Increasing the Use of Natural Gas in the Asia-Pacific Region

Overview

Increased use of natural gas in the Asia-Pacific region could bring substantial local and global benefits. Countries in the region could take advantage of newly abundant global gas supplies to diversify their energy mix; the United States, awash in gas supplies thanks to the fracking revolution, could expand its exports; and climate change could slow as a result of gas displacing coal in rapidly growing economies.

However, many Asian countries have not fully embraced natural gas. In previous decades, the United States and Europe both capitalized on low gas prices by investing in infrastructure to transport and store gas and by creating vibrant gas trading systems. By contrast, Asian countries have not invested in infrastructure, nor have they liberalized gas markets. Strict regulations, price controls, and rigid contracts stifle gas trading. The window of opportunity for making the transition to gas is closing, as slowing Asian energy demand and copious global supplies are reducing prices and discouraging global investment in infrastructure for gas trading and distribution. If supply dries up, prices could increase markedly, making gas unattractive to Asian countries, especially when compared to coal.

Still, this scenario is not inevitable. If global gas demand increased modestly over the next decade, raising prices enough for production to be profitable but not so much that consumption became unaffordable, Asian countries could invest in infrastructure and enact reforms to enable a large increase in gas consumption. However, because of sluggish global economic growth, the Asia-Pacific region itself is the only plausible source of an initial uptick in new gas demand that can support a sustained surge.

A simulation of global gas markets finds that a 25 percent increase in gas demand in both China and India, compared with current market forecasts, could help stabilize prices. The 25 percent increase would represent just a 2.9 percent increase in global demand but would be enough to boost Asian gas prices by more than 20 percent over the next decade. Such an increase in demand is plausible in both China and India, because they are large and growing economies that use relatively little gas today as a share of their energy mix and are motivated to use more gas to displace the burning of coal, which causes air pollution. At the same time, because China is the world’s largest source of greenhouse gas (GHG) emissions and India is the third-largest and fastest-growing source, gas use that replaces coal would slow global GHG emissions.

Such demand increases are not necessarily favorable for U.S. strategic interests. Still, the United States stands to gain more than it loses by promoting a transition to gas in the Asia-Pacific. Whether the initial increase in gas demand materializes will depend largely on domestic policy decisions—for example on infrastructure investment or on caps on local gas prices—in China and India. The United States can encourage Chinese and Indian governments to make these decisions by providing technical assistance to implement reforms and recommending that international institutions provide financial assistance. U.S. policymakers should also coordinate competing proposals from China, Japan, and Singapore to establish a thriving gas trading hub. Finally, to secure the environmental benefits of a transition to gas, the United States should develop best practices for measuring and minimizing methane leakage from natural gas infrastructure built in the region.