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Singapore sees LNG price indices expanding

Pushing the development of regional Asian LNG trade, Singapore is encouraging local price discovery

Singapore's dominant supplier of physical cargoes is UK producer BG, whose CEO Helge Lund told Gastech in late October that the market was becoming freer all the time, and would become even more efficient when companies learned to collaborate. For example, he described the two adjacent projects of Gladstone LNG and Queensland LNG - both planned before Lund joined BG - as a steelmaker's dream owing to the redundancy.

But on the water at least things are moving in the right direction. "Despite constraints, the cargoes have ended up where they are needed," he said. That was despite the fact that LNG is not yet a globally liquid market, with only 40 million metric tons of the total 240m mt/yr traded on contracts of one year's duration or less - and much less sold on a prompt basis. But he said the industry "would press the fast-forward button. Exports from the US would change the game regarding flexibility and liquidity." That is due to happen early next year.

More storage capacity will limit price volatility and give buyers more confidence that investments in gas will find an affordable source of supply.

Regional gas demand growth is difficult to predict although Philip Olivier, responsible for global LNG at Engie, says that the low oil price and oversupply had brought Asian and European prices together and at low levels. "Low prices are oxygen for importers", says Olivier.

But a key unknown is the relative price of coal and gas over the medium to long term, and that will dictate investment in power generation capacity. Another unknown is the extent to which environmentally-friendly policy measures, such as a carbon tax or emissions regulations, will be implemented and enforced. And there appears to be a growing gap between China's aspirations and the reality where gas is concerned.

However, given the medium-term length in the gas market - which is likely to become much longer with the arrival of US exports - and the impossibility of laying gas pipelines to the thousands of thinly populated islands in the region, small-scale LNG would be a cost-effective way of bringing clean power to small communities, as Indonesia is already doing. Singapore, which imports pipeline gas from Indonesia, already uses gas for 95% of its power needs. Its first LNG cargoes came in 2013.

Index calculation process

 

Other regions are vying to become hubs, including Shanghai. China is well supplied with pipelines, domestic production and import facilities for LNG. Drawbacks include the application of the rule of law in the event of arbitration; and transparency.

Among the traders pushing for Singapore pricing is Pavilion Energy, the LNG division of state wealth fund Temasek, and Japanese Jera -the Chubu Electric-Tokyo Electric Power joint venture that was established in April.

Jera's president Yuji Kakimi told the conference that Jera would promote change in the Asian LNG market. By next summer the two companies hope to integrate their 40m mt/yr purchase portfolio and their overseas independent power production operations. By spring 2017 their domestic power plants will also be brought under one roof, he said. He went on to say that the market needed an index that reflected gas demand and supply and Jera would use such indices for long and short term contracts, perhaps assuming that the sheer volume of demand it represented would give sellers no choice in the matter. "Sellers who see buyers" needs and develop solutions will have good business opportunities with Jera and other buyers," he said.

Pavilion has announced a ten-year purchase contract with Gazprom. It is developing regional demand to build a robust LNG ecosystem in Singapore and Asia. In its bid to establish Singapore as an Asian LNG trading hub, the company also announced plans to transact cargoes based on the newly formed Singapore spot price index for LNG, known as SLInG (short for SGX LNG Index Group and punning on the famous cocktail invented there). The weekly index is based on the submissions from international LNG players who offer their assessment of LNG prices to a division of the stock exchange. About 20 out of the top 30 global players, Pavilion Energy said, are on board with SLInG, up from 13 players when it was launched in June this year.

However, Pavilion's counterparty Gazprom was less vocal in support of hub pricing, even though it has become accustomed to it in Europe. The former head of Gazprom Export Alexander Medvedev told the conference not only that oil indexation clauses with their time lags brought with them predictability and security, which were both crucial for the market's long-term development; but further, that US LNG would no longer be competitive on a delivered basis with Asian oil-indexed contracts.

"Even under these new conditions Gazprom can remain competitive," he said, in reference to the 5.4m mt/year expansion of the Sakhalin LNG export terminal in Russia's far east. He was however silent on Gazprom's proposed giant Vladivostok LNG plant, on Russia's eastern seaboard, for which the final investment decision has been taken but no offtakers announced. He said Gazprom was confident of growth in China, on which it has pinned its hopes of a second lease of life. The so-called pivot to Asia is primarily driven by export pipelines, for which price remains a key stumbling block. He said the energy balance was changing in favour of gas, and Gazprom could help with downstream activities there such as gas-fired power generation and gas transmission and storage.

Also speaking on the sidelines of the same conference was Jonathan Stern, who runs the gas department at the Oxford Institute of Energy Studies in the UK. He said there was a window of opportunity for an Asian spot market to take off, as another precondition for developing a liquid market in gas was oversupply - which was what had driven the rapid growth of the UK's National Balancing Point, Europe's first virtual gas hub, in the mid-1990s. In Asia, he said, "Nobody knows when take-off will happen." But he expects the market to start to tighten from the start of the 2020s.

There are a lot of pricing formulas in place in Asian LNG supply contracts, ranging from various proportions of Brent crude over various time periods, to US Henry Hub gas, and taking in a mix of other prices along the way to form a confusing hybrid.

His suggestion, which will require a change of attitude from the incumbents and their lenders, was to shorten contract terms to only ten years or so and to only commit to a short-term pricing formula which could be linked to a hub when the reopener clause applied, perhaps after just five years. The current long-term contract price reopener clauses were too weak to give lawyers or arbitration courts anything to get their hands around, he said. This has to change: "But everyone has got very comfortable, it is the way they like it, but nothing else is traded for 20 years with the price linked to another commodity. The logic has gone."

Politeness prevails in North America

While a handful of projects is now virtually unstoppable, the North American export market is less exciting than it was thanks to low oil prices, and project proponents are begging each other to take precedence. Perhaps the most self-effacing is Alaska, which has been exporting LNG for 42 years and briefly held a monopoly on sales to Japan. Its 18.24m mt/year project might enter front-end engineering next year, have its final investment decision in 2019 and produce its first gas in 2025. By that time, even the most bearish forecasters believe, markets should become tight once more. In its favour, it has conditional approvals from the Department of Energy and from the indigenous peoples, as its footprint follows the oil route. Second, there is no geological risk as the gas is a known quantity, having been cycled repeatedly to produce the oil, an activity that will cease by 2025.

On the other hand, the other partners - ExxonMobil, ConocoPhillips, BP and TransCanada Pipelines - are not showing the determination that the governor of Alaska wants. Possibly the cost of the pipeline to the coast is one deterrent. So to ensure the gas stays in the project even if one of the counterparty leaves, the state of Alaska has converted its share of royalties into a 25% stake, which will give it the right to trade a quarter of the gas, perhaps as much as 4.5m mt/year, in its own name. The state has not got as far as a marketing strategy, or dreamed up a name for this new line of business, however.

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