40th IAEE, Singapore, June 17-21, 2017
A REFERENCE FRAMEWORK FOR
FORMULATING HUB BASED PRICE
BENCHMARK: CASE STUDY OF EAST ASIA
SHI XUNPENG
PRINCIPAL RESEARCH FELLOW, ACRI, UTS
SENIOR FELLOW, ENERGY STUDIES INSTITUTE, NUS
HARI MP
RESEARCH ASSOCIATE, ESI NUS
UTS CRICOS PROVIDER CODE: 00099F
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OUTLINE
 Introduction
 Methodology
 The framework
 Case study of East Asia
 Conclusion
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INTRODUCTION
GAS PRICING MECHANISMS
GoG vs. Oil-Linked Markets
Asia – oil-linked LNG market
Europe – a hybrid market
Since the late 1980s
North America – a spot market
Source: Poten & Partners
GoG Priced in Total Imports
% of Hub priced trade in total impprt
50%
45%
Share of spot trade is growing
In Asia Pacific, growth is slower
World average/2015: ~45%
Asia-Pacific average: ~18%
40%
35%
30%
25%
20%
15%
10%
World
5%
0%
2005
2006
2007
2008
2009
Asia Pacific
2010
2011
2012
2013
Source: IGU 2016
4
INTRODUCTION
PREVAILING CRITICISMS OF OIL INDEXATION
 First, Oil is no long a major competitor to gas in the end use market.
 Second, the competition between gas and coal will become more
important
 Thirdly, the oil indexation results in relatively higher prices than hubindexed gas prices
 Lastly, the gas pricing that is realized through regional gas to gas
competition in Europe and North America will not reflect Asia’s market
fundamentals.
INTRODUCTION
QUEST FOR GAS TRADING HUBS
LNG Prices
Motivations
Asia Premium (IEA, 2014)
LNG Prices
Gas Prices
Pricing power (Tong et al., 2014)
Inter-hub competition (IEA, 2013)
East Asia in the process of
creating its own regional gas
pricing through the establishment
of gas trading hubs.
LNG Prices
INTRODUCTION
MOTIVATION
 QUESTIONS
oWhat are the necessary factors in creating benchmark hub gas
prices?
oHow are the progress in China, Japan and Singapore?
oWho has the comparative advantage/disadvantages?
 CONTRIBUTIONS
oFirst, clarify various misleading concepts
oSecond, propose a reference framework for creating a gas trading
hub
oThird， analyse the East Asian situation with reference to the
framework.
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METHODOLOGY
Hub definition and clarification of key hub concepts
o A hub, or a trading point, is the place where buyers and
sellers exchange the ownership of gas in papers and in
physical delivery.
o physical hubs and virtual hubs as difference in scope
of hubs, while not different things.
Indicative relationship of various hub concepts
Virtual
Benchmark hub
Balancing
hub
Financial hub
Physical
Sourcs: Authors’ own deliberation
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METHODOLOGY
Key Hub Elements
European hub
elements
Our framework
Basic requirements for all hubs
Advanced recruitments for benchmark
hubs
Entry-exit system
established
A trading point. Could be a virtual trading
point, or a physical network
interconnection. The trading point is
operating by TSO.
defined Role of Hub
operator
Provide some services in addition to the
infrastructure under the trading point.
Could be assumed by TSOs or
Exchanges.
Trading platform, often Exchange
Establishment of
exchange
Standardised contract Specification of contract and products,
including, but not limit to standardization
Price Reporting
Agencies (PRAs)
Market makers,
Brokers and nonphysical traders
In the case of benchmark pricing hub,
a benchmark trading point needs to
be further defined.
Futures products to be developed for
future markets
PRAs
Right mix of market players
Sourcs: Authors’ own deliberation
Participation of financial players.
The number has to be sufficient for
meaning competition.
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THE FRAMEWORK (1)
Basic requirements for all hubs
Advanced recruitments for
benchmark hubs
A trading point. Could be a virtual trading point, In the case of benchmark pricing
or a physical network interconnection. The
hub, a benchmark trading point
trading point is operating by TSO.
needs to be further defined.
Provide some services in addition to the
infrastructure under the trading point. Could be
assumed by TSOs or Exchanges.
Trading platform, often Exchange
Specification of contract and products,
including, but not limit to standardization
Right mix of market players
Futures products to be developed
for future markets
PRAs
Participation of financial players.
The number has to be sufficient for
meaning competition.
