With demand for LNG rising in Asia and a wave of supplies coming on-stream, long-term point-to-point contracts in the Asian market may give way to more flexible trade patterns and the growth of spot trading. Singapore with its deep water harbour and thriving financial centre is gearing up to become the first LNG trading hub for Asia. But success is not guaranteed. Energy reporter Rudolf ten Hoedt reports from Singapore.
Late in August, Singapore claimed it had turned a new page in the book of Asian LNG. State entity Singapore LNG Corporation (SLNG) signed a contract with a Korean construction company for the expansion of its first LNG terminal with a fourth – and the world’s largest (260,000 m3) – storage tank. This should allow SLNG “to respond to new business opportunities in the regional or global LNG markets” as the company wrote in a press release. The S$700 million (€434 million) expansion will be completed in 2018, bringing the terminal’s send-out from the current 6 mtpa (million tonnes per annum) to 11 mtpa. The size of the global LNG market is about 240 mtpa. According to experts, 11 mtpa is enough capacity to make a start as Asia’s first LNG trading hub. In Singapore’s vision, it is a decisive step to become the “Gateway for LNG in Asia”.
For Singapore the expansion into LNG is a logical next step, as oil has been at the heart of Singapore’s rise as a financial and commodities hub. The city-state is Asia’s leading oil trading hub and pricing centre. Under the autocratic rule of a well-paid and highly entrepreneurial elite, Singapore has evolved into a global manufacturing and business hub for petrochemicals and one of the top three export refining centres of the world. It dominates the regional oil storage business and with rig builder Keppel and SembCorp Marine it has first-rate domestic suppliers to the offshore oil industry.
Now Singapore wants to repeat its oil story with freezing liquefied gas. LNG is expected to be the fastest growing fossil fuel source of power generation in energy hungry Asia for the next two decades. Asia accounts for approximately 75% of global demand already. There is little doubt that the continent will continue to be the key market for LNG for many years to come. According to energy consultant Wood Mackenzie, Asian LNGdemand is set to rise from 117 mtpa now to about 255 mtpa by 2020. A significant share of this increase will stem from China, whose total natural gas imports, including pipeline supplies, are expected to rise from 53 bcm to 122 bcm, with LNG accounting for almost 40% of this increase. New supplies from North America, Australia, Russia and East Africa will come on stream from 2018 onwards to cover this growing demand.
The Asian LNG market is still dominated by secretive, long-term oil-linked contracts with destination restriction clauses that prohibit buyers to redirect cargoes. Utilities from Japan, the world’s biggest LNG importer, have been complaining about this for at least two years now, because it makes them and other Asian consumers pay more for gas than elsewhere. Expectations are that with a strong increase of LNG flows and trades on Asia’s doorstep, long-term contracts will give way to more flexibility, transparency and lower prices and more gas will find its way to the spot market.
The LNG spot market constitutes 30% of global LNG trade but only 15% in Asia. There are signs that the spot market is growing. Japanese trading houses Mitsubishi and Mitsui sealed contracts with Cameron LNG, one of the approved US LNG projects, to sell flexible volumes of LNG to flexible destinations. A more liquid spot market may also raise the interest among buyers to shift from long-term contracts or to inspire them to follow the example of the one of the big Japanese LNG players Tokyo Gas, to become portfolio players committed to various long term supply contracts sourced from different projects. Alternative pricing mechanisms, such as theHenry Hub spot market on which US LNG supplies are based, may erode long-term oil-linked contracts even further. As Alex Forbes shows in this recent article for Energy Post, US LNG exports are expected to shake up the market in coming years.
“In Singapore there is still a lack of physical capacity and the market does not have any seasonality”
All in all, then, there are good reasons to believe the dominance of oil indexed LNG contracts will further erode and spot market trade will rise. Chevron for instance is already having problems sealing long term sales contracts for its Gorgon LNG plant in Australia. “Australian LNG producers are under pressure to accept more flexible pricing and volume clauses in their long-term contracts to firm up existing agreements, secure offtake for uncommitted gas and renew expiring contracts”,research groupOxford Analytica writes in a recent report (‘US-Australian LNG competition may cut profits’). Mike Henry, chief marketeer of global resource company BHP, told an audience of Australian gas sellers and their Japanese clients earlier this month that “support for greater spot market depth and pricing on the basis of LNG fundamentals rather than by way of linkage to other indices will enhance the functioning of the LNG market and hence supply resilience. Recent tentative moves by both buyers and sellers in that direction are encouraging but I think need to be accelerated.”
