlLlon, as 70 of global LnC lmporLs ln 2010 were oll lndexed. ln addlLlon, only a
llmlLed amounL (18) of LnC ls dellvered ln markeLs wlLh a genulne compeLlLlve wholesale gas
markeL (e.q. ln Lhe unlLed klngdom and Lhe unlLed SLaLes) and prlced aL a level deLermlned by
supply/demand facLors.
1hls means LhaL Lhe prlce for spoLLraded LnC ln Asla ls noL based on supply/demand ln Lhe Asla
aclflc reglon. lnsLead, Lhe olllndexed gas prlce seLs a reference prlce level whlch markeL condlLlons
Lhen modlfy. 1hose markeL condlLlons are deLermlned by Lhe relaLlonshlp beLween a buyer and a
seller, Lhe avallablllLy of surplus gas ln Lhe LnC supply chaln, and Lhe buyer's need for Lhe gas.
1hese markeL condlLlons shlfL Lhe LnC spoL prlce above or below Lhe olllndexed level.
ln Lhls regard, Lhe LnC spoL prlce ln Asla ls noL one LhaL ls reallsed Lhrough markeL compeLlLlon ln
Lhe AngloAmerlcan sense. As Asla has no Lradlng hub Lo faclllLaLe gasLogas compeLlLlon, Lhe
Lerm spoL purchase" slgnlfles Lhe purchase of a slngle cargo LhaL can vary ln slze, and LhaL wlll be
llfLed" ln a relaLlvely shorL Llmeframe, usually less Lhan one year ln Lhe fuLure.
3
Whlle ln norLh
Amerlca Lhere are no olllndexed volumes LhaL lnfluence Lhe spoL markeL.
1he sale of an LnC spoL cargo ls frequenLly negoLlaLed wlLhouL reference Lo oLher sources of
naLural gas, because Lhe maln Aslan LnClmporLlng economles have no connecLlon Lo plpellne
naLural gas. SpoL cargoes are generally prlced above or below a longLerm, olllndexed LnC prlce
ln Lhe lmporLlng markeL, Lhe prlce level of whlch depends on global markeL demand for oll raLher
Lhan reglonal supply/demand for naLural gas.
As a resulL, spoL LnC has frequenLly been more expenslve Lhan Lhe olllndexed cargoes boughL
under longLerm conLracLs ln Lhe Aslan reglon. Cver Lhe perlod 2007 Lo C1 2012, !apan, korea
and Chlnese 1alpel have frequenLly pald a spoL premlum compared Lo Lhelr longLerm supply
conLracLs, on average, 77 of Lhe lmporLed spoL cargoes were prlced above longLerm conLracLs
(1able 1).
1he currenL oll lndexaLlon ln Lhe Aslaaclflc gas Lrade ls Lhe resulL of hlsLorlcal developmenLs and
conLracL negoLlaLlons beLween suppllers and, orlglnally, !apanese cusLomers. ln 1969 Lhe flrsL
LnC supply conLracL was slgned LhaL made volumes avallable from Alaska ln Lhe unlLed SLaLes.
1he flrsL 13 Lo 20year LnC supply conLracLs (8runel and Abu uhabl sLarLed Lo dellver LnC Lo
!apan as well) adopLed a flxedprlce seLLlng LhaL valued LnC aL around uSu 0.3/M8Lu. lnlLlally,
Lhe LnC prlce was seL aL a premlum versus crude oll, and was Lhen progresslvely ralsed as oll
prlces rose durlng Lhe 1970s.
1*4$" D - R+/ 0&%, 7*.)%"0 2"$'#"."2 '( \*&*(P ]%."* *(2 JH'("0" 1*'&"'P GFFO^D GFDG

Spot cargoes Spot price
bcm % LNG import > Iong-term < Iong-term
Japan 29.6 6% 74% 26%
Korea 32.7 20% 83% 17%
Chinese Taipei 12.3 17% 71% 29%
TotaI 74.5 11% 77% 23%
noLe: spoL cargoes for !apan orlglnaLe from Algerla, LgypL, LquaLorlal Culnea, nlgerla, norway, eru, 1rlnldad, ?emen and reexporLed
cargoes from nonproduclng naLlons. SpoL cargoes for korea orlglnaLe from Lhe unlLed Arab LmlraLes, Algerla, 8runel, LgypL, nlgerla,
norway, eru, CaLar, 1rlnldad, Lhe unlLed SLaLes and reexporLed cargoes from nonproduclng naLlons. SpoL cargoes for Chlnese
1alpel orlglnaLe from Lhe unlLed Arab LmlraLes, Algerla, 8runel, LgypL, LquaLorlal Culnea, norway, Cman, eru, 8ussla, 1rlnldad,
unlLed SLaLes, ?emen, and reexporLed cargoes from nonproduclng naLlons.
Sources: cusLoms daLa !apan, korea and Chlnese 1alpel.

3
1hls quallflcaLlon of spoL purchase and shorLLerm LnC Lrade" ls derlved from lnLernaLlonal Croup of Llquefled naLural Cas
lmporLers (CllCnL).
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 13
SubsequenLly, Lhe flrsL LnC supply conLracL slgned beLween lndonesla and !apan lnLroduced oll
lndexaLlon. lnlLlally, Lhls would esLabllsh a llnk wlLh Lhe average oll prlce or Lhe governmenL
selllng prlce (CS) of lndonesla's crude oll sales. Powever, near Lhe end of Lhe 1980s, Saudl
Arabla lnLroduced neLback prlclng for lLs oll exporLs, Lhls reduced lndonesla's CS and consequenLly,
Lhe prlce of LnC exporLed Lo !apan. 1herefore, lL was ln Lhe LnC producer's lnLeresL LhaL Lhe oll
lndexed prlce would be deLermlned ln Lhe markeL where Lhe LnC would be dellvered, Lhe
!apanese CusLom Cleared (!CC) prlce provlded LhaL requlremenL.
6

When korea (1983) and Chlnese 1alpel (1990) sLarLed Lo lmporL LnC, Lhelr supply conLracLs were
also llnked Lo Lhe !CC, maklng Lhls Lhe domlnanL oll marker ln Lhe reglon. 1he decllne ln oll prlces
durlng Lhe 1980s led Lo Lhe lnLroducLlon of Scurve prlclng formulas. Scurve formulas are usually
esLabllshlng a llnear relaLlonshlp beLween Lhe prlce of gas and oll as long as oll prlces sLay wlLhln
a predeLermlned range. When Lhe oll prlce moves ouL of Lhls range, Lhe relaLlonshlp beLween Lhe
prlce of oll and Lhe resulLlng gas prlce weakens, Lherefore reduclng Lhe rlsk of low oll prlces for
producers, buL also lnLroduclng proLecLlon agalnsL hlgh oll prlces for consumers.
7
As Lhe flrsL
Scurve conLracLs were developed Lo proLecL producers (and Lhelr upfronL lnvesLmenLs ln LnC
lnfrasLrucLure), aL an average oll prlce below uSu 20/bbl durlng Lhe perlod 198399, Lhls resulLed
ln more expenslve LnC Lhan Lhe energy equlvalenL ln oll.
S')-." = - 5#".*)" \*&*("0" R+/ ';&%., &.'7"0 *(2 &.'7" .*()"

Source: !apanese cusLoms.

uurlng Lhe 2000s, oll prlces lncreased slgnlflcanLly, buL Scurves proLecLed LnC buyers agalnsL
Lhls lncrease, reduclng Lhe prlce of LnC lmporLs on a calorlflc basls ln relaLlon Lo LhaL of oll.
uesplLe Lhe renegoLlaLlon of longLerm conLracLs durlng Lhe flrsL parL of Lhe decade, a rapld rlse
ln oll prlces resulLed ln longLerm LnC prlces lower Lhan Lhelr oll equlvalenL. Powever, Lhe addlLlonal
lmporL of spoLmarkeLed cargoes would frequenLly be above prlces equal Lo Lhe calorlflc oll
equlvalenL (llgure 3).

6
1he !CC ls also frequenLly referred Lo as Lhe !apan Crude CockLall.
7
lor an lnLroducLlon Lo LnC prlclng and Lhe Scurve see: llower (2008).
0
3
10
13
20
23
u
S
u
/
M
8
L
u
rlce range LnC purchase LnC aL !CC parlLy !apan LnC average
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 16
AfLer 2004, LnC producers Lrled Lhrough negoLlaLlons Lo ralse or abollsh Lhe Scurve (MlyamoLo,
lshlguro and ?amada, 2009). CurrenLly Lhe dlscusslon ln longLerm LnC supply conLracLs focuses
on Lhe slope" ln an LnC prlce formula, baslcally deLermlnlng LnC prlces aL a cerLaln percenLage
of Lhe !CC prlce (plus or mlnus a consLanL). As a consequence of lncreaslng oll prlces, lncreased
avallablllLy of spoLmarkeLed LnC on global markeLs, Lhe rlgldlLy of longLerm LnC supply
conLracLs and addlLlonal gas demand shocks (prlmarlly, Lhe lukushlma accldenL ln 2011), LnC
spoL prlces have become more volaLlle slnce 2004.
AlLhough oll and LnC prlces dlverged conslderably, Lhe overall movemenL of Lhe LnC prlce ls sLlll
comparable wlLh oll prlces. 1he lncreased lmporL of spoLpurchased LnC, however, has lncreased
Lhe prlce spread, maklng LnC an lncreaslngly volaLlle commodlLy.
1*4$" G - R+/ ';&%., '(,% \*&*(M *, \JJ &*.',@P H'0,%.'7*$ *#".*)" *(2 *#".*)" 0&."*2 %8 2"$'#".'"0
USD/MBtu LNG at JCC parity Japanese LNG import price Average spread Spread
2000 4.89 4.70 1.02 22%
2001 4.27 4.61 0.56 12%
2002 4.36 4.28 0.71 16%
2003 5.05 4.79 0.63 13%
2004 6.37 5.19 1.24 24%
2005 9.02 6.02 2.51 42%
2006 11.08 7.12 6.14 86%
2007 12.30 7.74 5.02 65%
2008 16.92 12.66 11.16 88%
2009 10.92 9.04 7.23 80%
2010 13.83 10.90 6.15 56%
2011 19.07 14.78 7.36 50%

Cn average, Lhe prlce spread beLween monLhly LnC lmporLs durlng a year has lncreased slnce
2004. As a consequence of Lhe flnanclal crlsls, spreads beLween varlous LnC supplles for !apan
peaked aL uSu 11.16/M8Lu ln 2008. 1hls equaLed Lo around 83 of Lhe average lmporL prlce for
!apanese LnC LhaL year. AlLhough Lhe dlfferenLlal ln prlce beLween varlous LnC lmporLs has
decreased somewhaL ln Lhe followlng years, lL remalned over 30 of Lhe average LnC lmporL
prlce Lhrough 200911.
1hls does noL necessary lmply LhaL spoLpurchased cargoes are always more expenslve Lhan oll
lndexed LnC lmporLs (as seen ln 1able 1).
8
1he prlce formulas ln longLerm supply conLracLs
generally seL Lhe average prlce of LnC aL a level below Lhe level of Lhe oll equlvalenL, buL are
responslve Lo Lhe relaLlve changes ln Lhe oll prlce Lhrough Llme. Aslan longLerm conLracLs for
naLural gas Lraded vla plpellnes have a slmllar olllndexed prlce mechanlsm, alLhough Lhe overall
prlce level ls generally lower Lhan LnC.
CurrenLly, Lhen, Lhe lack of a compeLlLlve naLural gas markeL ln Lhe Aslaaclflc reglon hlnders Lhe
developmenL of a prlce reflecLlng approprlaLe supply and demand crlLerla.
9
ConsequenLly, Lhe
prlce of naLural gas ln Lhe Aslaaclflc reglon ls seL by LnC buyers and based on a dlfferenL
markeL (oll). Clllndexed LnC conLracLs seL a prlce benchmark, whlle spoL LnC ls lmporLed aL
lncreaslngly dlverglng prlces relaLlve Lo Lhe olllndexed benchmark. under Lhese clrcumsLances lL

8
ln 2011, Lhe volume lmporLed as spoL cargoes ln !apan was generally prlced below oll lndexed longLerm conLracLs (lLA, 2012a).
9
An alLernaLlve !apan/korea Marker does exlsL and ls dlscussed ln 8ox 2 ln ChapLer 4.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 17
ls dlfflculL lf noL lmposslble for boLh longLerm LnC and spoL LnC prlces Lo reflecL Lhe accuraLe
markeL value of naLural gas ln Lhe varlous developlng and developed economles ln Asla.
1H" .*,'%(*$" 8%. )*0,%)*0 &.'7'() '( 50'*E*7'8'7
As LnC dld noL have a markeL" ln Asla, Lhe orlglnal raLlonale for oll lndexaLlon ln Aslan LnC
conLracLs, much llke ln Lhe Luropean gas markeL, was Lo look for lLs replacemenL value. ln !apan,
LnC was seen as an alLernaLlve for oll LhaL was sLlll promlnenLly used ln power generaLlon. Cn
Lhe supply slde, Lhe CrganlsaLlon of eLroleum LxporLlng CounLrles (CLC) agreed ln 1980 on an
LnC exporL pollcy LhaL expllclLly almed aL calorlflc parlLy wlLh oll prlces. More recenLly, ln 2011,
Lhe Cas LxporLers CounLry lorum (CLCl) also endorsed oll lndexaLlon as Lhe preferred prlclng
scheme Lo Lrade naLural gas (CLCl, 2012).
A llnk Lo a globally Lraded commodlLy such as oll glves lnvesLors ln LnC llquefacLlon planLs and
LransporL lnfrasLrucLure Lhe ablllLy Lo hedge revenues over longer perlods of Llme and Lherefore
provldes a secure flow of revenues. 1he global oll markeL ls generally percelved wlLh a hlgh
degree of confldence wlLh regard Lo lLs lower probablllLy for prlce manlpulaLlon and lower
volaLlllLy compared Lo naLural gas (C20, 2011). Cn Lhe downsLream slde, mosL of Lhe lnlLlal LnC
buyers were regulaLed uLlllLles, whlch enabled Lhem Lo shlfL markeL rlsk Lo Lhelr end consumers
(!ensen, 2004). Cll lndexaLlon was Lherefore lnlLlally readlly accepLed by boLh producers and
consumers as one of Lhe key prlnclples underplnnlng longLerm LnC supply conLracLs.
1lmes have changed, however. AlLhough furLher lnvesLmenL ln LnC producLlon capaclLy needs Lo
be properly faclllLaLed, naLural gas also needs Lo be compeLlLlve wlLhln Lhe enduser markeL. Cll
ls less and less Lhe prlmary compeLlLor Lo naLural gas ln Lhe Aslaaclflc reglon.
S')-." A - YH*." %8 %'$ *(2 )*0 '( "$"7,.'7',@ )"(".*,"2 '( \*&*(P DUUFGFDD

noLe: unless oLherwlse sLaLed, all maLerlal ln flgures and Lables derlves from lLA daLa and analysls.
Source: lLA, 2012c.

1ake Lhe followlng as an example: ln Lhe !apanese energy mlx, oll has losL lLs domlnanL share ln
power generaLlon Lo naLural gas, coal and (unLll Lhe lukushlma accldenL) nuclear power. 1hls
0
3
10
13
20
23
30
33
40
Casflred power generaLlon Cllflred power generaLlon
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 18
developmenL has slgnlflcanLly redressed LnC's compeLlLlve envlronmenL ln power generaLlon
from olldomlnaLed Lo dlrecLly compeLlng wlLh oll, coal and nuclear power. Cll has malnLalned lLs
domlnanL share ln !apan's LoLal prlmary energy supply Lhrough lLs role ln LransporL (currenLly also
sLrengLhened by Lhe use of oll Lo replace nuclear power generaLlon, buL Lhls ls llkely Lo be
Lemporary), a developmenL noL speclflcally !apanese, buL global.
Llnklng Lhe prlce of naLural gas Lo oll on accounL of enduser compeLlLlon makes llLLle sense when
oll does noL dlrecLly compeLe wlLh naLural gas (!ensen, 2011). ?eL, ln developlng naLural gas
markeLs, olllndexed conLracLs have been Lhe backbone for markeL developmenL (as descrlbed
above). 1hese conLracLs are llkely Lo conLlnue Lo domlnaLe ln Lhe developlng economles ln Asla,
as conslderaLlons oLher Lhan prlce (envlronmenLal facLors and securlLy of supply) are frequenLly
more relevanL for companles and pollcymakers, and an alLernaLlve naLural gas prlce ls generally
noL avallable ln Lhese economles.
Powever, for maLure naLural gas markeLs, Lhe llmlLs of oll lndexaLlon as a prlceseLLlng mechanlsm
for LnC became clear ln 2011, when !apan needed an lncreaslng amounL of LnC Lo saLlsfy power
demand afLer Lhe lukushlma accldenL. !apanese spoL cargo purchases lncreased Lo record levels,
and alLhough average LnC lmporL prlces dld Lhe same, Lhls was noL an lmmedlaLe consequence
of supply and demand on Lhe global LnC markeL.
MosL of Lhe addlLlonal volume of spoL LnC purchased beLween !anuary 2011 and Aprll 2012 was
prlced below longLerm, olllndexed volumes (and longLerm LnC exporLers LhaL benchmark spoL
cargoes Lo oll) (lLA, 2012a). As a consequence, Lhese lower prlced spoL supplles (from, among
oLhers, nlgerla and LquaLorlal Culnea), reduced Lhe average prlce of a cublc meLre of LnC, desplLe
record demand. ConsequenLly, Lhe rlse ln LnC prlces was malnly caused by Lhe slmulLaneous run
up ln oll prlces durlng 2011 (as a consequence of Lhe Arab Sprlng ln norLh Afrlca and lssues wlLh
lran) raLher Lhan Lhe lncrease ln !apanese demand.
S')-." O - \*&*("0" $%(),".; *(2 0&%, #%$-;"0 ';&%.,P GFDFDG


Whlle consumlng naLlons mlghL see a need for longLerm conLracLs Lo ensure supply securlLy
(alLhough Lhls ulLlmaLely depends on Lhe physlcal avallablllLy of gas), producers generally use
Lhese conLracLs Lo secure flnanclng and a reLurn on lnvesLmenL. lor developlng naLural gas
markeLs, ollllnkage ls frequenLly readlly accepLed by boLh producers ooJ consumers as a prlclng
0
2
4
6
8
10
12
14
16
18
0
2
4
6
8
10
12
b
c
m
SpoL !apan lmporL LnC longLerm !apan lmporL LnC spoL
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 19
mechanlsm, for lack of a rellable alLernaLlve. A developlng gas markeL ls lnlLlally unable Lo
generaLe a rellable naLural gas prlce, as Lhe lnfrasLrucLure lnvesLmenLs requlred Lo develop a
markeL wlll seL Lhese aL an uncompeLlLlve level.
Powever, ln maLure naLural gas markeLs, oll prlce llnkage ls a weak lnsLrumenL for generaLlng a
compeLlLlve prlce. Slnce Lhe lnlLlal lnfrasLrucLure lnvesLmenLs ln many maLure gas markeLs have
depreclaLed, governmenLs mlghL wlsh Lo lnLroduce more compeLlLlon Lhrough Lhe separaLlon of
neLworks and supply acLlvlLles ln Lhe naLural gas secLor. 1hls process separaLes procuremenL cosLs
from dlsLrlbuLlon cosLs ln Lhe wholesale naLural gas prlce, allowlng lnfrasLrucLure lnvesLmenLs Lo
be flnanced on Lhe basls of a servlce fee for dellvery of Lhe commodlLy Lo cusLomers.
SlmulLaneously, Lhe naLural gas prlce resulLlng from compeLlLlon wlll lncrease Lransparency ln Lhe
gas markeL because commodlLy and LransporL capaclLy are prlced separaLely, aL levels reflecLlng
Lhelr respecLlve supply/demand balance. When a naLural gas markeL ls properly seL up, Lhe resulLlng
prlce wlll reveal lnefflclencles or boLLlenecks ln Lhe supply chaln (whlch beforehand were only
known Lo verLlcally lnLegraLed monopolles), allowlng for efflclenL accommodaLlon of Lhese
boLLlenecks Lhrough flnanclal lncenLlves. 1he lnLroducLlon of compeLlLlon Lhus allows for more
efflclenL procuremenL and dlsLrlbuLlon of naLural gas by companles LhroughouL Lhe value chaln.
Cll lndexaLlon slmply cannoL dellver Lhe lncreased Lransparency and lnformaLlon requlred ln a
maLure naLural gas markeL. As prlce lncenLlves Lo generaLe lnvesLmenLs (or change consumer/
producer behavlour) are generaLed ln a markeL LhaL has very llmlLed lnLeracLlon wlLh Lhe gas
markeL, lL wlll be lncreaslngly dlfflculL for naLural gas companles Lo efflclenLly supply cusLomers
as a markeL maLures.
lnLroducLlon of compeLlLlon ln naLural gas markeLs wlll generaLe prlce slgnals dlfferenL from
Lhose generaLed by Lhe oll markeL. A compeLlLlve naLural gas prlce wlll noL mean LhaL naLural gas
ls auLomaLlcally prlced lower Lhan equlvalenL olllndexed volumes. When properly seL up, lL wlll
mean LhaL a naLural gas markeL wlll prlce naLural gas aL lLs relaLlve value ln a speclflc energy mlx,
provldlng cusLomers wlLh a rellable, flexlble and low carbon source of energy. Powever, before
Lurnlng Lo Lhe ways ln whlch a compeLlLlve naLural gas Lradlng hub can be creaLed, Lhe nexL
chapLer wlll focus on Lhe ouLlook for Lhe Aslaaclflc naLural gas markeL.

!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 20
G< 1H" 50'*(E*7'8'7 (*,-.*$ )*0 ;*.9",
1he Aslanaclflc naLural gas markeL ls complex and fragmenLed. lL ls cerLalnly noL a geographlcally
deflned markeL: lL ls noL hlghly lnLerconnecLed by hlgh pressure plpellnes, llke Lhe Luropean and
norLh Amerlcan naLural gas markeLs. 1he maln naLural gasconsumlng counLrles ln Aslaaclflc
are: Chlna, !apan, lndla, korea, 1halland, lndonesla, Malaysla, aklsLan, 8angladesh AusLralla and
Chlnese 1alpel. 1hese counLrles each consumed over 10 bcm of naLural gas ln 2011.
1he reglon has Lhree separaLe markeLs wlLh have Lhelr dlsLlncL dynamlcs. llrsL Lhere are Lhe
maLure, wellesLabllshed markeLs of !apan, korea and Chlnese 1alpel, whlch are lsolaLed, malnly
supplled by LnC and have llmlLed scope for furLher growLh.
10
Second, Lhe emerglng glanLs",
Chlna and lndla, whlch wlll develop conslderable naLural gas demand supplled Lhrough boLh
plpellne and LnC.
11
1hlrd, Lhe area of SouLhLasL Asla, whlch conslsLs of several large LnC
producers (Malaysla, lndonesla and 8runel) and rapldly growlng economles lnLerconnecLed Lo a
llmlLed exLenL by plpellnes.
50'*E*7'8'7 0-&&$@2";*(2 4*$*(7"
Slnce 1990, Lhe naLural gas markeL ln Lhe Aslaaclflc reglon has undergone remarkable growLh,
Lo abouL 360 bcm ln 2010. naLural gas consumpLlon has grown by more Lhan 230 slnce 1990,
represenLlng an average yearonyear lncrease of 6 for over Lwo decades. !apanese consumpLlon
represenLed Lhe malnsLay of Aslan naLural gas demand, especlally ln LnC, unLll 2010, when Chlna
surpassed !apan as Lhe largesL naLural gas markeL ln Asla.
S')-." C - +*,-.*$ )*0 2";*(2 '( 50'*E*7'8'7P DUUFGFDO

noLe: CLher Aslaaclflc" ln Lhls graph conslsLs of: 8runel uarussalam, Mongolla, Myanmar, nepal, new Zealand, korea, Lhe
hlllpplnes, Slngapore, Srl Lanka, vleLnam, and oLher.
Sources: lLA, 2011b, lLA, 2012a.

10
1he full lmpacL of Lhe lukushlma accldenL on fuLure power secLor demand ln Lhe maLure gas markeL of !apan (buL also
korea and Chlnese 1alpel) ls sLlll unclear. naLural gas ls generally well placed Lo speedlly replace generaLlon capaclLy lf
needed, as lL has conslderably lower caplLal expendlLures Lhan coalflred generaLlon and offshore wlnd generaLlon.
11
lndlan plpellne connecLlons wlLh elLher lran or 1urkmenlsLan have been dlscussed ln Lhe pasL, buL prospecLs for Lhese
plpellne connecLlons remaln very unclear because of geopollLlcal Lenslons and uncerLalnLles over economlc vlablllLy.
0
100
200
300
400
300
600
700
800
900
b
c
m
CLher Aslaaclflc
8angladesh
1halland
aklsLan
AusLralla
Malaysla
lndonesla
Chlnese 1alpel
korea
lndla
Chlna (lncl. Pong kong)
!apan
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 21
Slnce 1998, LoLal naLural gas producLlon ln Aslaaclflc has lagged behlnd reglonal consumpLlon.
A few counLrles, such as lndonesla and Malaysla, were neL exporLers provldlng LnC for lmporL
dependenL counLrles such as korea and !apan. ln 2010, naLural gas producLlon ln Lhe reglon fell
around 93 bcm shorL of consumpLlon, a shorLfall LhaL ls expecLed Lo lncrease Lo abouL 200 bcm ln
2017, desplLe a conslderable lncrease ln reglonal producLlon.
S')-." U - 50'*E*7'8'7 (*,-.*$ )*0 7%(0-;&,'%(&.%2-7,'%( 8%."7*0,P DUUFGFDO

Sources: lLA, 2011b, lLA 2012a.

uependence on naLural gas lmporLs from ouLslde Lhe Aslaaclflc reglon lncreased by 12 annually
LhroughouL 200010. lL ls expecLed LhaL Lhls lmporL dependency wlll grow by 3 annually over
Lhe perlod 201117. 1he relaLlvely moderaLe lncrease reflecLs lncreaslng gas producLlon pro[ecLed
for Chlna and AusLralla. Cverall demand ln Lhe Aslaaclflc reglon ls expecLed Lo follow global
demand Lrends, growlng aL around 3 per annum Lo reach 873 bcm ln 2017.
!"#$%"& '"( )*+",) -. (*/#0% 1, 2(1"3"/141/
lasLgrowlng demand for naLural gas wlll lead Lo growLh ln every naLural gasconsumlng secLor ln
mosL of Lhe Aslanaclflc economles. 1he power and lndusLrlal secLors predomlnaLe, wlLh 71 of
Lhe reglon's naLural gas consumed ln Lhese secLors ln 2010. naLural gas consumpLlon ln Lhe
power secLor ls seL Lo be domlnanL LhroughouL Lhe perlod 201117, wlLh 44 consumed ln 2017,
down sllghLly from 47 ln 2010.
1he resldenLlal/commerclal secLor ln Aslaaclflc consumed around 110 bcm ln 2011, whlch
made lLs overall share around 17 of LoLal naLural gas consumpLlon. AlLhough Lhls represenLs a
conslderable amounL of naLural gas, lL ls a much lower share Lhan Lhe unlLed SLaLes (34 ln 2009)
and Lurope (37 ln 2009). 1he Aslaaclflc resldenLlal secLor ls forecasL Lo creaLe abouL 18 of
reglonal naLural gas demand (160 bcm) ln 2017 (llgure 10).
1he maln exempLlons Lo Lhls rule are korea and Lhe developlng economy of Chlna, where Lhe
resldenLlal secLors make up a conslderable share of demand, as naLural gas ls used for heaLlng ln
Lhe norLhern parLs of Lhe counLrles. AlLhough demand growLh ln korea's resldenLlal secLor ls
expecLed Lo be falrly llmlLed (up 2 bcm ln 2017), resldenLlal demand wlll conLlnue Lo comprlse
around 40 of LoLal gas demand (lAC1S, 2012). uemand ln Lhe Chlnese resldenLlal secLor ls seL Lo
0
100
200
300
400
300
600
700
800
900
b
c
m
Cas consumpLlon Aslaaclflc lLA 2012 forecasL
Cas producLlon Aslaaclflc lLA 2012 forecasL
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 22
lncrease conslderably, by 32 bcm (11 annually unLll 2017), lncreaslng 2017 resldenLlal demand
Lo around 33 of LoLal. Such growLh ln demand, responslve Lo seasonal LemperaLures, would have
Lo be accommodaLed Lhrough lncreases ln seasonal flexlblllLy ln naLural gas supply (boLh LnC and
plpellne), much llke LhaL observed ln oLher maLure markeLs wlLh slgnlflcanL resldenLlal demand.
S')-." DF - Y"7,%.*$ 2";*(2 8%. (*,-.*$ )*0 '( 50'*E*7'8'7P GFFFDO

noLe: oLher comprlses use by Lhe energy and LransporL lndusLrles, and losses.
Sources: lLA, 2011, lLA, 2012.

AlLhough demand for naLural gas ln Lhe resldenLlal secLor ls seL Lo lncrease aL a fasLer pace (6
per year) Lhan demand ln Lhe lndusLrlal and power secLor (3 and 4 per year, respecLlvely)
naLural gas consumpLlon wlll conLlnue Lo be domlnaLed by lndusLry and power consumers, boLh
of whlch usually requlre llLLle seasonal flexlblllLy.
12
uemand from Lhe power secLor requlres more
shorLLerm flexlblllLy, slnce gasflred power generaLlon ls frequenLly used Lo balance Lhe elecLrlclLy
neLwork LhroughouL Lhe day. lndusLrlal gas demand ls prlmarlly responslve Lo overall economlc
growLh and secLoral buslness cycles.
!"#$%"& '"( #%")* 1, 2(1"3"/141/
naLural gas Lrade ln Lhls reglon ls growlng by 6 per year, whlch makes lL Lhe maln drlver ln
global growLh pro[ecLlons of 3 annually over Lhe perlod 201117. Whlle naLural gas Lrade ln Lhe
reglon ls currenLly domlnaLed by LnC, plpellne naLural gas ls seL Lo grow by 13 per year Lhrough
Lhe perlod 201117.
1he share of plpellneLraded gas ls Lo lncrease Lo abouL 18 of LoLal Lrade ln 2017, up from 11
ln 2011. lpellne Lrade ls malnly drlven by lncreased lmporLs from CenLral Asla and Myanmar lnLo

12
Seasonal flexlblllLy ls consldered long Lerm and ls usually provlded Lhrough sLorage ln depleLed naLural flelds wlLh conslderable
worklng volume LhaL can accommodaLe seasonal LemperaLurerelaLed swlngs ln naLural gas demand ln Lhe resldenLlal secLor.
1hls conLrasLs wlLh shorLLerm flexlblllLy (l.e. wlLhln day, wlLhln week) whlch usually lnvolves sLorage ln salL caverns or aqulfers
wlLh llmlLed worklng volume, buL hlgh sendouL capaclLy LhaL can accommodaLe shorLLerm swlngs ln demand/supply.
0
100
200
300
400
300
600
700
800
900
Cbserved lLA 2012 forecasL
b
c
m
8esldenLlal/commerclal lndusLry ower CLher
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 23
Chlna, as no oLher new plpellne lnLerconnecLlons or expanslons ln Lhe reglon are under serlous
conslderaLlon ln Lhe reglon aL Lhe momenL.
S')-." DD - E'&"$'(" *(2 R+/ ,.*2" '( 50'*E*7'8'7P GFFFDO

Sources: lLA, 2011a, lLA, 2012b.
5!6 #%")* 1, 2(1"3"/141/
1he Lwo mosL maLure naLural gas markeLs ln Lhe Aslaaclflc reglon are !apan and Chlnese 1alpel,
colncldenLally, boLh markeLs are nearly excluslvely supplled by LnC, as local producLlon ls
pracLlcally nonexlsLenL. ln 2011, Lhese Lwo maLure markeLs consumed 87 of all LnC dellvered
lnLo Asla. A marked shlfL ln demand for LnC ls expecLed, as maLure markeLs such as !apan have
llmlLed poLenLlal for an lncrease ln LnC demand, whlle demand growLh ln Chlna and lndla ls llkely
Lo be conslderable.
1he ASLAn naLlons LhaL currenLly funcLlon as a large source of reglonal LnC producLlon, supplylng
abouL 66 bcm of LnC Lo saLlsfy broader Aslaaclflc demand, wlll see a marked change ln Lhelr
neL exporL poslLlon.
13
ln Lhe medlum Lerm, Lhe neL exporL poslLlon wlll decllne as LnC producLlon
decreases and reglonal consumpLlon lncreases. 1halland sLarLed Lo lmporL LnC ln 2012, whlle
Slngapore, vleLnam, and Lhe hlllpplnes are expecLed Lo sLarL lmporLlng LnC wlLhln Lhls decade.
Cverall, LnC exporL capaclLy of Lhe ASLAn reglon Lo supply Lhe Aslaaclflc markeL ls pro[ecLed Lo
decrease by 18 by 2017.
1radlLlonally, Lhe Aslaaclflc demand for LnC was saLlsfled by reglonally produced LnC, from
AusLralla as well as ASLAn counLrles. ln Lhe flrsL quarLer of 2012, 47 of Aslanaclflc LnC
lmporLs orlglnaLed from Lhe Aslaaclflc reglon, a level noL seen slnce Lhe 1970s. uesplLe Lhe
forecasL lncrease ln Aslanaclflc gas demand, a conslderable lncrease ln AusLrallan LnC producLlon

13
Member sLaLes of Lhe AssoclaLlon of SouLh LasL Aslan naLlons (ASLAn) comprlse: 8runel uarussalam, Cambodla, lndonesla,
Laos, Malaysla, Myanmar, Lhe hlllpplnes, Slngapore, 1halland and vleLnam. WlLhln Lhe ASLAn, Malaysla, lndonesla and
8runel uarussalam are neL LnC exporLers.
0
30
100
130
200
230
300
330
400
Cbserved lLA 2012 lorecasL
b
c
m
lpellne Lrade Aslaaclflc LnC Lrade Aslaaclflc
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 24
wlll malnLaln Aslaaclflc LnC producLlon around 32 of LoLal reglonal LnC demand. 1oLal Aslan
aclflc LnC lmporL from oLher reglons ls esLlmaLed Lo be 147 bcm by 2017, an lncrease of abouL
62 from 2011 levels.
S')-." DG - S%."7*0,"2 ).%:,H '( R+/ ,.*2" '( \*&*(P JH'(*P B(2'* *(2 5Y>5+ (*,'%(0P GFDDDO

