The Buzz

One Way to Cut Tensions in Asia: Building a Regional Natural-Gas Pipeline

Building a regional natural gas network is the biggest step Asia can take over the next 5-10 years to reduce destructive climate change.

In the journey from coal to clean energy, natural gas will play a key transition role in energy markets.

Once this transition is complete (say, sometime between 2030-2050), gas will give way to better energy sources -- like solar, wind, geothermal, biomass and even closed-cycle nuclear.

As new, better, lower emission energy resources come online and make gas obsolete, gas pipeline networks can shift to carrying other fuels -- like hydrogen or bio-energy. This flexibility offers enormous long-term economic value.

Events already are moving in this direction. China recently announced two deals with Russia to build natural gas pipelines to bring Siberian natural gas to China’s eastern and western regions. A third pipeline, passing through China to South Korea, also is possible.

These pipelines will increase China’s domestic gas supply. As markets change, and China’s gas supply needs fall, China can trade some of that Russian gas with its neighbors. Buyers could include Japan, South Korea and/or the Association of Southeast Asian Nation states. Cross-border trading can alleviate gluts and shortages. This benefits everyone.

As Asia (and the world) reduce carbon emissions over the next 10-30 years, natural gas almost certainly well be the ‘benchmark’ fuel price against which other energy sources (like nuclear, solar, biomass, hydro and wind) are initially compared. These discounts or premiums will provide crucial price signals for investment.

At the recent APEC meeting in China, the US and China announced a bilateral deal on carbon emission reductions. The United States agreed to cut its emissions between 26-28% from 2005 levels by 2025. China agreed its carbon emissions would would be capped by 2030, with non-fossil fuels accounting for 20% of domestic energy supply at that time. The deal lays the groundwork for a global climate agreement in December 2015 at the United Nations Climate Change Conference in Paris.

For a global climate agreement to succeed, energy markets must evolve. With an interconnected regional gas network, and the world’s largest regional energy market, Asia’s natural gas price will become the world’s benchmark price. This will benefit everyone.

At present, the ‘Henry Hub’ price set in the United States is often used as a global benchmark.  That’s because the US has (at present) the world’s largest open, interconnected and integrated national gas pipeline network. One result is that many natural gas contracts in Asia are being pegged to the Henry Hub price, even though the Henry Hub price doesn’t necessarily reflect supply-demand fundamentals in Asia.

Given its own integrated, cross-border natural gas pipeline network, ‘Asia’ (ie China, Japan, South Korea, the ASEAN states, East Timor and Australia) could have its own benchmark trading price -- most likely set in Hong Kong or Shanghai.

Both Hong Kong and Shanghai are gas pipeline hubs. Both also have Liquid Natural Gas import terminals either operating or planned. This makes them ideal for arbitraging price differentials between pipeline gas and Liquid Natural Gas. This will improve Asian investment signals, particularly if prices are denominated in China’s currency expands its role in international trade.

In Australia, ill-considered construction of Liquid Natural Gas export infrastructure (some of it to China) has led to cost overruns, negative environmental consequences and bad long-term economics. These investment mistakes have been caused by poorly-interpreted price signals (for natural gas, carbon emissions and tanker transport, to name three), the infrastructure complexity and inflexibility of LNG and the rapidly falling cost of energy alternatives ranging from solar PV to pipeline gas delivered from Siberia.

Most energy economists estimate initial carbon prices of $20-30 per tonne are needed to start shifting global infrastructure and energy resource development investment toward low-emission energy sources like solar, wind and nuclear and away from coal. In 2011, the energy-related carbon emissions of China, Japan, South Korea, the ASEAN states and Australia amounted to 12.7 billion metric tonnes. Priced at $25 dollars per tonne, that’s $317 billion per year that could be recycled into new infrastructure investment. This money could flow through such organizations as the Green Climate Fund, the Asian Development Bank or China’s proposed Asian Infrastructure Investment Bank.

A large amount of this infrastructure investment would probably flow from Chinese state champion infrastructure companies like China National Petroleum Corporation (CNPC), Petrochina and State Grid Corp. of China. These companies have built up world-class expertise in delivering large infrastructure projects in China’s over the past two decades.

Therefore, the expertise exists to build a cross-border gas pipeline system in Asia to alongside which other energy infrastructure -- like High-Voltage Direct Current (HVDC) power lines -- can be added later. This will add to the network flexibility of the system by enabling fuel switching between natural gas and electricity.

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