Singapore poised to become Asia’s gas trading hub-
Asia is the fastest growing gas market in the world; in fact, it is set to become the second largest market globally by 2015, with demand for natural gas likely to be in the range of 790 billion cubic metres (bcm). There are about 50 liquefied natural gas (LNG) terminals that are expected to come up over the next few years in the Asian region. What the region lacks is a gas trading hub and transparent natural gas pricing. Singapore has long harboured plans of becoming a regional gas trading hub, given its strategic importance in the gas trading routes in Asia and the number of oil and gas companies currently based in the city-state. With its first LNG import terminal coming online in May 2013, Singapore is now on course for achieving its goal.
Gas markets in Asia today
Complex and fragmented, the Asia-Pacific market is made up of diverse national gas markets with varying levels of development. On one end of the spectrum are the well-established and mature markets of Japan, Korea, and Chinese Taipei, and on the other are the emerging markets of China and India. Then there are the Southeast Asian countries that are major natural gas producers.
An important development in the market is the growing reliance on imported natural gas. While the amount of natural gas trading done through pipelines is very limited, the region is experiencing growing dependence on the global LNG supply chain. Japan, South Korea, and Taipei have been the biggest LNG importers. India and China started importing in 2004 and 2005, respectively. Over the last couple of years, Thailand, Malaysia, Indonesia, and, most recently, Singapore have joined the importer group. Even more Southeast Asian countries such as Vietnam and the Philippines are expected to begin LNG imports in the next few years, while China and India are expanding their LNG consumption. The LNG supply to the Asia-Pacific region comes from several ASEAN countries, Australia, and the Arabian Gulf. New reserves are being developed in East Africa, and with the discovery of shale gas in the US, North America is also turning into a potential LNG source.
Currently, the market for natural gas in Asia is dominated by long-term contracts with prices indexed to those of oil. While these contracts may have been necessary to ensure energy security for these countries, they have also kept the natural gas prices of the region at levels that are far higher than those of more mature markets like Europe and the US. This status quo thus raises questions relating to the competitiveness and the sustainability of the pricing system in the region in the long run.
In contrast, in the US, large reserves of shale gas have led to the lowering of prices to the range of $3 per million British thermal units (mmBtu). The North American gas market is characterised by gas-to-gas pricing, with gas trading taking place at the Henry Hub that sets the benchmark price for the entire North American trading region. Spot prices in Europe though three–four times those in the US are still lower than those in the Asia-Pacific region. In the European market, oil price indexation is the dominant price mechanism. It is, however, now shifting more towards gas-to-gas-based prices with increasing trade activity taking place through gas hubs.
Developing a natural gas trading hub for the Southeast Asian region would allow countries to negotiate shorter-term contracts in which prices are determined mainly by supply and demand. Such a practice would allow countries to respond to market forces more quickly. A more transparent price signal will also help to steer investments towards natural gas infrastructure.
Why Singapore?
Nestled between LNG demand centres in Northeast Asia and LNG supply sources in Southeast Asia, the Middle East, and Australia, Singapore has a favourable geographical location. Essentially, its location at the southern tip of the Strait of Malacca situates it at the heart of most LNG trade routes in Asia and makes it an ideal gateway to Southeast Asia. LNG traders can use Singapore to centrally store their cargoes before shipping them to big consumers like Japan, China, and Korea.
According to International Energy Agency (IEA) analysis, Singapore is the best candidate to be a natural gas trading hub. The city-state has the brightest prospects for establishing a competitive wholesale natural gas market. Some of the advantages that Singapore enjoys vis-à-vis other potential hubs are elaborated below.
Liberalised domestic market
Singapore has market-oriented policies, and is characterised by limited government interference and wholesale pricing of natural gas. Despite being totally dependent on imports, the government has chosen a free market approach towards both the natural gas and power sectors, with a new gas industry structure since September 2008. As part of the restructuring process, the gas transport business was unbundled from the competitive business of gas import and retail. The sector is regulated by an independent energy regulator, the Energy Market Authority (EMA). The Gas Network Code ensures open and non-discriminatory access to the gas pipeline network.