Source: lLA, 2012b.
S')-." DI - R+/ ';&%., '(,% \*&*(P ]%."*P JH'(*P JH'("0" 1*'&"' *(2 B(2'*P GFFODG

Sources: cusLoms agencles of !apan, korea and Chlnese 1alpel (plus Chlna and lndla when avallable).

ln absoluLe Lerms, Lhe Aslaaclflc reglon wlll lncreaslngly depend on global LnC suppllers, a Lrend
LhaL has lnLenslfled over Lhe perlod 200711, when a near doubllng of CaLarl supplles sLrengLhened
Aslaaclflc dependency on oLher produclng reglons (prlmarlly, Lhe Mlddle LasL). roducers locaLed
ln Lhe Mlddle LasL (CaLar) are geographlcally well poslLloned Lo be Lhe swlng suppllers Lo boLh
Lhe Aslan and ALlanLlc baslns (!ensen 2011). volumes from Lhe unlLed SLaLes (Alaska) and Lhe
lormer SovleL unlon (l.e. lSu, Shakalln ll, 8ussla) are effecLlvely desLlned for Lhe Aslan markeL.
1he prevalllng dlfferenLlal beLween Lhe olllndexed LnC prlce ln Lhe Aslaaclflc reglon and
Luropean prlces has aL Llmes aLLracLed conslderable volumes from Lhe ALlanLlc 8asln, namely ln
100
30
0
30
100
130
!apan Chlna lndla ASLAn
8
c
m
2011 2017
+7%
+257%
+72%
-18%
0
20
40
60
80
100
120
140
160
180
200
2007 2008 2009 2010 2011 C1 2012
b
c
m
lmporL Aslaaclflc lmporL lSu lmporL Mlddle LasL
lmporL ALlanLlc lmporL Amerlcas
=DZ
LOZ
AOZ
AFZ
AUZ
A=Z
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 23
2008 (due Lo hlgh oll prlces) and 2011 (due Lo hlgh oll prlces, Lhe lukushlma accldenL and a lack
of demand for LnC ln Lhe ALlanLlc 8asln). More Lhan 73 of volume dellvered from Lhe ALlanLlc
lnLo Lhe Aslaaclflc reglon ln 200712 was prlced aL over uSu 10/M8Lu (llgure 14). ln 2011,
cargo dlverslons and an lncreaslng number of reexporLs boosLed supplles from Lhe ALlanLlc 8asln
Lo Asla Lo around 17 bcm (equlvalenL Lo roughly 200 large cargoes).
14

S')-." DL - 5,$*(,'7 R+/ 2"$'#"."2 '(,% \*&*(P ]%."* *(2 JH'("0" 1*'&"' *, ';&%., &.'7"P GFFODG

Sources: cusLoms agencles of !apan, korea and Chlnese 1alpel.
!"#$%"& '"( 717*&1,*( 1, 2(1"3"/141/
lpellne Lrade wlLhln Lhe Aslanaclflc reglon ls mlnlmal compared Lo LnC Lrade, because of Lhe
llmlLed plpellne lnfrasLrucLure connecLlng SouLhLasL Asla's neL exporLers wlLh neL lmporLers.
Slmllarly, Lhe largesL consumlng naLural gas markeLs of Aslaaclflc are lnLernally fragmenLed as a
resulL of a sLlll developlng gas lnfrasLrucLure (Chlna) and a dependence on LnC supply wlLh
llmlLed domesLlc lnLerconnecLlon (!apan).
ln Lhe ASLAn reglon Lhere ls a longsLandlng goal Lo expand Lhe reglonal plpellne sysLem lnLo a
LransASLAn gas plpellne sysLem (1AC) connecLlng elghL ASLAn naLlons by 2020.
13
uesplLe
progress on some lnLerconnecLlons, several key lnfrasLrucLure pro[ecLs have so far noL maLerlallsed.
ASLAn has seL compleLlon of Lhe 1ransASLAn Lnergy neLwork as a sLraLeglc goal, and Lhe
developmenL of Lhe offshore LasLnaLuna naLural gas fleld ls consldered Lhe maln crlLlcal facLor ln
achlevlng lL. So far, Lhe hlgh carbon dloxlde (CC
2
) conLenL of LasLnaLuna gas (nearly 70 of Lhe
deposlL ls CC
2
) has drlven up Lhe cosL Lo develop Lhe resource and consequenLly pushed back Lhe
sLarLup daLe (now belleved Lo lle beyond 2022). 1he developmenL of any 1ransASLAn gas
lnfrasLrucLure ls llkely Lo be posLponed beyond a slmllar daLe, even lf commerclal vlablllLy ls
proven (a polnL also recognlsed by ASLAn) (ASLAn, 2009).
1he area of SouLhLasL Asla conslsLs of several large naLural gas producers (Malaysla, lndonesla
and 8runel) of whlch Malaysla has Lhe mosL developed lnLernal Lransmlsslon sysLem connecLlng
producers wlLh consumers and oLher producers. 1he enlnsular Cas uLlllsaLlon (Cu) pro[ecL,
compleLed ln 1999, spans more Lhan 1400 kllomeLres and connecLs Malaysla wlLh 1halland and
Slngapore. 1halland supplles Malaysla wlLh naLural gas from Lhe !olnL uevelopmenL Area (!uA) ln
whlch boLh counLrles have a share (Lhrough Lhelr naLlonal gas companles), whlle Malaysla
supplles naLural gas Lo Lhe clLy sLaLe of Slngapore.

14
8ased on cusLoms daLa and assumlng an average LnC carrler of 140 000 m
3
LnC.
13
lndonesla, Malaysla, Slngapore, vleLnam, Myanmar, Lhe hlllpplnes, 8runel uarussalam and 1halland.
0
10
20
30
40
30
60
70
80
90
100
1 2 3 4 3 6 7 8 9 10 11 12 13 14 13 16 17 18 19 20 21 22 23 24
c
u
m
u
l
a
L
l
v
e
s
u
p
p
l
y
rlce LnC (uSu/M8Lu)
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 26
Slngapore ls supplled Lhrough four plpellnes developed over Lhe perlod 19912007, connecLlng
Slngapore wlLh Malaysla (Lwo plpellnes) and lndonesla (Lwo plpellnes), wlLh a LoLal annual supply
capaclLy of around 9.6 bcm. AlLhough Slngapore has no LranslL faclllLles, lL can be consldered as
an lnLerconnecLlon beLween lndonesla and Malaysla (and 1halland). 1halland ls also connecLed Lo
Myanmar and Lakes naLural gas from Lhe ?adana and ?eLagun deposlLs Lhrough Lwo plpellnes
wlLh LoLal capaclLy of 7.4 bcm. ln addlLlon, 1halland ls (Lechnlcally) connecLed wlLh vleLnam
Lhrough a plpellne LhaL connecLs a shared offshore gas fleld (M3 deposlL) wlLh Lhe vleLnamese
malnland aL Ca Mau. ln Lhe near fuLure, Myanmar wlll be connecLed wlLh Chlna, as Lhe Myanmar
Chlna plpellne, wlLh an annual capaclLy of 12 bcm, ls scheduled Lo be compleLed ln 2013.
1*4$" I - B(,.* *(2 '(,"..")'%(*$ &'&"$'("W0X '( 50'*E*7'8'7
IntraregionaI PipeIine OperationaI (year) Capacity (bcm/yr)
Myanmar-China Myanmar-China Pipeline 2013 12.0
Myanmar-Thailand Yadana-Export Pipeline 1998 5.4
Yetagun-Export Pipeline 2000 2.0
Thailand-Vietnam PM3-Ca Mau Pipeline 2007 2.0
Thailand-Malaysia Trans-Thailand-Malaysia Gas Pipeline (TTM) 2005 7.7
Malaysia-Singapore Peninsular Gas Utilisation Pipeline System (PGU) 1991 1.5
Peninsular Gas Utilisation Pipeline System (PGU) 2007 1.1
ndonesia-Singapore West-Natuna Transportation System 2001 3.4
Grissik-Singapore Pipeline 2003 3.6
InterregionaI
Turkmenistan-China Central Asia Gas Pipeline (CAG) 2011 30.0
Sources: lLA, 2012a, AL8C, 2000, AL8C, 2012, varlous company webslLes.

lnLerreglonal plpellne Lrade ls so far llmlLed Lo Lhe 1urkmenlsLanChlna plpellne, whlch connecLs
1urkmen gas producLlon wlLh Lhe cenLres of naLural gas demand ln easLern Chlna. 1he plpellne ls
currenLly belng upgraded Lo faclllLaLe Lhe LransporL of around 40 bcm of naLural gas annually. ln
addlLlon, spurs of Lhe plpellne ln kazakhsLan are under conslderaLlon Lo be able Lo farm more naLural
gas from Lhe reglon, wlLh a posslble 63 bcm of LoLal capaclLy for Lhe plpellne belng dlscussed.
lL ls unllkely LhaL any of Lhe gas from CenLral Asla (lncludlng posslbly 8ussla ln Lhe fuLure) wlll
reach oLher markeLs ln Lhe Aslaaclflc reglon (Pong kong belng consldered as an lnLegral parL of
Lhe Chlnese supply sysLem). As Malaysla has one of Lhe mosL exLenslve naLural gas plpellne
neLworks ln SouLhLasL Asla, lL connecLs 1halland and Slngapore Lhrough lLs Cu sysLem. Powever,
LhaL ls all Lhe lnLrareglonal LranslL capaclLy LhaL exlsLs. CLher connecLlons ln Lhe ASLAn reglon
are dedlcaLed upsLream plpellnes connecLed Lo cenLres of demand, wlLhouL Lhe LranslL capablllLles
observed ln more welldeveloped naLural gas neLworks.
Lxpanslon of Lhe number of lnLerreglonal plpellnes connecLlng Lhe Aslanaclflc wlLh oLher produclng
areas, such as Lhe Mlddle LasL and CenLral Asla, seems hlghly unllkely. uesplLe decades of speculaLlon,
Lhe geopollLlcal obsLacles Lo naLural gas plpellnes Lhrough AfghanlsLan and aklsLan seem as lnLracLable
as ever. 8eslde geopollLlcal obsLacles, lnLerreglonal plpellne LransporL ls frequenLly uncompeLlLlve
wlLh LnC LransporL, as Lhls ls usually more cosLeffecLlve over longer dlsLances (!ensen, 2011).
1he mosL llkely developmenL mlghL be a naLural gas plpellne beLween Chlna and 8ussla. uesplLe
many hlghlevel pollLlcal agreemenLs over Lhe pasL decade, a flnal lnvesLmenL declslon beLween
commerclal parLles ls sLlll consldered Lo be years away. 1he lssue of Lhe naLural gas prlce has
proven Lo be an lnsurmounLable obsLacle. ln addlLlon, Chlna has developed lLs own energy brldge
wlLh CenLral Asla, supplylng Chlna wlLh adequaLe volumes of aLLracLlvely prlced naLural gas for
Lhe Llme belng (Penderson, 2011).
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 27
As naLural gas consumpLlon ln Lhe Aslaaclflc reglon conLlnues Lo grow and lnLerreglonal and
lnLrareglonal LranslL capaclLy remalns llmlLed, naLlons look lncreaslngly aL seaborne LnC Lo
supply Lhelr economles wlLh naLural gas. A growlng number of counLrles ln Lhe Aslaaclflc reglon
are conslderlng bulldlng regaslflcaLlon Lermlnals.
5!6 ($77&. /8"1, 4&*91-1&1#. 1, 2(1"3"/141/
LnC supplles need Lo be dellvered ln a way LhaL assures flexlble and rellable supply for cusLomers.
1hey musL be locaLed ln areas servlced by LnC regaslflcaLlon Lermlnals and be parL of a compleLe
LnC supply chaln.
16
1hls musL accommodaLe shorLLerm demand flucLuaLlons from (large) lndlvldual
consumers, seasonal demand changes, and demand LhaL follows economlc cycles whlle malnLalnlng
economlc efflclency.
keqoslflcotloo tetmlools
8egaslflcaLlon Lermlnals are a cruclal parL of Lhe LnC lnfrasLrucLure, noL only for Lhe access Lo
global LnC supplles Lhey provlde, buL also as suppllers of downsLream flexlblllLy.
S')-." D= - Q")*0'8'7*,'%( %&".*,'%(*$P -(2". 7%(0,.-7,'%( *(2 &$*(("2 '( 50'*E*7'8'7P GFFFDO

Sources for daLa on 8angladesh, Chlna, Chlnese 1alpel, lndla, lndonesla, !apan, korea, Malaysla, new Zealand, aklsLan, Lhe
hlllpplnes, 1halland and vleLnam: lLA daLabases, varlous company webslLes.

1radlLlonally, Lhere has been ample capaclLy ln Lhe Aslaaclflc reglon Lo recelve and despaLch
Lhe annual LnC LoLal (llgure 13). Powever, Lhls should noL be seen as overcapaclLy. 8egaslflcaLlon
Lermlnals are bullL Lo accommodaLe pollLlcal and economlc as well as Lechnlcal requlremenLs of
Lhe markeL. 1hese requlremenLs lnclude: Lhe forecasLed peak demand of Lhe area LhaL ls supplled
by Lhe Lermlnal, Lhe number of alLernaLlve sources of supply (l.e. Lhe lnLerconnecLedness) of Lhe
supplled markeL whlch ls frequenLly deLermlned by geographlc consLralnLs. ln addlLlon governmenL
regulaLlons (such as Lhe requlred reserve margln Lo ensure securlLy of supply or 1A requlremenLs)
and supply conLracL characLerlsLlcs also lnfluence Lermlnal capaclLy cholces of Lhe user(s) of Lhe
Lermlnal.
17
1he yearly capaclLy uLlllsaLlon ln Aslaaclflc ls esLlmaLed Lo have been 34 ln 2000,
slowly rlslng Lo around 30 ln 2011 and pro[ecLed Lo sLablllse around Lhls level as new and

16
LnC llquefacLlon, LnC carrlers, regaslflcaLlon Lermlnals and downsLream dlsLrlbuLlon lnfrasLrucLure.
17
Such as cargo slze, seasonallLy requlremenLs, swap arrangemenLs, LnC quallLy speclflcaLlons, eLc.
0
100
200
300
400
300
600
700
b
c
m
CperaLlonal under consLrucLlon lanned LnC lmporL Aslaaclflc
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 28
planned capaclLy comes on sLream. ln addlLlon Lo Chlna, lndla, !apan, korea and Chlnese 1alpel,
whlch already had regaslflcaLlon Lermlnals, 1halland came on sLream ln 2011and several oLher
counLrles are bulldlng or conslderlng bulldlng Lermlnals.
newcomers such as Slngapore, 1halland, aklsLan, 8angladesh, vleLnam, new Zealand and Lhe
hlllpplnes have announced plans Lo consLrucL regaslflcaLlon Lermlnals or are ln Lhe process of
dolng so. ln addlLlon, Lhe LradlLlonal blg LnC exporLers, Malaysla and lndonesla, have consLrucLed
LnC regaslflcaLlon Lermlnals LhaL allow Lhem Lo lmporL LnC Lo supply Lhelr domesLlc markeL, as
domesLlc plpellne dlsLrlbuLlon has so far noL maLerlallsed.
5eosoool flexlblllty tbtooqb lNC sopply
Aslanaclflc economles generally have llmlLed needs for seasonal flexlblllLy ln gas, because of
Lhe preemlnence of naLural gas usage for power and lndusLry secLors. 1he Lwo excepLlons, as
dlscussed above, are Chlna and korea.
AL flrsL glance, Chlna has a conslderable number of opLlons Lo supply seasonal flexlblllLy compared
Lo oLher Aslanaclflc markeLs. 1hese opLlons conslsL of domesLlc producLlon, underground gas
sLorage (uCS) and access Lo plpellne supplles from oLher suppllers (allowlng LnC Lo supply
seasonal flexlblllLy, as lL ls generally noL Lhe baseload supply opLlon). Powever, as Lhe Chlnese
naLural gas markeL ls rapldly developlng, Lhese opLlons need Lo be fully explored and uLlllsed Lo
keep up wlLh demand.
uue Lo lsolaLlon from plpellnes supplles and llmlLed geologlcal opLlons for underground sLorage
(elLher seasonal or shorLLerm), korea lncreased Lhe flexlblllLy of lLs LnC supply chaln Lo meeL
domesLlc demand. 1hls has lnvolved Lhe expanslon of hlghcosL sLorage onshore ln regaslflcaLlon
Lermlnals, addlLlonal spoL purchases on Lhe global LnC markeL (naLlonal gas company kCCAS ls
Lhe largesL spoL cargo purchaser ln Lhe world Lo ensure wlnLer supplles) and equlLy parLlclpaLlon
ln LnC upsLream pro[ecLs.
lNC opstteom loftosttoctote flexlblllty
uesplLe conslderable regaslflcaLlon capaclLy LhaL can servlce Lhe flexlblllLy requlremenLs of Lhe
lndlvldual economles, overall flexlblllLy ln Lhe LnC supply chaln ls llmlLed by lnfrasLrucLural rlgldlLles
ln Lhe upsLream secLor. LnC llquefacLlon planLs are frequenLly produclng baseload, as Lhey are
very caplLallnLenslve venLures LhaL need Lo recoup Lhese lnvesLmenLs. 1hls llmlLs Lhelr avallablllLy
Lo provlde flexlblllLy" for gas markeLs LhaL rely on LnC for Lhelr supply (l.e. ramplng up and down
when requlred).
1herefore, ln order Lo llmlL Lhe exLenslve usage of hlghcosL LnC sLorage, flexlblllLy ln Lhe LnC
supply chaln wlll frequenLly come Lhrough porLfollo managemenL. Companles wlll comblne varlous
upsLream sources lnLo Lhe requlred downsLream supply proflle for Lhe overall economy (whlle
regaslflcaLlon Lermlnals ulLlmaLely provlde shorLLerm supply flexlblllLy Lo Lhe cusLomers ln Lhe
area supplled by Lhe Lermlnal).
lNC cottlet copoclty
A conslderable barrler Lo engaglng ln shorLLerm porLfollo managemenL ls Lhe resLrlcLlon of LnC
carrler capaclLy dedlcaLed Lo upsLream pro[ecLs on a longLerm basls and desLlnaLlon clauses LhaL
prevenL reselllng cargoes Lo Lhlrd parLles. As a resulL of Lhe global economlc crlsls and shale gas
developmenL ln Lhe unlLed SLaLes (whlch freed up Lanker capaclLy orlglnally desLlned for Lhe
unlLed SLaLes' markeL), free Lanker avallablllLy lncreased unLll Lhe flrsL quarLer of 2011. SubsequenLly,
Lhe lukushlma accldenL reduced Lhe mldLerm avallablllLy of LnC carrlers, as !apanese parLles
conLracLed avallable Lankers Lo LransporL spoL purchases (oLen, 2012). 1hls has resulLed ln
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 29
slgnlflcanLly lncreased shorLLerm Lanker raLes LhroughouL 2011 and Lhe flrsL quarLer of 2012
(lLA, 2012a).
As of mld2012, Lhe number of LnC carrlers under consLrucLlon LhaL are noL dedlcaLed Lo long
Lerm pro[ecLs comprlses 37 ouL of 81 carrlers globally unLll 2016. AlLhough lndependenL shlp
owners mlghL opL Lo lease ouL Lhelr carrlers under longLerm conLracLs (whlch mlghL llmlL any
lncrease ln shorLLerm avallablllLy of LnC LransporL capaclLy), Lhls shows LhaL more shlp owners
see an aLLracLlve buslness ln operaLlng LnC carrlers. WlLh more parLles wllllng Lo provlde LnC
LransporL servlces, LnC supply ls llkely Lo become more flexlble ln Lhe medlum Lerm.
1be lmpoct of qovetomeot pollcles oo motket sttoctote
1he rlgldlLy of Lhe LnC supply chaln has LradlLlonally provlded conslderable lmpeLus Lo governmenLs
Lo secure longLerm securlLy of supply Lhrough sLaLe owned naLural gas companles. 1hese
organlsaLlons can maLch supply and demand for LnC Lhrough Lhe verLlcal lnLegraLlon of Lhelr
acLlvlLles along Lhe value chaln, especlally Lhrough longLerm supply conLracLs and acqulrlng
equlLy ln upsLream developmenL. 8egaslflcaLlon Lermlnals are generally developed Lo accommodaLe
longLerm supply conLracLs concluded by sLaLeowned enLerprlses and, wlLhouL unblased Lhlrd
parLy access, furLher llmlL LnC supply flexlblllLy Lo consumers.
ln addlLlon, Lhe naLural gas markeL sLrucLure ln mosL Aslan economles llmlLs compeLlLlon as a
resulL of sLrong naLlonal organlsaLlons, whlch are generally regulaLed monopolles. 1hese alm Lo
maxlmlse revenues on Lhelr longLerm, olllndexed LnC conLracLs ln Lhelr respecLlve home markeLs
(8ogers, 2012). 1he conLlnued sLaLe lnvolvemenL of varlous Aslanaclflc economles ln Lhe
naLural gas secLor ls also vlslble ln Lhe regaslflcaLlon Lermlnals' ownershlp of sLaLeowned
enLerprlses. nearly 79 of Lhe Lermlnals ln operaLlon, under consLrucLlon or planned unLll 2017
are owned and operaLed by verLlcally lnLegraLed, governmenLowned enLlLles.
uesplLe Lhe lncrease ln regaslflcaLlon capaclLy, Lhe currenL lnfrasLrucLure of Lhe LnC supply chaln
llmlLs Lhe ablllLy Lo respond Lo changes ln demand or supply. Lven wlLh an lncrease ln Lhe number
of LnC carrlers avallable shorL Lerm, Lhe currenL LnC conLracLlng sLrucLure ls domlnaLed by long
Lerm conLracLs LhaL llmlL Lhe avallablllLy of spoL LnC on world markeLs (see ChapLer 4). 1hls
means LnC supply cannoL respond cosLeffecLlvely Lo changlng demand paLLerns ln downsLream
Aslaaclflc markeLs.
+*,-.*$ )*0 &.'7" 2"#"$%&;"(, '( 50'*E*7'8'7
1he facL LhaL Aslan LnClmporLlng economles are malnly supplled Lhrough longLerm, olllndexed
conLracLs has drlven naLural gas prlces ln Lhe Aslaaclflc reglon Lo record hlghs. PlsLorlcally
(before 2004), LnC prlces beLween Lhe Lhree ma[or cenLres of consumpLlon were llnked Lhrough
Lhe oll prlce movemenL. Powever, shale gas developmenL ln Lhe unlLed SLaLes and lncreased
llberallsaLlon of naLural gas markeLs ln Lurope have seL Lhe global wholesale gas prlces aL Lhree
dlsLlncL levels beLween 2009 and 2012.
Slnce 2011, Aslaaclflc LnC prlces are back aL precrlsls levels for Lhe maLure Aslan gas markeLs
!apan, korea and Chlnese 1alpel. lndlan and Chlnese LnC lmporL prlce levels have been markedly
lower Lhan Lhose of oLher Aslan economles due Lo dlfferenL conLracLual arrangemenLs. Chlna ln
parLlcular negoLlaLed favourable longLerm prlce formulas aL Lhe sLarL of Lhls cenLury for lLs
AusLrallan supply conLracLs. 1hls made Chlnese LnC lmporL prlces compeLlLlve wlLh coal lmporL
unLll !anuary 2011. 8uL as lmporLs from oLher LnC suppllers have lncreased, Chlnese LnC lmporLs
have become less compeLlLlve wlLh coal (lLA, 2012a).
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 30
S')-." DA - Q")'%(*$ )*0 &.'7"0 *(2 \*&*( J.-2" J%79,*'$P GFFODG

Sources: lLA daLabases, uS Lnergy lnformaLlon AdmlnlsLraLlon, uk cusLoms, !apanese cusLoms, korean cusLoms, and Chlnese
1alpel cusLoms.

uesplLe Lhe domlnance of oll lndexaLlon ln lmporL conLracLs for boLh LnC and plpellne supplles,
oLher lndexaLlon models are someLlmes consldered, e.q. coal lndexaLlon ln Lhe negoLlaLlons
beLween Lhe 8usslan and Chlnese admlnlsLraLlons for longLerm naLural gas lmporLs. Cn Lhe basls
of markeL value (naLural gas ls prlced aL Lhe level of Lhe fuel lL replaces ln Lhe energy mlx), lL
could be argued LhaL naLural gas ls prlmarlly ln compeLlLlon wlLh coal, as Lhls ls Lhe predomlnanL
fuel ln Chlna.
1he lncluslon of a llnk Lo Lhe coal prlce ln longLerm gas conLracLs has proven Lo be unaccepLable
for Lhe 8usslan gas company Cazprom (lLA, 2011a). lor Lhls exporLer Lhe llnk Lo coal prlces ls a
slgnlflcanL rlsk Lo lnvesLmenL recovery, as coal prlces are generally lower Lhan olllndexed naLural
gas prlces. ln addlLlon, Lhe llnkage Lo Lhe coal markeL ls a rlsk Lo Lhe prlceseLLlng mechanlsm as
Chlnese (frequenLly sLaLe owned) coal producers have conslderable sway over lnLernaLlonal coal
prlces, Lhus presenLlng a LhreaL Lo markeLbased prlclng. Powever, desplLe Lhese lnlLlal developmenLs
new benchmarks for lndexaLlon are llkely Lo be used ln Lhe fuLure ln commerclal negoLlaLlons
beLween suppller and consumer.
1he Aslanaclflc markeL broadly comprlses Lhree areas of markeL maLurlLy (see lnLroducLlon Lo
Lhls ChapLer):
Lhe wellesLabllshed markeLs of !apan, korea and Chlnese 1alpel have enduser naLural gas prlces
LhaL reflecL Lhe domlnance of olllndexed supplles aL a cosLplus basls: olllndexed commodlLy
plus servlces for consumers,
Lhe emerglng glanLs, noLably Chlna, have subsLanLlal domesLlc producLlon and regulaLed end
user prlces across varlous economlc secLors, Lhese are seL aL a level Lo provlde energy for Lhe
growlng economy (lLA, 2012b), and
Lhe area of SouLhLasL Asla where enduser prlces are regulaLed aL a level frequenLly below
cosL of servlce, namely ln economles wlLh conslderable domesLlc producLlon, leadlng Lo a subsldy
for consumers (lLA, 2011c).
Wholesale prlces ln Lhe Aslanaclflc reglon are seL aL a cosLplus basls from olllndexed naLural
gas prlces or aL a regulaLed level, dependlng on Lhe economy and secLor where naLural gas ls
0
3
10
13
20
23
u
S
u
/
M
8
L
u
uS LnC uk LnC Asla LnC !CC Aslan coal marker
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 31
consumed. AparL from Lhe lsolaLed markeL of AusLralla
18
and Lhe !apan/korea Marker (!kM) from
laLLs (dlscussed ln ChapLer 4) Lhere ls no Aslaaclflc wholesale prlce for naLural gas LhaL reflecLs
Lhe fundamenLals of demand and supply.
1%:*.20 * .")'%(*$ '(,".7%(("7,"2 ;*.9",N
AlLhough Lhe overall dependence of Aslaaclflc on naLural gas lmporLs from oLher produclng
reglons wlll sLablllse aL roughly 30 over Lhe nexL decade, Lhe overall volume of lmporLed naLural
gas ln Lhe reglon wlll conLlnue Lo lncrease, Lo around 200 bcm ln 2017. Powever, as Lhe largesL
lndlvldual naLural gas markeLs (!apan and Chlna) suffer from a lack of lnLerconnecLedness, a
physlcally lnLerconnecLed reglonal naLural gas markeL ls unllkely wlLhln Lhls Llme frame.
CurrenLly, Lhe plpellnes connecLlng dlfferenL cenLres of demand ln Lhe reglon are generally
dedlcaLed Lo upsLream developmenLs. A conslderable expanslon of Lhe lnLrareglonal nC (plpellne
supplled naLural gas) Lrade (wlLh 8ussla) of naLural gas remalns unllkely for Lhe Llme belng.
LlmlLed progress on plpellne lnfrasLrucLure (even wlLhln domesLlc markeLs) has led Lo a surge ln
regaslflcaLlon Lermlnals Lo connecL Lhe naLlonal gas markeLs Lo Lhe global LnC supply sysLem.
ln prlnclple, Lhere are no Lechnlcal barrlers LhaL would hlnder Lhe emergence of a reglonally
lnLerconnecLed Aslanaclflc markeL wlLh LnC Lrade as lLs backbone. Powever, Lhe currenL
sLrucLures of Lhe LnC supply chaln (llquefacLlon and LransporL) offer llmlLed flexlblllLy. ln addlLlon,
Lhe lmporLlng gas markeLs are frequenLly domlnaLed by a few verLlcally lnLegraLed organlsaLlons
LhaL wlLh supply lnfrasLrucLures LhaL sulL Lhelr speclflc longLerm, olllndexed conLracLs, buL do
noL promoLe flexlblllLy or compeLlLlon.
llnally, Lhere ls currenLly no effecLlve reglonal cooperaLlon beLween large naLural gas markeLs
(boLh developlng and maLure) LhaL would supporL a more lnLerconnecLed gas markeL ln Lhe Asla
aclflc reglon. AlLhough ASLAn has proposed amblLlous ob[ecLlves for furLher cooperaLlon, progress
ls llmlLed. As a resulL of dlfferlng naLlonal pollcles, mosL noL relaLed Lo energy, cooperaLlon LhaL
could lead Lo a reglonal naLural gas markeL slmllar Lo LhaL (sLlll Lo be compleLed) for Lhe Luropean
unlon ls unllkely for Lhe Llme belng.
uevelopmenL of a naLural gas prlce reflecLlng reglonal supply/demand ln an LnCdomlnaLed supply
sysLem does noL necessarlly requlre pollLlcal and economlc cooperaLlon on a level such as Lhe
Luropean unlon's. 1ransparenL naLlonal gas prlces derlved from local supply and demand can provlde
lncenLlves Lo dlrecL LnC flows across Lhe reglon, faclllLaLe furLher lnvesLmenL lnfrasLrucLure and
generaLe a represenLaLlve reglonal prlce level. 1hls would be slmllar Lo Lhe plpellne based naLural
gas markeL ln Lhe unlLed SLaLes.
1he flrsL sLeps Lo creaLe a supply/demandresponslve naLural gas prlce would lnvolve governmenLs
resLrucLurlng Lhelr naLlonal gas markeLs so as Lo allow an alLernaLlve prlce slgnal Lo develop. 1he
sLeps needed by governmenLs Lo develop such a LransparenL prlclng slgnal are ouLllned ln Lhe
followlng chapLer.

