Don’t Let the Window of Opportunity for Increasing Asia’s Use of Natural Gas Close

This post is guest authored by Ian Cronshaw, visiting fellow at the Australian National University’s Crawford School of Public Policy; Quentin Grafton, professor of economics and director of the Centre for Water Economics, Environment, and Policy at the Crawford School of Public Policy; and Llewelyn Hughes, associate professor at the Crawford School of Public Policy.

Natural gas markets in the Asia-Pacific are on the cusp of an extraordinary transformation thanks, in part, to the rise of liquefied natural gas (LNG) exports to the Asia-Pacific from U.S. suppliers. Natural gas use is projected to grow faster than that of any other fossil fuel because China, India, and other Asian countries are thirsty for more energy. If gas displaced coal, it would give a big boost to the world’s critically needed transition to a low carbon future.

We recently published a CFR discussion paper laying out how to reach that future. We point out that the rapid rise of LNG exports into the Asia-Pacific has created a window of opportunity for the region to reform its gas trading regulations and use more of the cheap gas available on global markets.

LNG itself is not new to the region—it, rather than pipelines, has for decades dominated trade in natural gas in the Asia-Pacific region. Pioneered by Japan, the LNG trade has traditionally been governed by rigid long-term contracts, and linked to oil prices. This assured buyers their supplies were secure and encouraged investment in the expensive infrastructure required to supercool and then to re-gasify LNG. But because gas markets were so illiquid, trade in gas has been limited, and gas historically been more expensive than other fuels.

But now the rise of U.S. gas exports, as well as exports from Australia and other countries, are increasing the available supply of gas and reducing the price at which Asian buyers could obtain it if they were to participate in liquid, transparent markets. This new reality is helping to break down the rigid structure of contracts governing Asia-Pacific gas trade, making such contracts unattractive for buyers. As a result, buyers are demanding more flexibility and cargoes are increasingly being sold using a more market-oriented pricing approach and with flexible terms on the length and destination of contracts. The U.S. revolution in gas is, thus, helping to globalize a gas market that has been largely regionalized.

However, the window of opportunity for Asia to increase its gas use might be closing. A projected oversupply of gas could lead to a boom-bust cycle over the coming decade, as was seen in the 1980s and 1990s in crude oil. A less-than-stable gas market may hinder governments in Asia from implementing the regulatory changes and investing in infrastructure needed to promote the uptake of gas in place of coal.

In our paper, we found that a 25 percent increase in demand in just two countries—China and India—would be enough to boost Asian gas prices by more than 20 percent over the next decade, thus bolstering investment in gas supply while still keeping the price of gas affordable compared to coal. We argue that such an increase in demand in China and India is plausible because both countries have large, growing economies and large populations that use relatively little gas today. And by using more gas, they would improve their energy security as well as secure local health and environmental benefits if gas were to replace the use of coal for heating and power generation.

Importantly, this would also provide benefits to LNG exporters like Australia and the United States. In our study, we found that gas demand increases are favorable to existing gas exporters to the region, including the United States. However, Russia would also benefit by selling 30 percent more gas to the region, primarily via pipeline to China. U.S. producers would also be likely to export less gas to Europe in favor of a more lucrative Asian market. The downside for Europe is that they become more dependent on Russian gas.

All countries in the Asia-Pacific region stand to gain by promoting a transition to gas. Australia also has an important role to play in gas markets in the region. It has expertise in gas regulation, strong institutions, will soon be the world’s largest LNG exporter. And it is a world leader in the extraction of coal seam gas (coal-bed methane). Australia can lead by supporting competitive gas markets domestically and internationally, and avoiding ill-advised policy interventions for short-sighted political gain.  Collectively, the gas exporters and importers in the Asia Pacific have the opportunity, with timely and carefully considered regulatory moves, to promote market transparency and liquidity, to ensure both lower energy costs, more flexible and secure supplies, and reduced carbon emissions. This will not happen by chance, but will require the full attention and co-operative efforts of leading gas producing and importing countries in the region.

Given its importance globally in gas production, the United States should encourage Chinese and Indian governments to make the needed policy and regulatory changes by providing technical assistance to implement reforms and by recommending that international institutions provide financial assistance. U.S. policymakers could also coordinate competing proposals from China, Japan, and Singapore to establish a thriving gas trading hub.

If the transition from coal to gas and ultimately a lower carbon future is to be successful, attention must also be given to developing best practices for measuring and minimizing methane leakage from natural gas infrastructure built in the Asia and Pacific region. Securing the emissions benefits of such a shift depends in large part on reducing the leakage of methane from the gas supply chain.

With the right policies, increased natural gas use in the Asia-Pacific could help the United States become the one of the world’s leading natural gas exporters and cut emissions in the world’s fastest growing economies. Without them, the window of opportunity will close.