In its analysis, the IEA pointed out that Singapore’s approach towards the natural gas market can be considered to be one of the most hands-off in the Asia-Pacific region. In fact, these reforms, designed to facilitate the evolution of a competitive market, are what make Singapore an ideal candidate for a natural gas trading hub.
Presence of intra- and interregional connections
Singapore is connected to its neighbouring countries via pipelines. Singapore is linked to Indonesia and Malaysia through four pipelines with a total annual supply capacity of around 9.6 bcm (see Table 1). Although Singapore has no transit facilities, it can be considered to be an interconnection point for Indonesia and Malaysia (and Thailand).
In addition, Singapore has also added LNG to its portfolio recently through the commissioning of an LNG terminal at Jurong Island. The S$1.7 billion LNG receiving terminal commenced commercial operations on May 7, 2013. The initial capacity of the LNG receiving terminal that has two regasification tanks is 3.5 million tonnes per annum (mtpa). Its capacity will increase to 6 mtpa by end-2013, when a third tank, a second jetty, and regasification facilities are added. The terminal’s throughput capacity will rise further to 9 mtpa when the fourth tank and its related regasification facilities are constructed. The LNG terminal will increase Singapore’s import capacity beyond its domestic consumption requirements.
This LNG terminal is the first in Asia to accommodate multiple types of ships with the capabilities to re-export LNG cargoes. Almost all the terminals in service worldwide are used exclusively to either export or import LNG. While Malaysia, Indonesia, and Thailand have existing terminals or facilities in the works, the Singapore terminal is the only one with the ability to both import and export LNG. The terminal can also be set up as a fully functioning gateway to break down bulk LNG supplies for redistribution to regional destinations that either cannot afford to build large LNG terminals or have port facilities that are too small to handle the giant LNG tankers. It could also potentially offer LNG bunkering services to ships that utilise hybrid LNG and oil-based fuel systems in the future.
Also, the terminal is the first open access terminal in Asia and deliberately separates ownership of infrastructure from commercial activities. It is regulated by the independent regulator EMA. This has effectively separated commercial activities from any activity related to infrastructure in Singapore.
Leading oil trading hub
Singapore is already a leading oil trading hub for the Asia-Pacific region. It boasts of a stable political system and a supportive legal and pro-business environment. The Singapore government has enacted various incentive programmes and provided tax breaks to attract major oil and gas companies.
In 2001, it instituted the Global Trader Programme to encourage companies to establish the headquarters of their regional/global operations in Singapore. Companies also benefit from concessionary tax rates of 10 per cent on their qualifying trade income. Furthermore, in 2007, the government imposed a 5 per cent concessionary corporate tax rate for LNG trading income, with the intent of spurring the development of an LNG trading hub.
Many of the major energy trading houses, along with supporting banking, professional service companies, and key price reporting agencies such as Platts, ICIS, and Argus, have already set up their bases in Singapore. Further, over the last few years, several LNG trading houses have established their presence in the city-state, in line with the view that Singapore can serve as a hub for short-term sales trading of LNG. As a result, an industry that offers customised risk management products and services centring on LNG has arisen.
In addition, industry players such as Shell, British Petroleum (BP), GDF Suez, Statoil, ConocoPhillips, GAIL, and Gazprom have begun to use Singapore as a hub for their business in the region. To this effect, they have established trading or marketing desks in the city-state. In fact, Shell has decided to relocate its global gas operations in Singapore from The Hague in response to the growing demand for LNG in Asia. BP has its regional headquarters in Singapore. The presence of various international oil companies in one location also means that financial service organisations will ensure that their services are available; moreover, they will be customised for the natural gas trading industry.
Lastly, political will is also supportive. The Singapore government is contemplating the construction of a second LNG terminal. In November 2012, the EMA issued a tender for a consultant to conduct a six-month feasibility study.
A competitive landscape
While Singapore has a number of factors that favour its transition to a leading natural gas trading hub, it still faces competition from other nations in the region (including Malaysia, China, South Korea, Japan, and Indonesia), which are seeking to do the same.