18
1echnlcally, AusLralla does lmporL naLural gas from Lhe shared developmenL wlLh 1lmorLesLe, buL lL remalns a geographlcally
lsolaLed neL exporLer.
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 32
I< J."*,'() * $'K-'2 (*,-.*$ )*0 ,.*2'() H-4
As governmenLs Lry Lo creaLe a compeLlLlve, susLalnable and secure naLural gas markeL, lncreaslng
compeLlLlon ln Lhe gas markeL ls seen as a way Lo dellver all Lhree of Lhese pollcy LargeLs aL a
mlnlmum cosL Lo socleLy. ln general, Lhls process wlll lnvolve Lhree lnLerllnked Lrends.
a move from publlc ownershlp ln Lhe energy secLor Lo a more prlvaLe one,
a move Lo less verLlcally lnLegraLed energy companles, and
less governmenL lnLerference ln Lhe naLural gas markeL (MlngZhl Cao, 2010).
A monopollsLlc markeL sLrucLure ls falrly common ln Lhe Lakeoff phase of naLural gas markeL
developmenL, due Lo Lhe need for a caplLallnLenslve lnfrasLrucLure and Lhe subsequenL low reLurns
on lnvesLmenL ln Lhe developmenL sLage (lLA, 1998). ln general, pressure for a more compeLlLlve
naLural gas markeL sLarLs Lo bulld when a gas markeL has developed lnLo a maLure markeL.
19
ln
Lhls sLage, lnfrasLrucLure lnvesLmenLs have depreclaLed and reLurns sLarL Lo lncrease ln relaLlon
Lo furLher lnvesLmenL requlremenLs as exlsLlng lnfrasLrucLure can be uLlllsed aL low marglnal cosL.
AlLhough Lhe sLarLlng polnL of varlous naLlonal naLural gas markeLs may dlffer, governmenLs
generally need Lo Lake a number of sLeps Lo allow markeLs Lo open up and Lhen Lo conLlnue Lo
funcLlon. A governmenL needs Lo guaranLee a seL of lnsLlLuLlonal and sLrucLural requlremenLs Lo
(furLher) open a markeL: access Lo lnfrasLrucLure, lnLroducLlon of consumer cholce, reducLlon of
wholesale prlce regulaLlon and appllcaLlon of compeLlLlon pollcy. 1hese sLeps should lnlLlally
creaLe Lhe confldence for consumers and producers Lo sLarL uslng Lhe markeL place as Lhe prlmary
plaLform Lo faclllLaLe Lhe exchange of ownershlp of naLural gas ln Lhe markeL.
Q"K-'.";"(,0 8%. * 8-(7,'%('() (*,-.*$ )*0 ;*.9",
1hls chapLer wlll look aL ways Lo creaLe a funcLlonlng wholesale naLural gas markeL, whlch can be
deflned as: a slngle prlce zone accesslble Lo lncumbenLs and new enLranLs on equal Lerms and
where Lradlng ls llquld, so LhaL lL creaLes a rellable prlce slgnal ln Lhe forward and spoL markeLs
whlch are noL dlsLorLed" (uengel, 2011).
1he prlmary goal of a deregulaLlon process ls Lo lncrease compeLlLlon among naLural gas
suppllers and consumers ln a markeL. ln general, a move away from a monopollsed naLural gas
markeL wlll lead from a noncompeLlLlve markeL, vla a developlng markeL sLage Lo a maLure,
funcLlonlng markeL wlLh full reLall compeLlLlon. lLA has ldenLlfled Lwo markeL models LhaL serve
as an alLernaLlve Lo Lhe monopoly markeL sLrucLure: Lhe plpellneLoplpellne compeLlLlon model
and Lhe mandaLory Lhlrd parLy access Lo Lhe neLwork model.
Any funcLlonlng markeL wlll have a degree of compeLlLlon among suppllers, elLher aL Lhe beglnnlng
of Lhe value chaln or Lhrough Lhe enLlre value chaln down Lo Lhe reLall level. ln Lhe plpellneLo
plpellne model, compeLlLlon ls organlsed beLween suppllers who bulld Lhe lnfrasLrucLure Lo
dellver Lo cusLomers. ln mandaLory access Lo neLwork, a dlsLlncLlon can be made beLween a
markeL wlLh wholesale compeLlLlon and a markeL wlLh full reLall compeLlLlon, ln Lhe laLLer case,
compeLlLlon ls lnLroduced lnLo Lhe flnal parL of Lhe value chaln, whlle wholesale compeLlLlon
sLops shorL of Lhe reLall segmenL.
As governmenLs sLarL Lo deregulaLe Lhelr naLural gas markeLs, Lhey wlll embark on a complex
process Lo meeL Lhelr respecLlve soclal, economlc and supply securlLy ob[ecLlves for Lhls secLor
and Lhe energy supply as a whole. Powever, new parLles LhaL wlll enLer Lhe naLural gas secLor as

19
MaLure markeL: a markeL LhaL has reached a sLaLe of equlllbrlum marked by Lhe absence of slgnlflcanL growLh.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 33
a resulL of deregulaLlon wlll lnfluence Lhe ongolng process ln a way LhaL mlghL requlre furLher
changes ln Lhe rules seL by Lhe governmenL. lL ls Lherefore a conLlnuous reclprocal process beLween
a governmenL and markeL parLles, wlLh ouLcomes LhaL wlll never be enLlrely clear from Lhe onseL.
S')-." DO - B(7."*0'() 7%;&",','%( '( * (*,-.*$ )*0 ;*.9",

Sources: lLA (1998), auLhor.
S')-." DC - J."*,'() * 7%;&",','#" :H%$"0*$" (*,-.*$ )*0 ;*.9",

A funcLlonlng wholesale markeL ulLlmaLely dellvers a rellable prlce slgnal LhaL accuraLely reflecLs
Lhe supply/demand balance, now and ln Lhe fuLure. Lach counLry wlll have a dlfferenL polnL of
B(7."*0'() 7%;&",','%(
Monopoly
Wholesale
markeL
compeLlLlon
lull reLall
compeLlLlon
lpellneLo
plpellne
compeLlLlon
[%(%&%$@ .')H,0
%( )*0
,.*(0;'00'%( *(2
2'0,.'4-,'%(
Y-&&$@ %4$')*,'%(
Q")-$*,'%( %8 )*0
&.'7"0
E%00'4'$',@ 8%.
7%;&",',%.0 ,%
4-'$2
,.*(0;'00'%(
&'&"$'("0
!'."7, 0*$"0 ,%
$*.)" "(2 -0".0
*(2 $%7*$
2'0,.'4-,%.0
Q")-$*,'%( %8
W4-(2$"2X )*0
0"$$'() &.'7"0
1H'.2&*.,@ *77"00
_(4-(2$'() %8
,.*(0&%., *(2
;*.9",'()
8-(7,'%(0
J%;&",','%( '(
)*0 0-&&$@ ,%
$*.)" "(2 -0".0
*(2 $%7*$
2'0,.'4-,%.0
+% &.'7" 7%(,.%$0
%( )*0 0*$"0
Q")-$*,'%( %8
*77"00 '(7$-2'()
-0"%80@0,";
7H*.)"
1H'.2&*.,@ *77"00
S-$$ -(4-(2$'()
J%;&",','%( '(
)*0 0-&&$@ ,% *$$
"(2 -0".0
+% &.'7" 7%(,.%$0
%( )*0 0*$"0
Q")-$*,'%( %8
*77"00 '(7$-2'()
-0"%80@0,";
7H*.)"
+%(7%;&",','#"
;*.9",
!".")-$*,"2`2"#"$%&'() ;*.9",
J%;&",','#"
;*.9",
+%(7%;&",','#"
;*.9",
!".")-$*,"2`2"#"$%&'() ;*.9",
S-(7,'%('()
;*.9",
1hlrdparLy access
Wholesale prlce
deregulaLlon
Pandsoff aLLlLude
CompeLlLlve
suppllers
SufflclenL neLwork
capaclLy
Llnk wlLh flnanclals
SpoL markeL
luLures markeL
1hlrd arLy Access
Wholesale rlce
ueregulaLlon
Pands Cff ALLlLude
1hlrd arLy Access
Wholesale rlce
ueregulaLlon
Pands Cff ALLlLude
CompeLlLlve number
arLlclpanLs
SufflclenL neLwork
CapaclLy
Llnk wlLh llnanclals
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 34
deparLure and a dlfferenL ob[ecLlve when lmplemenLlng pollcles Lo supporL a compeLlLlve naLural
gas markeL. CovernmenL acLlon ls necessary Lo creaLe a LransparenL and level playlng fleld LhaL
lncreases compeLlLlon beLween suppllers and consumers.
lncreaslng compeLlLlon ln Lhe naLural gas markeL ls a process usually seL ln moLlon by Lhe
governmenL, buL ulLlmaLely needlng Lo be selfsusLalned by Lhe markeL ln whlch Lhe governmenL
has a supervlsory role (e.q. Lhrough a compeLlLlon auLhorlLy). 1hls wlll mean LhaL Lhe governmenL's
role lLself wlll shlfL durlng Lhls process from belng Lhe markeL (Lhrough a sLaLe company or oLher
enLlLy) Lo a regulaLor LhaL effecLlvely monlLors and seLs Lhe rules, Lo flnally a role slmllar Lo LhaL of
a compeLlLlon auLhorlLy.
1he esLabllshmenL of a gas exchange wlLh a spoL and fuLures markeL LhaL provldes a rellable prlce
slgnal ls consldered Lo be a key aLLrlbuLe of a compeLlLlve naLural gas markeL. 1he lnsLlLuLlonal
and sLrucLural requlremenLs for a deregulaLed wholesale naLural gas markeL LhaL ls Lhe foundaLlon
of a naLural gas exchange are seL ouL below.
20

:,(#1#$#10,"& %*;$1%*+*,#( #0 /%*"#* " <80&*("&* ,"#$%"& '"( +"%=*#
1o supporL compeLlLlon ln a naLural gas markeL, flrsL some lnsLlLuLlonal requlremenLs need Lo be meL.
CovernmenLs musL acLlvely creaLe Lhe foundaLlons of a naLural gas markeL, dlsmanLllng old lnsLlLuLlons
whlle bulldlng new ones. 1he way Lhese requlremenLs are meL can vary from governmenL Lo governmenL,
dependlng on Lhe respecLlve sLaLe of Lhe naLural gas secLor ln a counLry, among oLher facLors.
ln general, a successful aLLempL aL lncreaslng compeLlLlon wlll meeL Lhe followlng lnsLlLuLlonal
requlremenLs (ln no speclflc order):
5 H*(20%88 )%#".(;"(, *&&.%*7H ,% (*,-.*$ )*0 ;*.9",0M Lhls lmplles a governmenLal mlndseL
LhaL wlll be carrled on Lhrough Lhe respecLlve naLural gas markeL governlng enLlLles. lL also
lmplles a shlfL from dlrecL pollcy maklng and markeL lnvolvemenL Lo markeL monlLorlng Lhrough
an lndependenL anLlLrusL agency. Powever, Lhe parLlcular lnsLlLuLlonal arrangemenLs Lo wlLhdraw
dlrecL governmenL lnfluence from Lhe markeL may dlffer slgnlflcanLly among counLrles.
Y"&*.*,'%( %8 ,.*(0&%., *(2 7%;;".7'*$ *7,'#','"0M Lhe naLural gas lndusLry ls known for lLs
Lendency Lo behave as a naLural monopoly, slnce Lhe hlgh cosLs of lnfrasLrucLure lnvesLmenLs
prohlblL Lhe developmenL of parallel lnfrasLrucLures Lo supply Lhe same cusLomers (especlally
aL reLall level). lL ls wldely recognlsed LhaL Lhese verLlcally lnLegraLed supply sysLems need Lo be
broken up. WheLher Lhls breakup ls esLabllshed Lhrough full ownershlp unbundllng or Lhrough
flnanclal separaLlon (from Lhe moLher company) ls lmmaLerlal, as long as commerclal and LransporL
acLlvlLles are run as separaLe enLlLles.
21
SubsequenLly, Lhe lndependenL LransporL enLlLy wlll
levy a falr and lndlscrlmlnaLe Lransmlsslon fee on a proporLlonal basls for all shlppers.
aH%$"0*$" &.'7" 2".")-$*,'%(M parL of Lhe governmenLal handsoff approach would lnvolve
leLLlng Lhe markeL seL Lhe wholesale prlce level for naLural gas. 1hls would lmmedlaLely break
Lhe former bundled, regulaLed, naLural gas prlce lnLo a Lransmlsslon prlce (Lhrough unbundllng)
and a wholesale prlce LhaL lncludes commodlLy, servlces and a proflL margln. lL would allow large
cusLomers Lo seek Lhe suppller LhaL can dellver Lhe producL LhaL sulLs Lhelr need aL Lhe leasL
posslble cosL. LvenLually, Lhls freedom of cholce can also be offered Lo lndlvldual households,
buL lL ls noL sLrlcLly necessary for a funcLlonlng wholesale markeL Lo emerge (alLhough lL would
spread Lhe soclaleconomlc beneflLs of greaLer economlc efflclency Lo Lhese cusLomers).

20
8ased on: 8. Paas and P. Auer (2006), pp. 837864. AlLhough elecLrlclLy markeLs are decldedly noL Lhe same as naLural gas
markeLs, boLh are heavlly dependenL on lnfrasLrucLure access and Lherefore allow for a slmllar markeL developmenL.
21
1here ls ongolng debaLe on whaL would be requlred Lo guaranLee unblased LhlrdparLy access. ln Lhe llghL of markeL
confldence, lL mlghL be advlsable Lo conslder full ownershlp unbundllng as a measure Lo lncrease confldence LhaL neLwork and
commerclal acLlvlLles are Lruly run separaLely.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 33
>#%$/#$%"& %*;$1%*+*,#( #0 /%*"#* " <80&*("&* ,"#$%"& '"( +"%=*#
ln addlLlon Lo lnsLlLuLlonal requlremenLs, lL ls generally accepLed LhaL markeL parLles need a
mlnlmum degree of cerLalnLy LhaL a markeL ls acLually compeLlLlve and ls funcLlonlng as such. 1hls
requlres sLrucLural requlremenLs Lo be secured (by Lhe governmenL or Lhe lndependenL enLlLy).
1he governmenLal role wlll Lhen shlfL from acLlve parLlclpanL Lo regulaLor, seLLlng rules and
monlLorlng Lhe secLor. 1hese sLrucLural requlremenLs are Lhe followlng (ln no speclflc order):
Y-88'7'"(, (",:%.9 7*&*7',@ *(2 (%(2'07.';'(*,%.@ *77"00 ,% (",:%.90M essenLlal Lo a well
funcLlonlng naLural gas markeL ls lLs accesslblllLy vla nondlscrlmlnaLory access Lo neLworks,
and Lhe avallablllLy of capaclLy on Lhese neLworks. nondlscrlmlnaLory access wlll lncrease Lhe
number of markeL parLlclpanLs, whlle sufflclenL neLwork capaclLy wlll ensure LhaL no separaLe
lslands" LhaL behave accordlng Lo Lhelr own supply/demand dynamlcs wlll exlsL wlLhln Lhe
naLural gas neLworks. LssenLlal elemenLs Lo guaranLee Lhese sLrucLural requlremenLs are an
lndependenL Lransmlsslon sysLem operaLor (1SC), elLher dlvesLed or funcLlonally separaLed, and
a clear and unblased lnvesLmenL reglme based on a welldeveloped neLwork code (seL of rules).
J%;&",','#" (-;4". %8 ;*.9", &*.,'7'&*(,0M lowerlng Lhe barrler Lo enLry Lhrough a well
regulaLed neLwork code should lncrease compeLlLlon for Lhe lncumbenL naLural gas company.
A genulnely compeLlLlve gas markeL requlres a number of parLles wlLh compeLlLlve markeL
shares along a nonregulaLed value chaln (upsLream and downsLream). 1he quesLlon of how
many markeL parLlclpanLs, and wlLh whaL share of Lhe markeL, consLlLuLes Lrue compeLlLlon
depends on markeLspeclflc clrcumsLances and needs Lo be answered by Lhe governmenL/
regulaLor. 1he regulaLor Lhen needs Lo enforce Lhe approprlaLe sLrucLure, lncreaslngly behavlng
as a compeLlLlon auLhorlLy.
B(#%$#";"(, %8 8'(*(7'*$ '(0,',-,'%(0M enabllng a markeL Lo efflclenLly servlce supply and
demand wlll requlre lnvesLmenL LhroughouL Lhe naLural gas value chaln (upsLream developmenL,
LransporL, sLorage and dlsLrlbuLlon capaclLy). AparL from caplLal lnvesLmenLs LhaL wlll be
recouped by operaLlonal revenues, a compeLlLlve naLural gas markeL wlll also need flnanclal
parLles LhaL are wllllng Lo cover flnanclal/operaLlonal rlsks for parLles lnvolved ln Lhe naLural
gas Lrade, provldlng Lools for cusLomers Lo smooLh ouL and opLlmlse revenue sLreams from
Lhelr acLlvlLles ln Lhe naLural gas markeL. lf a naLural gas Lradlng plaLform ls esLabllshed, a llnk
beLween naLural gas markeLs and flnanclal lnsLlLuLlons ls needed Lo reduce counLerparLy rlsk
and Lo provlde a clear, longLerm prlce slgnal. lL ls cruclal LhaL flnanclal parLles Lake longLerm
poslLlons ln Lhe gas markeL and generaLe a longLerm prlce slgnal, as flnanclals currenLly do ln
Lhe global oll markeL.
1he sLrucLural requlremenLs (avallable capaclLy wlLh unblased access, a compeLlLlve number of
markeL parLlclpanLs and a llnk wlLh flnanclals) are essenLlal Lo klcksLarL a naLural gas markeL.
1hey should be guaranLeed by a regulaLor (ldeally lndependenL of companles ooJ governmenL)
LhaL monlLors Lhe markeL and can acL lndependenLly, when needed (e.q. force an lncumbenL
company Lo faclllLaLe more compeLlLlon). 1he exlsLence of an lndependenL regulaLor should also
boosL Lhe confldence of parLles ln Lhe markeL. Powever, a LransparenL naLural gas prlce LhaL
reflecLs Lhe currenL and fuLure sLaLe of Lhe markeL wlll noL be reallsed unless a plaLform for Lhe
ownershlp exchange of naLural gas ls developed.
J."*,'() * (*,-.*$ )*0 &.'7"M 8.%; H-4 ,% ;*.9",
uurlng a complex process such as Lhe deregulaLlon of a naLural gas secLor, Lhe ulLlmaLe pollcy alm
would be LhaL Lhe secLor would susLaln lLself by aLLracLlng ouLslde lnvesLmenLs Lo more efflclenLly
serve lLs cusLomers. Powever, Lo allow gas supply and demand Lo meeL ln a markeL place, a
plaLform for exchange ls needed, more commonly referred Lo as a hub.
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 36
A naLural gas Lradlng hub ls where Lhe LlLle for naLural gas ls exchanged beLween a number of
buyers and sellers. lnlLlally lL has a purely admlnlsLraLlve funcLlon Lo faclllLaLe Lrade, buL one LhaL
ls cruclal Lo enable compeLlLlve markeLs Lo funcLlon, as Lrade wlLhouL ownershlp exchange ls
slmply noL posslble. Cn Lhe hub, boLh a spoL markeL, where gas ls Lraded for llmlLed Llme lnLo Lhe
fuLure, and a fuLures markeL, where dellvery of Lhe gas can exLend several years lnLo Lhe fuLure,
can subsequenLly be reallsed. Clobally, Lwo Lypes of hubs for naLural gas Lradlng have emerged: a
physlcal and a vlrLual hub.
?%")1,' 7&"#40%+(@ 78.(1/"& A*%($( A1%#$"& 8$-(
A physlcal hub ls a geographlcal polnL ln Lhe neLwork where a prlce ls seL for naLural gas dellvered
on LhaL speclflc locaLlon. A prlme example of such a physlcal hub ls LhaL of Lhe unlLed SLaLes, Lhe
besL funcLlonlng and mosL llquld naLural gas markeL ln Lhe world, whlch essenLlally conslsLs of a
physlcal Lradlng polnL (Lhe Penry Pub ln Loulslana), whlch seLs Lhe benchmark prlce for Lhe enLlre
norLh Amerlcan Lradlng area. Powever, Lhe unlLed SLaLes also has many reglonal physlcal Lradlng
hubs reflecLlng local and reglonal supply/demand balances. AL Lhese local hubs, naLural gas ls
frequenLly Lraded aL a dlfferenLlal from Penry Pub, Laklng lnLo accounL reglonal dlsparlLles and
producLlon and LransporL cosLs Lo LhaL speclflc reglonal hub.
ln essence, Lhe whole norLh Amerlcan naLural gas sysLem operaLes around a prlce seL by
Lhe naLural gas exchange aL Penry Pub, resulLlng ln prlces across Lhe unlLed SLaLes LhaL dlffer,
albelL sLaylng reasonably close LogeLher. WlLhln Lhe unlLed SLaLes' geographlcal area, arblLrage
opporLunlLles beLween reglonal hub prlces drlve lnvesLmenLs ln LransporL capaclLy by prlvaLe
plpellne companles. Powever, for Lhls Lo work ln oLher counLrles' markeLs would probably
requlre a regulaLor LhaL can regulaLe access Lo lnLerconnecLlng plpellnes LhroughouL Lhe gas
markeL, such as Lhe lederal Lnergy 8egulaLory Commlsslon (lL8C) ln Lhe unlLed SLaLes.
Penry Pub (PP) was noL selecLed by Lhe naLural gas markeL regulaLor, buL by Lhe new ?ork MercanLlle
Lxchange (n?MLx), whlch was looklng for a cenLrally locaLed and sufflclenLly lnLerconnecLed
polnL for Lhe exchange of naLural gas ownershlp. A dlfferenL approach was Laken ln Lhe unlLed
klngdom. When Lhe 8rlLlsh naLural gas secLor was deregulaLed ln Lhe 1990s, Lhe 8rlLlsh regulaLor
esLabllshed a neLwork code LhaL creaLed Lhe vlrLual naLlonal 8alanclng olnL (n8). 1hls vlrLual
Lradlng polnL was esLabllshed as a dally balanclng Lool for Lhe enLlre 8rlLlsh geographlc area. 1he
n8 prlce reflecLs Lhe commodlLy prlce ln Lhe enLlre area wlLhouL geographlc dlfferenLlals due Lo
LransporL cosLs. 1ransporL cosLs are levled separaLely by Lhe 1SC LhaL runs Lhe 8rlLlsh gas neLwork
and are regulaLed by Lhe 8rlLlsh energy regulaLor (Cfgem).
CurrenLly Lhe Luropean unlon prefers Lo conLlnue Lo lnLegraLe lLs naLural gas markeLs Lhrough
Lhe esLabllshmenL of vlrLual (reglonal) Lradlng hubs.
22
1hls ls a pragmaLlc approach, slnce lL bullds
on Lhe exlsLlng arrangemenLs of naLlonal 1SCs and regulaLors (raLher Lhan creaLlng one overarchlng
Luropean regulaLor) and an lnfrasLrucLure bullL Lo faclllLaLe longLerm lmporL conLracLs wlLh
naLlonal balanclng and llmlLed lnLerconnecLlons. 1he demlse ln relevance of Lhe physlcal Zeebrugge
hub has shown LhaL ln Lhe currenL developlng Luropean markeL envlronmenL, a vlrLual hub ls
consldered less cumbersome due Lo slmpllfled enLry/exlL arrangemenLs, aLLracLlng new parLles Lo
gas markeLs.
23

hyslcal and vlrLual gas Lradlng hubs have dlfferenL seLups Lo accommodaLe Lhe dlfferenL
sLrucLures of Lhelr lndusLrles (l.e. fully prlvaLlsed LransporL acLlvlLles ln unlLed SLaLes versus

22
1he Luropean unlon accepLed a proposal Lo develop compeLlLlve naLural gas markeLs ln Lurope by Lhe Councll of Luropean
Lnergy 8egulaLors (CLL8, 2011).
23
ConsequenLly, Lhe 8elglan regulaLor C8LC and 1SC lluxys have declded Lo develop Lwo vlrLual hubs ln 8elglum ahead of a
declslon by Luropean regulaLor CLL8 Lo recommend vlrLual hub developmenL as Lhe basls of Lhe Luropean Cas 1argeL Model.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 37
regulaLed 1SC ln Lhe Luropean unlon) and purpose of Lhe hub (Lo faclllLaLe Lrade ln Lhe unlLed
SLaLes versus balanclng ln Lhe Luropean unlon). 8uL boLh plaLforms have proven Lo be able Lo
faclllLaLe Lrade, Lo susLaln Lhe LranslLlon Lowards a llquld fuLures markeL, and Lo generaLe rellable
prlclng slgnals for markeL parLlclpanLs.
B*%'1,' 78.(1/"& ",) A1%#$"& ,"#$%"& '"( #%")*
8egardless of Lhe hub ls physlcal or vlrLual, when movlng from physlcal balanclng on Lhe spoL
markeL Lo a llquld fuLures markeL, Lhe physlcal gas supply and Lhe vlrLual gas supply wlll meeL aL
Lhls hub. 1he naLural gas hub wlll Lhen brlng LogeLher markeL parLlclpanLs LhaL use Lhe same
naLural gas markeL for dlfferenL alms. 1hls has consequences for Lhe way LhaL naLural gas ls Lraded,
for Lhe Lype of markeL parLlclpanLs acLlve ln Lhe markeL, and for Lhe producLs LhaL are Lraded ln
Lhe markeL.
Motket ttoJloq. bllotetol vetsos ceottollseJ ttoJloq
ln a noncompeLlLlve markeL, Lhe ownershlp exchange of naLural gas would be arranged ln a bllaLeral
fashlon beLween Lhe endconsumer and Lhe (reglonal) suppller. As wholesale markeLs lncrease
compeLlLlon beLween suppllers and beLween consumers, oLher arrangemenLs open up. ln wholesale
markeLs, naLural gas ls Lraded elLher bllaLerally beLween markeL parLles and overLhecounLer Lrades
(C1C, frequenLly Lhrough brokers) or cenLrally on an exchange operaLed by a markeLlng organlsaLlon,
such as n?MLx, Ax/Lndex (AnglouuLch energy exchange) or lnLerconLlnenLal Lxchange (lCL).
8llaLeral Lrade lnvolves Lradlng noL only ln sLandardlsed producLs, buL also cusLomlsed producLs
LhaL are wldely used by suppllers Lo accommodaLe a consumer's speclflc requlremenLs for Llmlng,
flexlblllLy, volume, eLc. 1hese bllaLeral Lrades can be closed boLh ln Lhe fuLures markeL and spoL markeL,
however, Lhese wlll be dellvered on Lhe hub, as lL ls a plaLform faclllLaLlng ownershlp exchange.
S')-." DU - V'$*,".*$P 61J *(2 7"(,.*$ ,.*2'() *(2 ,.*(0&*."(7@ %( 0&%, *(2 8-,-."0 ;*.9",0

A percelved beneflL of exchangebased Lradlng ls LhaL LransacLlons Lake place on exchanges LhaL
faclllLaLe LransparenL, cenLrallsed Lrade ln sLandardlsed producLs, wlLh Lhe gas hub as dellvery
polnL. 1hls cenLrallsed Lrade Lhrough Lhe exchange wlll lncrease Lransparency ln Lhe naLural gas
markeL Lhrough Lhe prlce slgnals and lndlces LhaL Lhese LransacLlons wlll provlde. ln general,
Lradlng Lhrough cenLrallsed exchanges ls consldered Lo be more LransparenL by regulaLors, slnce
C1C Lradlng does noL Lake place on screen".
Time of delivery in future
Spot market Futures market
Forward curve
1
.
*
(
0
&
*
.
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(
7
@
V'$*,".*$ 2"*$ 4",:""( ;*.9", &*.,'"0
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V'$*,".*$M 61J ,.*2'()
b
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013

640,*7$"0 *(2 6&&%.,-(','"0

age | 38
AlLhough Lhls Lransparency argumenL ls vlable, lL does noL necessarlly mean LhaL C1C Lradlng
llmlLs Lhe funcLlonlng of a naLural gas markeL, slnce all markeL parLles lnvolved ln C1C Lrade have
equal access Lo Lhls lnformaLlon.
24

An lmporLanL facLor ln chooslng how Lo Lrade naLural gas on a hub ls Lhe way counLerparLy rlsk ls
managed. 1o a large exLenL, Lhls reflecLs Lhe merger of Lhe physlcal naLural gas lndusLry wlLh Lhe
flnanclal lndusLry, wlLh lncreased flnanclallsaLlon" of Lhe naLural gas Lrade as a wholesale gas
markeL develops.
ln bllaLeral (or C1C) LransacLlons, counLerparLy rlsk wlll Lo a large exLenL resL wlLh Lhe parLles
lnvolved ln Lhe LransacLlon. 1he prlmary advanLages consldered for Lhese LransacLlons are Lhe
lower cosLs (e.q. clearlng fees and oLher servlces) and Lhe facL LhaL C1C LransacLlons allow parLles
Lo buy and sell cusLomlsed producLs. CusLomlsed producLs can decrease Lhe need Lo seL up
porLfollo managemenL sLrucLures and Lradlng desks. Cenerally, companles LhaL engage ln C1C
LransacLlons reduce Lhelr counLerparLy rlsk by lnLernal corporaLe regulaLlons LhaL assess credlL
worLhlness, whlch someLlmes resulLs ln bllaLeral clearlng agreemenLs. lf a markeL parLy wlshes Lo
lnsure lLself agalnsL counLerparLy rlsk, Lhls ls sLlll posslble Lhrough clearlng houses, buL Lhls
reduces Lhe cosL advanLage of an C1C Lradlng LransacLlon versus an exchangebased LransacLlon,
where LransacLlons are always cleared and so safer.
S')-." GF - 5 07H";*,'7 61J ,.*(0*7,'%(

arL of Lhe cosL of uslng a clearlng house (CP) ls lncurred by Lhe CP carrylng Lhe rlsk of seLLlemenL
fallures. A CP (frequenLly parL of Lhe markeLlng organlsaLlon LhaL operaLes Lhe exchange markeL)
faclllLaLes rlsk mlLlgaLlon beLween Lhe clearlng member (CM, frequenLly a flnanclal lnsLlLuLlon)
and Lhe markeL counLerparLy. CounLerparLy rlsk, boLh flnanclal and legal, ls Lhen lsolaLed from
Lhe non clearlng member's (nCM, a markeL parLlclpanL) Lradlng on Lhe fuLure and spoL markeL.
S')-." GD - 5 07H";*,'7 8'(*(7'*$ ,.*(0*7,'%( %( * (*,-.*$ )*0 "?7H*()"

24
1hls ls a debaLe LhaL frequenLly resurfaces as pollLlclans blame lnvlslble speculaLors for hlgh commodlLy prlces (frequenLly
crude oll, buL also sLaple foods and oLher sLraLeglc commodlLles). 1hey frequenLly refer Lo Lhe C1C markeL as Lhe markeL". ln
facL, boLh C1C and exchangebased LransacLlons lncrease Lhe funcLlonlng of a naLural gas Lradlng hub, as boLh provlde speclflc
servlces Lo markeL parLlclpanLs and so aLLracL markeL parLlclpaLlon.
Q")-$*,%.M "(".)@`7%;&",','%( *-,H%.',@
PhysicaI/OTC transaction
Non cIearing
member
CIearing
house
Exchange
market
OptionaI risk mitigation avaiIabIe through brokers
Q")-$*,%.M 8'(*(7'*$ ;*.9", *-,H%.',@
FinanciaI transaction
Exchange
market
CIearing
house
CIearing
member
Non cIearing
member
Risk mitigation
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 39
An lmporLanL dlsLlncLlon ls LhaL Lhe LransacLlon descrlbed here as a flnanclal" LransacLlon on an
exchange does noL necessarlly lnvolve physlcal naLural gas exchanglng hands, naLural gas has become
an energy derlvaLlve. ConsequenLly, Lhe governmenL's regulaLory auLhorlLy LhaL wlll be mosL llkely
lnvolved ls Lhe flnanclal markeL auLhorlLy (lMA), slnce Lhls Lype of LransacLlon generally flLs well
wlLhln Lhe compeLence of such a regulaLor. usually, a physlcal LransacLlon Lhrough C1C Lrades on
Lhe spoL markeL wlll fall under compeLency of Lhe energy markeL regulaLor or compeLlLlon auLhorlLy.
1hls shlfL ln regulaLory reglme Lhrough Lhe merger of Lhe physlcal and flnanclal Lrade on an
exchange hub exempllfles Lhe deregulaLlon process. As a consequence, flnanclal parLles wlll come
Lo recognlse markeL mechanlsms and regulaLory frameworks, creaLlng lncreased confldence ln
Lhe markeL whlch wlll encourage Lhem Lo lnLegraLe naLural gas Lradlng lnLo Lhelr malnsLream
acLlvlLles. As a resulL, flnanclal markeLs wlll provlde realLlmeprlced naLural gas derlvaLlves Lo all
markeL parLles, Lhereby furLher lncreaslng Lransparency and confldence ln Lhe markeL. 1hls wlll
ulLlmaLely drlve Lhe process of creaLlng a compeLlLlve wholesale markeL forward.
Motket pottlclpoots. pbyslcol vetsos floooclol ployets
As explalned above, lnvolvemenL from flnanclal parLles ls crlLlcal Lo developlng fuLure prlclng, as
Lhese parLles are wllllng Lo Lake rlsk exposure Lo creaLe a margln. 1he enLry of flnanclal enLlLles ln
a markeL Lends Lo lncrease compeLlLlon, and lnvolvemenL ln Lhe fuLures markeL. hyslcal parLles
(shlppers) LhaL dellver gas Lo consumers use Lhe spoL markeL as a balanclng Lool for Lhelr porLfollo
and wlll be conslderably less acLlve on Lhe fuLures markeL.
ln general, flnanclal parLles would llke Lo geL ouL" of Lhe markeL before physlcal dellvery Lakes
place. 1herefore, whlle flnanclal parLles are more presenL ln Lhe fuLures markeL, Lhey someLlmes
depend on Lhe spoL markeL Lo unwlnd Lhelr poslLlons. 1he relaLlonshlp beLween shlppers and
flnanclals ls symbloLlc. Whlle lncreased Lradlng by shlppers on Lhe spoL markeL ls essenLlal for
flnanclals Lo geL ouL of Lhelr poslLlons, shlppers aL Lhe same Llme depend on Lhe flnanclal
derlvaLlves LhaL flnanclal parLles provlde Lhrough Lhe fuLures markeL Lo reduce Lhe rlsks assoclaLed
wlLh shlpper acLlvlLles.
S')-." GG - YH'&&". *(2 8'(*(7'*$ &*.,@ *7,'#',@ %( ,H" 0&%, *(2 8-,-."0 ;*.9",

Cn a wellfuncLlonlng Lradlng hub, Lhe prlce dlfference beLween Lhe fuLures markeL and Lhe
spoL markeL aL Lhe polnL ln Lhe fuLure where Lhese markeLs meeL ls zero. 1hls creaLes an

M
a
r
k
e
t

p
a
r
t
y

a
c
t
i
v
i
t
y
Shipper/trader activity (physical)
Trader/financial party activity
Forward curve
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 40
unlnLerrupLed prlce slgnal for naLural gas dellvered now and aL any polnL ln Lhe fuLure (Lhe
forward curve) (llgure 22).
23

V%? D - 6,H". &*.,'"0 '(#%$#"2 '( (*,-.*$ )*0 H-4 2"#"$%&;"(,
Motket ptoJocts. pbyslcol vetsos popet ptoJocts
1o esLabllsh a wholesale Lradlng markeL, boLh shlppers and Lraders need sLandardlsed conLracLs
LhaL enable Lhem Lo Lrade quanLlLles of gas labelled as a producL" by Lhelr Llme of dellvery ln Lhe
fuLure. 1hls ls a slmple necesslLy Lo make gas a Lradable commodlLy. ln Lurn, flnanclal parLles can more
easlly value Lhese commodlLles and sLarL buylng and selllng Lhese producLs on Lhe fuLures markeL.
As explalned above, producLs Lraded on Lhe fuLures markeL depend on an underlylng llquld spoL
markeL Lo creaLe Lrade ln producLs ln Lhe fuLure. 1he more llquld Lhe Lrade ln an underlylng
producL or markeL, Lhe more easlly a producL ls Lraded ln Lhe fuLure. MarkeL parLles percelve less
rlsk as Lhey can more easlly geL ouL of Lhelr (flnanclal) poslLlons. 1he number of producLs offered
on spoL and fuLures markeLs Lherefore depends on Lwo facLors:
underlylng producL llquldlLy for shorL duraLlon, close Lo explry conLracLs (prompL of Lhe
curve
26
) LhaL wlll sLlmulaLe and push ouL" Lrade ln producLs for dellvery ln Lhe more dlsLanL
fuLure (ln shorL: Lhe more llquld Lhe prompL, Lhe more llquld Lhe curve).
1he demand from markeL parLles for cerLaln producLs Lo be lnLroduced Lo balance Lhelr
physlcal porLfollo on Lhe spoL markeL or Lo hedge Lhelr flnanclal porLfollo ln Lhe fuLures
markeL. 1hls need for producLs ls seL by varlous markeL clrcumsLances, such as regulaLlons ln
Lhe physlcal gas markeL LhaL drlve Lhe need for new balanclng Lools or flnanclal regulaLlons
LhaL requlre beLLer hedglng faclllLles on Lhe fuLures markeL.

