Paradigm Shift in International Gas Market Towards an Integrated Market? - Possible Impacts on Markets in East Asia and North West Europe

Abstract

Currently gas markets are largely regional and segmented as the result of transport complexities, differences in regional price formation and regulatory factors. Natural gas is more difficult to transport than oil and if the distance is too large to bridge via transmission pipelines, natural gas has to be transformed in to liquefied natural gas (LNG) for transportation, for which the infrastructure is very costly. Concerning price formation, natural gas priced are determined by supply and demand conditions in regional gas spot markets in the U.S., UK and Asia Pacific. In Contrary, in continental Europe gas is mainly imported through pipe lines and sold on long term contracts linked to the price of oil, albeit in some European countries market based-pricing is gaining ground. Meanwhile, Asia secures their gas requirement by importing expensive LNG, with trades being mainly settled through long term contracts indexed to oil prices. As a result of these factors, arbitrage at the global level driven by regional gas price differences has so far been limited. On the other hand, the rapid growth in LNG markets more likely could shift gas price formation towards a more market-based system, supporting the possibility of convergence global gas prices. In addition, the gas prices in Europe are increasingly interlinked to gas spot prices instead of oil prices which resulted a growing share of globally traded gas on spot basis. Could these facts contribute to greater flexibility and increase gas liquidity which lead to a market integration? This thesis is aimed to examine the facts and information that exist in the perspective; intersect to the possibility of shifting from regionally segmented in to a globally convergence market and how long the process will take; as well as its impact to gas markets in East Asia and Northwest Europe.