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Asian Natural Gas Market Starting to Heat Up

Commodities / Natural Gas May 29, 2010 - 05:33 AM GMT

By: OilPrice_Com

Commodities

Asia is one of the more interesting gas markets in the world.

Places like Thailand and its southeast Asian neighbors have seen phenomenal demand growth over the last several years. Total has said they're in Thailand for gas. (Part of the reason I believe Thai shale gas may become an interesting play over the coming years.)


Asian LNG demand has also been strong. Japan, China and Korea have helped pick up (a little of) the slack in the LNG market created by booming U.S. shale gas production displacing LNG imports.

But a developing gas market brings challenges. Especially when it comes to pricing.

In parts of the world where gas demand is low, any company discovering natural gas is usually forced to sell on long-term contracts, often at relatively low prices. (Leading to the old oilman's joke that the only thing in frontier exploration worse than a dry hole is a gas discovery. A dry hole you can plug and abandon. If you find gas, the host government usually wants you to foot the bill and test it. Even if there's no hope of selling the gas profitably.)

But in areas where significant amounts of gas are discovered, increased demand usually follows. Gas-fired power plants are built. Industrial facilities spring up.

And as demand ramps up, pricing gets more complex. With more users vying for supply, prices become a key control on rationing and allocating supplies. Those who need the gas most are generally willing to pay more. Supply goes to the highest bidder. If people need it really badly, prices spike and exploration activity increases. Hopefully growing output.

Today, we're seeing signs of maturing in the Asian gas market. Pricing is becoming more complex as demand grows and different users jockey for supply.

Just this week, the Asia-Pacific Economic Cooperation Business Advisory Council has urged Asian energy ministers to look at implementing an Asian gas futures market. APEC ministers are meeting next month in Japan.

Futures are needed in complex markets. The introduction of such a system would allow Asian gas users to queue up for supplies months in advance, allowing for proper planning and coordination.

Pricing evolution is also happening in India. Last week, the Indian government announced an unprecedented increase in the domestic sale price of gas. To around $4.20 per thousand cubic feet, up from a previous $2 per mcf.

India has been struggling with pricing for some time. The government doesn't want to upset consumers who've grown used to $2 gas. But at the same time, the nation needs new supply. Higher prices are necessary to encourage exploration.

(As a side note, the government appears to be trying to play both sides of this coin. Although gas producers will now receive a higher price, it looks as if gas distribution companies will be barred from passing on the entire cost increase to end consumers. In effect, the government is simply shifting losses from one part of the supply chain to another.)

Countries like Argentina are facing similar issues. Price controls have killed domestic gas exploration. Turning the nation from a gas exporter to an importer. Something will have to give here, sooner or later.

These evolving markets can be great for investors. Using a little foresight, it's easy to see areas ripe for price appreciation and liberalization. Buying in before the price increases makes for good returns. India's Oil & Natural Gas Corp, for example, jumped 10% on news of the gas price hike.

Keep an eye on Asia. This is a gas market just getting started.

Source: http://oilprice.com/Energy/Natural-Gas/Asian-Gas-Market-Starting-to-Heat-Up.html

By Dave Forest for OilPrice.com who offer detailed analysis on Crude oil, Natural Gas, Geopolitics, Gold and most other Commodities. They also provide free political and economic intelligence to help investors gain a greater understanding of world events and the impact they have on certain regions and sectors. Visit: http://www.oilprice.com


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