23
lor schemaLlc purposes ln Lhls graph and Lhe ones below, Lhe spoL markeL ls deflned by wlLhlnweek producLs, such as
WlLhln uay (Wu), uay Ahead (uA), Weekend Ahead (WA) and 8alance of Week (8CW), as Lhese producLs allow for balanclng
proposes ln Lhe shorL Lerm. Pow many producLs and how far ln Lhe fuLure Lhese producLs are Lraded as parL of Lhe spoL
markeL dlffers beLween markeLs. ln Lhls paper we conslder a spoL markeL Lo be Lhe markeL LhaL ls used for shorLLerm,
physlcal balanclng purposes by shlppers.
26
1he curve ls a seL of prlces for varlous producLs for dellvery ln Lhe fuLure, whlch glves a cusLomer a prlce for naLural gas
dellvered aL any glven Llme ln Lhe fuLure (from now unLll Lhe end of Lhe curve)
ln Lhe prevlous chapLer, Lraders and Lhelr acLlvlLles are dlsLlngulshed on Lhe basls of Lhelr physlcal or
flnanclal LransacLlons. 8esldes Lhe parLles LhaL use a hub for ownershlp exchange, Lhere are a number
of oLher parLles lnvolved ln Lhe esLabllshmenL of a hub and naLural gas markeL. 1helr subsequenL
emergence on a hub and Lhelr lndlvldual roles and acLlvlLles mlrror Lhe process seL ouL ln ChapLer 3
for Lhe esLabllshmenL of a funcLlonlng wholesale markeL.
B(8.*0,.-7,-." %&".*,%.M ensures LhaL a sysLem remalns physlcally balanced, manages Lhe
capaclLy Lo and from a hub, and admlnlsLers Lhe Lransfer of ownershlp rlghLs.
V.%9".M medlaLes beLween markeL parLles and Lhus slmpllfles Lhe search for counLerparLles Lo
sell/buy gas and helps creaLe awareness of C1C deals.
3-4 %&".*,%.M provldes hub servlce agreemenLs (for wheellng, parklng, eLc.), ensures conLracLual
flrmness Lhrough backup/down servlces, faclllLaLes Lransfer of gas and sLlmulaLes sLandard producL
developmenL.
>?7H*()"M sLands beLween Lrades and allows anonymlLyP reduces or removes counLerparLy rlskP
ensures LhaL prlces are reporLed, and enables sLandard producLs Lo be cleared.
1hese parLles all provlde servlces for a Lradlng hub LhaL enable a hub Lo funcLlon and efflclenLly seL a
prlce LhaL reflecLs Lhe overall supply/demand balance of Lhe naLural gas markeL.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 41
new producLs are usually developed by Lhe markeLlng organlsaLlon LhaL operaLes Lhe energy
exchange ln close consulLaLlon wlLh markeL parLles uslng Lhe exchange. 1he markeL parLles assess
Lhe need for new producLs on Lhe spoL and fuLures markeL, usually Lrylng Lo develop producLs on
Lhe curve when LradablllLy ln underlylng producLs ls deemed sufflclenL. 1hls ls a dellcaLe process
lnvolvlng deslgnaLed markeL makers who wlll Lry Lo klcksLarL Lhe Lrade ln Lhese new producLs,
expandlng Lhe producL porLfollo offered on a hub.
27
A schemaLlc seL of producLs LhaL mlmlc
varlous markeL parLy needs ln Lhe spoL and fuLures markeL ls shown ln llgure 23.
S')-." GI - E.%2-7,0 ,.*2"2 c%( ,H" 7-.#"d

1hrough esLabllshlng a wholesale markeL for naLural gas wlLh spoL and fuLures deals, a naLural
gas markeL wlll lncreaslngly resemble a commodlLy derlvaLlve markeL. 1hls wlll mean lncreaslng
Lhe numbers of C1C and exchangebased LransacLlons, flnanclal and physlcal parLles acLlve on Lhe
Lradlng hub, and producLs Lraded wlLh dellvery ln Lhe fuLure. As a consequence, Lhe resulLlng
prlces on Lhe spoL and fuLures markeL wlll lncreaslngly reflecL domlnanL supply/demand balance
for a geographlcal area ln Lhe near fuLure.
An exchange operaLor's ablllLy Lo aLLracL markeL parLles and Lo supporL conLlnued lncrease ln Lhe
producLs and servlces offered on Lhe exchange ls also lnfluenced by a number of oLher facLors,
lncludlng Lhe sLrong supporL of Lhe lncumbenL companles. 1he supporL of markeL makers
(frequenLly also lncumbenLs) ln lnLroduclng producLs and servlces wlll reduce LlmeLomarkeL and
wlll help an exchange Lo meeL lLs users' needs.
28
llnally, Lhe quallLy and cosLs of Lhe developed
markeL model and servlces wlll deLermlne Lhe success of an exchange operaLor ln relaLlon Lo
oLher operaLors on Lhe same hub or ln Lhe reglon.

27
A markeL maker ls a markeL parLlclpanL LhaL agrees (wlLh Lhe markeLlng organlsaLlon) Lo make bld/offer spreads for cerLaln
producLs, wlLhln agreed parameLers, ln order Lo lncrease llquldlLy ln Lhe Lrade of Lhese producLs for all parLlclpanLs.
28
1lmeLomarkeL ls Lhe amounL of Llme lL Lakes from a producL belng concelved unLll lL ls avallable for sale, a reducLlon ln
LlmeLomarkeL enables suppllers (boLh physlcal and flnanclal) Lo prompLly meeL changes ln producL demand.
Forward curve
?A ?A+2 ?A+3 ?A+.
1
.
*
2
"
2

&
.
%
2
-
7
,
0
WlLhln
week
C+2 C+3 C+4 CA
MA M+3 M+2
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 42
J%(,.*7,-*$ 7%(0"K-"(7"0N
1he lnLroducLlon of compeLlLlon and Lradlng hubs wlll have lmpacL LhroughouL Lhe naLural gas
value chaln, on boLh commerclal parLles and governmenLs. 1rade ln naLural gas ls llkely Lo
lncrease markedly ln scale and scope, as a naLural gas hub's ablllLy Lo balance porLfollos opens up
new posslblllLles for suppllers and consumers ouLslde Lhelr longLerm conLracLual obllgaLlons.
When naLural gas ls lnLroduced as an energy source lnLo an economy, Lhere ls a conslderable
need for upfronL caplLal lnvesLmenL, as lnfrasLrucLure needs Lo be bullL Lo supply cusLomers. 1he
subsLanLlal lnvesLmenL rlsks assoclaLed wlLh bulldlng such an lnfrasLrucLure are mlLlgaLed Lhrough
longLerm conLracLs deslgned Lo guaranLee an accepLable reLurn on lnvesLmenL.
1he volume rlsk ln Lhese longLerm conLracLs ls shouldered by Lhe buyer of naLural gas, who
guaranLees Lo buy a cerLaln amounL of annual conLracL quanLlLy (ACC) over Lhe duraLlon of Lhe
conLracL. volume rlsk can be llmlLed by flexlblllLy ln a longLerm conLracL provldlng for a cerLaln
share of Lhe volume noL Lo fall under Lakeorpay obllgaLlons, or cerLaln volumes LhaL can be
consumed ln Lhe fuLure (l.e. makeup gas).
ln Lhe case of physlcal subsLlLuLlon wlLh Lhe producL (oll) LhaL forms Lhe basls of lndexaLlon rlce
rlsk ls shouldered by Lhe seller, who guaranLees LhaL hls producL would be compeLlLlve. 1hls rlsk
sharlng arrangemenL lnlLlally requlres a guaranLeed dlsLrlbuLlon markeL for Lhe buyer, who could
oLherwlse noL meeL Lhe volumerlsk obllgaLlons. 1he dlsLrlbuLlon markeL need Lo be sub[ecL Lo a
resLrlcLlon on supply compeLlLlon for a geographlc area Lhrough Lhe obllgaLlon/commlLmenL noL
Lo resell naLural gas ln oLher geographlc markeLs where naLural gas mlghL have a hlgher value (l.e.
flnal desLlnaLlon clause).
LongLerm conLracLs usually provlde for a mechanlsm Lo deal wlLh ma[or changes ln markeL
condlLlons, such as a sudden upswlng ln demand or regulaLory changes LhaL severely affecL Lhe
compeLlLlveness of naLural gas ln Lhe energy markeL. 1he maln mechanlsm ls Lhe faclllLy Lo
renegoLlaLe conLracL condlLlons, Lo brlng Lhem lnLo llne wlLh prevalllng markeL condlLlons. As a
resulL of Lhese conLracL clauses, Lhe naLural gas lndusLry ln Lurope has seen a conslderable
number of renegoLlaLlons ln response Lo Lhe collapse of demand ln 2009.
C"/#0%( 1,4&$*,/1,' 7%1/1,'
1he prlce formula ln longLerm supply conLracLs ls lnLended Lo esLabllsh a longLerm prlce for gas
on Lhe basls of Lhe value for gas percelved ln Lhe (near) fuLure by boLh Lhe seller and Lhe buyer.
As markeLs conLlnue Lo develop, Lhe value of naLural gas ln Lhe overall economy and energy mlx
wlll change, consequenLly, Lhe prlce of naLural gas needs Lo be ad[usLed Lo reallgn boLh prlce and
volume rlsk. Cenerally, prlclng arrangemenLs ln longLerm conLracLs are adapLed Lo changlng
markeL clrcumsLances ln one or more of Lhree ways:
Lhe prlce level can be ad[usLed Lo Lhe percelved markeL's value of gas (where Lhere ls no
compeLlLlve markeL) or Lo Lhe level of Lhe markeL prlce (ln a compeLlLlve markeL),
Lhe commodlLy Lo whlch a naLural gas prlce ls lndexed can be changed Lo a more relevanL
commodlLy for Lhe secLors ln whlch naLural gas ls consumed, and
Lhe pace of Lhe prlce revlew can be lncreased (or reduced), reallgnlng a prlce more or less
frequenLly Lo new markeL clrcumsLances.
1hese ad[usLmenLs wlll have Lo be achleved Lhrough negoLlaLlons beLween buyer and seller. ln a
compeLlLlve naLural gas markeL, Lhese renegoLlaLlons are consldered Lo be a cosL, as Lhey requlre
exLenslve conLracL revlews. 1hls frequenLly lnvolves expenslve llLlgaLlon, wlLh Lhe sole alm Lo
brlng Lhe prlce of Lhe dellvered volume ln llne wlLh Lhe percelved markeL value of Lhe gas, usually
for only one parLy. rlmary moLlvaLlons for boLh parLles Lo reallgn Lhe conLracL prlce are Lhe cosLs
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 43
LhaL elLher parLy can lncur from Lhe prlce dlsparlLles beLween Lhe longLerm conLracL prlce and
Lhe markeL prlce (SuLherland, 1993).
ln a compeLlLlve markeL, buyers wlll alm Lo reduce Lhelr procuremenL cosLs compared Lo Lhose
of Lhelr compeLlLors. LongLerm olllndexed conLracLs wlll lncrease opporLunlLy cosLs Lhrough
renegoLlaLlons and rlsk assoclaLed wlLh prlce dlsparlLles versus sLandardlsed producLs boughL aL
Lhe spoL or fuLures markeL. 1he lncenLlve Lo reduce Lhese opporLunlLy cosLs may provlde a
powerful moLlvaLlon for consumers Lo reduce volumes boughL under longLerm conLracLs and opL
for shorLLerm, sLandardlsed alLernaLlves wlLh lower assoclaLed cosLs.
1he exlsLence of Lhe Lwo prlclng mechanlsms (olllndexed and naLural gas) ln one naLural gas
markeL has conslderable consequences for Lhe dlsLrlbuLlon of rlsks beLween suppller and
consumer ln LradlLlonal longLerm conLracLs. 1he suppller can no longer auLomaLlcally pass on Lhe
rlsk of oll prlce lndexaLlon Lo endusers. As a resulL, from a rlsk managemenL perspecLlve lL ls
forced Lo have lLs own lmporL conLracLs reprlced on a markeL basls as well. 1he only way Lo
redlsLrlbuLe" Lhe prlce rlsk Lowards Lhe suppller would lnvolve lndexlng Lhe longLerm volumes
on Lhe gas markeL, whlch would requlre furLher renegoLlaLlon of conLracLs.
Cas consumers who dlrecLly depend for Lhelr overall compeLlLlveness on Lhe cosL of Lhelr naLural
gas supply (such as elecLrlclLy producers ln a compeLlLlve elecLrlclLy markeL and ferLlllser producers)
have a dlrecL sLake ln reduclng supply cosLs, as Lhey cannoL easlly pass prlce rlsk onLo Lhelr
cusLomers. 1hese consumers are Lherefore usually Lhe flrsL movers lnLo shorLerLerm, markeL
based naLural gas conLracLs, as Lhey cannoL afford Lo prlce Lhemselves ouL of Lhe markeL ln relaLlon
Lo Lhelr (lnLernaLlonal) compeLlLors and need Lo mlLlgaLe Lhese prlce rlsks Lhrough shorL(er)Lerm
conLracLs. AlLhough prlce volaLlllLy assoclaLed wlLh compeLlLlve naLural gas markeLs ls a polnL of
concern Lo lndusLrles (and an obsLacle Lo movlng Loward hubbased prlclng), a wellfuncLlonlng
fuLures markeL wlll reduce Lhese concerns.
8egulaLed uLlllLles wlLh reglonal monopolles wlll be more comforLable wlLh any prlce sLrucLure ln
longLerm conLracLs, as Lhey can pass prlce rlsks on Lo (frequenLly resldenLlal) end consumers.
Powever, a regulaLor mlghL lmpose naLural gas prlces ln llne wlLh Lhelr (Lhe regulaLor's) percelved
markeL value (SuLherland, 1993) or a governmenL mlghL enforce a cerLaln prlce level. A pollcy of
adopLlng markeLbased prlclng ln supply conLracLs wlll provlde regulaLed uLlllLles wlLh lnsurance
agalnsL such regulaLory blas.
roducers are llkely Lo be relucLanL Lo change Lowards shorLLerm conLracLlng, as Lhey wlll generally
clalm Lo be ln need of longLerm demand securlLy for naLural gas Lo develop caplLallnLenslve
resources Lo supply cusLomers. 1hey frequenLly argue LhaL Lhe demand for Lhelr producL wlll be
deLermlned Lhrough lnLerfuel compeLlLlon ln a markeL. Powever, Lhls need noL exclude markeL
based prlclng ln supply conLracLs, as prlces deLermlned on Lhe basls of supply and demand should
provlde an lncenLlve for lnLerfuel compeLlLlon.
AnoLher explanaLlon for producer reslsLance Lo spoLlndexed prlclng ls a lack of confldence ln Lhe
gas hub's ablllLy Lo provlde a rellable prlce (due Lo a llmlLed number of suppllers/consumers,
eLc.). roducers may also be relucLanL Lo abandon wellesLabllshed conLracL pracLlces LhaL may
have proven rellable for many years. llnally, Lhe currenL markeL envlronmenL wlLh hlgh oll prlces
versus lower gas prlces (ln Lurope and Lhe unlLed SLaLes) does noL provlde an lncenLlve for
producers Lo change Lo an alLernaLlve prlclng sysLem (lLA, 2008a).
When Lhe naLural gas markeL becomes more compeLlLlve, consumers and producers wlll have Lhe
opporLunlLy Lo lnLroduce dlfferenL producLs wlLh a markeL prlce sulLed Lo Lhelr respecLlve needs.
1hls wlll noL necessarlly enLall abandonlng longLerm conLracLs, because Lhese conLracLs have
conslderable value and boLh buyer and seller have an lnLeresL ln secure longLerm supply and demand.
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 44
S')-." GL - [*.9", 2"#"$%&;"(,P 7%(,.*7, 2-.*,'%( *(2 ;*.9", ;*,-.',@

Source: LCS, 2007.

uesplLe Lhe lmpacL of Lradlng hubs on longLerm conLracLs, lL ls a wldespread mlsconcepLlon LhaL
longLerm supply conLracLs are noL posslble ln a compeLlLlve markeL. As buyers and sellers
deLermlne Lhe conLracL duraLlon, Lhelr overall ob[ecLlve wlll be Lo reduce assoclaLed cosLs. 1hls
can be done by creaLlng a longLerm conLracL LhaL uses a markeLbased prlce, however, Lhls
would leave Lhe offLake obllgaLlon wlLh Lhe buyer, as prlce rlsk no longer poses an lssue (and ls
Lhus noL a reason for renegoLlaLlons).
lL ls posslble (and frequenLly preferred ln fasLgrowlng markeLs) for consumers Lo conLracL long
Lerm volumes, however, Lhls wlll only be advanLageous lf Lhe LoLal producL (e.q. Laklng lnLo
accounL oLher conLracL condlLlons) sulLs Lhe needs of boLh suppller and buyer. lndeed, Lhere are
aLLracLlons Lo a hybrld sysLem of naLural gas prlclng (as ls currenLly Lhe case ln Lurope) where
longLerm, olllndexed conLracLs conLlnue Lo be Lhe backbone of naLural gas supply, whlle spoL
lndexed supplles provlde a balanclng role (ClL, 2008). ln a compeLlLlve naLural gas markeL (long
Lerm or shorLLerm), conLracLs and Lhelr prlclng mechanlsms wlll have Lo sulL Lhe producer's and
consumer's needs, slnce oLher opLlons are always on Lhe Lable.
1he maln consequence of an lncrease ln compeLlLlon on naLural gas conLracLs ls LhaL Lhe number
of avallable conLracLs wlll lncrease as suppllers and consumers look for Lhe counLerparLy LhaL can
provlde Lhelr speclflc conLracLual need. uevelopmenLs ln Lhe unlLed SLaLes and Lurope have shown
LhaL Lhls wlll lnvolve a shlfL away from longLerm supply conLracLs and an lncrease of markeL
based prlclng mechanlsms ln Lhese conLracLs. 1he LranslLlon from a gas markeL LhaL ls domlnaLed
by longLerm conLracLs wlLh lndexed prlclng mechanlsms Lo a compeLlLlve markeL envlronmenL
wlLh shorLLerm conLracLlng and markeLbased prlclng schemes does noL happen overnlghL. 8oLh
ln Lhe unlLed SLaLes and Lhe unlLed klngdom, Lhls conLracLual LranslLlon Lo nearly 100 markeL
based prlclng schemes Look around a decade and someLlmes longer (SLern and 8ogers, 2011).
3-40 *0 * 0%-.7" %8 8$"?'4'$',@ '( (*,-.*$ )*0 ;*.9",0
uesplLe Lhe lnLroducLlon of concepLs such as vlrLual hubs, paper Lrades and forward curves,
naLural gas Lradlng ls fundamenLally a physlcal process LhaL needs a caplLallnLenslve, physlcal
+% ;*.9", !".")-$*,"2`2"#"$%&'() ;*.9",
J%;&",','#"
;*.9",
R%(),".; 7%(,.*7,0
Y&%,`8-,-." 2"*$0
YH%.,,".; 7%(,.*7,0
S-,-." ,.*2'()
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 43
lnfrasLrucLure. 1he number of physlcal connecLlons beLween a naLlonal area servlced by a naLural
gas hub and oLher markeLs deLermlnes Lhe supply and demand opLlons on LhaL hub. An
lncreaslng number of lnLerconnecLlons wlLh oLher areas (boLh LnC and nC) allows for lncreased
compeLlLlon ln a markeL and subsequenLly supporLs Lhe funcLlonlng of Lhe naLural gas markeL.
ln a nomarkeL gas supply envlronmenL, flexlblllLy lnsLrumenLs are essenLlally used by Lhe 1SC/
naLlonal gas company Lo ad[usL Lo changes ln Lhe demand and supply level ln Lhe neLwork. 1he
1SC has varlous Lools aL lLs dlsposal, such as swlng ln supply (domesLlc producLlon, plpellne
lmporLs and LnC), underground sLorage (boLh shorL and longLerm), lnLerrupLlble conLracLs and
llnepack.
29
1hese are all used by Lhe 1SC/naLlonal gas company Lo keep Lhe neLwork ln physlcal
balance, frequenLly wlLhln safeLy marglns seL by Lhe governmenL (lLA, 2002).
S')-." G= - Y*$" %8 8$"?'4'$',@ 0".#'7"0 ,H.%-)H #'.,-*$ H-40 '( >-.%&"

Source: Cas1erra 8.v., 2010.

1A ls essenLlal for Lhe developmenL of compeLlLlon and lnLroduces a separaLe valuaLlon for
LransporL capaclLy and commodlLy ln Lhe area servlced by Lhe Lradlng hub. 1hrough 1A, Lradlng
hubs wlll provlde addlLlonal lnsLrumenLs for neLwork balanclng, wlLh Lhe followlng consequences:
As shlppers can buy or sell Lhelr supply lmbalances Lo oLher markeL parLlclpanLs, Lhls wlll
reduce Lhe amounL of flexlblllLy lnsLrumenLs LhaL a 1SC needs Lo guaranLee neLwork lnLegrlLy.
1he naLural gas hub wlll provlde balanclng lncenLlves Lhrough Lhe gas prlce LhaL sLlmulaLes
markeL parLlclpanLs Lo adopL Lhelr supply/demand paLLerns accordlngly.
A wellfuncLlonlng naLural gas hub wlll provlde an lncenLlve Lo lnvesL ln flexlblllLy lnsLrumenLs -
conslderable volaLlllLy ln cerLaln gas producLs mlghL slgnal Lhe opporLunlLy for sLorage developers
Lo bulld Lhe requlred capaclLy, for example. Conslderable spreads beLween summer and wlnLer
producLs on Lhe fuLures markeLs would slgnal an expecLed shorLage ln seasonal swlng ln Lhe
markeL. 1hls slgnal would provlde Lhe lncenLlve Lo develop exLra seasonal swlng Lhrough uCS
ln depleLed gas flelds. Slmllarly, conslderable volaLlllLy on Lhe spoL markeL should provlde an
lncenLlve Lo develop more shorLLerm uCS Lhrough aqulfers and salL caverns.

29
Llnepack: Lhe ablllLy of a gas neLwork Lo absorb pressure dlfferences as a resulL of shlfLlng demand/supply paLLerns. 1he
blgger Lhe neLwork Lhe blgger llnepack LhaL ls avallable Lo absorb changes.
NBP flexibility reach
TTF flexibility reach
NCG flexibility reach
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 46
A prlce slgnal LhaL shows Lhe expecLed flexlblllLy requlremenLs Lo markeL parLlclpanLs noL only
provldes an lncenLlve Lo develop addlLlonal uCS, buL wlll also provlde flnanclng. A well
funcLlonlng naLural gas exchange wlll provlde a more solld buslness case for flnanclal parLles
Lo supporL parLles LhaL develop uCS Lo sell capaclLy Lo markeL parLlclpanLs. Powever, overall
confldence ln Lhe prlce slgnal wlll be cruclal for flnanclal parLles Lo supporL lnvesLmenLs ln
flexlblllLy lnfrasLrucLure ln compeLlLlve markeLs. 1hls makes Lhe parLlclpaLlon of flnanclals ln
vlrLual Lradlng on Lhe spoL and fuLures markeL an even more cruclal lssue Lo supporL LrusL and
furLher flnanclal parLlclpaLlon ln Lhe physlcal markeL.
llnally, Lhrough Lhe lnLerconnecLlons wlLh oLher markeLs and Lhe avallablllLy of a prlce for
LransporL capaclLy, parLles flnd LhaL Lhe area servlced by Lhe hub can lncrease slgnlflcanLly
beyond Lhe naLlonal boundary of a markeL. 1hrough separaLlng Lhe prlce for commodlLy from
flexlblllLy, boLh become avallable for oLher parLles ln a connecLed markeL, and lf Lhey are
prlced advanLageously, Lhey wlll be lnLroduced across Lhe naLlonal border (or can be lmporLed
from beyond). ln Lurope, flexlblllLy producLs offered from a vlrLual Lradlng hub can expand
lnLo a geographlc area of roughly 1 000 kllomeLres ln dlameLer.
E.'7" '(,".*7,'%( :',H %,H". )*0 ;*.9",0
As a gas markeL moves from a noncompeLlLlve Lo a compeLlLlve slLuaLlon, alLernaLlve sources of
naLural gas wlll be offered Lo wholesale consumers (ln addlLlon Lo longLerm conLracLed gas). 1hls
offer can exLend Lo cusLomers ln connecLed markeLs (unless expllclLly forbldden Lhrough regulaLlons,
or made very cosLly Lhrough enLry/exlL requlremenLs). 1he comblnaLlon of 1A and physlcal
connecLlons wlLh oLher markeL areas wlll Lhus spread compeLlLlon across naLlonal borders.
8efore 2009, Lhere have been conslderable prlce convergences across Lhe ALlanLlc beLween Penry
Pub and n8. 1he unlLed SLaLes and unlLed klngdom boLh have a clear prlce level and 1A Lo
some regaslflcaLlon Lermlnals, a slLuaLlon LhaL provlded for conslderable arblLrage opporLunlLles
(lLA, 2006). As a resulL, Lhe respecLlve naLural gas prlces remalned wlLhln a margln of uSu 2 Lo
uSu 3/M8Lu for a long perlod. naLural gas prlces sLarLed Lo decouple only afLer shale gas vlrLually
ellmlnaLed demand for LnC ln norLh Amerlca and a lack of LnC exporL capaclLy ln Lhe unlLed
SLaLes (wlLh Lhe excepLlon of one slngle faclllLy ln Alaska) physlcally llmlLed arblLrage wlLh Lhe resL
of Lhe world.
A plpellne connecLlon beLween markeLs mlghL be of even greaLer value Lhan LnC, as lL would
generally be less cosLly Lo make use of arblLrage opporLunlLles (provlded capaclLy ls avallable aL a
compeLlLlve prlce). ln Lhe unlLed SLaLes, arblLrage ln Lhe naLural gas markeL has shown Lo be so
effecLlve LhaL dlfferences beLween varlous physlcal hubs' prlces have slmply reflecLed LransporL cosLs.
1hese examples show LhaL Lhe slmple exlsLence of an alLernaLlve hub lncreases Lhe opLlons for
reglonal naLural gas consumers, affecLlng Lhe prlclng envlronmenL beyond Lhe borders of Lhe
compeLlLlve markeL.
lL ls generally expecLed LhaL Lhe varlous hubs developlng ln Lurope Loday wlll converge Lo one
prlce level, as regulaLory reglmes across Lurope allgn ln Lhe fuLure. ln facL, desplLe Lhe lack of a
welldeveloped neLwork code LhaL descrlbes capaclLy allocaLlon beLween naLlonal gas markeLs,
prlces already converge conslderably beLween varlous Luropean naLural gas markeLs (LL8, 2010).
Analysls has shown LhaL Lhe relaLlve lawofoneprlce (LC) holds ln Lhe norLhwesL Luropean gas
markeL: prlces aL varlous Luropean gas hubs move ln harmony. 1hls ls a consequence of Lhe
alLernaLlve supply opLlon LhaL wlll always loom" over a gas markeL, even lf lL ls noL dlrecLly
connecLed by plpellne (for example, n8 and nCC, whlch are connecLed vla Lhe 11l or Lhe norweglan
supply sysLem). SysLemaLlc prlce dlfferenLlals wlll conLlnue Lo exlsL as a resulL of dlfference ln
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 47
LransporL cosLs and capaclLy avallablllLy, buL a relaLlve LC analysls has shown LhaL prlces reLurn
Lo Lhelr relaLlve level raLher qulckly beLween all norLhwesL Luropean markeLs.
30

S')-." GA - E.'7" 2"#"$%&;"(, '( ,H" 5,$*(,'7 V*0'(P GFFIDG

Source: lLA daLabase.

Several facLors supporL prlce colnLegraLlon beLween naLural gas markeLs ln Lurope. llrsL, Lhere ls
a conLlnuous efforL Lo lncrease Lhe ease by whlch naLural gas can be Lraded beLween markeLs
(alLhough lL ls sLlll far from perfecL) (lLA, 2012a). 1hen, Lhere ls Lhe conLlnued lnLegraLlon of varlous
naLlonal balanclng zones, whlch provldes for lncreaslng volumes Lraded on one slngle hub and
beLLer funcLlonallLy. llnally, Lhere ls Lhe exlsLence of a flexlble supply source ln norway LhaL can
arblLrage beLween all ma[or Luropean hubs dlrecLly, allowlng prlces Lo reLurn relaLlve qulckly Lo
Lhelr relaLlve prlce levels on a dayahead basls.
31

:+7&1/"#10,( 40% 2(1"3"/141/
Cn Lhe whole, Lhe LransALlanLlc and Luropean developmenLs have shown LhaL no perfecL regulaLory
reglme needs Lo be ln place and noL all markeLs have Lo be consldered wellfuncLlonlng Lo
supporL a prlce effecL beyond Lhe naLlonal boundarles of Lhe area servlced by a hub. ln Lhe case
of Aslaaclflc, Lhls would mean LhaL lf a funcLlonlng wholesale markeL were Lo be reallsed, Lhe
prlce effecL would be felL ln oLher markeLs, even lf Lhese oLher markeLs were ln a dlfferenL sLage
of developmenL wlLh regard Lo compeLlLlon. Llkewlse, lf LnC were Lo become a flexlble source of
supply wlLh easy access Lo all of Lhe varlous naLlonal markeLs ln Lhe Aslaaclflc reglon, Lhls cross
border effecL of compeLlLlve prlclng would mosL llkely be sLrengLhened.

30
1he markeLs under revlew were n8 (unlLed klngdom), Zeebrugge (8elglum), 11l (neLherlands), LCnord (lrance) and
nCC and Caspool (boLh ln Cermany).
31
1he norweglan plpellne supply sysLem ls dlrecLly connecLed Lo Lhe followlng hubs: n8, Zeebrugge, LCnord and Caspool.
10
3
0
3
10
13
20
u
S
u
/
M
8
L
u
uelLa n8PP Penry Pub (monLhly average) n8 (monLhly average)
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 48
[*.9", ;*,-.',@M :H"( '0 * $'K-'2 )*0 ;*.9", ,.-$@ $'K-'2N
As ouLllned above, lncreaslng compeLlLlon among naLural gas suppllers and consumers ln a
markeL area ls key Lo esLabllshlng a funcLlonlng wholesale markeL. 1he effecLlve funcLlonlng of a
compeLlLlve Lradlng hub wlll resulL ln Lhe hlgh confldence among markeL parLlclpanLs, lndlcaLed
by lncreased usage of Lhe markeL as Lhe prlmary plaLform for naLural gas exchange.
AfLer Lhe ouLllned lnsLlLuLlonal and sLrucLural reforms begln Lo Lake place, wlll a funcLlonlng
wholesale markeL emerge? Wlll Lhe absence of a move Lowards a more funcLlonlng wholesale
markeL conflrm LhaL Lhe llberallsaLlon process was flawed, or would oLher sLrucLural lssues be Lo
blame? ln general, Lwo facLors need Lo be consldered very carefully before [udglng gas markeL
reform a success: confldence and Llmlng.
Several facLors could lnfluence markeL parLles' wllllngness Lo swlLch from Lhe old" naLural gas
markeL Lo Lhe new" compeLlLlve naLural gas markeL. An example would be governmenL pressure,
whereby Lhe governmenL ln essence mandaLes parLles Lo sLarL Lradlng Lhrough a gas hub. AlLhough
Lhls would be a fasL way Lo force parLles Lo use Lhe naLural gas hub, lL would hardly creaLe
favourable condlLlons for susLalnable markeL developmenL. 1hls would mosL llkely lncur conslderable
commerclal llLlgaLlon and evenLual penalLles for commerclal parLles lnvolved LhaL would lnLerfere
wlLh Lhelr exlsLlng conLracLual obllgaLlons. lL ls unllkely LhaL dlrecL governmenL pressure on markeL
parLles would lead Lo a susLalnable compeLlLlve gas markeL.
A governmenL would be more llkely Lo lnsplre confldence lf lL meL Lhe lnsLlLuLlonal and sLrucLural
requlremenLs, and made a naLural gas hub as aLLracLlve as posslble by lowerlng barrlers Lo enLry
(cosLs, lnfrasLrucLure, bureaucracy) and lncreaslng overall Lransparency (markeL daLa publlcly
avallable). 1he llquldlLy of a markeL ls generally consldered a falr lndlcaLor of markeL parLles'
confldence ln Lhe funcLlonlng of a hub and lLs ablllLy Lo generaLe a represenLaLlve prlce.
Cenerally, markeL llquldlLy ls referrlng Lo Lhe easlness Lo Lrade an asseL. Powever, lL ls nearly
lmposslble Lo express a level of llquldlLy ln one allencompasslng lndlcaLor LhaL accounLs for
markeL slze, number of markeL parLlclpanLs, churn facLor, number of producLs offered, and Lhe
bldask spread. ln addlLlon, all lndlcaLors represenL Lhe currenL sLaLe of affalrs, and do noL
necessarlly denoLe fuLure developmenL.
ulfferenL lndlcaLors are used Lo lndlcaLe a markeL's ablllLy Lo funcLlon and seL a rellable prlce.
Lach has lLs drawbacks.
+%;'(*,"2 #%$-;"0 ,% * H-4M Lhls lndlcaLor would complle all Lhe nomlnaLed volumes on a
hub as publlshed by Lhe 1SC Lo show usage of Lhe hub ln Lhe gas markeL. 1he value of Lhls
lndlcaLor would depend conslderably on Lhe pracLlce and meLhodology of Lhe 1SC and Lhus
would noL provlde an undlspuLed measure for hub aLLracLlveness.
e%$-;"0 ,.*2"2 %( "?7H*()" W0-&&$";"(,"2 :',H 61JXM Lhls would glve an lndlcaLlon of Lhe
usage of Lhe hub ln Lhe fuLure, as Lhe exchangeLraded volumes are also Lraded on Lhe
forward curve. Powever, as Lhese volumes do noL lnclude C1C Lrades, whlch mlghL be a far
more successful meLhod of Lradlng on a hub (due Lo lower cosLs for markeL parLlclpanLs), Lhls
lndlcaLor would reflecL Lhe Lradlng reallLy for boLh Lhe spoL and fuLures markeLs. A slgnlflcanL
drawback, however, ls LhaL daLa on C1C Lrades ls generally speclallsed daLa only avallable for
markeL parLles, whlch Lhus llmlLs lLs general and wldespread appllcablllLy.
JH-.( .*,"M Lhe mosL baslc measuremenL of Lhe llquldlLy ln a spoL markeL ls measurlng Lhe
churn raLe, Lhe Lraded volume of naLural gas dlvlded by Lhe physlcal volume of gas dellvered
aL Lhe hub. 1he blggesL uncerLalnLy ln uslng churn as a measure for llquldlLy ls Lhe sub[ecLlvlLy
of Lhe number, as Lhere ls conslderable debaLe on Lhe meLhodology and whlch churn raLe
acLually represenLs a llquld markeL.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 49
1.*2" H%.'f%(M anoLher lndlcaLor would be Lhe Llme horlzon on whlch producLs can be Lraded
on Lhe fuLures markeL. lncreased Lrade ln producLs laLer ln Lhe fuLure should lndlcaLe LhaL a
markeL ls movlng away from Lhe balanclng funcLlon and has Lhe ablllLy Lo generaLe a prlce
slgnal for dellvery of gas ln Lhe fuLure. Powever, a longer Llme horlzon says llLLle abouL Lhe
markeL depLh and LradablllLy of Lhe producLs on Lhe curve. 8y lLself, lL ls generally consldered
a meanlngless lndlcaLor.
V'2*09 0&."*20M measurlng Lhe bldoffer spread for a producL would lndlcaLe Lhe LradablllLy
of lndlvldual producLs. 1he smaller Lhe spread beLween Lhe bld and ask prlces, Lhe beLLer
supply and demand are allgned. Measurlng Lhe bldask spread ls frequenLly used Lo complle a
LradablllLy lndex LhaL compares Lhe number of producLs on Lhe curve and Lhelr respecLlve spread.
uesplLe Lhe lnslghL Lhls provldes on producL avallablllLy on Lhe curve and Lhe performance of
one markeL versus anoLher, lL does noL provlde a clear deflnlLlon of whaL level of spread ls
consldered Lo mark a llquld producL (excepL as small as posslble).
CLher quallLy lndlcaLors lnclude: supporL of Lhe lncumbenLs, markeL makers, LlmeLomarkeL, level
of compeLlLlon beLween C1C brokers, Lhe number of reglsLered members, quallLy of Lhe markeL
model, quallLy of servlces and overall sysLem cosLs (owernexL, 2011).

