[NGW Magazine] Singapore: favourite for Asian LNG hub
This article is featured in NGW Magazine Volume 2, Issue 12
By Audrey Raj
Singapore has many conditions for a Asian gas hub to flourish: a good location, low taxes and a free-trade mindset. All that is missing is high gas demand.
Situated at the crossroads of major energy consumers and exporters, Singapore is very well placed to tap into the rising Asian trade flows of LNG. In 2015, 400 of the largest commodities trading companies in Singapore had generated more than $1 trillion in turnover and supported over 15,000 jobs, according to the International Enterprise Singapore.
About 40 LNG trading companies have set up shop in Singapore, ten in the last three years alone. The independent trading houses that will likely play an increasingly important role in LNG – Vitol, Trafigura, and Noble Group among others – already have a long history in the country.
Japanese companies are also eyeing an early foothold in Singapore’s LNG market. Last June, Toho Gas – Japan’s largest buyer, after Tokyo Gas and Osaka Gas – set up its Singapore unit. Japan is also seen as another potential candidate for being the Asian LNG trading hub.
Kansai Electric Power, another Japanese utility, announced in March its plans to set up a LNG trading unit there to help it strengthen procurement and sales. The new company, KE Fuel Trading Singapore, will sell LNG with more flexibility, as spot trades are becoming more important to reflect change in demand in an era of real competition at home (NGW Vol 2, Issue 11).
Furthermore, in April, Singapore and Japan held their first energy dialogue to deepen collaboration. Representatives from the Energy Market Authority (EMA) of Singapore and the ministry of economy, trade and industry (Meti) of Japan met in Tokyo to talk over various regional and bilateral initiatives on energy issues of mutual interest, including the establishment of a regional gas trading and pricing hub and LNG bunkering.
They emphasised the importance of creating transparent, competitive and liquid gas markets, and expressed interest in exploring collaboration in these areas.
The global LNG industry also took a step forward with the launch of a new online trading platform in Singapore that went live in the first quarter of this year. Developed by Global LNG Exchange (GLX), the digital platform allows LNG traders to buy and sell spot cargoes via online auctions.
Developed in Australia by LNG industry professionals who saw the opportunity for LNG trading to undergo a technological transformation, GLX will operate the platform in Singapore, with auctions being conducted on either Singapore or London time.
Deloitte’s LNG leader in Australia Bernadette Cullinane told NGW: There are different types of ‘hubs’, and we could see the emergence of different trading hubs in various Asian markets in the future. That said, at the moment all the stars are aligning for Singapore.
“Singapore is the prime candidate for a regional LNG hub operation underpinned by many supportive factors. It’s the perfect geographic location in Asia, it already has a world class commodity trading reputation, it has the trading infrastructure and deep expertise in place, it has low sovereign risk, high quality institutions and sophisticated capital markets to facilitate a major trading operation.
“In the World Economic Forum’s annual competitiveness index, Singapore scores very highly due to the quality of its economy and its institutions. The country is also attempting to push deeper into the markets for shipping finance and develop new derivative products. This plays nicely to the LNG as a marine transportation fuel story. For these reasons, I would place Singapore ahead of the other two potential candidates – Japan and China,” Cullinane told NGW.
In April, Deloitte hosted its first annual Energy Trading Summit in Singapore, which was attended by senior energy sector leaders from across Asia. In a survey of these executives, nearly 80% identified the republic as the country most likely to become the Asian LNG trading hub in the next five to ten years. Japan and China were also identified as other potential hub locations.
In addition, over half of the survey respondents (58%) agreed that Platts’ Japan Korea Marker (JKM) will be the most widely adopted benchmark for spot LNG trades in Asia in five years, while the SGX LNG Index Group (Sling) is also expected to emerge as an important index for Asian trades.
“There’s certainly plenty of competition to be Asia’s LNG sentiment index of choice. There’s JKM, the Sling index, Icis’ East Asia Index, RIM/CME and ICE. From a physical LNG trading perspective, GLX is emerging as the first digital trading platform,” Cullinane added.
Sling could surpass JKM
Published by S&P Global Platts, JKM is the LNG benchmark price for spot physical cargoes referenced in contracts both in Northeast Asia and globally. JKM reflects delivered ex-ship spot LNG prices for cargoes delivered into Japan and South Korea. Trades into China and Taiwan are also used to calculate JKM, by allowing for the difference in shipping costs relative to Japan/Korea.
Launched in October 2015, Sling is a series of indices created by Energy Market Company (EMC) and Singapore Exchange (SGX) to reflect the price of spot LNG cargoes at selected locations. In October 2015, the Singapore Sling was launched as a reference point for the fast-growing and developing southeast Asian LNG market.
In September 2016, the North Asia Sling was introduced to provide a much-needed transparent and representative price for a traditional centre of LNG demand. In March 2017, SGX and brokers Tullett Prebon collaborated to launch the Dubai-Kuwait-India (DKI) Sling to support one of the fastest-growing regions for LNG spot trading.
“Today, the JKM is the choice sentiment indicator of Asia LNG spot prices,” Cullinane said, adding that it takes time for an index to become trusted by investors and to reach critical mass in terms of trading volumes. She said JKM has the head-start - it’s liquid, reasonably heavily traded, well understood and accurately reflects the market it is designed to benchmark.
