Singapore Challenged as LNG Trade Hub by Liquidity Lack

Singapore’s drive to become an Asian hub for buying and selling liquefied natural gas will be constrained by stagnant volumes in the spot market, which traders say may not expand anytime soon.

The city-state, which opened its first LNG terminal in May, plans to award import licenses to as many as two suppliers and almost triple the amount of gas it can receive over the next three years, the government said yesterday. While it has the infrastructure and supply options needed for a market to develop, a lack of liquidity may prevent that from happening for at least four years, according to Wood Mackenzie Ltd.

Asia’s oil-trading center is vying to become a hub for LNG, supercooled gas shipped by tankers rather than pipelines. The region has overtaken Europe as the world’s biggest gas importer, accounting for 46 percent of global trade, according to the International Energy Agency, which identifies Singapore as being best-placed to become the center for trading LNG.

“Conceptually it’s fine, but possibly it’s a little bit ahead of its time,” said Tony Regan, a Singapore-based energy consultant at Tri-Zen International Inc. “Singapore has facilitated the development of this market, it’s just that other parts, such as receivers and buyers, are not moving at quite the same speed.”

About 59 million metric tons of LNG, or 25 percent of the 236 million tons sold globally, were traded as short-term or spot cargoes last year, unchanged from the year before, according to an annual report by the International Group of Liquefied Natural Gas Importers, the industry group for LNG buyers and sellers known by its French acronym GIIGNL. Asia accounted for 70 percent of the total.

Spot Constraints

A lack of new supply is limiting spot transactions, GIIGNL said. “Until substantial new volumes become available, this phenomenon is likely to continue for the next couple of years as Asian importers have a growing appetite for more secure supplies.”

While trade may remain stagnant, companies are still lining up to tap Singapore’s market. Companies from Germany’s E.ON SE to Glencore Xstrata Plc are said to have hired LNG traders in the city this year. Qatar Liquefied Gas Co., the world’s largest producer, is looking to expand in the region, Abdulla Al-Hussaini, the company’s marketing director, said today.

GAIL India Ltd., the country’s biggest gas distributor, will allocate 1 million tons of the fuel from the U.S. for trading at its Singapore unit, Chairman B.C. Tripathi said in an interview Oct. 29.

Temasek Holdings Pte, Singapore’s state-owned investment company, set up Pavilion Energy Pte in April to trade LNG. Pavilion signed its first long-term deal with a European supplier, it said yesterday.

Pavilion Contract

Pavilion will get 500,000 tons a year for 10 years starting in 2018, according to a statement. The contract is with “a major European oil and gas multinational” for delivery into Singapore and the region, Chief Executive Seah Moon Ming said at a Singapore International Energy Week event yesterday. Pavilion has started trading LNG and expects to complete its first cargo delivery to Asia by February, Seah said.

The nation of 5.4 million people opened the Jurong Island terminal with an initial annual capacity of 3.5 million tons, rising to 6 million tons by the end of 2013. A fourth tank at the facility will boost that to 9 million tons by 2016. Natural gas supplied 84 percent of Singapore’s electricity in 2012.

BG Plc won the contract in 2008 to supply 3 million tons annually over 10 years starting in 2013. Singapore may buy an additional 1.5 million tons a year under the new licenses, Second Trade Minister S. Iswaran said in a speech at the conference yesterday. The Energy Market Authority, the industry regulator, will invite proposals and shortlist candidates next year, he said at the event.

‘Greater Role’

The terminal “gives Singapore an opportunity to play a greater role in the region by supporting LNG trade and providing ancillary services,” Iswaran said.

The government also plans to lift a moratorium on piped-gas supplies by 2018 or when BG reaches its 3 million-ton commitment, according to Iswaran. This may lead to increased purchases from neighboring Malaysia or Indonesia, he said, depending on how competitive they are. As of August, Reading, U.K.-based BG had supplied almost 90 percent of its franchised volume, according to its website.

“We had a moratorium in order to ensure that the LNG market was able to develop and have a certain baseload position in Singapore,” Iswaran said. “We should be able to open up our market to different sources of gas to ensure the most competitive sources are able to supply to Singapore.”

Lacking Liquidity

The Asian LNG markets don’t yet have the requisite liquidity and they are still controlled by governments, making it “very difficult” for a trading hub to develop, said Mangesh Patankar, the managing consultant for Asia-Pacific gas and power at Wood Mackenzie.

“Singapore is well-placed, it has pipeline connectivity, it now has a regasification terminal, but the key issue would be the quantum of demand,” Patankar said by phone. “For a trading hub to develop, there is also a need for a decent amount of demand and that may not be the case in some of the Southeast Asian countries at least. Places like China or Japan may have an advantage in those terms.”

Japan, the world’s biggest LNG buyer, accounted for almost half of Asia’s spot trade in 2012, according to GIIGNL. South Korea, the second-largest consumer, purchased a about a quarter of the cargoes.

LNG Prices

Southeast Asia’s gas demand will rise by about 15 percent to 169 billion cubic meters by 2016 from 2012 levels, compared with 9.7 percent growth in global consumption, the Paris-based IEA estimates. By contrast, China’s needs will increase by 59 percent to 237 billion in the same period.

Spot LNG prices for Northeast Asia jumped to the highest level in almost eight months through Oct. 21 as Japan boosted purchases after shutting down all its nuclear reactors as a result of the March 2011 earthquake. Prices increased to $17.10 per million British thermal units, New York-based Energy Intelligence Group said on the website of its World Gas Intelligence publication.

“I don’t think Singapore’s status as an LNG hub will be purely based on domestic demand, which is fairly limited,” Nick Kouvaritakis, an associate at Herbert Smith Freehills LLP, said in the city yesterday. “It has a lot to do with external trade and the ability to get trading flow from international companies.”

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