lL ls clear LhaL none of Lhe
lndlcaLors on lLs own wlll express overall confldence for all markeL parLles.
lL wlll be Lhe overall package LhaL wlll persuade markeL parLles (boLh physlcal and flnanclal) Lo
supporL Lhe ongolng process of lncreaslng compeLlLlon. Confldence ln Lhe conLlnulLy of Lhls
process should be nourlshed and supporLed by lncreased Lransparency ln Lhe gas markeL. 1he
Llmely publlcaLlon of relevanL and conslsLenL daLa on Lhe naLural gas markeL by Lhe exchange
operaLor, 1SC and regulaLor ls essenLlal for lncreaslng Lransparency. 1he relevance of Lhe daLa
LhaL ls publlshed should be secured Lhrough regular debaLe beLween markeL parLles, 1SC(s) and
regulaLor(s) (PeaLher, 2012).
>*##1,' #8* 7"/* 04 /8",'*@ #8* %0&* 04 " %*'$&"#0%
Cne flnal lmporLanL lssue ln a markeL LhaL ls developlng lnLo a compeLlLlve markeL ls Lhe changlng
role of Lhe regulaLor, whlch ls closely llnked Lo Lhe expecLed pace of reform. A governmenL's role
ln a developlng markeL wlll change from belng a markeL parLlclpanL (Lhrough lLs sLaLeowned
enLlLles), Lo a markeL auLhorlLy (monlLorlng markeL developmenL and enforclng compeLlLlve
behavlour) and wlll flnally creaLe a role for flnanclal auLhorlLles, as well.
As Lhls process frequenLly sLarLs wlLh a dellberaLe declslon from Lhe governmenL Lo open up a
markeL for compeLlLlon, lL ls regularly expecLed LhaL Lhe resulL of Lhls process wlll look a cerLaln
way (ln Lhe case of Lurope, Lhe unlLed SLaLes ls frequenLly Laken as an example) (LL8, 2012).
1hese expecLaLlons are usually LranslaLed lnLo expecLaLlons on how any of Lhe lndlcaLors ouLllned
above wlll develop. Answerlng Lhe quesLlons of when a Lradlng hub ls llquld and wheLher a hub ls
worklng well depends largely on Lhese expecLed resulLs. Powever, Lhe amblLlon of regulaLors Lo
dellver on expecLaLlons ls also a conslderable regulaLory rlsk for markeL parLles.
A regulaLor mlghL be persuaded Lo reregulaLe" when an ouLcome ls noL whaL was lnlLlally
deslred, lncreaslng regulaLory uncerLalnLy for markeL parLlclpanLs. 1herefore, Lhe Llmeframe LhaL
a regulaLor seLs lLself Lo furLher markeL reform ls crlLlcal for Lhe overall process. lrequenL
changes ln markeL rules Lo achleve a deslred resulL more qulckly mlghL deLer furLher parLlclpaLlon
from markeL parLles, defeaLlng Lhe regulaLor's overall ob[ecLlve. 8oLh Lhe lndusLry and Lhe
governmenL need a reallsLlc expecLaLlon on Lhe Llmeframe ln whlch resulLs can be expecLed.
A clear paceseLLer for gas markeL llberallsaLlon ls Lhe scale of flnanclal llablllLles LhaL wlll need Lo
be unwound ln Lhe process. An efflclenL, economlc paLh needs Lo be esLabllshed because forced
change Lo conLracLual sLrucLures carrles slgnlflcanL flnanclal rlsks for boLh companles and
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 30
economles. As shown ln ChapLer 2, adapLlng general conLracLs Lo new markeL clrcumsLances Look
abouL a decade ln Lhe unlLed SLaLes and Lhe unlLed klngdom. lor a reglonal sysLem such as Lhe
Luropean unlon, whlch would lnvolve even more governmenLs, regulaLors, 1SCs and commerclal
parLles, lL ls llkely Lo Lake longer (SLern and 8ogers, 2012).
luLure (reglonal) Aslan Lradlng hubs and Lhelr regulaLors wlll Lherefore have Lo Lake lnLo accounL
LhaL lncreaslng compeLlLlveness ln a naLural gas markeL wlll Lake Llme, and wlll ln all llkellhood
Lake more Llme when more governmenLs are lnvolved. A reallsLlc Llmeframe ln Lhe governmenL's
and/or regulaLor's conveyed expecLaLlons Lo allow compeLlLlon Lo develop wlll reduce regulaLory
uncerLalnLy and beneflL Lhe LranslLlon process Lowards a more compeLlLlve naLural gas markeL.
5 ,.*(0&*."(, *(2 7%;&",','#" &.'7" 8%. (*,-.*$ )*0
1he maln requlremenL for a LransparenL naLural gas prlce ls Lhe lnLroducLlon of compeLlLlon ln
Lhe markeL, Lhereby movlng from a noncompeLlLlve markeL Lo a compeLlLlve naLural gas markeL
aL Lhe wholesale level.
32
An lncrease ln compeLlLlon among suppllers and consumers requlres
lnsLlLuLlonal changes lnlLlaLed by governmenL, and monlLored and enforced by Lhe governmenL/
regulaLor.
A compeLlLlve wholesale markeL requlres a hub Lo faclllLaLe ownershlp exchange of naLural gas
beLween markeL parLles, boLh spoL and fuLure. 1he lnLroducLlon of exchangebased Lradlng wlll
llkely lncrease Lhe flnanclallsaLlon of naLural gas Lrade, maklng naLural gas a flnanclal derlvaLlve
as well as a physlcal producL. 1he resulLlng markeL prlce should reflecL boLh Lhe physlcal and
flnanclal markeL players' expecLaLlons of Lhe prlce level a markeL ls movlng Lowards aL a cerLaln
Llme ln Lhe fuLure, Lhus reflecLlng currenL ooJ fuLure supply and demand ln LhaL markeL.
1he lmpacL of a naLural gas Lradlng hub ls felL ln Lhe broader naLural gas markeL, as lL requlres
boLh consumers and suppllers Lo revlew, revalue, and ulLlmaLely rewrlLe buslness pracLlces as has
been (frequenLly) done slnce Lhe lnvenLlon of Lhe lndusLry. Cenerally, a shlfL from longLerm Lo
shorL(er)Lerm focus of Lhe buslness wlll emerge, wlLh adapLlng conLracLual and lnvesLmenL
schemes llkely Lo follow. 1hls process may Lake aL leasL a decade for naLlonal markeLs wlLh a clear
regulaLory auLhorlLy - and longer for more reglonal lnlLlaLlves, due Lo Lhe lncreased number of
sLakeholders lnvolved.
When properly seL up, gasLogas prlclng ln a markeL can dellver Lransparency on Lhe sLaLe of Lhe
markeL and lLs lnvesLmenL requlremenLs LhaL ls unsurpassed by olllndexed alLernaLlves for gas
prlclng. 1hls confldence lles ulLlmaLely ln Lhe longLerm resolve of governmenLs Lo allow markeLs
Lo deLermlne a naLural gas prlce wlLhouL leLLlng pollLlcal conslderaLlons geL ln Lhe way ln Lhe
shorL Lerm. SLrengLhenlng Lhe role of a (preferably lndependenL) regulaLor wlLh a clearly deflned
anLlLrusL mandaLe ln boLh Lhe flnanclal and physlcal area of Lhe naLural gas markeL wlll lncrease
confldence of markeL parLles and Lhelr wllllngness Lo play a full parL ln Lhe markeL.

32
lnLroduclng compeLlLlon down Lo Lhe reLall level ls noL sLrlcLly necessary for a rellable prlce slgnal on naLural gas Lradlng
hubs, buL lL wlll glve resldenLlal consumers Lhe beneflL of cholce.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 31
L< E".0&"7,'#"0 %( 50'*( )*0 H-4 2"#"$%&;"(,
1he ablllLy of naLural gas Lo effecLlvely compeLe ln an energy mlx would be greaLly enhanced lf Lhe
prlce seLLlng were compeLlLlve. Powever, because mosL Aslan naLlons have, or wlll have, a
conslderable lmporL dependency lL frequenLly occurs LhaL overall securlLy of supply conslderaLlons
Lake prlorlLy over prlce conslderaLlons ln energy pollcy maklng.
Cvercomlng Lhe securlLy of supply raLlonale LhaL drlves companles Lo pay olllndexed prlces for
Lhelr longLerm supplles wlll be a challenge. As global naLural markeLs are forecasL Lo LlghLen ln
Lhe shorL Lerm, governmenLs wlll experlence lncreased urgency Lo secure volumes of naLural gas
for Lhelr respecLlve economles.
33
1hls zerosum game reflex has so far llmlLed a furLher drlve Lo
lncrease compeLlLlon ln Lhese wholesale naLural gas markeLs.
luLure challenges Lo Lhe energy secLor as a whole mlghL glve an lmpeLus Lo compeLlLlon, as Lhe
maln role of naLural gas ln Lhe energy mlx of several Aslan naLlons mlghL be flexlblllLy. Several
economles ln Lhe Aslaaclflc reglon wlll have Lo ad[usL Lo new reallLles ln Lhelr energy mlx ln Lhe
near fuLure. AlLhough Lhe challenges dlffer broadly among Aslanaclflc naLlons (e.q. reduclng
coal consumpLlon, replaclng nuclear power, or faclllLaLlng lmporLs Lo prop up Lhe supply/demand
balance), all Lhe amblLlons crlLlcally hlnge on Lhe ablllLy of naLural gas Lo provlde a flexlble source
of energy.
As Lhe ouLlooks for varlous scenarlos depend greaLly on governmenL declslons, energy markeLs
are noL llkely Lo develop ln a smooLh fashlon. Cn Lhe conLrary, lL seems far more llkely LhaL
energy mlxes across Lhe world wlll experlence conslderable shocks lnduced by shlfLlng governmenL
prlorlLles. 1radlng hubs for naLural gas can be used as a source of flexlblllLy ln Lhe Aslan gas
markeLs, allowlng for cosLeffecLlve adapLaLlon of companles' porLfollos Lo mlLlgaLe Lhe lmpacL of
exLernal (governmenL pollcylnduced or oLher) shocks Lo Lhe energy mlx.
As descrlbed ln ChapLer 3, creaLlng a compeLlLlve naLural gas markeL wlll lnvolve a rlgorous
process LhaL demands fundamenLal change from boLh lndusLry and governmenL acLors ln Lhe
naLural gas secLor, as well as aLLracLlng new parLlclpanLs. As Lhere are no funcLlonlng wholesale
naLural gas markeLs ln Lhe neLlmporLlng naLlons of Lhe Aslaaclflc reglon Loday, perspecLlves for
such compeLlLlve markeLs Lo emerge wlll be assessed aL Lhe level of Lhe lnsLlLuLlonal and
sLrucLural requlremenLs for a compeLlLlve naLural gas markeL seL ouL ln ChapLer 3.
34

E".0&"7,'#"0M 7%(0-;".0 '( 50'*E*7'8'7
As Aslaaclflc ls a reglon LhaL encompasses varlous naLlonal gas markeLs ln varlous sLages of
developmenL (no markeL, developlng and maLure), Lhls worklng paper presenLs analyses of four
economles ln Lhe reglon LhaL are broadly represenLaLlve of Lhe challenges LhaL varlous economles
face ln creaLlng a secure, affordable an envlronmenLally frlendly energy supply.
1he Aslanaclflc markeL ls a paLchwork of dlverse economles wlLh slmllarly dlverse naLural gas
markeLs and overall energy secLors. 1hls analysls wlll llmlL lLself Lo korea, !apan, Chlna and
Slngapore, buL Lhe range of lssues explored below ls represenLaLlve Lo varylng degrees of Lhe
oLher counLrles ln Lhe markeL.

33
ln lLA (2012a), Lhe global gas markeL ls LlghLenlng ln Lhe shorL Lerm, whlle a wave of AusLrallan supply ls expecLed Lo loosen
global markeLs beyond 2013.
34
Slx requlremenLs: a handsoff governmenL approach, separaLlon of LransporL and commerclal acLlvlLles, prlce deregulaLlon
aL Lhe wholesale level, sufflclenL neLwork capaclLy and nondlscrlmlnaLory access Lo neLworks, a compeLlLlve number of
markeL parLlclpanLs, and Lhe lnvolvemenL of flnanclal lnsLlLuLlons.
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 32
D"7",
!apan was LradlLlonally Lhe largesL naLural gasconsumlng markeL ln Aslaaclflc, only recenLly
overLaken by Chlna. lL wlll remaln Lhe largesL LnClmporLlng economy for Lhe foreseeable fuLure,
as lL ls an lsland economy wlLh very llmlLed domesLlc producLlon and wlLhouL plpellne
connecLlons Lo oLher markeLs. 1he March 2011 LasL !apan earLhquake and subsequenL lukushlma
nuclear accldenL creaLed conslderable securlLy of supply concerns abouL Lhe !apanese nuclear
focused energy pollcy.
33

As a consequence of Lhe lukushlma accldenL, Lhe ouLlook for naLural gas demand ln !apan
depends heavlly on how much of Lhe now ldle nuclear capaclLy (lf any) wlll be allowed Lo come
back onllne ln Lhe fuLure. WlLh dlscusslons on a new energy pollcy for !apan ongolng, overall
energy pollcy developmenL ln !apan ls mosL llkely Lo be deflned ln Lerms of a prelukushlma and
a posLlukushlma era.
WhaLever Lhe ouLcome of Lhe currenL pollcy debaLe, lL wlll have a slgnlflcanL lmpacL on Lhe
naLural gas secLor, as carbon consLralnLs wlll llkely allow only low carbon energy sources Lo
replace nuclear power generaLlon. A recenLly publlshed analysls of Lhe effecLs of lukushlma on
!apanese LnC demand beyond 2012 modelled a spread of around 10.6 mllllon Lonnes of LnC
(14.4 bcm) beLween a renuclearlsaLlon and denuclearlsaLlon scenarlo. 1he effecL of Lhls slngle
pollcy declslon would (desplLe naLlonal energy conservaLlon efforLs) have an effecL amounLlng Lo
13 of LoLal LnC consumed ln !apan ln Lhe prelukushlma era (l.e. 69.8 mllllon Lonnes or around
93 bcm of LnC ln 2010) (MlyamoLo, lshlguro and nakamura, 2012).
8efore Lhe lukushlma accldenL, !apan was consldered a maLure naLural gas markeL, as !apanese
LnC lmporLs were expecLed Lo gradually decllne Lowards Lhe year 2030. lncreaslng compeLlLlon
would Lhen mosL llkely creaLe conslderable beneflLs, as lnfrasLrucLure lnvesLmenLs have been
amorLlsed. 1he lukushlma accldenL made lL llkely LhaL naLural gas demand wlll lncrease
conslderably ln Lhe medlum Lerm, whlch wlll requlre conslderable lnvesLmenLs ln !apan's naLural
gas lnfrasLrucLure.
8efore lukushlma, Lhe power secLor represenLed 60 of LoLal naLural gas demand. 1hls ls
esLlmaLed Lo have lncreased Lo around 63 ln 2011. Clven Lhls lmporLanL share of demand,
changes on Lhe gas markeL wlll be conslderably hlndered lf compeLlLlon ls noL lnLroduced ln Lhe
power secLor. Lxperlence wlLh Lhe openlng of Lhe Luropean power and gas markeLs suggesLs LhaL
verLlcal lnLegraLlon of power generaLlon ls a very lmporLanL new source of compeLlLlon ln gas
markeLs. Llkewlse, wellfuncLlonlng compeLlLlve wholesale elecLrlclLy markeLs creaLe pressure for
Lhe gas markeLs as well, Lhrough Lhe need Lo reduce cosLs. Moreover, elecLrlclLy or gas uLlllLles
wlLh preexlsLlng reLall porLfollos are well poslLloned Lo bypass Lhe enLry barrlers LhaL exlsL aL Lhe
reLall level, consequenLly, a wellfuncLlonlng compeLlLlve elecLrlclLy markeL would greaLly enhance
Lhe chances of esLabllshlng a llquld gas hub.
A booJsoff qovetomeot opptoocb?
ln parallel wlLh Lhe debaLe on Lhe !apanese posLlukushlma energy pollcy, Lhe role of Lhe
governmenL ln Lhe !apanese energy secLor wlll ln all llkellhood be reassessed. AddlLlonal lmpeLus
Lo Lhls dlscusslon ls provlded by Lhe Je focto naLlonallsaLlon (for Len years lnlLlally) of Lhe power
company 1epco ln Lhe wake of Lhe lukushlma accldenL, as well as Lhe company runnlng
lukushlma, 1epco ls a conslderable LnC lmporLer for lLs power planLs. lL ls currenLly very unllkely
LhaL Lhe !apanese governmenL's lnvolvemenL ln Lhe power secLor wlll recede (MlyamoLo, lshlguro

33
lor a deLalled accounL of !apan's naLural gas markeL and pollcles before 2011, see: MlyamoLo (2008).
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 33
and nakamura, 2012). 1hls lncreased lnvolvemenL ln downsLream power markeLs wlll undoubLedly
splll over lnLo Lhe gas markeL, as Lhe power secLor had been consumlng abouL 60 of LoLal gas
consumpLlon before Lhe lukushlma accldenL (lLA, 2011b).
Slmllarly, Lhe LradlLlonal focus of governmenL pollcy on supply securlLy ln energy pollcy maklng
has led Lo governmenL lnvolvemenL ln accesslng upsLream developmenL Lhrough Lhe sLaLeowned
!apan Cll, Cas and MeLals naLlonal CorporaLlon (!CCMLC). !CCMLC ls malnly a governmenL vehlcle
for !apanese companles Lo reduce exposure Lo exploraLlon rlsk: lL seeks Lo creaLe a sLable supply
of naLural resources for !apan" (!CCMLC, 2012).
1he !apanese governmenL acLlvely encourages uLlllLles Lo leverage buylng power on Lhe global
LnC markeL Lhough comblned procuremenL of longLerm LnC supplles, a parLnershlp wlLh korea's
kCCAS ls perlodlcally consldered (WCl, 2011a). AlLhough Lhls ls frequenLly reslsLed by large LnC
lmporLers because lL does noL lncrease Lhelr domesLlc compeLlveness (due Lo Lhe enduser
prlclng scheme),
36
lL does slgnlfy Lhe governmenL's conLlnued commlLmenL Lo lnvolvemenL ln Lhe
supply of naLural gas Lo !apan aL every level of Lhe value chaln (WCl, 2011b). uesplLe pasL efforLs
Lo llberallse Lhe gas secLor domesLlcally, Lhe afLermaLh of Lhe lukushlma accldenL wlll mosL llkely
deLer any furLher efforLs ln Lhe near fuLure.
5epototloo of ttoospott ooJ commetclol octlvltles?
1he !apanese naLural gas LransporL and dlsLrlbuLlon lnfrasLrucLure ls owned and operaLed by
verLlcally lnLegraLed prlvaLe gas and power companles. AlLhough a funcLlonal unbundllng ls
requlred under !apan's Cas 8uslness AcL of 2004, Lhe reglme has been lenlenL compared wlLh
Luropean and unlLed SLaLes regulaLlons, as no legal unbundllng ls requlred. 1hls has had llmlLed
effecL on separaLlng declslonmaklng for LransporL and sales.
Moreover, Lhere ls no mandaLory funcLlonal unbundllng for LnC lnfrasLrucLure. 1hls furLher llmlLs
Lhe separaLlon of acLlvlLles Lo Lhe domesLlc Lrunk plpellnes and dlsLrlbuLlon secLors ln Lhe value
chaln (MlngZhl Cao, 2010). Some LnC ls redlsLrlbuLed Lo saLelllLe Lermlnals by domesLlc LnC vessels
LhaL lmprove reglonal dlsLrlbuLlon of LnC ln !apan. Powever, Lhls makes reglonal dlsLrlbuLlon
companles conslderably more dependenL on supply from blgger uLlllLles. 1hls, ln Lurn, makes
overall dlsLrlbuLlon even more dependenL on Lhe commerclal acLlvlLles of a few LnC lmporLers.
ltlce Jeteqolotloo ot tbe wbolesole level?
Slnce 1933, Lhe !apanese governmenL has seL lLs naLural gas secLor on a Lra[ecLory Lowards
wholesale prlce deregulaLlon. 1he governmenL lnLroduced leglslaLlon for boLh Lhe power and gas
lndusLrles Lo lncrease freedom of cholce for consumers. 1hls has resulLed ln Lhe gradual lnLroducLlon
of freedom of cholce for blg consumers (>2 mcm/annum) ln 1993, for consumers larger Lhan
1 mcm per annum ln 1999, larger Lhan 0.3 mcm per annum ln 2004 and larger Lhan 0.1 mcm per
annum ln 2007. ln effecL, wholesale prlce deregulaLlon has been esLabllshed ln !apan.
ln november 2012, Lhe !apanese governmenL announced LhaL lL proposes Lo creaLe an LnC
fuLures markeL LhaL seLs a prlce based on supply/demand facLors (Shlmbun, 2012). 1he !apanese
MlnlsLry of Lconomy, 1rade and lndusLry (ML1l) ls Lo consulL wlLh 18 companles (power and gas
uLlllLles, Lradlng companles and flnanclals) Lo esLabllsh a fuLures markeL LhaL allows companles Lo
hedge agalnsL fuLure prlce flucLuaLlons. 1he consulLaLlon should be flnlshed before March 2013,
whlle llsLlng on a commodlLy exchange should sLarL as early as Aprll 2014.

36
lor a reLall prlclng reglme, a cosL plus proflL scheme seLs procuremenL cosLs of naLural gas aL Lhe average lmporL cosLs for
LnC for all !apanese uLlllLles. 1hls has generally provlded an lncenLlve noL Lo engage ln consorLlum buylng wlLh oLher
companles, as Lhls would reduce Lhe ablllLy Lo galn a compeLlLlve prlce advanLage ln relaLlon Lo oLher gas companles.
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 34
AlLhough Lhe ouLcome and flnal sLrucLure are currenLly unclear, ML1l's declslon ls a very
encouraglng slgn. A wholesale LnC prlce reflecLlng supply/demand ln a markeL Lhe slze of !apan's
would have conslderable lmpacL on naLural gas prlclng ln Lhe reglon. lL would also consLlLuLe a
break wlLh Lhe LradlLlonal !apanese focus on longLerm supply conLracLs wlLh oll lndexaLlon.
Powever, Lhe currenL focus on Lhe prlce level of lmporLed LnC (especlally on lowerlng prlces
Lowards Luropean and unlLed SLaLes' prlce levels) could lead Lo dlsappolnLmenL wlLh pollcy
makers, as ln a compeLlLlve markeL, lower prlces are never guaranLeed. 1he focus on prlce level
seems Lo neglecL Lhe beneflLs of a prlceseLLlng mechanlsm LhaL could creaLe greaLer Lransparency
and efflclency for Lhe maLure !apanese naLural gas markeL.
ln Lhe power secLor, desplLe Lhe 1993 LlecLrlclLy 8uslness AcL and Lhe subsequenL lnLroducLlon of
freedom of cholce for nearly 60 of Lhe markeL, Lhe lncumbenL power companles have reLalned
nearmonopolles ln Lhelr generaLlon and reLalllng buslnesses. As hlghllghLed ln !apan's oetqy
lollcy kevlew ln 2008, !apan has underLaken a sLepwlse approach Lo markeL reform. 8uL
"compeLlLlve prlclng ls Lhe cornersLone ln an lncenLlvebased markeL framework and lL ls Lhe
feaLure LhaL allows markeL parLlclpanLs Lo communlcaLe and lnLeracL ln a way LhaL dellvers
opLlmal ouLcomes - prlclng ls Lhe glue of compeLlLlve markeLs" (lLA, 2008b).
Y-88'7'"(, (",:%.9 7*&*7',@ *(2 (%(2'07.';'(*,%.@ *77"00 ,% (",:%.90N
CurrenLly !apan has an annual lmporL capaclLy of around 230 bcm compared Lo naLural gas
demand of 123 bcm ln 2011. 1hlrd parLy access Lo Lrunk plpellnes and dlsLrlbuLlon neLworks was
lnLroduced ln 2004 and ls Lo be lndlvldually negoLlaLed by parLles proposlng Lo supply cusLomers.
Powever, for LnC Lermlnals, Lhe requlremenL for 1A ls deemed only deslrable, llmlLlng Lhe
obllgaLlon for companles Lo engage ln negoLlaLed 1A. Some companles have developed guldellnes,
buL ln general lL has proven dlfflculL Lo esLabllsh 1A aL LnC lmporL Lermlnals, as Lhese are
developed Lo flL an lmporLer's speclflc supply porLfollo and subsequenLly Lhe sales porLfollo
requlremenLs ln Lhe hlnLerland. 1he lack of lnLerconnecLlons beLween reglons Lhen furLher llmlLs
Lhe ablllLy Lo lncrease compeLlLlon Lhrough 1A.
+-;4". %8 ;*.9", &*.,'7'&*(,0N
1he !apanese naLural gas markeL has a conslderable number of LnC lmporLers (seven power
companles, elghL gas companles and several lndusLrlal lmporLers). LnC lmporLs are domlnaLed by
power companles LhaL malnly use LnC Lo supply power sLaLlons (62 of LoLal LnC lmporLs ln 2010).
Cas companles lmporLed 34 of LoLal LnC supplles, whlle large lndusLrles lmporLed around 4
of LoLal dellverles. 1here are around 200 local gas uLlllLles acLlve ln selllng naLural gas Lo end
consumers ln Lhe !apanese clLy gas lndusLry.
Powever, Lhese companles purchase Lhelr gas from Lhe larger gas and power companles LhaL
lmporL LnC. As four ma[or gas uLlllLles (1okyo Cas, 1epco, Csaka Cas and Chubu LlecLrlc) lmporLed
nearly 71 of LoLal LnC dellverles ln 2010, Lhelr prlceseLLlng ablllLy ls conslderable. uesplLe Lhe
large volume of naLural gas annually consumed ln !apan and Lhe conslderable number of parLles
acLlve ln Lhe secLor, Lhe lack of an lnLerconnecLed plpellne lnfrasLrucLure and llmlLed, non
dlscrlmlnaLory 1A on LnC lmporL Lermlnals llmlL Lhe markeL's compeLlLlveness.
B(#%$#";"(, %8 8'(*(7'*$ '(0,',-,'%(0N
!apan has currenLly no Lradlng hub on whlch naLural gas companles can buy and sell naLural gas,
Lherefore, Lhere are no naLural gas derlvaLlves LhaL flnanclal companles can Lrade on elLher a spoL
or fuLures markeL. AlLhough Lhe !apanese governmenL has slgnalled Lhe lnLenL Lo creaLe a fuLures
markeL wlLh Lhe speclflc alm Lo provlde Lools Lo manage commodlLy volaLlllLy, lL ls currenLly
unclear how Lhls mechanlsm would funcLlon and wheLher flnanclal lnsLlLuLlons would parLlclpaLe.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 33
1hls llmlLs Lhe role of Lhe flnanclal lnsLlLuLlons (publlc and prlvaLe) Lo provldlng caplLal for
lnfrasLrucLure lnvesLmenL (boLh upsLream and downsLream) ln Lhe naLural gas secLor.
?8* E*7$-&1/ 04 F0%*"
naLural gas consumpLlon ln korea has grown rapldly over Lhe pasL decades, prlmarlly drlven by
conLlnuous economlc growLh. uevelopmenL of Lhe korean gas secLor has been drlven by Lhe
creaLlon of Lhe sLaLeconLrolled korean Cas CorporaLlon (kCCAS) ln 1982, whlch seL ouL Lo dlverslfy
korea's economy away from lLs dependence on coal and oll.
As a resulL, Lhe flrsL LnC cargoes arrlved ln 1986 and naLural gas consumpLlon grew aL an
lmpresslve 14 annually, from 3.2 bcm ln 1990 Lo nearly 43 bcm ln 2010 (lLA, 2011b). 1he growLh
ln naLural gas consumpLlon ls pro[ecLed Lo slow Lo around 1.8 per annum unLll 2024, reflecLlng
Lhe lncreaslng maLurlLy of Lhe korean naLural gas secLor (MkL, 2011). naLural gas consumpLlon ls
domlnaLed by Lhe power secLor, wlLh 44 of consumpLlon ln 2010, whlle Lhe resldenLlal secLor
consumed a subsLanLlal share of 28.
1hls growLh ln demand has been meL by LnC lmporLs and a small volume of domesLlc producLlon
from Lhe small offshore uohnghae1 gas fleld developed and operaLed by Lhe korean naLlonal Cll
CorporaLlon (knCC). CurrenLly under dlscusslon ls Lhe usage of Lhe uohnghae gas fleld as an
underground sLorage slLe from 2017 onwards. korean naLural gas lmporLs are domlnaLed by LnC
lmporLs by kCCAS (wlLh one LnC Lermlnal operaLed by anoLher company, CSCC).
korea has a naLural gas lnfrasLrucLure LhaL ls slmllar Lo Lhe Luropean markeL's, wlLh an lnLegraLed
hlghpressure plpellne neLwork and conslderable seasonal flexlblllLy requlremenLs due Lo LemperaLure
relaLed changes ln demand from Lhe resldenLlal secLor. korea currenLly lacks underground sLorage
and plpellne lmporL alLernaLlves Lo LnC and has Lo meeL lLs seasonal requlremenLs excluslvely
from Lhe LnC supply chaln.
kCCAS has several flexlblllLy lnsLrumenLs aL lLs dlsposal Lo make supply meeL seasonal demand:
hlghcosL, sLraLeglc onshore sLorage,
spoL purchases on Lhe global LnC markeL. kCCAS ls one of Lhe mosL acLlve buyers on Lhe
global LnC markeL durlng Lhe wlnLer (SLern, ed., 2008),
LnC cargo swaps wlLh oLher companles LhaL have Lhe opposlLe seasonal requlremenLs, frequenLly
!apanese power companles (Cas MaLLers, 2006a), and
parLlclpaLlon ln upsLream LnC developmenLs, enabllng lL Lo maLch Lhe requlred supply Lo Lhe
domesLlc markeL.
AlLhough korea currenLly lacks Lhe underground sLorage faclllLles Lo accommodaLe swlngs ln
seasonal demand, lL has successfully used lLs verLlcally lnLegraLed buslness model Lo provlde
securlLy of supply. 1he esLabllshmenL of Lhe korean gas markeL ls Lhe resulL of Lhe governmenL's
sLraLeglc declslon Lo develop a naLural gas markeL ln 1982. 1hls has propelled Lhe naLural gas
markeL beyond Lhe lnLenslve growLh phase lnLo whaL ls now a maLure naLural gas markeL.
nooJsoff qovetomeot opptoocb?
ln 2001, Lhe korean governmenL announced an lnlLlaLlve Lo spllL up sLaLeconLrolled kCCAS (Lhe
governmenL currenLly owns 26.86 of Lhe shares) lnLo Lhree prlvaLely owned markeLlng companles
and one publlcly owned lnfrasLrucLure company.
37
Powever, slnce 2002, llberallsaLlon of Lhe
korean gas secLor has been progresslng aL a snall's pace.

37
1he korean LlecLrlc ower Company (kLCC) owns 24.46 of Lhe shares, local governmenLs own 9.39, whlle Lhe oLher
60 of Lhe shares are publlcly llsLed.
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 36
1he korean zeal for gas markeL llberallsaLlon waned afLer shorLages ln Lhe early 2000s LhaL were
blamed on kCCAS's lnablllLy Lo conclude longLerm lmporL conLracLs (SLern, ed., 2008). korea's
governmenL conLlnues Lo supporL dlrecL LnC lmporL venLures such as Lhe 2003opened
Cwangyang Lermlnal LhaL dellvers dlrecLly Lo lndusLrles and power companles.
Powever, securlLy of supply pollcy remalns a Lop prlorlLy for Lhe governmenL and kCCAS Lakes a
plvoLal role ln Lhls pollcy. 1he korean governmenL's mosL recenL longLerm naLural gas supply and
demand plan calls for more access Lo upsLream naLural gas producLlon and kCCAS's leverage of
lLs buylng power on world LnC markeLs (Moon[ong, 2011). lL ls Lherefore very unllkely LhaL Lhe
plans Lo prlvaLlse kCCAS wlll be revlved ln Lhe near fuLure. 1hls wlll mean LhaL Lhe governmenL
conLlnues Lo exerL a commandlng lnfluence ln korea's naLural gas lndusLry.
5epototloo of ttoospott ooJ commetclol octlvltles?
As Lhe sole wholesaler ln korea, sLaLeconLrolled kCCAS ls ln charge of naLural gas lmporLs,
sLorage and Lransmlsslon. uesplLe Lhe exlsLence of a fourLh LnC lmporL Lermlnal lndependenL
from kCCAS, Lhe subsequenL Lransmlsslon neLwork ls also owned by kCCAS, effecLlvely leavlng
no room for separaLlon of commerclal acLlvlLles from LransporL.
kCCAS and Lhe subsequenL clLy gas companles LhaL dlsLrlbuLe Lhe naLural gas Lo cusLomers and
lndusLrles pass on prlce changes wlLh a LwomonLh Llme lag. Wholesale prlces for power companles
and clLy gas dlsLrlbuLors have Lo be approved by Lhe MlnlsLry of Commerce, lndusLry and Lnergy
(MCClL), whereas local prlces for end consumers musL be approved by reglonal governmenLs.
1hls makes Lhe korean wholesale prlce scheme an effecLlve 8egulaLlon CosL of Servlce (8CS)
prlclng scheme, wlLh no prlce deregulaLlon aL Lhe wholesale level.
38

5offlcleot oetwotk copoclty ooJ oooJlsctlmloototy occess to oetwotks?
LnC ls supplled by kCCAS, whlch operaLes Lhe Lhree maln lmporL Lermlnals wlLh a comblned lmporL
capaclLy of around 100 bcm annually. kCCAS ls requlred Lo reserve 22 of annual consumpLlon
by 2017 ln lLs domesLlc regaslflcaLlon Lermlnals (LhaL level ls currenLly 16). 1hls obllgaLlon glves
kCCAS a domlnanL role ln guaranLeelng sufflclenL neLwork capaclLy Lo accommodaLe overall
demand and seasonal swlng ln Lhe korean gas markeL.
ln 1999, Lhe korean governmenL Lrled Lo lnLroduce an openaccess reglme for Lhe korean naLural
gas neLwork. AL flrsL, a regulaLed 1A reglme was consldered (under supervlslon of Lhe korean
compeLlLlon auLhorlLy noL MCClL), buL Lhls falled Lo maLerlallse. SubsequenLly, a negoLlaLed
1A reglme was lnLroduced for companles LhaL wanLed Lo dlrecLly lmporL LnC (and had MCClL's
permlsslon Lo do so) and needed Lo use kCCAS's faclllLles. 1he companles LhaL wanL Lo lmporL
LnC dlrecLly can only do so for Lhelr own use (and are Lhus noL allowed Lo resell), musL have
adequaLe sLorage capaclLy avallable and musL have compleLed negoLlaLlons wlLh kCCAS coverlng
use of lnfrasLrucLure (MlngZhl Cao, 2010).
1he process of negoLlaLed 1A has proven very cumbersome, as demonsLraLed by Lhe sLeel company
CSCC, whlch soughL Lo lmporL LnC for lLs own use. AfLer obLalnlng permlsslon from MCClL, access
negoLlaLlons Lo kCCAS's LnC Lermlnals and plpellnes falled and CSCC declded Lo bulld lLs own
regaslflcaLlon Lermlnal. ln 2003, CSCC lmporLed lLs flrsL LnC cargo supplled from 8's 1angguh
pro[ecL Lhrough lLs Cwangyang Lermlnal LhaL represenLs 2 of LoLal korean lmporL capaclLy and ls
dedlcaLed Lo dlrecLly supply Lwo lndusLrles and one power sLaLlon (CSCC, kpower and CS CalLex).