Sourcs: Authors’ own deliberation
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THE FRAMEWORK (2)
 Basic requirements to all hubs
 Establishment of a trading point: network, TSO, and storage capacity
oPhysical network connections
 Hub operator
ocommodity exchange services, e.g., wheeling, park and loan, storage, title
transfer, and trading (EIA, 2017)
oTSO or Exchange
 A trading platform, often in the form of Exchange
oExchange is NOT a hub
 Specification and even standardization of products (contracts)
o In both technical and commercial terms
 The right mix of market participants
oPhysical parties (shippers), namely producers, wholesalers, retailers and
consumers
oTSO, Hub operator, Exchange
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THE FRAMEWORK (3)
 Advance requirements to benchmark hubs
 Development of futures products and markets
oThe benchmarked market gas prices are based on futures prices
oThe futures trading will be concentrated on benchmark hubs.
 Financial and sufficient number of market participants
oFutures products will increase access to the market, especially by non-physical
players, who is driver behind the high churn Rate
oThe number of participants not only shows the convenience of gas trade on the
hub, but also indicates the level of competitiveness.
 Definition of a benchmark trading point
oTrade could happen without a benchmark delivery zone, but there will be
difficulties in having a benchmark price without such a benchmark zone.
 Price reporting agency
oTransparency and availability of data are necessary factors for instilling
confidence in market players,
oPricing reporting agencies have played an important role by assessing clear and
transparent price and volume reporting
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CASE STUDY OF EAST ASIA
Singapore
Establishment of Virtual LNG hub defined
trading point
Operator is the Singapore
Exchange
Independent
Already in existence.
transmission
TPA has been enforced
network and third Although not relevant to
party access (TPA) LNG hub, would be an asset
for gas hub
Japan
Not defined
China
Not defined
Storage
Sufficient in SLNG
Not in existence. For its
geographic condition, it is
also difficult, would be
costly and time
consuming to have such
one.
TPA is not enforced
Not independent storage
Trade
platform/Exchang
e
Specification of
products
Yes
Yes
Some regional; transmission
networks; no national one; it
is costly, if not impossible to
aggregate all into one
network.
TPA existing, but not strictly
enforced
Not sufficient and
development is impeded by
no price volatility
Yes
Forward products
No spot trading
Only spot trading
Not standardized yet.
No spot trading.
A few trades of futures
Modest, but mainly
Japanese players
Yes
Active spot trading, but prices
are regulated
Sufficient number, but all
Chinese players
No. and there is little hope to
develop one in the near
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future.
Spot and forward products
have been specified.
Futures yet to be defined.
Active spot market No actual trading. Prices
based on assessment
Market players
Sufficient and diversified
Futures markets
and products
Swaps happened
Futures markets in process
CONCLUSION
 Proposes an analytical framework to assess the process of hub
development.
 Despite the much interest and many efforts across East Asia in
developing gas or LNG hub, there are no natural gas or LNG market
hubs.
oSingapore is leading the way to generate regional LNG benchmark prices.
oJapan is following a similar path of Singapore but is disadvantaged by its
fragmented gas markets.
oChina, given its vast infrastructure and differing characteristics of regional
markets, has the potential to build a few gas hubs, but the progress so far is
limited to establishment of two Exchanges only.
oShanghai is not a hub similar to Henri Hub
 Virtual hub is recommended for East Asia
 Building an East Asian benchmark gas faces great challenges.
oFurther market liberalization, infrastructure development, trade piint,
benchmark point, product specification, secondary gas market
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ABOUT ACRI
• Established by the University of
Technology Sydney in 2014
• ACRI Director Professor Bob Carr.
• The first think tank devoted to the study of
the Australia-China relationship
• ACRI’s key outputs are; events, fact- sheets
and opinion pieces, academic research and
external engagement.
• ACRI Advisory Board chaired former
Minister Hon Philip Ruddock
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ABOUT MYSELF
ENERGY ECONOMIST, WITH REGIONAL EXPERTISE IN CHINA, ASEAN & EAST ASIA
• Principal Research Fellow, ACRI,
UTS, 2016• Senior Research Fellow, Energy Study
Institute, National University of
Singapore, 2014• President, Chinese Economic Society
Australia (CESA), 2016.7WeChat
 Career Highlights
o Deputy head of Energy Economics,
ESI, NUS. 2015-7-2016.12
o Chief Researcher, Brunei National
Energy Research Institute, 20132014
• Energy Economics, Economic
Research Institute for ASEAN and
East Asia, 2009-13
• Various management and
professional positions in China’s
leading energy institutes, 1997-2005
o Managed East Asian Summit Energy
Cooperation Taskforce Energy
Market Integration (EMI) study, 20092013
o Consultant /Member for ADB, or UN
EACAP Expert Group, 2013-2017
Linkedin: https://www.linkedin.com/in/xunpeng-shibb209a1?trk=nav_responsive_tab_profile
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