“[However], with southeast Asia, China and India expected to become more important as emerging Asian demand centres and the traditional markets of Japan and Korea expected to exert less weight going forward, a broad Asian benchmark like the Sling index could eventually surpass JKM as the primary Asian LNG price marker. This process will be accelerated if Singapore becomes the Asian LNG trading hub as anticipated,” Cullinane noted.
JKM sees expansion
JKM has become the benchmark price for spot physical LNG cargoes for several factors, pointed out Platts’ senior managing editor for LNG, Marc Howson. He said that the LNG industry trends are conducive to further spot trade and liquidity. These trends include, on the supply side, the rapid upcoming ramp-up in destination-flexible US LNG supplies and, on the demand side, the ongoing deregulation of the Japanese gas and power sectors.
“Furthermore, large volumes of long-term contracted LNG into Japan are expiring over the next five years. The JKM is increasingly used in term LNG contract pricing. Trade in JKM swaps has soared over the past year, for both hedging and pure trading purposes. These trends should help ensure the increasing use of JKM,” he told NGW.
In addition to cargoes delivered into Japan and Korea, JKM also considers prices of LNG spot cargoes delivered into ports in China and Taiwan. India is also an important growing LNG market and so Platts is adding further granularity to its west India assessment, which is also delivery ex-ship.
Platts publishes a single front-month DES West India assessment but it is extending the forward curve. “On June 16, we will introduce five half-month assessments for DES West India. Four of the half-months will match the delivery periods of Platts JKM assessments, with the fifth half-month introduced immediately preceding the first half-month,” Howson added.
SGX twice weekly
While the Sling methodology has not changed since inception, SGX told NGW that it is always working closely with industry participants to support the market as it evolves and grows. For each of the locations of Singapore, North Asia and Dubai-Kuwait-India, prices are assessed twice a week on Mondays and Thursdays. According to SGX’s director of oil, power and gas within derivatives Cheong Jin Yu, Sling’s methodology is simple and auditable, and is aligned with the International Organisation of Securities Commissions (Iosco) Principles for Financial Benchmarks (PFB).
Iosco is the international body that brings together the world’s securities regulators, and is recognised as the global standard setter for the securities sector. Iosco develops, implements and promotes adherence to internationally recognised standards for securities regulation, with different standards for different uses.
The Sling benchmark is based on assessments from participants following a hierarchy of data as Iosco recommends. The index methodology allows the weighting to naturally move towards physical trades as the market develops.
Cheong said there are 23 physical market participants contributing assessments to the Sling, ranging from end-users and traders to the oil and gas majors. As each panellist only holds one vote, the risk of manipulation is minimised; additionally, upper and lower outliers are removed before the index is calculated.
“SGX’s value proposition is a strong one: being an exchange puts us apart from price-reporting agencies in that we have an open platform that has the potential for continuous price discovery, even intra-day,” he said.
“That is something that price-reporting agencies currently do not provide. EMC, which administers the Sling indices, already operates the spot power market in Singapore with real time price discovery 24 hours a day. In October 2016, EMC further extended its reach by pioneering a secondary gas trading board.”
Sling is also applicable to both conventional cargo sizes and small scale LNG. For example, Sling can serve as a reference price for small-scale projects and developments in Indonesia.
Moreover, amid an oversupply in the global LNG market, the role and relevance of spot and shorter-term contracts has indeed increased.
“While spot trading volumes have steadily risen, Asia lacks a widely accepted price marker to support this growth,” Cheong said. “This is where we believe the Sling indices can make a difference. As the industry moves away from oil-linked pricing, Sling provides a credible solution for gas-on-gas pricing.”
Singapore’s evolving LNG landscape
Adding to its portfolio as a physical and financial hub for LNG trading, Singapore has ambitious plans to be the world’s largest LNG bunkering hub and the government has been supportive with its initiatives to make it a reality. The country has been taking steps to position itself as a regional gas hub.
For example, Singapore’s first LNG terminal came into operation in 2013 with a present throughput capacity of 6mn metric tons/yr. This is set to increase to 11mn mt/yr following the construction of additional regasification facilities scheduled for completion this year. In addition, the country is also building a fourth tank to be completed by the first quarter of 2018, increasing storage to 800,000m³.
In April, following the launch of Singapore’s first LNG truck loading facility by the Maritime & Port Authority (MPA) and Singapore LNG Corporation; Singapore reached another milestone in May with the kick start of its first LNG bunkering demonstration at the country’s Jurong port. This is a first for southeast Asia.
The demonstration was carried out by state Temasek-backed Pavilion Energy, which is one of the two LNG bunker suppliers licensed by the Energy Markets Authority of Singapore, to supply the next tranche of LNG for Singapore, along with Shell. The two companies will supply Singapore with 1mn m/yr of LNG for up to three years.
Speaking at Pavilion’s LNG bunkering launch on 2 May, Singapore’s senior minister of state, ministry of trade and industry Koh Poh Koon said the country planned to be LNG bunker-ready as early as 2020.
He said MPA has a programme to co-fund up to S$2mn ($1.5mn) for LNG-fuelled harbour craft, coming on stream from 2018 onwards. The five harbour craft include tugboats and bunker tankers from Keppel SMIT, Maju Maritime, Harley Marine and Sinanju Tankers.
“[Moreover], through the Port Focus Group which Singapore is a member of, we will also keep abreast of developments in LNG bunkering, learn best practices from other members, and participate in building a network of LNG bunker-ready ports for vessels plying the Far East-Europe and TransPacific routes,” he concluded.