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Asia a poor candidate for an LNG hub-I: Find out why
May 03: An Asian LNG hub is unlikely to work, according to fresh research that has just come in.
8Although the U.S. hub follows the physical hub model and the European hubs the virtual hub model, they nonetheless have one thing in common – they are all mature pipeline markets providing geographical interconnectivity with limited reliance on LNG. As such the price of LNG in those markets may more reasonably be assumed to reflect genuine demand for gas across the geographical range of pipeline connectivity.
8Geographical interconnectivity between Japan, South Korea, Taiwan, China and India (or between Singapore and its ASEAN partner-countries) is unlikely to arise and if it did, it may not facilitate the creation of a cross-border market with sufficient deregulation, liberalisation, integration and liquidity.
8Therefore, most likely, localised (i.e., not cross-border) markets may, at best, arise but would not correlate to each other.
8Recent market shifts of cargoes from North-East Asia towards the Middle East demonstrate how new technology, such as FSRUs or FLNG, can have a greater impact on market dynamics than the existence of a natural gas hub. It also challenges the case that any one Asian country or region can or should set the price for the rest of Asia. The logical inference from this is that a greater regionalisation of LNG prices for Asia could materialise. In turn, this fragmentation will impact on liquidity, which is already sparse.
8Competition between, among others, Japan and Singapore to develop a natural gas trading hub, competition between pricing benchmark providers and competition between large market stakeholders, all of whom are seeking to take advantage of the transition away from oil pricing, will, in the short term, fragment the little liquidity that exists in the Asian LNG spot markets. New additional LNG spot Asian benchmarks are being launched regularly which simply further fragments liquidity
8An alternative to having its own Asian reference price may be to use U.S. or European reference prices, with the differential of cost of transport. However, as previously mentioned, this means that Asian supply and demand dynamics will have no direct influence on the Asian LNG spot price.
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