Bets on the spot market
These developments make many bullish about an Asian LNG spot market, particularly in Singapore. Take David Phua. He is a senior associate and member of the Global Energy Practice at law firm King & Spalding with International Arbitration and Energy Practices across the world. Its Singapore branch specializes in LNG projects. “The volume of LNG supply will grow substantially” says Phua. “Not all of it will be absorbed by point-to-point long-term contracts. While long-term LNG sales contracts are likely to continue to dominate in the near future, there are increasing signs of a growing and sustained momentum in spot and short term LNG trades. There is a lot of potential for diversions and cargo swaps, due to the growing number of destinations LNG cargos are coming from. Buyers will increasingly want to redirect LNG and hedge their bets on the spot market.”
According to others, that does not necessarily mean an Asian LNG trading hub will happen quickly. Gavin Thompson, Head of Asia Pacific Gas & Power Research at energy consultant Wood Mackenzie, has doubts whether an LNG Trading Hub in Singapore can have a big impact on LNG prices in Asia in the near term, because of limited storage capacity and little arbitrage. “Singapore has many attributes. It is competitive, transparent and counts for many trading organisations. But it does not yet drive price. Henry Hub for instance is on top of a very big liquid market with a lot of storage and seasonality. As a trader, I might chose to buy gas options in summer and sell them in winter for a higher price, but in Singapore there is still a lack of physical capacity and the market does not have any seasonality. It may become a pricing reference point, but not necessarily for a large amount of the LNG sold in Asia.”
In addition, says Thompson, “other markets may offer competition. Tokyo or Shanghai potentially could but they have other shortcomings. In Asia there is potential for a price marker, but arguably not yet a suitable platform for physical trade as there is in Europe. It is also likely that the total volume of traded LNG as a percentage of overall gas sales in Asia will be lower than in Europe. I do not believe that Japanese buyers will necessarily run away from long-term contracts that have been the base of trading over the last 40 years. A lower price in long-term contracts is more reflective of their concerns. I see signs that this is happening.”
Singapore has a different view, however. It took the first step to pioneering an open-access import and export LNG hub in the region in May 2013, when it opened the first LNG terminal on the artificial Island of Jurong. This first terminal will have a maximum capacity of seven storage tanks and 15 mtpa, meant partly for domestic energy demand and security. The Singapore government stepped in financially because it could not find private parties able to participate directly as investors, insiders tell EnergyPost. As a result, the first LNG terminal is now owned and operated by state company SLNG.
In February of this year, inaugurating the third storage tank and second jetty, authorities also announced the construction of a second LNG terminal. This should be built in the eastern part of the island state due to land scarcity on Jurong Island and is supposed to spur growth in local LNG industry and develop LNG trading facilities such as bunkering and vessel cool-down services. “We take this plan for a second terminal very seriously and expect it to be developed,” says David Phua, who has been advising the Singapore government and LNG terminal operator SLNG. “The government is very much pro-business, has been very quick to capitalize on market movements and has been very determined to push for an LNG terminal.”
Generous tax schemes
In various way Singapore is working to launch and control an Asian LNG spot market. Temasek, Singapore’s Sovereign Wealth Fund, is investing in upstream gas assets that could feed Singapore’s LNG terminals with non-contracted gas. Temasek created LNG trader Pavilion Energy in 2013 and provided it with a $6.9 billion war chest.
Pavilion says the time is ripe for an Asian LNG hub and acts upon it. The company has made up-stream acquisitions in Nigeria and Tanzania and struck deals with various companies (Sempra Energy’s Cameron LNG project in Louisiana, Total, BP) for some 1.5 mtpa of LNG from 2018 on. Pavilion also cooperates with the Singapore Stock Exchange and others to develop a Singapore LNG price marker. CEO Seah Moon Ming, who is also on the board of Temasek and chairman of the trade promotion agency known as IE Singapore, called his acquisitions during a ‘pioneering’ LNG conference in Singapore last February, “a key upstream component of Pavilion Energy’s LNG portfolio” with a “great supply potential for Singapore and Asia.” Seah is also interested in building liquefied natural gas receiving terminals in Shandong, China, Singapore’s top trading partner.
“Shanghai is distrusted because of lack of transparency and the risk of price manipulation. Tokyo is not liberalized”
In order to harness a future LNG trading hub, Singapore is also making efforts to attract more LNG portfolio players and traders through generous tax schemes, with some success. Shell moved its Integrated Gas division from The Hague to Singapore in 2013, stressing the growing importance of Asia for the company’s LNG business. British Gas followed in April 2014, shifting the headquarters of its oil and LNG business from Britain to low-tax Singapore. BG now sells over 70 percent of its LNG cargos to Asian clients and the company delivered the first commercial cargo to Singapore’s new LNG terminal in May 2013. Singapore also hosts investment banks with LNG trading arms such as Bank of America, Merrill Lynch and Goldman Sachs. Commodity trading companies like Gunvor and Trafigura have transferred LNG traders to Singapore and Gazprom is there as well.
