Examing the Key Differences Between Natural Gas Markets in Three Distinct Regions: North America, Europe and Asia

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Zack Tatum

EXAMING THE KEY DIFFERENCES BETWEEN NATURAL GAS MARKETS IN THREE DISTINCT REGIONS: NORTH AMERICA, EUROPE AND ASIA

TABLE OF CONTENTS

IntroductionPage 3

Asia – Market MaturityPage 3
Asia – Sources of SupplyPage 3
Asia – Dependence on ImportsPage 4
Europe – Market MaturityPage 4
Europe – Sources of SupplyPage 4
Europe – Dependence on ImportsPage 4
North America – Market MaturityPage 5
North America – Sources of SupplyPage 5
North America – Dependence on ImportsPage 5

ReferencesPage 7

Introduction
As with many other products and commodities participating in a globalized supply chain, the three dominant market places are located in North America, Europe and Asia. This is no different for natural gas. While each region shares similarly a reliance on energy to support the tenets of the modern high-standard of living, all three are highly divergent in terms of demographic, culture, and history; and differ widely in policies concerning finance, monetary regulation, and of course, energy. These qualities and more have shaped generations of market development in terms of policy and practice, and in examining the results of those developments, or today’s key differences between the natural gas markets in Asia, Europe, and North America, differentiations will be made based on the following three criteria: market maturity, the sources of supply, and the dependence on imports. (McRae and Ruppel, 2011) Asia – Market Maturity

Asia is the least developed natural gas market but shows the greatest growth potential. China in particular is rapidly modernizing; what was once a largely agrarian country is becoming a collection of burgeoning city-centers with growing energy needs--proof can be found in any of over 100 cities with a population over one million (Perkowski, 2012). In addition, Chinese government has recently unveiled a policy whereby natural gas is prioritized for the transportation sector in an effort to displace diesel and reign in emissions. (Aishu and Hua, 2012) This suggests China, currently the eighth largest consumer of natural gas, may ascend that list to the top three—situating itself among Russia and the US. Despite China’s position to increase gas consumption, significant barriers exist to natural gas market maturity. Structural and regulatory issues concerning natural gas—including pricing--are addressed ad hoc. (Huang, 2012 p.3058) Although industrialized Asia largely sets worldwide LNG prices (which are tied to oil-indexed long term contracts), the prices are not binding. China has pursued non-market concessions with India through bilateral agreements (McRae and Ruppel, 2011), and bypassed bidding processes with countries like Angola and Nigeria, who sign agreements without human rights or financial transparency requirements normally required by Western investors. (Mitchell, 2012) Absent any semblance of sound legal framework (let alone continuity of pricing practice), such actions show great unpredictability in China’s trading habits which reduce confidence of potential investors aspiring to enter China’s natural gas industry. These add up to significant barriers to natural gas market maturity. Asia – Sources of Supply

Asian geography promotes trade by sea and larger economies have logically invested heavily in LNG—more than two-thirds of global LNG is traded in the Asia Pacific region (Mitchell, 2012) where flexibility exists to receive gas shipments from a variety sources. Australia (LNG) and Central Asia (pipeline) have traditionally supplied gas to China, but should global market conditions shift, China is easily able to accept shipments from Canada and the United States, and high-CAPEX projects like the Kitimat LNG terminal in British Colombia are indications that North America may grow in relevance to China’s gas supply chain.

Asia – Dependence on Imports
With limited local conventional gas,...
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