Singapore – the new player in the global LNG market

Already well-established as a major centre for global oil trading, Singapore seems on track to become the leading Asia-Pacific trading hub for LNG. With its first LNG terminal set to open later this year, Singapore’s strategic location and proenterprise environment will enable the country to take advantage of the projected future growth in demand for LNG in Asia and establish itself as the key player in the global LNG market.

LNG in Singapore: the current andfuture position

According to the Energy Market Authority (EMA), at present approximately 80% of Singapore’selectricity is imported through four natural gas pipelines from the South Sumatra and West Natuna gas fields in Indonesia and from Malaysia. In order to reduce the country’s reliance on these sources of energy, in 2006 the Singapore government announced plans to develop thecountry’s first LNG import and regasification terminal on Jurong island, an artificial island to thesouthwest of the main island of Singapore. The terminal, which cost approximately S$1.7 billion to construct, is due to commence operations in the second quarter of this year. It is seen as unique in the world in that it has been designed to accommodate both imports and exports of LNG and to allow multi-party use. As such, it is likely that this will lead to increased opportunities for spot market trading, break bulking and regional distribution of LNG cargoes.

The Jurong Island terminal has a start-up capacity of approximately 3.5 million tonnes per annum (mtpa). This will be increased to 6 mtpa in 2014 and around 9 mtpa by 2018 when a third and fourth storage tank are completed. BG Asia Pacific Pte Ltd (BG) is the current LNG aggregator for Singapore, but it is expected to reach its 3 million tonnes per year franchise by the end of 2013. The question of Singapore’s future importpolicy beyond the BG franchise is therefore currently open for discussion. In June last year the EMA concluded its first industry consultation on the post-BG franchise, in which it considered whether Singapore’s LNG future imports should be carried out through a regulated sole importer(BG+1) or a multiple aggregatorframework (BG+3), variations of whichare used in South Korea, Japan, Taiwan and Thailand. A second consultation paper is envisaged atsome stage this year.

It also appears that a second LNGterminal has been mooted for Singapore in the future, although theprecise details are yet to be released.

Increased Asian demand

The opening of the Jurong LNGterminal this year comes at aparticularly opportune moment fromthe perspective of Asian gas demand.Recent years have seen a markedincrease in demand for LNG in Asiaand it is anticipated that this trend will continue in the future. According to the International Energy Agency, Asia will consume approximately 790 billion cubic meters a year of gas by 2015. This will make Asia the world’s secondlargest gas market.

The increase in Asian gas demandis the result of a combination ofenvironmental, political and economicfactors. Following the Fukushimadisaster in March 2011, Japan hasmoved away from nuclear power andplaced a greater emphasis on LNG.As a result, the country currentlyconsumes approximately 83 milliontonnes of LNG, which amounts to roughly one-third of the total LNG trade.

Similarly, demand for natural gas has increased dramatically in China in recent years. Government plans for the expansion of domestic gas production will lead to an increase in LNG imports into the country. Analysis by Ernst and Young predicts that Chinese demand for natural gas could more than double between 2012–2020.

Malaysia and Indonesia, currently the second and third largest exporters of LNG respectively (after Qatar) are also expected to become importers in the near future. A decline in domestic output and significant population growth in recent years has led to a sharp increase in domestic gas consumption. As such, LNG importswill be needed to bridge the gap.

Increased gas supply

In parallel with the increased demand for gas in Asia, the development of new fracking technology has led to an increase in the supply of gas in the form of USA shale gas. In just ten years, shale gas has grown from 1% of USA gas supply to 30% of current supply. As a result, the spotlight is currently on the USA as a potential future LNG exporter. Since Singapore enjoys a Free Trade Agreement with the USA, it should not be difficult forSingapore end-users to obtain USALNG export licences from the USADepartment of Energy and commenceoperations in the near future. Indeed, there are indications that some Singapore companies are alreadyseriously considering the prospect ofUSA LNG supplies.

Further, recent discoveries of significant natural gas reserves off the east coast of Africa (notably Mozambique, where more than 110 tcf of gas in place has been identified offshore) are likely to give rise to increased LNG exports from the region. Given the geographic proximity of East Africa to Asia, this future LNG will most likely end up in the Asia-Pacific markets.

Singapore as a LNG hub

Singapore is extremely well placedto take advantage of the above trends in the gas market. The countryenjoys a particularly advantageousgeographic position in Asia, givingit a strong competitive advantageover other key players in the region.It is located between the Indian andPacific Oceans, and can therefore offer traders both a storage point for their LNG shipments and an export point from which they can ship their cargoes to the key industry-intensive growth countries in the region, in particular India, China, Indonesia and Malaysia.

Further, Singapore is renowned for its pro-business environment. In contrast to some of its neighbours, setting up and operating a foreign company is very easy in Singapore, with red tape kept to a minimum. Moreover, the Government has launched a number of initiatives which are designed to actively encourage traders to use Singapore as their base. The most well-known and successful of these initiatives is the Global Trader Programme (GTP), under which certain companies enjoy concessionary tax rates on qualifying trading income. Most LNG trading companies will qualify under the GTP and will be able to enjoy the special rates of taxation (provided they meet the requirements). Even without the GTP, Singapore still offers both corporations and individuals extremely favourable rates of taxation in comparison with the rest of the developed world.

The above factors have alreadysucceeded in attracting the majorplayers in the energy market toSingapore. Key names include BGGroup, BP, Gazprom, Shell, GAIL,Statoil and Trafigura, all of whichhave LNG trading desks and otherwell-established energy operations inSingapore. Once the Jurong Islandterminal is completed, it will be able to provide these companies with the physical infrastructure to support their LNG trading activities in Singapore.

Although other Asian countries such as Japan, South Korea, Indonesiaand China would seem like primecandidates for future LNG hubs,especially Japan and South Korea,which already have sophisticatedinfrastructures for LNG operations,none can provide traders with quitethe combination of an extremelyfavourable geographic location andcommercially advantageous conditionsthat are on offer in Singapore. Perhaps the most serious contender in the region is Malaysia, which is due to complete Phase 1 of its US$1.3billion LNG import terminal in thePengerang Integrated PetroleumComplex in the first quarter of 2014.The terminal, which is designed tohave a total storage capacity of fivemillion cubic meters, will be used for storage, loading and regasification of LNG, with both domestic and trading use contemplated. Moreover, Q2 of this year will see Malaysia launch theworld’s first-of-its-kind re-gasification unit on an island jetty located in Melaka. Singapore will need to keep a close eye on these developments in order to stay ahead of the game.

LNG shipping in Singapore

In addition to the status Singapore enjoys as a global energy hub, the country is also one of Asia’s key shipping centres. The Port of Singapore is one of the busiest in the world, with annual vessel arrival tonnage reaching a record high of 2.25 billion gross tons (GT) in 2012, according to the Maritime and Port Authority of Singapore. In contrast to the container and dry bulk cargomarkets, which have seen a sharpdecline over the last five years, thegas markets (both LNG as well asLPG) have been the boom sectorsof the shipping industry during thisperiod. The increase in the international transportation of gas combined with extremely strong freight rates in this sector mean that earning prospects for gas carriers look positive in the long-term and there are good opportunities for Singapore shipowners in the current market.

Conclusion

All of the above mentioned factorsfirmly place Singapore on the map as a future global LNG hub, which is able to offer traders the unique combination of a strategic location for their operations, including a new state of the art LNG terminal, and various government-led initiatives to support their business.

Singapore is extremely well equipped to meet the change in dynamics in the global gas market and consolidate its position as a key player for the future.