(EnergyAsia, September 13 2012, Thursday) — The following is an edited version of the speech by Teo Eng Cheong, chief executive of IE Singapore (IES), the country’s trade department, at the 4th Asia Pacific Summit of the World LNG Series held this week.

IES is the government agency responsible for promoting Singapore’s trade as well as overseas investments. Apart from promoting exports of goods and services, IES also promotes offshore trading in Singapore, focusing on energy, agri-commodities as well as metals and minerals.

“In recent years, we have seen the emergence of the liquefied natural gas (LNG) markets globally due to rising Asian demand, a huge increase in supply due to the use of new technologies, and the development of pricing mechanisms.

As a trading hub, Singapore must recognise these trends and adapt to the emergence of LNG.

The first trend is the increasing importance of Asia as an importer, and a consumer in the global LNG trade. Global LNG trade has grown steadily.

Last year, it increased 9.4% to reach 240 million tonnes. Various projections point to significant growth in the coming years. By 2020, it is likely that we would see at least, a doubling of the volume of LNG trade to about 500 million tonnes.

Asia accounted for almost two-thirds of the global trade in LNG in 2011. The import of LNG into the region is forecast to grow by an average annual rate of 7% to reach 217 million tonnes by 2017.

Japan, as the world’s largest LNG importer, consumes about 83 million tonnes or about one-third of the global trade. Japan’s LNG imports are not likely to fall as it shifts away from nuclear power after the Fukushima nuclear power-plant accident.

Southeast Asia will also see interesting changes. Malaysia and Indonesia are the second and third largest LNG exporter respectively, after Qatar, with Brunei the 10th largest. But with their domestic output declining, Malaysia and Indonesia will also become net importers soon.

Singapore, Malaysia, Indonesia and Vietnam are building terminals to import LNG. By 2015, Southeast Asia is expected to have 10 LNG terminals with a total capacity of 34 billion cubic metres.

China’s gas demand has risen by about 15% per year since 2000. By 2016, the share of gas in the country’s energy mix is expected to rise from 4% to 8%.

This increased demand will be met by LNG, piped gas and domestic production. China is expected to account for a third of the total increase in Asia’s LNG imports.

By 2014, China plans to install 13 new LNG tanks, with a capacity of nearly 2.1 billion cubic metres, and another nine import terminals. What is less certain is how China would tap on its own shale-gas reserves, which could be the world’s largest.

The second trend is the breakthrough in supply as a result of the development of fracking technology to extract shale gas. Today, shale gas extracted in the US contributes a third of the country’s gas.

Large shale reserves are also found in Europe and Asia, but these have not been exploited yet out of fear of groundwater contamination, poor business environment or a lack of technological know-how.

It remains to be seen how much of the gas from the US will reach Asian shores. The US Department of Energy has approved only one export project, with many applications still pending approval.

The US economy and manufacturing benefit from low energy prices, while jobs will be generated from the export of LNG.

The third trend is that the huge surge in demand and supply will impact the pricing of LNG, which is unique in three ways.

First, there are significant price differentials for different types of gas among regions. In the US, Henry Hub gas costs about US$2-3 per MMBtu (million British thermal units), while European pipeline gas costs about US$10-12 and Asian LNG costs about US$14-18.

While the prices fluctuate, their differentials remain as the transport of LNG requires capital-intensive liquefaction and re-gasification facilities as well as specialised super-tankers.

Second, in Asia, gas contracts are often indexed to oil prices, mainly because gas remains a substitute for oil. As oil prices increased over the years, gas prices have similarly increased.

Third, both piped gas and LNG require heavy investments so gas contracts are often long-term, based on take-or-pay contracts lasting 20 to 30 years.

These trends have come under pressure recently. Over the past five years, the share of LNG spot trading is estimated to have more than doubled to account for 20% of the global market.

Will there continue to be significant price differentials among the different regions? Will contracts continue to be long-term and oil-indexed? How big would spot trading become eventually? How will shale gas change the dynamics of the industry?

Asia will likely continue to face supply shortages in the near to mid-term. Earlier this year, gas prices rose to a high of US$18 per MMBtu, in Asia, softening in recent months as more cargoes have been diverted into the region from elsewhere.

Singapore as Asia’s LNG hub

Companies are positioning themselves for the new environment, choosing Singapore as their base to access opportunities in the region.

Singapore offers a stable business environment, an open economy, supply of talent, risk management services and a deep financial market.

IE Singapore works very closely with the industry, the exchanges and other government agencies to strengthen our trade infrastructure and groom talents. We have attracted over 350 commodities trading companies, which contribute more than 4% to Singapore’s GDP. Petroleum companies are a major constituent, making Singapore the leading oil trading hub in Asia.

Singapore can also become a base for global and regional LNG players.

A whole ecosystem comprising LNG traders, service companies and the supporting physical infrastructure is now taking shape. With no significant LNG players five years ago, we now have 14 companies with LNG trading or marketing desks in Singapore including BG Group, BP, Gazprom and Shell. Many have expanded their LNG desks with activities ranging from trading and marketing, to origination, operations and risk management.

BP started trading LNG with three staff in 2010. Today, its core LNG team is 18-man strong, and carries out trading, origination, operations, LNG shipping assurance and risk management from Singapore.

Over the past year, India’s GAIL and Statoil have established LNG trading desks in Singapore while Trafigura is looking to do the same in the near future.

Law firms such as King & Spalding are building their LNG teams and expertise in Singapore while energy media like Platts, ICIS and Argus are enhancing Singapore’s role as an LNG pricing centre.

Singapore’s first LNG terminal is due to start up by the second quarter of next year, increasing opportunities for spot trading, break bulking and regional distribution of LNG cargoes.

BG, Singapore’s LNG aggregator, is expected to reach its three-million-tonnes per year franchise by 2013. In June this year, the Energy Market Authority (EMA) concluded its first industry consultation on the post-3Mtpa LNG procurement framework. A second consultation paper is due by the end of the year.

We expect EMA to reach a decision on the framework by first quarter next year.

The potential for LNG bunkering here is great. With increasing focus on clean energy, the industry is looking for cleaner marine fuels including LNG as an option.

As the world’s top bunkering port selling more than 40 million tonnes of bunkers last year, Singapore is committed to sustainable practices in the maritime sector. The Maritime and Port Authority (MPA) is assessing the feasibility of offering LNG as a bunker fuel.

All these developments strengthen Singapore’s foundation to support and house a vibrant LNG cluster, be it for domestic use, storage, bunkering or trading.

IE Singapore aims to continue to grow Singapore into a leading LNG hub in Asia.