Malaysia is in the process of establishing its own bidirectional LNG terminal. The first phase of construction of the $1.3 billion Pengerang Independent Deepwater Petroleum Terminal is set for completion in the first quarter of 2014. The terminal is a crucial element of the Pengerang Integrated Petroleum Complex, which aims to transform the country into an oil and gas hub. Malaysia is also set to commission the world’s first LNG regasification unit on an island jetty later in 2013. Further, Petronas, a state oil and gas company, is constructing its ninth LNG production train at its Bintulu complex, which would take the total capacity of the complex to over 27 mtpa. At that point, the Bintulu complex will have one of the largest LNG production facilities in a single location.
China that transitioned to the fourth largest gas consumer in the world in 2011 is another formidable competitor. In December 2010, the Shanghai Petroleum Exchange (SPEX) launched the region’s first LNG spot market. More recently, the SPEX has launched a natural gas “peak shaving” spot market to secure volumes of natural gas for gas-fired power plants during peak electricity demand in the summer and enforce an efficient market-based pricing system. Despite the low volumes, there is interest among the players and the government to explore market-based instruments. China is also one of the few economies in the region where LNG and piped natural gas both compete for market shares. Finally, the Chinese government has an ambitious plan of increasing gas usage in all sectors.
The advantage that South Korea and Japan have over the other countries is that both have the required infrastructure for LNG trading such as storage tanks and related facilities. Further, there are a number of domestic LNG trading players in both countries, which have established operations. Indonesia is aiming to increase its LNG export capacity with the Tangguh LNG expansion project and the Donggi–Senoro LNG project. Countries in the region are also exploring the development of floating storage and regasification units.
However, a key common challenge that all these countries face is the lack of competition and heavy government involvement in the natural gas sector either to ensure the security of supply, or as a market participant through vertically integrated companies. For example, in China, the government plays a central role at each level of the gas value chain via state-owned oil and gas companies. Hence, pricing is regulated and is linked to oil products. While there is an extensive pipeline network that connects domestic and international production centres on China’s east coast, the network is still fragmented.
Similarly, in Malaysia, Petronas, a state-owned enterprise, occupies a dominant position in the oil and gas industry. According to the Executive Director of Malaysia Petroleum Resources Corporation, an agency under the Malaysian Prime Minister, which is in charge of transforming the country into a major centre of oil and gas production by 2017, Malaysia is looking to build a complementary relation with Singapore, not replace it as a natural gas trading hub.
Both South Korea and Japan lack the central location enjoyed by Singapore. Moreover, there are additional factors that undermine the two countries’ transformation into international natural gas hubs, despite the relative maturity of their natural gas markets. Currently, the natural gas industry of South Korea is dominated by the state-owned Korea Gas Company. The government’s plans to liberalise the gas sector have not materialised; thus, it continues to exercise significant influence on the sector due to its concern with the security of supply. Currently, there is no trading hub where companies can buy and sell natural gas.
In Japan, the Fukushima incident and the ongoing policy debate is likely to exert a significant impact on the natural gas sector. As with South Korea, supply security concerns have led the government to adopt a heavy-handed approach with regard to the natural gas sector of the country. Attempts are being made to set up a futures market: in March 2013, Japan’s Ministry of Economy, Trade, and Industry announced plans to launch the first LNG futures contract at the Tokyo Commodity Exchange in two stages, starting in 2014. However, given the increased importance of natural gas after the Fukushima incident, the government’s involvement in almost every step of the gas value chain is unlikely to change in the near future.
Singapore: Still an ideal candidate
Based on the above discussion, it would appear that Singapore possesses the geographical, economic, and infrastructure attributes that make it an ideal candidate as a gas trading hub for the region. Despite stiff competition from other countries in the region, it has considerable advantage over others in having greater competition, sufficient network capacity, and non-discriminating access, as well as a hands-off government approach. Hence, it continues to attract significant LNG players that are keen to invest in its LNG sector and remains committed to its goal of becoming a leading regional gas trading hub.