38
1he ma[or excepLlon belng Lhe lndusLrles LhaL purchase LnC on world markeLs Lhrough Lhe Cwangyang Lermlnal.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 37
ln Aprll 2012, Lhe korean power company korean Mldland ower (komlpo, whlch ls a kLCC
subsldlary) concluded a 0.4 mLpa Lenyear supply conLracL wlLh Lradlng company vlLol Lo supply
lLs power sLaLlons. lL wlll lmporL Lhls volume Lhrough Lhe CSCC Lermlnal because a conslderable
obsLacle Lo accesslng capaclLy aL kCCAS's Lermlnals was LhaL capaclLy has Lo be applled for flve
years ln advance (WCl, 2012).
1he lnablllLy of companles Lo resell Lhelr lmporLed LnC ln Lhe korean gas markeL and cumbersome
access negoLlaLlons for kCCAS's LnC Lermlnals are conslderable barrlers for naLural gas suppllers.
Nombet of motket pottlclpoots?
kCCAS has a monopoly on naLural gas sales Lhrough 98 of LnC lmporL capaclLy, whlle Lhe
fourLh Cwangyang Lermlnal so far has only four cusLomers (whlch are noL allowed Lo resell Lhelr
lmporLed LnC). 1hls currenLly creaLes a Je focto monopoly for kCCAS as a suppller of naLural gas
for dlsLrlbuLlon companles. 1here are currenLly 30 clLy gas companles and 14 power companles
LhaL buy naLural gas from kCCAS.
lovolvemeot of floooclol lostltotloos?
korea has currenLly no Lradlng hub on whlch companles can buy and sell wholesale naLural gas,
Lherefore, Lhere are no naLural gas derlvaLlves LhaL flnanclal companles can Lrade on elLher a spoL
or fuLures markeL. 1hls llmlLs Lhe role of Lhe flnanclal lnsLlLuLlons Lo provlder of flnance for
lnfrasLrucLure lnvesLmenL (upsLream and downsLream) ln Lhe naLural gas secLor.
G81,"
1he sLory of Lhe developlng Chlnese gas markeL has come under lnLense scruLlny as a Chlnese gas
markeL barely exlsLed Lwo decades ago (13 bcm ln 1990). urlven by lLs welldocumenLed economlc
expanslon, naLural gas consumpLlon has lncreased more Lhan flvefold slnce 2000, growlng from
around 26 bcm ln 2000 Lo around 130 bcm ln 2011. 1hls makes Chlna Lhe fourLh largesL gas
markeL ln Lhe world. naLural gas consumpLlon ls expecLed Lo grow abouL 13 annually for Lhe
nexL flve years.
1he 12Lh Chlnese llve?ear lan publlshed ln 2010 (coverlng Lhe perlod 201113) ouLllned Chlna's
goal Lo slgnlflcanLly lncrease gas usage by 2013. 1he lLA analysls showed LhaL Lhe planned LargeL
mlghL be somewhaL overamblLlous, buL esLlmaLed LhaL Lhls LargeL (260 bcm, Lwlce as much as
Chlna's gas consumpLlon ln 2011) could be meL ln 2017. 1hls amblLlon ls malnly an efforL Lo wean
Lhe overall Chlnese economy off lLs dependence on, coal for envlronmenLal reasons. Casflred
power generaLlon currenLly comprlses around 2 of LoLal power producLlon ln Chlna. Powever,
Chlnese naLural gas demand wlll lncrease across all secLors (resldenLlal, lndusLry, and power) wlLh
each secLor consumlng roughly oneLhlrd of naLural gas demand ln 2017.
ln Lhe nexL flve years, naLural gas ln Chlna wlll be supplled from Lhree sources: domesLlc
producLlon, plpellne lmporLs from Myanmar and CenLral Asla, and Lhe global LnC markeL. AlLhough
naLural gas producLlon ln Chlna wlll conLlnue Lo meeL Lhe bulk of demand, lL ls forecasL LhaL boLh
nC and LnC lmporLs wlll lncrease as well, dellverlng sllghLly less Lhan half of Lhe LoLal Chlnese
demand ln 2017 (lLA, 2012a).
An exLenslve plpellne neLwork connecLlng domesLlc and lnLernaLlonal producLlon wlLh cenLres of
demand on Chlna's easL coasL has already been developed, buL ls sLlll fragmenLed. Powever,
expandlng Lhls neLwork Lo keep up wlLh Lhe pro[ecLed growLh ln demand wlll be challenglng.
8oLh lnLernaLlonal plpellnes connecLlng Myanmar and CenLral Asla are owned and operaLed by
Lhe Chlna naLlonal eLroleum Company (CnC), whlch also operaLes 90 of Lhe domesLlc naLural
gas Lransmlsslon plpellnes. lmporL Lermlnals for LnC have been rapldly developed as well and are
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 38
ldeally sulLed Lo supply naLural gas Lo Lhe urban coasLal reglons. Chlnese LnC lmporL Lermlnals
currenLly have an lmporL capaclLy of 29 bcm annually, whlch, LogeLher wlLh Lermlnals under
consLrucLlon wlll lncrease capaclLy Lo over 32 bcm per annum ln 2013.
Chlna wlll encounLer conslderable challenges for governmenLs and companles Lo conLlnue Lo
meeL Lhe forecasL growLh and expand capaclLy aL every level of Lhe value chaln.
39
As Lhe demand
level beyond 2030 ls forecasL Lo reach 430 bcm, Chlna's demand wlll have conslderable lmpacL on
Lhe Aslanaclflc and world gas markeLs.
nooJsoff qovetomeot opptoocb?
1he Chlnese governmenL has a plvoLal role ln developlng Lhe Chlnese naLural gas markeL, boLh aL
naLlonal and local levels. Cverall pollcy amblLlons wlll be seL by Lhe naLlonal uevelopmenL and
8eform Commlsslon (nu8C) and several oLher governmenL sLakeholders. ln addlLlon, Lhe governmenL
has a dlrecL sLake ln every level of Lhe naLural gas value chaln Lhrough Lhe sLaLeowned oll companles
(ln addlLlon Lo CnC, Lhe Chlna naLlonal Cffshore Cll Company (CnCCC) and Slnopec). llnally, local
governmenLs ofLen own shares ln Lhe reglonal naLural gas uLlllLy companles LhaL are also dlrecLly
connecLed wlLh lnLernaLlonal markeLs Lhrough varlous LnC lmporL Lermlnals under developmenL.
AlLhough Lhe naLural gas markeL ln Chlna has reached an lnLenslve growLh phase drlven by
governmenL pollcles LhaL supporL a dlverslflcaLlon away from coal and oll, Lhe governmenL ls
already looklng beyond a pollcydrlven naLural gas secLor, experlmenLlng wlLh less governmenL
lnvolvemenL ln prlceseLLlng and openlng up Lechnlcally challenglng shale gas resources for
lnLernaLlonal energy companles. Powever, desplLe Lhese experlmenLs wlLh markeL mechanlsms
and markeL parLles ln Lhe naLural gas secLor, Lhe governmenL's plvoLal role ln Lhe naLural gas
secLor remalns flrmly enLrenched.
5epototloo of ttoospott ooJ commetclol octlvltles lo tbe oototol qos sectot?
As Lhe Chlnese naLural gas secLor ls ln a phase of lnLenslve growLh, Lhe overall focus of Lhe
lndusLry ls expandlng lLs naLural gas lnfrasLrucLure aL an exLremely rapld pace Lo accommodaLe
currenL and fuLure demand. As a resulL, LransporL lnvesLmenL ls lnLlmaLely llnked wlLh upsLream
developmenL and subsequenL markeLlng acLlvlLles from lndlvldual companles. 1here ls currenLly
no separaLlon beLween LransporL and commerclal acLlvlLles, as Lhese are llnked Lhrough Lhe
acLlvlLles of verLlcally lnLegraLed naLural gas companles, prlmarlly CnC.
naLural gas prlces ln Chlna are regulaLed by cenLral and local governmenLs, whlch have generally
favoured households over elecLrlclLy producers and lndusLrlals. Cn Lhe whole, Lhe governmenL
seLs prlces for dlfferenL sLages along Lhe value chaln (wellhead, LransporL, explanL/clLy gaLe) on a
cosLplus basls and dlfferenLlaLes beLween dlfferenL end consumers (lLA, 2009). LffecLlvely, Lhls
has led Lo an S8 prlclng mechanlsm, whlch ls far from deregulaLed prlces aL Lhe wholesale level.
naLural gas has had dlfflculLy peneLraLlng Lhe varlous reglonal markeLs ln Chlna (endangerlng
governmenL growLh LargeLs), as lL was frequenLly consldered Loo expenslve compared Lo Lhe
alLernaLlves of coal and llquefled peLroleum gas (LC) ln consumlng secLors. 1hls prlclng lssue has
Lrlggered Lhe governmenL Lo develop reglonal markeL reforms ln Lhe Cuangdong and Cuangxl
provlnces. under Lhese new prlclng mechanlsms, clLygaLe prlces are llnked Lo a baskeL of fuel oll
and LC.

39
A comprehenslve reporL ouLllnlng Lhese challenges was recenLly publlshed: lLA (2012b).
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 39
1hls has effecLlvely led Lo Lhe lnLroducLlon of a replacemenL value prlclng scheme down Lo Lhe
endconsumer level. 1he scheme ls expecLed Lo be expanded beyond Lhe currenL areas Lo
Slchuan and Lhe Shanghal area, where exposure Lo olllndexed naLural gas lmporLs ls hlgher (WCl,
2012b). lf Lhls scheme were Lo be exLended across Chlna, lL would effecLlvely llnk wholesale
naLural gas prlces ln Chlna Lo Lhe oll producLs LhaL Lhey should replace (whlch would mlrror
Luropean pracLlces aL a slmllar markeL developmenL sLage).
ln uecember 2010, Lhe Shanghal eLroleum Lxchange (SLx) launched Lhe flrsL LnC spoL markeL
ln Asla. 1he spoL markeL was lnLended Lo help relleve a LlghL supply slLuaLlon, whlch had occurred
ln Lhe Shanghal reglon ln wlnLer 2009. Slnce lLs lnLroducLlon, Lradlng has remalned relaLlvely low.
More recenLly, SLx has launched a naLural gas peak shavlng" spoL markeL Lo secure volumes of
naLural gas for gasflred power planLs durlng peak elecLrlclLy demand ln Lhe summer. 1hls
slmulLaneously provldes an ouLleL for companles LhaL have conLracLed relaLlvely expenslve LnC.
AlLhough Lhe lnlLlal volume Lraded durlng Lhe summer (!uly/SepLember) ls llmlLed Lo 100 mcm, lL
does show Lhe wllllngness of Lhe companles and Lhe governmenL Lo look lnLo markeLbased
mechanlsms Lo address consLralnLs ln Lhe naLural gas (and power) secLor.
uue Lo Lhe breakneck pace aL whlch Chlna's naLural gas demand ls developlng, lnfrasLrucLure
avallablllLy ls a key concern for companles LhaL asplre Lo enLer Lhe Chlnese gas markeL. As Lhere ls no
1A reglme and no regulaLor Lo monlLor Lhe overall Chlnese naLural gas LransporL neLwork, lndlvldual
companles have Lo negoLlaLe for plpellne access and capaclLy. 1hls severely llmlLs Lhelr ablllLy Lo
supply or procure naLural gas from sources oLher Lhan Lhe lncumbenL producers and lmporLers.
roducLlon of naLural gas ln Chlna ls Lhe effecLlve domaln of Lhe Lhree blg sLaLeowned energy
companles: CnC, CnCCC and Slnopec. 1here are several smaller naLural gas producers acLlve ln
Lhe reglons, buL Lhey depend on LransporL faclllLles provlded by Lhe blg Lhree (especlally, CnC).
ln Lhe area of Lransmlsslon capaclLy, CnC has a nearly compleLe monopoly, whlch llmlLs Lhe
opLlons for cusLomers looklng for compeLlLlve supplles.
1here are already a conslderable number of commerclal parLles connecLed Lo Lhe grld (around
1 800 companles are members of Chlna ClLy Cas), and Lhls number wlll conLlnue Lo grow as Lhe
markeL expands.
40

Powever, as more reglonal uLlllLles sLarL Lo codevelop LnC regaslflcaLlon Lermlnals, Lhls could
lncrease compeLlLlon beLween lmporLed LnC and clLy gaLedellvered gas Lhrough CnC's plpellnes.
Chlna ls one of Lhe very few economles ln Lhe Aslaaclflc reglon LhaL has nC and LnC dlrecLly
compeLlng for markeL share, whlch lncreases overall supply securlLy, buL also lncreases posslble
compeLlLlon ln Lhe fuLure.
Chlna currenLly has Lwo spoL Lradlng mechanlsms, speclflcally developed Lo provlde a (llmlLed)
opLlon for companles Lo balance Lhelr porLfollos ln wlnLer/summer. 1hls has so far noL Lrlggered
flnanclal parLy acLlvlLy Lo faclllLaLe Lrade beyond Lhe spoL markeL. 1herefore, Lhere are no naLural
gas derlvaLlves LhaL flnanclal companles can Lrade on elLher spoL or fuLures markeLs, as markeL
player acLlvlLy ls decldedly physlcal.

40
AL leasL 63 of all urbanlsed areas connecLed Lo Lhe naLural gas grld by 2030, accordlng Lo Lhe 11Lh llve?ear lan.
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 60
ln addlLlon, Chlna has currency and caplLal conLrols LhaL llmlL lnLernaLlonal flnanclal parLles' ablllLy
Lo freely converL Lhe Chlnese 8enmlnbl, Lo repaLrlaLe proflLs and Lo have flnanclal lnsLrumenLs
legally secured. 1hls llmlLs Lhe role of Lhe lnLernaLlonal flnanclal lnsLlLuLlons ln commodlLy Lradlng
ln Chlna. uomesLlc flnanclal lnsLlLuLlons play a slgnlflcanL (buL ulLlmaLely resLrlcLed) role ln flnanclng
lnfrasLrucLure pro[ecLs (upsLream and downsLream) ln Lhe naLural gas secLor.
>1,'"70%*
As Slngapore sLarLed Lo lmporL naLural gas ln 1992 wlLh Lhe commlsslonlng of Lhe flrsL plpellne
connecLed Lo Malaysla, Lhe clLysLaLe's naLural gas sLory ls one of growLh raLes slmllar Lo oLher
developlng Aslan economles (albelL on a smaller scale). naLural gas consumpLlon grew from
1.3 bcm ln 2000 Lo 8.7 bcm ln 2010. lL ls forecasL by Lhe lLA Lo conLlnue Lo grow by around 3
per annum for Lhe nexL flve years.
Slnce Slngapore has no domesLlc gas producLlon, any lncrease ln demand for naLural gas
slmulLaneously creaLes Lhe necesslLy Lo lncrease lmporL capaclLy. As of 2012, Lhe Slngapore lmporL
connecLlons have a comblned capaclLy 9.6 bcm per annum (see ChapLer 2). 1he gas dlsLrlbuLlon
neLwork ln Slngapore conslsLs of Lwo separaLe gas plpellne neLworks: Lhe Lown gas neLwork and
Lhe naLural gas neLwork. 1own gas, whlch ls used for cooklng and waLer heaLlng by resldenLlal
and commerclal cusLomers, ls manufacLured from naLural gas. 1he Lown gas plpellne neLwork
serves abouL 30 of Lhe households ln Slngapore.
ln 2006, Lhe Slngaporean governmenL declded Lo develop an LnC Lermlnal Lo furLher dlverslfy Lhe
sLaLe's naLural gas supply. ln 2008, 8C Slngapore Cas MarkeLlng (8CSCM) was appolnLed
aggregaLor Lo supply Lhe lnlLlal 3 mLpa volumes of LnC for 20 years Lo Lhe Lermlnal. ln !une 2009,
Lhe governmenL announced LhaL lL lnLended Lo Lake over Lhe developmenL and ownershlp of Lhe
LnC Lermlnal Lhrough Lhe Slngapore LnC CorporaLlon Le. LLd. (SLnC) Lo develop, bulld, own and
operaLe Lhe Lermlnal. 8C Croup wlll source LnC supply for Slngapore from lLs porLfollo, buL lL ls
expecLed LhaL Lhe Cueensland CurLls LnC pro[ecL wlll serve as one of Lhe maln sources of supply.
ln 2010, Lhe Slngaporean Lnergy MarkeL AuLhorlLy (LMA, 2011) announced Lhe consLrucLlon of a
Lhlrd sLorage Lank aL Lhe SLnC Lermlnal, as Lhe lnlLlal 4.1 bcm of annual supply had been fully
conLracLed by consumers. 1he capaclLy wlll Lhen double Lo 8.2 bcm ln 2014, lncreaslng sLorage
flexlblllLy for LnC Lraders who wanL Lo Lake advanLage of Slngapore's geographlcally cenLral
locaLlon ln Lhe SouLhLasL Aslan gas markeL. SLnC wlll be able Lo accommodaLe varlous slzed
LnC carrlers, from large 263 000 cublc meLre vessels Lo small reglonal carrlers of around
10 000 cublc meLres. llnally, Lhe LnC Lermlnal wlll have reexporLlng capablllLles and wlll be able
Lo servlce Lhe broader Aslan markeL, lf requlred.
WlLh moderaLely growlng demand, lncreaslng lnfrasLrucLure capaclLy and supply secured from
varlous sources, Slngapore's naLural gas markeL can lncreaslngly be consldered a maLure markeL
locaLed ln Lhe cenLre of a fasLgrowlng demand reglon.
A booJsoff qovetomeot opptoocb?
uesplLe belng LoLally dependenL on naLural gas lmporLs, Lhe Slngaporean governmenL has chosen
a freemarkeL approach Lowards boLh Lhe power and naLural gas markeLs. LlberallsaLlon of Lhe
elecLrlclLy secLor and naLural gas secLor are cornersLones of Lhe currenL Slngaporean energy
pollcy. 1he Cas AcL of 2001 seL Lhe Slngapore gas secLor on a flrm course Lowards deregulaLlon
wlLh Lhe unbundllng of LransporL and commerclal acLlvlLles, and overslghL enLrusLed Lo Lhe
lndependenL energy regulaLor LMA.
More recenLly Lhe Slngaporean MlnlsLry of 1rade and lndusLry (M1l) esLabllshed lLs rlclng Lnergy
8lghL as one of Lhe flve key sLraLegles Lo meeL lLs energy pollcy ob[ecLlves. 1hls acknowledged
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 61
LhaL a compeLlLlve energy markeL wlll seL Lhe prlce level for energy ln Slngapore's economy and
wlll provlde a slgnal for lnvesLmenLs ln lnfrasLrucLure and energy efflclency measures. 1he
approach of Slngapore Lowards Lhe naLural gas markeL can be consldered as one of Lhe mosL
handsoff ln Lhe Aslaaclflc reglon.
5epototloo of ttoospott ooJ commetclol octlvltles lo tbe oototol qos sectot?
1he Slngaporean Cas AcL of 2001 separaLed commerclal acLlvlLles from LransporLaLlon acLlvlLles ln
Lhe gas secLor. As a consequence, owerCas LLd. dlvesLed lLs commerclal acLlvlLles ln 2002. 1he
commerclal gas lmporL acLlvlLles were dlvesLed lnLo Cas Supply LLd. and naLural gas reLalllng lnLo
ClLy Cas LLd. (boLh were Lransferred Lo Lhe sLaLeowned lnvesLmenL company 1emasek). ln 2008,
Lhe neLwork asseLs of Sembcorp Cas were also Lransferred Lo owerCas LLd. (Sembcorp Cas
reLalned lLs commerclal lmporL and sales acLlvlLles). SubsequenLly, owerCas LLd. ls Lhe 1SC LhaL
owns and operaLes Lhe naLural gas neLwork (naLural gas and Lown gas) ln Slngapore and ls
regulaLed by LMA. owerCas LLd ls now a subsldlary of Slngapore ower (S).
Llkewlse, Lhe LnC Lermlnal currenLly under consLrucLlon ln Slngapore ls Lhe flrsL openaccess
Lermlnal ln Asla and dellberaLely separaLes ownershlp of Lhe lnfrasLrucLure from commerclal
acLlvlLles. lL ls regulaLed by Lhe lndependenL regulaLor LMA. 1hls has effecLlvely separaLed
commerclal acLlvlLles from any acLlvlLy relaLed Lo lnfrasLrucLure ln Slngapore.
Slngapore has deregulaLed wholesale naLural gas prlces. Powever, wholesale prlces do sLlll reflecL
oll prlce movemenLs, as longLerm lmporL conLracLs wlLh lndonesla and Malaysla are llnked Lo oll.
1hls correlaLlon wlLh oll prlce movemenL may change beyond 2014, when Lhe expanslon of Lhe
SLnC Lermlnal ls compleLed and LnC prlced aL a dlfferenL level enLers Lhe Slngaporean markeL,
furLher dlluLlng Lhe olllndexed commodlLy prlce seL by nC lmporLs.
1hlrd parLy access ln Slngapore ls guaranLeed ln Lhe Cas neLwork Code (CnC) LhaL wenL lnLo
effecL ln 2008, seLLlng seL ouL Lhe rules for Lhe lnLegraLed Slngaporean gas neLwork. 1he CnC
esLabllshes a clear framework for neLwork operaLlon, capaclLy allocaLlon and responslblllLles for
boLh Lhe 1SC and shlppers on Lhe neLwork. lL enables open and nondlscrlmlnaLory access Lo Lhe
gas plpellne neLwork.
1he declslon Lo develop an LnC Lermlnal ln Slngapore wlll brlng Slngapore's lmporL capaclLy far
beyond lLs currenL domesLlc consumpLlon requlremenLs. 1he lnlLlal phase of Lhe LnC Lermlnal
would requlre 4.1 bcm of conLracLed capaclLy Lhrough 8C, as Lhls capaclLy was rapldly Laken up,
Lhe governmenL declded Lo expand capaclLy. ln an 8.7 bcm (2010) gas markeL, Lhe evenLual
8.2 bcm capaclLy of Lhe new LnC Lermlnal wlll provlde a conslderable supply capaclLy addlLlon. ln
order Lo commerclally operaLe Lhe LnC Lermlnal, Lhe governmenL needed a way Lo allow LnC Lo
enLer Lhe markeL.
1o achleve Lhls goal, Lhe Slngapore governmenL lnLroduced lmporL conLrols of nC Lo allow Lhe
bulldup of demand for LnC. lmporL conLrol on naLural gas has been ln effecL slnce 2006, and
allows old nC conLracLs Lo be honoured. new nC supply conLracLs are sub[ecL Lo LMA approval
and are only allowed for noncommerclal and oLher usages. CLher new nC supplles are allowed
Lo be concluded as a brldglng opLlon and wlll have Lo LermlnaLe before Aprll 2013 (Lhe SLnC
Lermlnal ls Lo sLarL commerclal operaLlons ln May 2013) (LMA, 2011).
A conslderable obsLacle LhaL remalns ls how Lhe governmenL wlll allow gas lmporLs Lo evolve
afLer Lhe SLnC Lermlnal has commenced operaLlons. lnlLlally, Lhe llmlLs on nC lmporLs would
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 62
noL be revlsed afLer Lhe LnC Lermlnal sLarLed operaLlng. 1he governmenL has shown a wllllngness
Lo supporL compeLlLlon ln Lhe naLural gas secLor, buL sLaLed LhaL lL wlll llmlL dlrecL compeLlLlon
beLween nC and LnC as long as Lhe flrsL phase of SLnC was noL fully conLracLed (LMA, 2011).
As Lhe flrsL phase was fully conLracLed and consLrucLlon of Lhe addlLlonal capaclLy of Lhe second
phase ls fully underway, clarlflcaLlon on Lhe fuLure of Lhe nC lmporL resLrlcLlons ls essenLlal for
markeL parLles Lo galn confldence ln Lhe compeLlLlveness of Lhe Slngaporean gas markeL over
Llme. ln Lhe Slngaporean gas markeL beyond 2013, leavlng 1A llmlLaLlons for new nC ln place
could poLenLlally render Lhe Slngaporean gas markeL less compeLlLlve Lhan lL ls oLherwlse
expecLed Lo become. 1lmely dlsclosure by Lhe governmenL on Lhe capaclLy allocaLlon for boLh
new nC and Lhe second phase of Lhe SnLC Lermlnal should greaLly beneflL confldence ln, and
compeLlLlveness of, Lhe markeL.
As Lhe Slngaporean naLural gas markeL ls raLher small (around 10 bcm) compared Lo surroundlng
naLural gas markeLs, lL remalns Lo be seen wheLher Lhe sales would be able Lo generaLe enough
llquldlLy Lo drlve any fuLure naLural gas prlce (lf a spoL markeL were Lo be lnLroduced). CurrenLly
nlne shlppers are acLlve on Lhe Slngaporean naLural gas markeL, of whlch slx have booked a LoLal
of 2.7 bcm capaclLy on Lhe SLnC Lermlnal.
41
1he Slngaporean gas markeL wlll be supplled by flve
gas lmporLers when SLnC comes lnLo operaLlon.
8CSCM was appolnLed LnC aggregaLor Lhrough a compeLlLlve requesLforproposal Lo carry ouL
Lhe lnlLlal LnC procuremenL for Lhe flrsL phase of SLnC. LMA concluded an aggregaLor agreemenL
wlLh 8C whlch seLs ouL Lhe prlclng deLalls and oLher Lerms and condlLlons for Lhe supply of LnC
Lo Slngapore. 8C's role as Lhe LnC AggregaLor ls Lo aggregaLe demand for regaslfled LnC from all
endusers of gas ln Slngapore and Lo procure LnC supply for Lhese endusers from lLs own global
porLfollo. 1hls has conslderably lncreased Lhe number of upsLream sources provldlng naLural gas
Lo Slngapore, and Lhe subsequenL expanslon wlll allow more compeLlLlve sources of LnC Lo emerge.
As menLloned for Chlna, Slngapore has Lhe capablllLy Lo faclllLaLe compeLlLlon beLween nC and
LnC, lncreaslng Lhe number of posslble upsLream compeLlLors (lf currenL lmporL resLrlcLlons are
properly resolved). 1he SLnC Lermlnal offers Lhe posslblllLy Lo servlce noL only Lhe Slngaporean
markeL, buL Lhrough lLs reexporLlng capablllLy, Lhe broader Aslaaclflc reglon (lf economlcs allow).
As LnC regaslflcaLlon lnfrasLrucLure ls slaLed Lo expand ln Lhe SouLhLasL Aslan reglon, Lhls wlll
lncrease Lhe relevanL markeL area ln whlch SLnC operaLes and Lhus Lhe number of compeLlLors
for supply and demand.
Slngapore ls currenLly one of Lhe blggesL ollLradlng hubs ln Lhe world, leveraglng lLs cenLral
locaLlon ln Lhe growlng Aslan markeL. lL has been Lhe governmenL's longsLandlng amblLlon Lo
become Asla's domlnanL commodlLles hub, aLLracLlng commodlLy Lraders Lhrough a Clobal 1raders
rogramme, whlch offers Lax lncenLlves for companles Lo seL up Lradlng desks ln Slngapore. 1hls
has led Lo a conslderable lnflow of energy Lradlng companles.
naLural gas companles have also begun Lo seL up Lradlng desks ln Slngapore. 1he presence of
varlous lnLernaLlonal oll companles secures Lhe avallablllLy of flnanclal servlces Lo caLer Lo Lhe
naLural gas Lradlng lndusLry. llnanclal LnC swaps were lnLroduced by banks ln Slngapore ln 2010.
Cn Lhe back of an already sLrong commodlLy Lradlng lnfrasLrucLure, Slngapore ls esLabllshlng
lLself as an LnC Lradlng hub even before Lhe physlcal lnfrasLrucLure Lo lmporL LnC ls ln place.

41
1hese are: ClLy Cas Le LLd, Cas Supply Le LLd., keppel Cas Le LLd., ?1L owerSeraya Le LLd., Senoko Cas Supply Le LLd.,
SembCorp Cas Le LLd., CM8 Lnergy (Slngapore) Le LLd., 1uas ower CeneraLlon Le LLd. and 1uasprlng Le LLd.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 63
G%*"#1,' /0+7*#1#10, 1, 2(1"3"/141/ ,"#$%"& '"( +"%=*#(
1haL Lhe Aslanaclflc naLural gas markeL operaLes wlLhln a paLchwork of developlng and
developed economles presenLs speclflc condlLlons for lncreaslng compeLlLlon ln Lhe naLural gas
secLor. 1wo lmporLanL lssues sLand ouL wlLh regard Lo governmenLal aLLlLudes Lowards naLlonal
lnvolvemenL ln Lhe naLural gas secLor.
llrsL, ln mosL naLural gas markeLs, Lhe governmenL conslders LhaL lLs mosL lmporLanL role ls Lo
guaranLee securlLy of supply of naLural gas for Lhe economy. Whlle a valld pollcy cholce, Lhls can
be deLrlmenLal Lo lncreaslng compeLlLlon ln a naLural gas markeL, as seen ln korea and !apan.
Second, Lhe role of Lhe governmenL ln Lhe naLural gas markeL as a markeL parLlclpanL Lhrough
verLlcally lnLegraLed energy companles does llmlL compeLlLlon and Lhe economlc efflclency ln whlch
markeLs can develop. 1hls can be seen ln korea, Chlna and also !apan, slnce Lhe naLlonallsaLlon of
1epco. CovernmenL ownershlp ln maLure energy markeLs such as korea creaLes conslderable barrlers
Lo enLry and puLs a brake on any move Loward a compeLlLlve markeL. Slmllar barrlers are observed
ln Chlna, alLhough aL Lhls phase of markeL developmenL, lL ls cerLalnly encouraglng Lo see Lhe
governmenL lnlLlaLlng (llmlLed) markeLbased measures Lo lncrease flexlblllLy ln Lhe gas markeL.
Lven lf mosL naLural gas markeLs dlscussed above comply Lo some exLenL wlLh some of Lhe
requlremenLs Lo lncrease compeLlLlon ln a markeL, Lhe currenL ouLlook for Lhe emergence of a
compeLlLlve markeL remalns bleak. 1he mosL llkely candldaLe Lo have reformed lLs naLural gas
secLor ln such a way LhaL a compeLlLlve markeL wlll evolve ls currenLly Slngapore, whlch complles
wlLh nearly all Lhe lnsLlLuLlonal and sLrucLural requlremenLs seL ouL ln ChapLer 3.
1*4$" L T J%;&",','#" ;*.9", ."K-'.";"(,0 '( 0"$"7,"2 7%-(,.'"0
InstitutionaI/structuraI requirement Japan Korea China Singapore
Hands-off government approach - - - +
Separation of transport and commercial activities - - - +
Wholesale price deregulation + - +/- +
Sufficient network capacity and non-discriminatory access - - - +
Competitive number of market participants + - + +/-
nvolvement of financial institutions +/- - - +
noLe: +"= currenLly conLrlbuLlng Lowards a compeLlLlve naLural gas markeL, = currenLly noL conLrlbuLlng Lowards a compeLlLlve
naLural gas markeL, +/ = currenLly unclear.

