Tokyo (Platts)--26Feb2013/713 am EST/1213 GMT

Asia will become the second-largest global natural gas market after North America by 2015 with annual demand rising to 790 billion cubic meters, the International Energy Agency said in a report released Tuesday.

"Asia is already home to the world's fastest-growing gas market. But expanding the role of gas in Asia will depend on regional market conditions that allow the fuel to compete autonomously in local energy markets that are themselves connected to global energy markets," IEA Executive Director Maria van der Hoeven told a conference in Tokyo sponsored by the Institute of Energy Economics, Japan.

"The future role of gas in Asia will depend considerably on how the pricing of natural gas is tied to the fundamentals of supply and demand in the region," Van der Hoeven said.

It will be "dominated by long-term contracts in which the price of gas is linked, or indexed, to that of oil," the report said.

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Developing countries might require long-term contracts to ensure security of supply for their fast-growing economies, while producers look for secure returns on their "considerable infrastructure investments," it added.

Long-term contracts can play a beneficial role in providing investment security, but their current pricing does not accurately reflect gas market fundamentals or the competitiveness of gas relative to other fuels, the IEA said. Without a competitive spot market for natural gas, there is little incentive and little scope to change current commercial practices, it added.

Among current constraints the IEA included Asia's lack of a trading hub to facilitate the exchange of natural gas and the development of a transparent price signal to steer investments in natural gas infrastructure.

The IEA added that the Asia-Pacific region would require competitive national/regional markets to develop a "reliable natural gas price." It would then need to meet a set of institutional and structural requirements to create enough market confidence to attract new participants from the financial sector and to encourage market participants to use a trading hub to balance their portfolios.

A "hands-off" approach from governments is necessary for the development of natural gas markets in Asia, the IEA said. This would involve separating transport from commercial activities, price deregulation at the wholesale level, sufficient network capacity and non-discriminatory access as well as a competitive number of market participants including financial institutions, it added.

The IEA said the potential for the development of a competitive wholesale natural gas market in Asia was limited as in mature Asia-Pacific markets "governments continue to emphasize security objectives over economic ones."

Among Asian nations, the IEA sees Singapore with the most potential to become a gas trading hub. "Singapore seems the candidate best suited to develop a competitive natural gas market and trading hub in the medium term" as the government has "a distinctly hands-off approach to the markets," it added.

It referred to the plan for an open-access regime for the future SLNG terminal, adding that financial parties serving global commodity markets were already in place in Singapore, and well-positioned to serve emerging natural gas trade.

Singapore LNG Corp. will raise the capacity of its LNG regasification terminal on Jurong Island to 9 million mt/year from 6 million mt/year, and will also add a fourth storage tank, Minister in the Prime Minister's Office S Iswaran said in October 2012.

The SLNG terminal is scheduled to commence operations in the second quarter of 2013, with an initial throughput capacity of 3.5 million mt/year and increasing to 6 million mt/year once additional jetties and regasification facilities are completed by the end of 2013, Platts reported earlier.

The current site has space to hold up to seven LNG storage tanks, with the possibility of adding two LPG tanks as well.

Three storage tanks, each with a capacity of 188,000 cubic meters, are currently being constructed.

At the conference in Tokyo, Van der Hoeven also said: "Japan has a great potential to act as a hub." But she added that the country needs to "take some important steps" domestically particularly on improving infrastructure access.

"This policy to open infrastructure access to gas and efforts to improve flexibility of purchase portfolio could put Japan on track towards effective a trading hub," she told the conference.

Commenting on Japan, Van der Hoeven also said destination clauses in rigid LNG contracts place an extra burden of $10 billion on the country, compared with a "properly integrated LNG market" such as Europe.

At the conference, van der Hoeven wondered why despite the fact that "gas demand is fairly weak in Europe and many companies struggle to fulfill their offtake obligations," more LNG cargoes were not heading to Asia.

"In this case, the reason is not physical but contractual and institutional," she said, referring to destination clauses and take-or-pay LNG contracts.

The lack of a trading hub in Asia makes it difficult to carry out trading, she added.

A competitive natural gas market in Asia would need an even more flexible supply of LNG, which will require continued expansion of shipping and third-party access to regasification terminals in the region, the IEA said. This would also involve relaxing destination clauses in LNG supply deals, it added.

The IEA said that a competitive natural gas market and reliable gas prices will not develop overnight, and will not necessarily lead to low prices. This will, however, allow participants in the Asia-Pacific region to "increase portfolio flexibility" in line with maturing gas markets, it added.

--Takeo Kumagai, takeo_kumagai@platts.com
--Edited by Maurice Geller, maurice_geller@platts.com

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