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.
Here’s to gas-fired markets,
Dave Forest
dforest@piercepoints.com
Copyright 2009 Resource Publishers Inc.
Note:
The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided “as is” without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.
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