A concerLed efforL from Lhe governmenL ls pushlng for lncreased compeLlLlon boLh from Lhe
consumer and suppller slde. 1he Slngaporean governmenL has conslderable experlence ln regulaLlng
Lhe energy commodlLy Lrade because lL ls already one of Lhe ma[or ollLradlng hubs ln Asla. 1he
mosL lmporLanL facLor ls LhaL Slngapore has a supporLlng sysLem Lo faclllLaLe a Lradlng hub wlLh
spoL and fuLures markeLs.
Powever, so far, no lndlcaLlon has been glven by Lhe 1SC or regulaLor LhaL developlng a hub LhaL
provldes balanclng servlces on Lhe spoL markeL (and posslbly a fuLures markeL) ls belng consldered.
1he Slngaporean governmenL conducLed a consulLaLlon round Lo assess dlfferenL markeL models
ln early 2012, a second consulLaLlon round has been delayed, and Lhe ouLcome ls Lhus currenLly
unclear. 1o develop a Slngaporean naLural gas Lradlng hub and lncrease confldence among markeL
parLles wlll llkely requlre Lhe regulaLor Lo revlse currenL lmporL llmlLaLlons on nC. lL ls cruclal
LhaL Lhese lssues be resolved ln a Llmely manner ln order Lo allow for a rellable prlclng slgnal Lo
develop ln Lhls markeL.
AlLhough lL ls quesLlonable wheLher Lhe volume of Lhe markeL ls sufflclenL Lo supporL llquldlLy on
a spoL markeL, lL has been observed ln Luropean markeLs LhaL even a llmlLed prlce slgnal ln an
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 64
lnsufflclenLly lnLerconnecLed markeL wlll provlde an alLernaLlve LhaL has lmpllcaLlons beyond Lhe
geographlcal llmlL of a markeL. Slngapore has cerLalnly poslLloned lLself (boLh Lhrough geography
and lnfrasLrucLure) Lo expand Lhe effecL of a Slngaporean naLural gas prlce beyond lLs borders.
Powever, Lhe lnsLlLuLlonal and sLrucLural requlremenLs Lo lncrease compeLlLlon are noL solely deflned
by a governmenL of an lmporLlng economy. 1he ablllLy of a compeLlLlve naLural gas markeL ln Lhe
Aslaaclflc reglon wlll cruclally depend on Lhe ablllLy of Lhe global LnC markeL Lo provlde flexlble
and compeLlLlve supplles. 1hese wlll reflecL boLh Lhe changlng naLure of a compeLlLlve spoL markeL
wlLh less demand for longLerm conLracLual arrangemenLs and more demand for a shorLLerm
orlenLed, dlverslfled suppller base. Powever, Lhese are clrcumsLances generally beyond governmenLs'
conLrol lf Lhey are noL wllllng Lo engage dlrecLly ln Lhe global markeL.
640,*7$"0 '( -&0,."*; R+/ 0-&&$@ 8$"?'4'$',@N
ln prlnclple, Lhere should be no dlfference beLween lncreaslng compeLlLlon ln a naLural gas markeL
prlmarlly supplled by LnC and dolng so one prlmarlly supplled by plpellnes. ln Lhe downsLream
markeL, Lhls would requlre Lhe sLeps seL ouL ln ChapLer 3. lncreaslng compeLlLlon among LnC
suppllers, however, would requlre a change ln Lhe global LnC markeL, whlch ls far more dlfflculL
Lo lnfluence by any one governmenL.
uesplLe a growlng number of reglonally dlspersed LnC suppllers and Lhe Lechnlcal ablllLy Lo send
LnC anywhere ln Lhe world (provlded Lhere ls a regaslflcaLlon Lermlnal), Lhe LnC supply chaln
lLself has conslderable rlgldlLles LhaL currenLly llmlL Lhe free flow of LnC on world markeLs
(Zhuravleva, 2009). 1he avallablllLy of shorLLerm conLracLed volumes has lncreased conslderably
over Lhe lasL decade, from 3 ln 2000 Lo abouL 26 ln 2011 (llgure 27).
S')-." GO - R%() *(2 0H%.,,".; 7%(,.*7,"2 R+/ '( ,H" :%.$2 *(2 50'*E*7'8'7P GFFODD

Sources: CllCnL, 2008, CllCnL, 2009, CllCnL, 2010, CllCnL, 2011, CllCnL, 2012.

1he share of spoL volume consumed ln Lhe Aslanaclflc markeL (24 ln 2011) lags sllghLly
compared Lo global spoL consumpLlon worldwlde (26 of LoLal consumpLlon). 1he Aslaaclflc
reglon has generally recelved Lhe largesL share of Lhe shorLLerm conLracLed volumes ln Lhe LnC
markeL. ln 2011, 61 of Lhe shorLLerm conLracLed cargoes were dellvered ln Lhe Aslaaclflc
reglon, a 43 lncrease compared Lo 2010. Aslanaclflc shorLLerm lmporLs lncreased by 32
compared Lo 2010, whlch reflecLed greaLer !apanese LnC demand afLer Lhe lukushlma accldenL
and lncreased korean and Chlnese lmporLs (llgure 28).
0
30
100
130
200
230
300
330
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
World Aslaaclflc
b
c
m
LnC longLerm LnC shorLLerm
GFZ
DUZ
DAZ
DCZ
GLZ
DLZ
DLZ GFZ
DCZ
GAZ
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 63
1hls overall lncrease ln shorLLerm supplles ln world markeLs reflecLs a subsLanLlal lncrease ln
shorLLerm Lradlng ln Lhe ALlanLlc 8asln, as Lhe norLh Amerlcan naLural gas markeL ls much more
compeLlLlve. LnC conLracLlng ln Lhe norLh Amerlcan naLural gas markeL ls far more shorLLerm
orlenLed, wlLh 44 of LoLal LnC supply lmporLed under shorLLerm commlLmenLs ln 2011.
S')-." GC - YH%.,,".; 7%(,.*7,"2 R+/ '( ,H" :%.$2 *(2 50'*E*7'8'7P GFFODD

Sources: CllCnL, 2008, CllCnL, 2009, CllCnL, 2010, CllCnL, 2011, CllCnL, 2012.

ShorLLerm Lraded LnC volumes are predlcLed Lo lncrease by 11 annually for Lhe nexL Lhree
years (oLen, 2012). Powever, a dlsLlncLlon needs Lo be made beLween shorLLerm and spoL
purchases. 1he Lerm shorLLerm purchases slgnlfy volumes conLracLed for dellvery wlLhln one Lo
four years lnLo Lhe fuLure.
42
SpoL purchases usually lndlcaLe cargoes LhaL are purchased and
dellvered wlLhln one year. Cenerally lL ls belleved LhaL roughly oneLhlrd of shorLLerm conLracLs
can be consldered spoL, ln 2011, Lhls was around 8 Lo 10 of LoLal lmporLed LnC, or abouL 1
of global naLural gas producLlon.
1he lncrease of avallable shorLLerm LnC supplles ls drlven by four facLors:
1he unexpecLed drop ln Lhe LnC lmporL requlremenL of Lhe unlLed SLaLes as a consequence of
Lhe shale gas revoluLlon provlded boLh Lhe llquefacLlon capaclLy and LransporL capaclLy ln Lhe
LnC supply chaln Lo slgnlflcanLly lncrease shorLLerm avallable LnC. 1hls also resulLed ln
lncreaslng LnC reexporLs from Lhe unlLed SLaLes,
1he emergence of selfconLracLlng porLfollo players who slgn longLerm commlLmenLs, buL
reLaln desLlnaLlon flexlblllLy, allows for Lhe besL neLback on Lhelr porLfollo. lrequenLly Lhese
markeLlng organlsaLlons have a global porLfollo LhaL enables Lhem Lo opLlmlse LransacLlon
cosLs Lhrough swapplng arrangemenLs,
1he emergence of large prlce dlfferenLlals LhaL make lL aLLracLlve for boLh Lhe buyer and Lhe
seller of LnC Lo dlverL cargoes Lo oLher markeLs (mosLly Asla), as consenL of boLh parLles ls
frequenLly requlred Lo engage ln arblLrage acLlvlLles, and
1he number of LnC suppllers has lncreased and ls llkely Lo expand lnLo new fronLler areas
(e.q. LasL Afrlca, Lhe 8usslan arcLlc and norLh Amerlca). 1hls wlll provlde more supply securlLy
for consumers, buL also lncrease opporLunlLles Lo swap cargoes. lL llmlLs Lhe overall dlsLance LhaL
LnC has Lo be LransporLed Lo reach consumers, lncreaslng efflclency of Lhe global supply chaln.

42
1hls follows Lhe deflnlLlon from Lhe lnLernaLlonal Croup of Llquefled naLural Cas lmporLers.
0
10
20
30
40
30
60
70
80
90
2007 2008 2009 2010 2011
b
c
m
8esL of world Aslaaclflc
ADZ
OCZ
ADZ
LIZ
=GZ
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 66
ln Lhe near fuLure, an even more shorLLerm orlenLed LnC supply sysLem wlll be dlfflculL, as LnC
ls a caplLallnLenslve lndusLry whlch makes volume rlsk for producers an even blgger lssue, [usL as
wlLh nC, slnce Lhe cusLomer has (poLenLlally) a large number of alLernaLlve sources avallable.
1he lnvesLmenL requlremenLs for LnC supply are heavlly LllLed Lowards upsLream developmenL
and LransporL, as a regaslflcaLlon Lermlnal wlll generally requlre no more Lhan 10 of LoLal
expendlLures on Lhe LnC supply chaln (dependlng on upsLream developmenL cosL).
1o overcome Lhe lnherenL demand lnsecurlLy, LnC supply ls generally conducLed Lhrough long
Lerm, olllndexed conLracLs LhaL have even more sLrlngenL Lakeorpay condlLlons Lhan nC
conLracLs. ln addlLlon Lo all Lhe Lechnlcal and economlc resLrlcLlons on LnC supply flexlblllLy, Lhe
currenL conLracLual sLrucLure of Lhe LnC buslness sLands ouL as a conslderable barrler Lo lncreased
shorLLerm Lradlng of LnC.
43

5!6 /0,#%"/# (#%$/#$%*
lncreaslng flexlblllLy ln Lhe LnC supply sysLem would ldeally resulL ln a freely floaLlng supply
source for markeLs LhaL would lmmedlaLely respond Lo prlce dlfferenLlals vla swap and spoL
LransacLlons among markeL parLles (suppllers, Lraders and consumers), allowlng Lhe mosL efflclenL
supply rouLes Lo servlce demand. 1o enable Lhe currenL plpellne sLrucLure ln LnC conLracLs, beLLer
supporL for compeLlLlve naLural gas markeLs ln Asla would requlre Lhe reducLlon of LransacLlon
cosLs ln shorLLerm conLracLs and adapLaLlon of currenL conLracLual arrangemenLs ln longLerm
supply conLracLs Lo allow for more flexlblllLy.
5botttetm sopply coottocts
lf a compeLlLlve naLural gas markeL ln Asla were Lo succeed, a more responslve LnC supply sysLem
would be cruclal Lo aLLracL supplles Lo Lhe markeL, Lhus lncreaslng overall llquldlLy. As ouLllned ln
ChapLer 3, Lhls would also reduce Lhe consumers' need for longLerm conLracLs due Lo Lhe supply
securlLy provlded Lhrough Lhe spoL markeL and lower LransacLlon cosLs.
CurrenLly, shorLLerm LransacLlons ln Lhe global LnC markeL are lndlvldually negoLlaLed conLracLs
LhaL do noL glve parLles Lhe beneflL of lower LransacLlon cosLs, because producLs are dlfflculL Lo
separaLe from flexlblllLy requlremenLs, as shlpplng avallablllLy ls an lndlspensable requlremenL. ln
essence, Lhe lack of a reglonal/global regulaLory reglme (as LnC ls sLlll a bulk cargo buslness) Lo
coordlnaLe LransporL capaclLy and Lhe sheer slze of LnC cargoes makes lL very dlfflculL Lo creaLe a
sLandard producL ln whlch a conslderable number of companles can easlly Lrade. 1hls ls even
more compllcaLed by Lechnlcal requlremenLs (Lhe quallLy of LnC, Lhe sorL of Lanker, eLc.) LhaL
furLher lmpede Lhe developmenL of sLandardlsed producLs for shorLLerm LransacLlons.
As ouLllned above, shorLLerm LransacLlons ln an LnC markeL are qulLe dlfferenL from shorLLerm
LransacLlons ln an lnLerconnecLed plpellne sysLem such as ln Lhe unlLed SLaLes. CurrenLly, shorL
Lerm conLracLlng conslsLs of roughly four Lypes of LransacLlons:
YH%.,,".; 0-&&$@ 7%(,.*7,0M one Lo fouryear supply bllaLeral conLracLs whlch do noL dlffer
markedly from longLerm supply deals, buL have no opLlon for prlce renegoLlaLlon (see long
Lerm conLracLs below),
E%.,8%$'% %&,';'0*,'%(M a company makes longLerm commlLmenLs for supply, buL reLalns
desLlnaLlon flexlblllLy, allowlng for Lhe besL neLback on lLs porLfollo. 1hls would frequenLly sLlll
lnvolve shorLLerm LransacLlons, breaklng up (several) longLerm conLracL(s) lnLo shorLerLerm
conLracLs Lo opLlmlse LransporL cosLs ln face of supply obllgaLlons,

43
1he Cxford lnsLlLuLe for Lnergy SLudles has dlsLlngulshed 12 barrlers Lo arblLrage: lack of a prlce dlfferenLlal, lack of LnC supply,
lack of lnformaLlon on markeLs, lack of prlce Lransparency, lack of speclallsL Lraders, conLracLual llmlLaLlons, Lechnlcal resLrlcLlons,
regulaLory and markeL resLrlcLlons, lack of shlpplng capaclLy, lack of regaslflcaLlon capaclLy, and lnefflclenL hedglng lnsLrumenLs.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 67
R+/ 0&%, 2"*$0M Lhe sale of cargoes LhaL are noL dedlcaLed Lo any speclflc markeL ls frequenLly
made Lhrough compeLlLlve Lenders, brokered Lrades, cargoes sold ln longer Lradlng chalns,
and speculaLlve Lradlng poslLlons Laken up by nonLradlLlonal parLlclpanLs (e.q. banks), and
R+/ *.4',.*,'%(M where a (longLerm or shorLLerm) LransacLlon already ln place ls modlfled Lo
creaLe value for boLh Lhe orlglnal seller and buyer and a cargo ls subsequenLly dellvered Lo a
Lhlrd parLy.
V%? G - 1H" \*&*(`]%."* [*.9".

1he LnC spoL and arblLraLlon deals can requlre conslderable Llmeconsumlng negoLlaLlons
beLween seller and buyer (ln case of arblLraLlon beLween seller, buyer and Lhlrd parLles lnvolved).
1o faclllLaLe Lrade and lncrease legal securlLy (for boLh seller and buyer), masLer sale and
purchase agreemenLs (MSA) have been developed.
1he !apan/korea Marker ls a spoL assessmenL prlce publlshed dally by Lhe energy consulLanL laLLs. lL
provldes a spoL prlce for Lraded LnC ln Lhe Aslaaclflc markeL and faclllLaLes swap and spoL deal
maklng. lL has a llmlLed Lrade horlzon lnLo Lhe fuLure, as Lhe prlces assessed are reporLed for Lhe
Lhlrd, fourLh, flfLh and slxLh halfmonLh ln Lhe fuLure (maxlmum dellvery horlzon of Lhree monLhs).
Launched ln lebruary 2009, Lhe !kM ls used as a reference prlce for swap and spoL deals by large
producers and consumers who Lhus engage ln whaL mlghL equaLe Lo plpellneLoplpellne compeLlLlon
on Lhe hlgh seas. ln !anuary 2010, Lhe !kM sLarLed Lo be publlshed as a slngle value assessmenL
lnsLead of a Lradable range.
1he assessmenL prlce ls a resulL of edlLorlal engagemenL wlLh markeL parLlclpanLs (producers, consumers,
Lraders, brokers, shlppers and oLher) by laLLs. rlces of Lrades lncluded ln Lhe assessmenL are dellvered
(exshlp) ln a reglon spannlng several porLs ln !apan and korea. Cargoes dellvered ln Chlnese 1alpel
and Chlna are lncluded ln a normallsed way, correcLed for assessed devlaLlon cosLs (laLLs, 2012).
SLandard cargoes of 133 000 Lo 173 000m
3
slze are consldered ln Lhe assessmenL.
1he !kM has become Lhe maln alLernaLlve Aslan prlclng lndlcaLor for parLles engaged ln global LnC
Lrade. ln !une 2012, laLLs launched a !kMswap assessmenL derlved from !kM, whlch ls assessed
(uslng Lhe same meLhodology as !kM) for Lhree monLhs lnLo Lhe fuLure. 1he !kMswap ls effecLlvely
Lhe flrsL LnC derlvaLlve wlLh slzes LhaL are seL aL a sLandard of 10 000 M8Lu. ln SepLember 2012, Lhe
flrsL 200 000 M8Lu !kMswap was cleared by lCL Lurope, slgnalllng Lhe emerglng lnLeresL of flnanclal
servlce provlders ln Lhe LnC Lrade, alLhough overall acLlvlLy from flnanclal parLles has been llmlLed.
1wo ma[or polnLs of concern sLand ouL when regardlng !kM as a LransparenL and represenLaLlve prlce
slgnal for Lhe Aslan naLural gas markeL.
R'K-'2',@M conslderlng Lhe slze of a 140 000 m
3
LnC carrler, Lhls would roughly LranslaLe lnLo a
uSu 43 000 000 LransacLlon (aL uSu 14/M8Lu). 1o parLlclpaLe ln LnC spoL Lrade would Lhus
requlre access Lo conslderable flnanclal reserves and rlskmlLlgaLlng lnsLrumenLs. 1hls flnanclal
Lhreshold llmlLs Lhe number of markeL parLlclpanLs and Lhe llquldlLy LhaL underpln Lhe !kM
assessmenL. 1he mlnlmum slze of a producL on spoL markeLs ln Lhe unlLed SLaLes and Lurope
would be conslderably smaller (even compared Lo Lhe !kMswap slze of 10 000 M8Lu).
1.*(0&*."(7@M desplLe Lhe llquldlLy lssues descrlbed above, Lhe esLabllshmenL of !kM as Lhe
lnLernaLlonal benchmark does slgnal Lhe conLlnued need for such an Aslan marker ln global LnC
Lrade. Powever, Lhe meLhod used Lo assess Lhe !kM prlce cannoL be consldered LransparenL
when compared Lo a posslble funcLlonlng wholesale markeL, as !kM prlce dlscovery does noL
evolve Lhrough dlrecL compeLlLlon for supply/demand on a spoL markeL or exchange.
!kM ls mosL cerLalnly an lmporLanL addlLlon Lo Lhe avallable lnLernaLlonal prlce lndlces (wlLh
conslderable prlce developmenL ln Lhe lasL Lhree years) and as such, supporLs Lhe emergence of an
efflclenL global LnC markeL. Powever, lL remalns Lhe besL alLernaLlve avallable only as long as Lhere ls
no Aslan naLural gas prlce derlved from LransparenL and compeLlLlve prlce dlscovery.
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 68
1he Luropean lederaLlon of Lnergy 1raders (LlL1) LnC MasLer AgreemenL launched ln 2010 ls
lncreaslngly used ln Lurope and has been used ln some deals ln Aslaaclflc.
44
1he LlL1 LnC
conLracL ls generally slmpler, shorLer and easler Lo use for all parLles Lhan Lhe LradlLlonal LnC
MSA. Slmllarly, Lhe lnLernaLlonal Croup of Llquefled naLural Cas lmporLers (CllCnL) has updaLed
Lhelr sLandard MSAs Lo reflecL changes ln Lhe global markeL ln 2011.
43
ln a response Lo an
lncrease ln shorLLerm supplles, Lhe AssoclaLlon of lnLernaLlonal eLroleum negoLlaLors (Aln)
has also recenLly (2012) updaLed lLs sLandard MSA. 1hese changes ln MSAs furLher faclllLaLe
Lrade, slmpllfy lncreaslngly compllcaLed LransacLlons and poLenLlally reduce LransacLlon cosLs and
lncrease llquldlLy on Lhe lnLernaLlonal LnC markeL.
ln addlLlon Lo conLracLual deLalls, Lhe maln negoLlaLlon lssue for any MSA would be Lhe prlce for
whlch Lhe LnC ls Lo be sold. lor suppllers and sellers Lo Lhe Aslaaclflc reglon, Lhls prlce would
currenLly reflecL Lhe buyer's and seller's urgency Lo conclude negoLlaLlons and an experL's
esLlmaLe of Lhe value of a cargo ln Lhe Aslanaclflc markeL. no LransparenL reference prlclng
polnL currenLly exlsLs (alLhough !kM ls an alLernaLlve lncreaslngly used for Lhls purpose), Lhe
lnLroducLlon of one would conslderably speed up Lhls negoLlaLlon process, furLher lncreaslng
llquldlLy ln Lhe global LnC markeL.
looqtetm coottocts. Jestlootloo clooses lo lNC
ln essence, a longLerm LnC supply conLracL ls sLlll a shlpplng conLracL wlLh feaLures slmllar Lo
LhaL for oLher bulk commodlLles Lraded on lnLernaLlonal marlLlme Lrade rouLes. Powever, LnC
Lrade requlres a very caplLallnLenslve and speclallsed supply lnfrasLrucLure LhaL ls qulLe dlfferenL
from oLher globally Lraded energy commodlLles (e.q. coal and oll). 1hls has led parLles (boLh
buyer and seller) Lo organlse Lhe LnC supply chaln ln such a way LhaL lL could be regarded as a
plpellne connecLlng supply and demand cenLres.
ln a LradlLlonal longLerm MSA, a buyer commlLs Lo offLake a predeLermlned volume of LnC (or
number of cargoes) over a seL Llmeframe, wlLh agreed llmlLs on shorLLerm flucLuaLlons and only
a small downward Lolerance before rlsklng a volume Lakeorpay penalLy. 1hus Lhe LnC producer
shoulders Lhe prlce rlsk, whlle Lhe LnC buyer ls commlLLed Lo sLrlcL Lakeorpay obllgaLlons and
shoulders Lhe volume rlsk (Zhuravleva, 2009).
LongLerm supplles are generally sLlll dellvered freeonboard (lC8) or dellvered exshlp (uLS).
1hls reflecLs sLandard lnLernaLlonal commerclal pracLlces and derlves from Lhe facL LhaL LnC
Lrade ls ln essence lnLernaLlonal bulk commodlLy Lrade, whlch requlres lnsurance and shlpplng.
46

S.""%(V%*.2 WS6VXM Lhe Lransfer of rlsk occurs when LnC passes Lhe shlp's rall aL Lhe porL of
shlpmenL, afLer whlch all cosL and llablllLy of LransporLlng Lhe LnC Lo Lhe porL of desLlnaLlon
wlll Lransfer Lo Lhe buyer. lC8 means LhaL a buyer has hlgher flexlblllLy wlLh regard Lo
desLlnaLlon. Powever, Lhls lncreases procuremenL cosL for Lhe buyer as lL has Lo provlde for
shlpplng, lnsurance, regaslflcaLlon capaclLy and oLher cosLs. 8uyers wlll mosL llkely choose lC8
dellvery lf lL has opLlons avallable LhaL reduce lnsurance and LransporL cosLs compared wlLh
exshlp dellvery ln Lhe porL of desLlnaLlon.
!"$'#"."2 >?YH'& W!>YXM Lhe Lransfer of rlsk does noL occur unLll Lhe shlp has arrlved aL Lhe
named porL of desLlnaLlon and Lhe LnC ls made avallable for unloadlng Lo Lhe buyer. 1he
seller has agreed Lo bear noL only frelghL and lnsurance cosLs, buL also rlsk and LlLle up Lo Lhe

44
1he LlL1 LnC MSA can be accessed aL: www.efeL.org.
43
1he CllCnL MSA ls avallable aL: www.gllgnl.org.
46
MarkeL parLles are lncreaslngly conslderlng alLernaLlve dellvery arrangemenLs such as Cll or reglonal dellvery polnLs
(someLlmes on Lhe hlgh seas) such as Lhe !kM dellvery polnL.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 69
arrlval of Lhe vessel aL Lhe named porL. CosLs for unloadlng Lhe goods, addlLlonal duLles, and
Laxes are for Lhe buyer.
47

S')-." GU - R%(),".; 7%(,.*7,"2 R+/ 2"$'#"."2 S6V %. !>Y '( GFDD

Source: CllCnL, 2012.

ln 2011, a conslderable share of global LnC dellverles was uLS (61), wlLh Lhe Aslaaclflc reglon
Laklng Lhe blggesL share of longLerm conLracLed supplles as uLS (64). uellvery exshlp usually
provldes less room for reselllng, as Lhe cargo ls dellvered aL porL. 1o redlrecL a cargo would Lhus
elLher lnvolve LnC arblLraLlon wlLh Lhe seller or lncur reloadlng and shlpplng cosL aL Lhe porL of
dellvery. 8oLh opLlons would requlre a prlce spread beLween markeLs Lo make elLher pracLlce
proflLable. usually LnC buyers ln Lhe Aslaaclflc reglon are uLlllLles wlLh a supply obllgaLlon Lo
cusLomers (a flxed sales porLfollo) and Lherefore generally llmlLed need Lo dlverL cargoes.
PlsLorlcally, longLerm LnC conLracL prlces were negoLlaLed aL a level LhaL would reflecL Lhe value
of naLural gas ln Lhe (elecLrlclLy) markeL where lL would be dellvered. A longLerm conLracL was
Lhus also a conslderable Lool for arblLrage lf naLural gas was valued aL a dlfferenL level ln a
connecLed (or geographlcally close) markeL. ln a way slmllar Lo Lhe Luropean longLerm supply
conLracLs, a conLracLual resLrlcLlon was needed Lo llmlL abuse Lhrough arblLrage by elLher parLy ln
Lhe conLracL. SubsequenLly, desLlnaLlon clauses were added Lo longLerm LnC conLracLs sLlpulaLlng
Lo whlch markeL a conLracLed LnC needed Lo be dellvered (whlch Lakeorpay clauses could noL
provlde as LnC can be shlpped around Lhe globe).
uesLlnaLlon clauses ln longLerm LnC supply conLracLs forbld buyers Lo resell a cargo ouLslde Lhe
counLry where Lhey are esLabllshed, whlch Lhereby guaranLees Lhe seller a form of proLecLlon of
compeLlLlon ln oLher markeLs. 1he desLlnaLlon clauses have helped Lo malnLaln prlce dlfferenLlals
across dlfferenL reglonal markeLs and are malnly used by large Mlddle LasLern producers, as Lhey
are geographlcally convenlenLly locaLed Lo arblLrage beLween Lhe markeLs ln Lhe ALlanLlc and
aclflc baslns.
uesLlnaLlon clauses have slnce Lhen served as a Lool of securlLy of supply ooJ demand on whlch
supply chalns and dlsLrlbuLlon sysLems ln LargeL markeLs were developed and amorLlsed. uesLlnaLlon

47
ln lncoLerms 2010 (publlshed 1 !anuary 2011) uLS was replaced by uellvered aL 1ermlnal (uA1).
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 70
clauses can Lake varlous legal shapes and forms and Lhe resLrlcLlons need noL be as expllclL as an
ouLrlghL ban on reselllng, buL can ralse Lhe arblLrage Lhreshold Lo a Je focto prohlblLlve level.
ln Lhe ALlanLlc 8asln, desLlnaLlon clauses have come under conslderable pressure. ln Lhe 2003
second Luropean gas ulrecLlve, Lhe Luropean Commlsslon forbade desLlnaLlon clauses (for boLh
nC an LnC), as Lhey are consldered Lo be markeLparLlLlonlng devlces for exporLers. AlLhough
Lhe unlLed SLaLes' governmenL has Laken a more lenlenL approach, new conLracLs have been
drafLed LhaL lncrease conLracLual flexlblllLy ln Lhe ALlanLlc 8asln.
Cverall, Lhe reducLlon of desLlnaLlon clauses ln Lhe ALlanLlc 8asln has led Lo lncreased desLlnaLlon
flexlblllLy from producers ln Lhls area, malnly nlgerla, LquaLorlal Culnea, and LgypL, slnce Lhe flrsL
quarLer of 2012. SubsequenLly, a number of sellers have sLarLed Lo selfconLracL cargoes, selllng
dlrecLly ln Lhe downsLream markeL, Lhus reduclng offLake rlsk. CurrenLly Lhls has lncreased
desLlnaLlon flexlblllLy and led Lo an lncreaslng amounL of LnC LhaL ls exporLed Lowards Lhe hlgher
prlced Aslaaclflc basln (see ChapLer 2).
Powever, Lhls developmenL has lagged for producers ln Lhe Aslaaclflc basln, where desLlnaLlon
clauses are sLlll regarded as a way Lo provlde supply/demand guaranLees for buyers/sellers (lL ls
also noL llkely LhaL under currenL conLracLual obllgaLlons, LnC supplles for Aslaaclflc markeLs
can easlly be dlverLed Lowards for Lhe ALlanLlc 8asln even lf prlces dld allow). Powever, Lhe
lncreased avallablllLy of flexlble LnC from Lhe ALlanLlc 8asln ls puLLlng pressure on flexlblllLy
provlded by longLerm LnC conLracLs. 1hls ln Lurn wlll puL conslderable pressure on producers
and consumers ln Lhe Aslaaclflc basln Lo new flnd ways Lo dlvlde rlsks ln LnC supply conLracLs.
ltlce tevlew lo looqtetm lNC coottocts
As longLerm nC and LnC conLracLs span more Lhan a decade, Lhey need Lo lnclude regular
conLracL revlews Lo recallbraLe Lhe conLracL Lo overall markeL condlLlons. 8uyers and sellers wlll
look Lo reduce Lhe cosLs LhaL elLher parLy can lncur from Lhe prlce dlsparlLles beLween Lhe long
Lerm conLracL prlce and Lhe prlce of Lhe mosL llkely alLernaLlve (ln a noncompeLlLlve markeL) or
an alLernaLlve source of naLural gas (ln a more compeLlLlve markeL). Any prlce revlew ln long
Lerm LnC conLracLs wlll have Lo be conducLed Lhrough commerclal negoLlaLlons.
1he approach Lo prlce renegoLlaLlon clauses ln longLerm LnC supply conLracLs ls generally one of
four dlfferenL Lypes:
no clause on renegoLlaLlon ls lncluded,
prlces shall be revlewed every Lhree Lo flve years,
prlces may be revlewed every Lhree Lo flve years lf buyer(s) or seller(s) wlsh Lo do so, and
a speclflc lnLerval ls noL lncluded ln Lhe conLracL, buL a prlce may be revlewed lf buyer(s) or
seller(s) wlsh Lo do so.
LongLerm conLracLs wlLhouL a renegoLlaLlon clause are rare, as Lhls would represenL conslderable
rlsk Lo Lhe buyer and/or seller. Cenerally, Lhe laLLer Lhree conLracLs represenL roughly Lhe same
renegoLlaLlon on prlce wlLh a dlfferenL Lrlgger Lo sLarL renegoLlaLlons.
1he scope of Lhe conLracL revlew ls generally llmlLed Lo Lhe lssue of prlce. ln Lhe olllndexed domlnaLed
supply conLracLs of Lhe Aslanaclflc reglon, Lhls would enLall a dlscusslon on Lhe slope of Lhe prlce
relaLlonshlp beLween oll and LnC, buL a compleLe revlew of Lhe prlce sLrucLure ls noL expllclLly denled
ln mosL renegoLlaLlon clauses. 1hls means LhaL a slgnlflcanL prlce revlew beyond Lhe change of Lhe
slope of Lhe Scurve ls usually an opLlon. 1hls would provlde Lhe opporLunlLy for LnC suppllers/
consumers Lo adapL Lhe prlclng sysLem Lo lnclude an alLernaLlve reglonal prlclng slgnal ln Lhe fuLure.
As opposed Lo longLerm nC conLracLs ln Lurope, renegoLlaLlons for LnC supply do noL dlscuss
conLracL condlLlons such as lndexaLlon, desLlnaLlon flexlblllLy and Lakeorpay level. LongLerm conLracLs
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 71
were sLrucLured Lo provlde maxlmum supply/demand securlLy and Lherefore are very sLrlcL ln
Lhelr Lakeorpay obllgaLlons compared Lo longLerm nC conLracLs.
48
1hus Lhe ablllLy Lo slgnlflcanLly
change Lhe volume obllgaLlons or flexlblllLy clauses ln longLerm LnC conLracLs ls very llmlLed.
Changes ln volume and/or flexlblllLy (lf noL caused by a fotce mojeote) are generally posslble only
when conLracLs come up for renewal. 8y 2017, nearly 30 of Lhe volume currenLly supplled
under conLracL wlll have been LermlnaLed.
49
1hls wlll mean LhaL a conslderable amounL of LnC
supply wlll be replaced (Lhls ls already happenlng). 1here has been a recenL Lrend of longLerm
LnC buyers looklng for shorLerLerm conLracLs and conslderlng lncreased supply flexlblllLy a
speclal polnL of lnLeresL (Argus Clobal LnC, 2012).
3*%(7*/#1A*( 40% /8",'* 1, /0,#%"/#(
uesplLe conLracLual, Lechnlcal and LransporL rlgldlLles, Lhe physlcal flow of naLural gas remalns
cruclal for any spoL markeL developmenL. 1he exlsLence of a spoL markeL wlll noL necessarlly
undermlne Lhe raLlonale for longLerm supply conLracLs, as sellers are llkely Lo sLlll value Lhe
ablllLy Lo conclude a longLerm agreemenL.
A flexlble LnC supply chaln would boLh beneflL from and supporL spoL markeL developmenL. 1he
esLabllshmenL of a rellable Lradlng hub ln Aslaaclflc would lnduce a change ln prlce seLLlng for
longLerm conLracLs and Lhe sorL of conLracLs LhaL are offered Lo buyers. 1he quesLlon would Lhen
be: whaL developmenLs on Lhe global LnC markeL could lmpede or supporL a more flexlble
sysLem of LnC supply?
cbooqe lo sblpploq ovolloblllty
CurrenL expanslon ln Lhe number of markeL parLles wlLhouL upsLream access (nearly 30 of shlps
on order are noL dedlcaLed Lo any upsLream pro[ecL) wlll lncrease Lhe number of nonconLracLed
LnC carrlers Lo nearly 10 of LoLal shlps ln operaLlon. A relnforcemenL of Lhls Lrend wlll noL only
show lncreased confldence from markeL parLles ln Lhelr ablllLy Lo make money ln LnC shlpplng,
buL wlll also supporL lncreaslng flexlblllLy of Lhe LnC supply chaln.
cbooqe lo teqoslflcotloo copoclty ovolloblllty
1hlrdparLy access Lo LnC regaslflcaLlon Lermlnals ln Lhe Aslaaclflc reglon ls exLremely llmlLed,
due Lo regulaLory hurdles and Lhe facL LhaL Lermlnals are generally purpose bullL. WlLh only one
openaccess Lermlnal currenLly under developmenL ln Slngapore, Lhe lmmedlaLe prospecL of
more 1A regaslflcaLlon capaclLy comlng avallable ln Lhe reglon, wlLhouL governmenL acLlon, remalns
raLher bleak. Lxpandlng 1A ln Lhe Aslaaclflc reglon wlll requlre subsLanLlal changes of pollcy
among governmenLs, elLher Lo creaLe a favourable lnvesLmenL cllmaLe ln addlLlonal 1A regaslflcaLlon
capaclLy, or Lo requlre lncumbenL companles Lo reduce barrlers Lo enLry.
Motket pottles lovolveJ
1he number of companles LhaL use Lhelr porLfollo Lo supply cusLomers wlLh shorL(er)Lerm LnC
volumes has been lncreaslng. 1hls ls a conslderable game changer, as Lhese companles use Lhelr
global upsLream porLfollo Lo arblLrage beLween markeLs and opLlmlse shlpplng rouLes wlLhln Lhe
porLfollo. 1hese companles are frequenLly lnLernaLlonal oll and gas companles (lCCC) LhaL noL
only have upsLream access, buL also regaslflcaLlon capaclLy avallable ln dlfferenL reglons, whlch
always provldes Lhem wlLh an ouLleL for Lhelr naLural gas.