Vopak, the world’s biggest independent company for the storage and handling of liquid chemicals, gases and oil, is watching LNG spot developments in Singapore very closely. The Dutch storage company, which owns LNG terminals in the Port of Rotterdam and in Altamira (Mexico) and has a prominent oil and petrochemicals presence in Singapore, is studying the possibility to jump on the Asian LNG train as well. Vopak is completing the first Asian independent 1.3 million cubic meters oil storage and blending facility in the deep water port of Pengerang on the Malaysian coast of the Malacca Strait, just south of Singapore. In July at the opening of the first phase of the oil terminal, Vopak-CEO Eelco Hoekstra declared that Pengerang would be the ideal location for Vopak’s first Asian LNG off-and on-load facility. “If Singapore develops into a liquid hub backed by a price marker for Asian LNG like the National Balancing Point for natural gas in Europe or the Henry Hub in the US, then you create demand among clients to book more storage capacity to cover hedge positions or facilitate physical trade to Indonesia, the Philippines and China,” says Dietrich Gerstein, Vopak’s Global Director LNG.
Seah Moon Ming, a spider in Singapore’s LNG web, said earlier that given all these developments, he is confident that Singapore will soon be an Asian LNG trading hub. “Over the next three years, additional storage capacity is expected to come on-stream. Over the years, more companies have established their trading operations here to tap into the strong ecosystem of trade services in areas such as legal, finance and logistics. In short, Singapore’s neutrality, proximity to key markets and strong ecosystem of trade services, has made it attractive for energy companyes and global investors in Singapore to capture the dynamic opportunities in the region.”
There is a strong view in the market that Singapore holds the best cards to become Asia’s first LNG trading hub. Last year in Tokyo, International Energy Agency’s chief Maria van der Hoeven presented a report in which the IEA expressed the need for an LNG trading hub in this region in order to get a more transparent price index for the Asian gas market. The IEA highlighted Singapore as the best candidate for an LNG trading hub. Market observers agree. Shanghai is distrusted because of lack of transparency and the risk of price manipulation. Tokyo, the other potential competitor, is not liberalized and has no open (on- and off-load, regasification, cooling) capacity available. Pressed by the Japanese government, the Japan OTC Exchange launched the start of an LNG trading platform without physical settlement on September 12, but there has been hardly any LNG traded so far, if at all. “We expected this to happen,” a Japanese gas analyst said. “There is 99% percent chance Singapore will get it.”
But even if Singapore manages to get this LNG trading hub going, challenges and uncertainties lie ahead. In the last couple of months, markets seem to have robbed it of one of its potential benefits: lower prices. More cargos have already been coming to the spot market this year. The US shale boom has freed supplies from big LNG exporters like Qatar to go to China and elsewhere in Asia. Some months ago, ExxonMobil brought LNG from Papua New Guinea to the market earlier than expected. Together with the economic slowdown in Europe and re-exports of European gas deliveries to Asia where prices are higher, this has considerably brought down the price of spot LNG. The Japan-Korea Marker, a benchmark spot price for Asia, has plummeted by a third to around $10.00 per MMBtu, almost dissolving the infamous Asian premium on LNG.
“Companies will look for ways to defend pricing and sit this glut out for 3-4 years”
According to Gavin Thompson of Wood Mackenzie, we aren’t in an LNG glut – yet.”There is momentarily a lot of gas in stock, but only one harsh winter will be enough to drive prices back up.” But, he adds, “a real LNG glut is coming from 2018 on. Prices in Asia will go down and may test as low as $8/MMbtu before recovering. The arbitrage between the Pacific and Atlantic basin may be reduced to transport costs.”
This structurally over supplied market will not necessarily pump redundant stock towards an LNG trading hub and make it available to the spot market, Thompson says. “This glut will be short lived. After 2022-2023 we see oversupply diminish and pressure ease. One of the reasons being that many Japanese and Korean contracts come to an end. There is not enough gas to roll over all these contracts. The net volume of additional LNG needed is considerable. So companies will look for ways to defend pricing and sit this glut out for 3-4 years. We may see LNG producers shut in production and buy in the spot market. By the end of this decade, Petronas for instance may have large amounts of uncontracted LNG available in an oversupplied global market and will try to pump it into the Malaysian peninsula. So suppliers will put in all kind of defence mechanisms against low spot prices and to protect long-term contracts.”