48
LongLerm nC conLracLs frequenLly have a predeLermlned bandwldLh LhaL provldes conslderable flexlblllLy wlLh regard Lo
Lhe ACC, wlLh Lhe posslblllLy Lo use carryforward and makeup volume.
49
lrom lLA daLabases.
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 72
A relaLlvely new phenomenon ln Lhe Aslaaclflc LnC markeL wlll be developlng lmporL requlremenLs
from LnC exporLlng glanLs such as sLaLe naLural gas company eLronas ln Malaysla and erLamlna
ln lndonesla. As prlclng ln Lhe domesLlc markeL ls frequenLly below cosL, Lhls has drlven domesLlc
consumpLlon Lo levels LhaL domesLlc producLlon cannoL susLaln wlLhouL compromlslng exporL
commlLmenLs. ConsequenLly, boLh companles wlll become conslderable porLfollo players wlLh
longLerm, olllndexed exporL commlLmenLs and an lncreaslng volume of olllndexed/spoL lmporL
commlLmenLs.
ln Malaysla, a LargeL daLe has been announced by whlch domesLlc gas prlces should reach markeL
parlLy. AlLhough Lhls should have an encouraglng effecL on energy efflclency, lL ls noL llkely Lo
solve Malaysla's longLerm challenge of lncreaslng lmporLs. 1hls could provlde an lncenLlve for
eLronas Lo sLarL looklng aL alLernaLlve shorLLerm supply sources from Lhe spoL markeL and ways
Lo accuraLely prlce naLural gas ln Lhe reglon, as Lhls would reduce prlce rlsk for Lhe company. A
funcLlonlng Lradlng hub ln Lhe reglon lmproves Lhe number of Lools avallable Lo manage porLfollo
rlsks for companles LhaL focus on creaLlng a margln.
ln addlLlon, flnanclal players such as banks have made lnroads ln LnC Lradlng by focuslng on
hedglng opporLunlLles for markeL parLles and Lradlng physlcal cargoes Lhemselves. Powever, physlcal
Lrade remalns llmlLed, as Lhe value of a cargo boughL ln Lhe ALlanLlc 8asln and desLlned for Asla
would be valued around uSu 43 mllllon.
30
LffecLlvely, wlLhouL regaslflcaLlon capaclLy conLracLed,
or a slzeable endconsumer porLfollo Lo supply, or a compeLlLlve wholesale markeL avallable LhaL
can absorb such a volume, such a cargo would be a conslderable unhedged poslLlon, a rlsk noL all
flnanclal players are comforLable wlLh. So far, Lhe speclallsL naLure of Lhe LnC Lrade and Lhe
llmlLed avallablllLy of flnanclal hedglng faclllLles have resLrlcLed flnanclal parLles' parLlclpaLlon ln
Lhe global LnC markeL (WCl, 2012d).
New flexlble sopplles. Nottb Ametlco ooJ ost Aftlco
1here has recenLly been conslderable speculaLlon abouL Lhe poLenLlal of new LnC producers Lo
dellver volumes Lo markeL beyond 2017. ln Lhe medlum Lerm, AusLrallan producLlon ls expecLed
Lo dellver slzeable volumes, buL Lhls wlll noL lncrease markeL flexlblllLy, as 91 of lL ls longLerm
conLracLed, Lhus leavlng abouL 9 bcm noL conLracLed.
1hls second wave of LnC ls expecLed Lo orlglnaLe from llquefacLlon Lermlnals bullL ln Lhe unlLed
SLaLes and Canada, and from recenLly dlscovered naLural gas deposlLs ln LasL Afrlca. Chenlere's
Sablne ass Lermlnal phase l (ln Lhe unlLed SLaLes) was Lhe flrsL Lermlnal Lo recelve a llnal lnvesLmenL
ueclslon (llu) and wlll be bullL on a new buslness model LhaL lndexed LnC Lo spoL markeL prlces
(ln Lhls case, 113 Penry Pub, whlch covers energy usage durlng llquefacLlon and Lradlng overhead
Lo offload Lhe volumes ln case Lhey are noL llfLed) and levles a separaLe uselLorloselL charge of
beLween uSu 2.23 and uSu 3.00/M8Lu (dependlng on conLracL) for llquefacLlon. 1he 21.9 bcm of
LnC supply ls longLerm conLracLed buL (unllke Lhe AusLrallan example above) sold wlLh compleLe
desLlnaLlon flexlblllLy. lnlLlal conLracLlng parLles are 8C, Cas naLural, Call and kCCAS.
AlLhough Lhe prlclng on Penry Pub ls currenLly compeLlLlve wlLh Aslan olllndexed volumes, Lhls
mlghL slgnlflcanLly change ln Lhe fuLure. lL ls Lherefore currenLly unllkely LhaL PPlndexaLlon wlll
make a slgnlflcanL lmpacL on olllndexed prlclng, as Lhe volume sold from Sablne ass alone ls noL
enough. Moreover, Lhese volumes from norLh Amerlca wlll also noL conLrlbuLe Lo a LransparenL
prlclng slgnal represenLlng supply/demand ln Lhe Aslaaclflc reglon, as PPlndexaLlon responds
Lo supply/demand ln norLh Amerlca. Powever, conslderable lmpacL mlghL be felL Lhrough Lhe
more flexlble conLracL arrangemenLs, as lower developmenL cosLs allow for less sLrlngenL volume
requlremenLs (such as a uselLorloselL fee).

30
Cargo of 140 000 m
3
aL uSu 14/M8Lu.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 73
ln Lhe unlLed SLaLes, a LoLal of 302 bcm of LnC exporL capaclLy ls currenLly proposed (as of end
uecember 2012), parL of whlch could come on sLream beyond 2017. ln addlLlon, Canada could
add anoLher 42 bcm by 2017.
31
1he proposed klLlmaL 13.6 bcm LnC llquefacLlon pro[ecL (developed
by Lncana and LCC resources) ls esLlmaLed Lo be very compeLlLlve, especlally conslderlng LhaL lLs
wesLern locaLlon ls close Lo Aslanaclflc markeLs. Powever, lL ls quesLlonable wheLher freely
avallable LnC wlll be avallable from Canada, as Lhe maln parLners ln developlng oLher Lermlnals
(eLroChlna, kCCAS and MlLsublshl) have dedlcaLed markeLs for sales ln Asla. Meanwhlle, several
lssues, such as domesLlc LransporL capaclLy, need Lo be lroned ouL before LnC could leave Lhe
wesLern Canadlan shores (WCl, 2012c).
S')-." IF - J%(0,.-7,'%( 7%0,0 8%. #*.'%-0 R+/ &.%g"7,0

noLes: green under consLrucLlon, blue ls produclng, red ls proposed. Sablne ass ls llu phase one. LnC ls apua new Culnea LnC.
LasL Afrlca ro[ecL cosLs are esLlmaLed.
Sources: lLA daLabase, varlous companles' webslLes.

ln LasL Afrlca, Mozamblque LnC ls Lhe mosL recenLly proposed developmenL, afLer conslderable
flnds were announced by Anadarko and Lnl. 8oLh companles are movlng Lowards developlng
LnC exporL capaclLy and negoLlaLlng Lerms and condlLlons wlLh Lhe governmenL. Several slgnlflcanL
dlscoverles have also been made ln 1anzanla. As exploraLlon ls currenLly underway ln Lhe reglon,
wlLh several lCCCs vylng for acreage and Lakeover opporLunlLles, Lhe full scale of LasLAfrlcan
reserves wlll become apparenL over Lhe nexL few years. A currenL esLlmaLe ls LhaL aL expecLed
producLlon cosLs of beLween uSu 1 300/Lonne and uSu 2 300/Lonne, LasLAfrlcan LnC flLs well
wlLhln Lhe global LnC porLfollo.
Several of Lhe companles lnvolved are ma[or porLfollo LnC markeLers (such as Lnl and 8C), whlch
lncreases Lhe llkellhood LhaL Lhe developmenL of Lhese reserves wlll lncrease Lhe avallable LnC
flows wlLhouL a speclflc commlLmenL Lo a markeL. ln addlLlon, Lhe LnC faclllLy LhaL would be bullL
on elLher Mozamblque's or 1anzanla's coasL would be ldeally locaLed Lo arblLrage beLween Lhe
ALlanLlc and aclflc baslns, lncreaslng Lhe scope of compeLlLlon for LnC powerhouse CaLar.
lL seems llkely LhaL naLural gas developmenLs ln norLh Amerlca and LasL Afrlca wlll lncrease
overall flexlblllLy Lo Lhe LnC supply chaln. 1hls mlghL have an lmpacL on overall LnC conLracLlng,
maklng desLlnaLlon flexlblllLy a key lssue for LnC procuremenL, as LnC producers wlll have Lo
provlde more flexlble Lerms lf Lhey wanL Lo sell volume Lo cusLomers.

31
uerlved from lLA daLabases.
800
940
1 000
1 026
1 300
1 731
1 830
2 083
2 273
2 778
2 867
3 236
3 238
4 048
0
300
1 000
1 300
2 000
2 300
3 000
3 300
4 000
4 300
u
S
u
/
L
o
n
n
e
s

o
f

p
r
o
d
u
c
L
l
o
n
2 300
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 74
5!6 "( " &1,= -*#<**, +"%=*#(H
1he LnC supply chaln can generally provlde flexlblllLy ln boLh Lhe long and shorL Lerm. LongLerm
flexlblllLy ls derlved Lhrough lnvesLmenLs ln Lhe overall supply chaln. ShorLLerm conLracLlng and
porLfollo managemenL wlll reduce Lravel dlsLance, lncrease flexlblllLy and opLlmlse revenues for
Lhe parLles lnvolved. 1here are several encouraglng slgns LhaL Lhe LnC supply chaln ls becomlng
more responslve Lo shlfLs ln global demand Lhrough lncreaslng desLlnaLlon flexlblllLy.
Powever, even ln Lhe LheoreLlcal and hlghly unllkely slLuaLlon wlLh unlversal LhlrdparLy access for
suppllers Lo LnC lmporL Lermlnals and no flexlblllLy resLrlcLlons ln supply conLracLs, Lhe ablllLy of an
LnC carrler wlll mosL llkely never be as responslve as a dlrecL upsLream connecLlon vla a plpellne.
ShorLLerm flucLuaLlons ln demand wlll always have Lo be meL by Lhe regaslflcaLlon Lermlnal, flexlblllLy
from plpellne lmporLs, addlLlonal sLorage wlLhdrawals and llnepack ln Lhe dlsLrlbuLlon sysLem.
1heoreLlcally, ln an Aslaaclflc naLural gas markeL wlLh several LransparenL prlclng hubs, LnC
could reduce prlclng slgnals beLween markeLs ln a slmllar way Lo LhaL observed ln Lurope. WlLh a
flexlble source of supply, lL ls posslble Lo send naLural gas Lo where lL ls mosL advanLageously
prlced ln a reglon LhaL would have several prlclng polnLs. AlLhough Lhls has resulLed ln conslderable
convergence of prlces on Lhe spoL markeL ln Lurope, lL ls unllkely LhaL (wlLhouL a more
lnLerconnecLed plpellne neLwork) Lhls wlll be Lhe case ln Asla. Powever, LnC Lrade ls able Lo
creaLe a prlce convergence beLween fuLures markeLs (monLhahead and beyond) lf Lhese develop,
whlch would llmlL prlce dlfferenLlals ln Lhe Aslaaclflc reglon.
5 0H%79 ,% ,H" 0@0,";N
uesplLe Lhe growlng demand for naLural gas ln Aslaaclflc energy markeLs, perspecLlves for a
funcLlonlng wholesale gas markeL remaln currenLly llmlLed. 1hls ls a resulL of governmenLal
pollcles LhaL value securlLy of supply over economlc ob[ecLlves ln Lhe more maLure Aslan markeLs,
and Lhe dlfferenL sLages of developmenL of Lhe naLural gas markeLs.
SecurlLy of supply conslderaLlons have resulLed ln conslderable governmenL lnLerference along
Lhe naLural gas value chaln ln maLure Aslan economles. CovernmenL lnLerference ln developlng
economles mlghL be a reflecLlon of Lhe overall developmenLal sLage of Lhe markeL, someLhlng
LhaL can change buL wlll requlre Llme.
Cn Lhe supply slde, conLracLual llmlLaLlons resLrlcL LnC's flexlblllLy Lo serve as a markeL arblLraLor
and supply Lhe markeL wlLh an effecLlve prlce lncenLlve. 1hls ls hamperlng LnC's ablllLy Lo provlde
Lhe flexlblllLy needed Lo supporL a compeLlLlve naLural gas markeL whlch lnsplres confldence ln
spoL/fuLure prlces. Whlle Lhe global LnC markeL has become decldedly more shorL Lerm over Lhe
pasL decade, Lhe Aslan markeL has beneflLed less from Lhls developmenL.
LongLerm supply conLracLs generally have prlce renegoLlaLlon clauses LhaL allow for prlce
adapLaLlons Lo changes ln Lhe markeL. Powever, volume or desLlnaLlon clauses are generally noL
parL of renegoLlaLlons. lncreaslng volume and desLlnaLlon flexlblllLy ln LnC supply conLracLs wlll
Lherefore requlre a change ln Lhe overall markeL LhaL wlll lncrease Lhese feaLures ln new conLracLs.
CurrenLly, changes ln Lhe markeL look promlslng on several aspecLs, namely Lhe lncreaslng role of
porLfollo players and Lhe expecLed desLlnaLlonfree volumes from norLh Amerlca and LasL Afrlca
LhaL wlll arrlve afLer 2017.
As LnC ls lncreaslngly allowed Lo be shlpped desLlnaLlon free, lL ls llkely LhaL lLs arblLrage role
beLween compeLlLlve markeLs wlll lncrease and prlce movemenLs wlll llkely colnLegraLe (lf a
compeLlLlve markeL ls avallable). 8uL lL ls llable Lo perform Lhls role on Lhe fuLures markeL and noL
necessarlly on Lhe spoL markeL, as Lhe physlcal responslveness of LnC supply ls llkely Lo always
lag behlnd plpellne supplles.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 73
J%(7$-0'%(M 7H'79"( %. "))N
Among Lhe ma[or gasconsumlng reglons, Lhe fully funcLlonlng norLh Amerlcan and qulckly
lmprovlng Luropean wholesale naLural gas markeLs boLh reflecL prlces LhaL closely correspond Lo
reglonal supply and demand. A Lhlrd prlce benchmark ln Lhe developlng Aslan naLural gas markeL
would make sense for longLerm Aslan economlc compeLlLlveness and Lhe fuLure of gas ln Lhe reglon.
1he Aslan naLural gas markeL ls Lhe fasLesLgrowlng markeL and ls expecLed Lo become Lhe second
largesL gas markeL by 2013, wlLh 790 bcm of naLural gas demand. Powever, Lhe enLlre Aslan
aclflc reglon lacks a Lradlng plaLform Lo faclllLaLe Lhe exchange of naLural gas and consequenLly
a prlce slgnal LhaL ls able Lo sLeer lnvesLmenLs ln naLural gas lnfrasLrucLures.
As governmenLs look Lo an lncreased share of naLural gas ln power generaLlon (for securlLy and
envlronmenLal conslderaLlons), gas wlll frequenLly need Lo compeLe wlLh domesLlcally produced
coal. 1o compeLe efflclenLly ln Lhe elecLrlclLy mlx, naLural gas wlll need Lo be prlced noL agalnsL
Lhe oll markeL (as oll has a very llmlLed role ln power generaLlon), buL on demand and supply for
Lhe gas lLself.
1hls lssue has come Lo Lhe forefronL ln Lhe afLermaLh of Lhe lukushlma accldenL. Aslan LnC
lmporL prlces were pushed Lo record hlghs as a resulL of oll prlce developmenLs raLher Lhan
demand/supply of gas. lndeed, Lhe flexlble gas supplles drawn ln from Lhe ALlanLlc 8asln Lo meeL
Lhe exLra !apanese demand were noLably cheaper. ln a compeLlLlve naLural gas markeL, oLherwlse
compeLlLlve LnC would noL be rendered dear Lhanks Lo prlclng Lrends of an alLogeLher separaLe
commodlLy ln a dlfferenL markeL.
J."*,'() * 7%;&",','#" )*0 ;*.9",
CeLLlng Lo LhaL markeL model sLarLs by lncreaslng compeLlLlon beLween suppllers (and consumers)
aL Lhe wholesale level. 1he flnal ob[ecLlve ln naLural gas markeL llberallsaLlon would be Lhe
esLabllshmenL of a Lradlng hub wlLh a naLural gas exchange provldlng a rellable prlce for fuLure
dellvery.
CovernmenLs wlll need Lo Lake a dlfferenL role Lhan ls now common among developlng Aslan
aclflc markeLs, adapLlng Lo Lhe role of regulaLor and ulLlmaLely LhaL of arblLraLor vla compeLlLlon
auLhorlLles. 1hls wlll requlre a conslsLenL mlndseL Loward lncreaslng compeLlLlon and surrenderlng
conLrol of whaL ls ofLen consldered a sLraLeglc secLor of Lhe economy. 1haL ls someLhlng many
governmenLs wlll flnd dlfflculL Lo do. And yeL lL wlll be necessary Lo lnsLll Lhe necessary confldence
Lo draw ln new parLlclpanLs (especlally flnanclal parLles), and for markeL players Lo sLarL uslng Lhe
hub Lo balance Lhelr porLfollos.
lnsLlLuLlonally, LhaL means a handsoff governmenL approach, separaLlon of LransporL and commerclal
acLlvlLles, and prlce deregulaLlon aL Lhe wholesale level. SubsequenLly, Lhree sLrucLural requlremenLs
have been ldenLlfled: sufflclenL neLwork capaclLy and nondlscrlmlnaLory access, a compeLlLlve
number of markeL parLlclpanLs, and Lhe longLerm lnvolvemenL of flnanclal lnsLlLuLlons.
1he creaLlon of a naLural gas markeL wlll lnfluence Lhe way naLural gas changes hands, as physlcal
and flnanclal Lradlng worlds wlll meeL on Lhe gas hub. llrsL, C1C Lradlng wlll be supplemenLed
wlLh exchangebased Lradlng, whlch requlres much more rlsk mlLlgaLlon Lhrough flnanclal lnsLlLuLlons.
1hls flnanclallsaLlon wlll aLLracL an lncreaslng number of players oLher Lhan LradlLlonal physlcal
porLfollo players. 1he resulLlng prlce for naLural gas should reflecL expecLaLlons of all markeL
players, lncludlng currenL ooJ fuLure supply/demand ln a markeL.

!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 76
1he lmpacL of a naLural gas Lradlng hub ls Lyplcally felL ln Lhe broader naLural gas markeL, as lL
requlres boLh consumers and suppllers Lo revlew, revalue and ulLlmaLely rewrlLe buslness pracLlces.
MosL llkely, a shlfL ln focus from long Lerm Lo shorL(er) Lerm wlll emerge, and dlfferenL or modlfled
conLracLual and lnvesLmenL schemes wlll follow. 1hls process wlll probably Lake aL leasL a decade
for naLlonal markeLs wlLh a clear regulaLory auLhorlLy - and longer for more reglonal lnlLlaLlves,
due Lo Lhe lncreased number of sLakeholders lnvolved.
1he lnsLlLuLlonal and sLrucLural requlremenLs for a compeLlLlve gas markeL (seL ouL ln ChapLer 3)
should enable a LransparenL and level playlng fleld for markeL players. A compeLlLlve naLural gas
markeL can provlde beLLer lnformaLlon on Lhe sLaLus of Lhe markeL, someLhlng LhaL oll lndexaLlon
cannoL. necessary lnvesLmenLs ln Lhe naLural gas lndusLry rely on confldence ln compeLlLlve gas
prlces. 1hls confldence can be derlved from markeL arrangemenLs, buL wlll ulLlmaLely come from
governmenLs' demonsLrable lnLenL Lo leL markeL forces deLermlne an ouLcome. Confldence also
requlres a sLrong and preferably lndependenL regulaLor wlLh a clearly deflned anLlLrusL mandaLe
ln boLh Lhe flnanclal and physlcal areas of Lhe naLural gas markeL.
1he lnLroducLlon of compeLlLlon alms Lo make Lhe procuremenL of naLural gas by gas companles
more efflclenL, and lnvesLmenL needs more LransparenL. 1hls wlll noL mean, however, LhaL naLural
gas ls auLomaLlcally prlced lower Lhan olllndexed equlvalenL volumes. lL wlll mean LhaL, when
properly seL up, Lhe markeL wlll prlce naLural gas aL lLs relaLlve value ln a speclflc energy mlx.
E.%0&"7,0 8%. * 7%;&",','#" )*0 ;*.9", '( 50'*E*7'8'7
CurrenLly, prospecLs for a funcLlonlng wholesale naLural gas markeL remaln llmlLed. Lven ln Lhe
more maLure Aslanaclflc markeLs, Lhe baslc requlremenLs for a wholesale markeL are noL currenLly
ln place, slnce governmenLs conLlnue Lo puL an emphasls on securlLy ob[ecLlves over economlc
ones. ln addlLlon, several governmenLs have developed and keep ln place preferenLlal prlceseLLlng
reglmes LhaL llmlL compeLlLlon ln Lhe naLural gas markeL.
SecurlLy of supply conslderaLlons have resulLed ln conslderable governmenL lnLerference along
Lhe naLural gas value chaln ln maLure Aslan markeLs such as korea and !apan. AlLhough Lhe pollcy
emphasls on securlLy of supply ls an enLlrely leglLlmaLe one, Lhe resulL ls ongolng governmenL
lnLerference and reslsLance Lo more downsLream compeLlLlon.
ln Chlna, Lhe markeL ls developlng fasL, wlLh lnLense demand growLh. Such enormous lnvesLmenL
requlremenLs reduce Lhe scope for compeLlLlon. ConsequenLly, Lhe Chlnese governmenL has looked
aL ways Lo lnLroduce more flexlble prlclng schemes ln some developed gas markeL areas on Lhe
easL coasL.
CurrenLly, Slngapore seems Lhe besLsulLed candldaLe for a reglonal naLural gas Lradlng hub, as lLs
governmenL has a dlsLlncLly handsoff approach Lo markeLs. 1he governmenL has also lnLroduced
wholesale prlclng for naLural gas and effecLlvely unbundled boLh Lhe power and naLural gas
lnfrasLrucLure. An openaccess reglme wlll be esLabllshed for Lhe fuLure SLnC Lermlnal, and
flnanclal parLles servlng global commodlLy markeLs are already ln place and wellposlLloned Lo
serve emerglng naLural gas Lrade. Slngapore lLself ls a relaLlvely small markeL, whlch could llmlL
Lhe number of players ln Lhe wholesale markeL, buL a wellconnecLed hub could serve Lhe reglon
well beyond Lhe clLysLaLe.
640,*7$"0 ,% * 7%;&",','#" )*0 ;*.9", '( 50'*E*7'8'7
A unlque characLerlsLlc of naLural gas Lrade ln Aslaaclflc ls Lhe llmlLed amounL of gas LhaL ls
Lraded vla lnLernaLlonal plpellnes - only abouL 10 of Lraded volume ln Lhe reglon.
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 77
An lncreaslngly flexlble supply chaln wlll requlre a conLlnued lncrease of LnC shlpplng avallablllLy
and LhlrdparLy access on Aslan regaslflcaLlon Lermlnals. usually such Lermlnals are bullL wlLh
capaclLy dedlcaLed Lo LnClmporLlng companles (frequenLly domlnanL naLlonal or reglonal
organlsaLlons), leavlng llLLle (lf any) spare capaclLy for compeLlLors. lncreaslng compeLlLlon beLween
LnC suppllers for markeL share ln several Aslan markeLs (beyond Slngapore) wlll Lherefore be a
very dlfflculL process from a regulaLory, Lechnlcal and commerclal perspecLlve.
ln addlLlon, desLlnaLlon clauses whlch were lnLroduced Lo relnforce lnvesLmenL securlLy have Lhe
unforLunaLe knockon effecL of creaLlng markeL segmenLaLlon and sLlffenlng Lhe overall supply chaln.
G81/=*, 0% *''H
lL ls clear LhaL Lhe posslble developmenL of a compeLlLlve naLural gas markeL LhaL ulLlmaLely
generaLes a rellable prlce slgnal ln any Aslan markeL wlll noL happen overnlghL, and wlll noL
necessarlly lead Lo lower prlces ln mosL markeLs (as some proLagonlsLs frequenLly assume). lL
does however glve Lhe Aslanaclflc economles an opporLunlLy Lo lncrease supply flexlblllLy and
overall economlc efflclency Lo meeL Lhelr growlng demand for energy.
1he move Lowards a compeLlLlve naLural gas Lradlng hub cannoL depend solely on exLernal shocks
ln Lhe global markeL. CovernmenLs wlll need Lo slgnal wheLher Lhey would accepL such a change
Lo happen.
ln Lhe very long Lerm, as markeLs ln Lhe Aslaaclflc reglon maLure and lnfrasLrucLures are
ln place and amorLlsed, a llkely ouLcome mlghL be LhaL mulLlple prlclng areas wlll develop.
!apan/korea, Chlna, and especlally Slngapore sLand ouL for Lhls on Lhe basls of Lhelr currenL and
fuLure markeL sLrucLure demand.
ln Lhe medlum Lerm, Lhls ls Lruly a chlcken or egg" dlscusslon. A more desLlnaLlonflexlble LnC
supply ls needed Lo drlve Lhe momenLum Lowards a gas Lradlng hub ln Asla, buL wlLhouL lnlLlal
sLeps Lowards such a hub, flexlble LnC would noL have a haven ln Asla aL whlch Lo arrlve.
A Slngaporean move Loward a compeLlLlve naLural gas markeL mlghL noL lmmedlaLely lead Lo a
compeLlLlve Aslanaclflc prlclng slgnal, buL lL ls a very lmporLanL and remarkable flrsL sLep.

!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 78
57.%(@;0P *44."#'*,'%(0 *(2 -(',0 %8 ;"*0-."
57.%(@;0 *(2 *44."#'*,'%(0
ACC annual conLracL quanLlLy
Aln AssoclaLlon of lnLernaLlonal eLroleum negoLlaLors
ASLAn AssoclaLlon of SouLhLasL Aslan naLlons
8CSCM 8C Slngapore Cas MarkeLlng
8M bllaLeral monopoly
8CW balance of week
CLL8 Councll of Luropean Lnergy 8egulaLors
CP clearlng house
CM clearlng member
CnCCC Chlna naLlonal Cffshore Cll Company
CnC Chlna naLlonal eLroleum Company
CC
2
carbon dloxlde
uA day ahead
uA1 dellvered aL Lermlnal
uLS dellvered exshlp
LMA (Slngapore) Lnergy MarkeL AuLhorlLy
Lu Luropean unlon
lL8C lederal Lnergy 8egulaLory Commlsslon
llu flnal lnvesLmenL declslon
lMA flnanclal markeL auLhorlLy
lC8 freeonboard
lSu lormer SovleL unlon
CLCl Cas LxporLlng CounLrles lorum
CllCnL lnLernaLlonal Croup of Llquefled naLural Cas lmporLers
CnC gas neLwork code
CS governmenL selllng prlce
PP Penry Pub
PPl PerflndahlPlrschman lndex
lCL lnLerconLlnenLal Lxchange
lCu lnLernaLlonal Cas unlon
lCCC lnLernaLlonal Cll and Cas Company
!CC !apan CusLoms Cleared (oll prlce) or !apan Crude CockLall
!kM !apan/korea Marker
!CCMLC !apan Cll, Cas and MeLals naLlonal CorporaLlon
knCC korean naLlonal Cll CorporaLlon
kCCAS korean Cas CorporaLlon
LnC llquefled naLural gas
LC lawofoneprlce
LC llquefled peLroleum gas
ML1l (!apanese) MlnlsLry of Lconomy, 1rade and lndusLry
MCClL (korean) MlnlsLry of Commerce, Lnergy and lndusLry
MSA masLer sale and purchase agreemenL
M1l (Slngaporean) MlnlsLry of 1rade and lndusLry
n8 naLlonal balanclng polnL
nCM nonclearlng member
nu8C (Chlnese) naLlonal uevelopmenL and 8eform Commlsslon
CLCu/lLA 2013 !"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'*
640,*7$"0 *(2 6&&%.,-(','"0

age | 79
n no prlce
n?MLx new ?ork MercanLlle Lxchange
CLCu CrganlsaLlon for Lconomlc CooperaLlon and uevelopmenL
CLC CrganlsaLlon of eLroleum LxporLlng CounLrles
C1C overLhecounLer
nC plpellne naLural gas
88C regulaLlon below cosL
8CS regulaLlon cosL of servlce
SLnC Slngapore Llquefled naLural Cas
S Slngapore ower
SA sales and purchase agreemenL
SLx Shanghal eLroleum Lxchange
S8 soclal and pollLlcal regulaLlon
1AC 1ransASLAn Cas lpellne sysLem
1A LhlrdparLy access
1SC Lransmlsslon sysLem operaLor
11l 1lLle 1ransfer laclllLy
uCS underground gas sLorage
WA weekend ahead
Wu wlLhln day
?A year ahead

_(',0 %8 ;"*0-."
8cm bllllon cublc meLres (40 M!/m
3
)
CLoe glgaLonnes of oll equlvalenL
CW glgawaLL
M8Lu mllllon 8rlLlsh Lhermal unlLs
Mcm mllllon cublc meLres (40 M!/m
3
)
M! mega[oule
M1 megaLonne
MLpa mllllon Lonnes per annum
MWh megawaLL hour
1Wh LerawaLL hour
uSu unlLed SLaLes dollar
!"#"$%&'() * +*,-.*$ /*0 1.*2'() 3-4 '( 50'* CLCu/lLA 2013
640,*7$"0 *(2 6&&%.,-(','"0

age | 80
Q"8"."(7"0
AL8C (Asla aclflc Lnergy 8esearch CenLre) (2000), Nototol Cos llpelloe uevelopmeot lo
5ootbeost Aslo, AL8C, 1okyo.
AL8C (2012), Alc oetqy Ovetvlew 2011, Asla aclflc Lnergy 8esearch CenLre, 1okyo.
Argus Clobal LnC (2012), !apan, SouLh korea ush for ShorLer1erm ConLracLs", Atqos Clobol
lNC, vol. 8, no. 4, Argus Medla LLd., London.
ASLAn (AssoclaLlon of SouLhLasL Aslan naLlons) (2009), A5AN lloo of Actloo fot oetqy
coopetotloo 2010 - 2015, ASLAn SecreLarlaL, !akarLa.
CLL8 (Councll of Luropean Lnergy 8egulaLors) (2011), ck vlsloo fot o otopeoo Cos 1otqet
MoJel, Concluslon aper, CLL8, 8russels.
ClL (Cllngendael lnLernaLlonal Lnergy rogramme) (2008), ltlcloq Nototol Cos. tbe Ootlook fot
otope, ClL, neLherlands lnsLlLuLe of lnLernaLlonal 8elaLlons, 1he Pague.
uengel, !. (2011), lmplemenLlng Lhe new Lu Cas 1argeL Model", presenLaLlon aL LmarL
Conference, 2324 november, Lyon.
LCS (Lnergy CharLer SecreLarlaL) (2007), lottloq o ltlce oo oetqy. lotetootloool ltlcloq
Mecboolsms fot Oll ooJ Cos, LC1S, 8russels.
LC1S (2009), lostetloq lNC ttoJe. Jevelopmeots lo lNC 1toJe ooJ ltlcloq, LC1S, 8russels.
LMA (2011), llnal ueLermlnaLlon: Addendum Lo lnformaLlon paper on ollcy on Cas lmporL
ConLrol", lofotmotloo lopet, LMA, Slngapore.
lCL (lacL Clobal Lnergy) (2012), Aslo loclflcs Nototol Cos 8olooce, 8ose cose. 197520J0, lCL,
Slngapore.
llower, A. (2008), LnC rlclng ln Asla, !apan Crude CockLall (!CC) and 'SCurves'" ln SLern, !. et ol.
(eds.), Nototol Cos lo Aslo. tbe cbolleoqes of Ctowtb lo cbloo, loJlo, Iopoo ooJ koteo, Cxford
lnsLlLuLe for Lnergy SLudles (ClLS), Cxford.
Cas MaLLers (2006a), korea - Lhe Lnd of LlberallsaLlon?", Cos Mottets, 29 november, London.
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640,*7$"0 *(2 6&&%.,-(','"0

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640,*7$"0 *(2 6&&%.,-(','"0

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1hls paper reflecLs Lhe vlews of Lhe lLA SecreLarlaL buL does noL necessarlly reflecL Lhose of
lndlvldual lLA member counLrles. 1he arLner CounLrles serles does noL consLlLuLe advlce on any
speclflc lssue or slLuaLlon. 1he lLA makes no represenLaLlon or warranLy, express or lmplled, ln
respecL of Lhe arLner CounLrles serles' conLenLs (lncludlng lLs compleLeness or accuracy) and
shall noL be responslble for any use of, or rellance on Lhe arLner CounLrles serles.

1hls documenL and any map lncluded hereln are wlLhouL pre[udlce Lo Lhe sLaLus of or soverelgnLy
over any LerrlLory, Lo Lhe dellmlLaLlon of lnLernaLlonal fronLlers and boundarles and Lo Lhe name
of any LerrlLory, clLy or area.

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Developing
a Natural Gas
Trading Hub in Asia
Obstacles and
Opportunities
The market for natural gas in Asia is dominated by long-term contracts in which the price of gas is linked, or indexed,
to that of oil. In recent years, this has helped keep Asian gas prices much higher than those in other parts of the
world, leading to serious questions about whether such a system is sustainable. In this report, the IEA shows what
it would take to create a regional natural gas trading hub in which prices arent indexed to those of oil but rather
reect local supply and demand fundamentals.
Long-term contracts can play a benecial role in providing investment security, but their current pricing does not
take into account fundamentals and the competitiveness of gas within the energy mix of the mature economies
where the gas is consumed. Moreover, without a competitive spot market for natural gas one that supports and
encourages price discovery there is little incentive and little scope to change current commercial practices. This
leaves both consumers and producers with insufcient room to explore different options, which limits the degree
to which natural gas can serve as a exible source of energy for both growing and mature economies.
Developing a natural gas trading hub in Asia aims to provide stakeholders with insights on the changes that are
required in the Asia-Pacic natural gas sector both downstream and upstream to allow a competitive natural
gas price to emerge. Building on OECD Europe and OECD America experiences, this report sets out to assess
perspectives for these changes in the Asia-Pacic natural gas markets. It identies obstacles and opportunities for
a competitive natural gas price in the Asian economies to emerge.

Asian Gas Hub

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