Thursday, February 27, 2014

SINGAPORE: Selected comments by Trade Minister S. Iswaran on developments in the LNG markets

(EnergyAsia, February 27 2014, Thursday) — The following are excerpts presented this week by Singapore's Trade and Industry Minister S. Iswaran on developments in the LNG markets. He spoke at the 9th edition of the LNG Supplies for Asian Markets (LNGA) Conference.

"On the supply-side, a tight market is anticipated in the next two years or so. However, this is expected to ease with new LNG supplies entering the market after 2015, coming from Australia, North America, and East Africa.

Over the long term, the International Energy Agency projects that global demand for natural gas in 2035 could be 50% more than 2010 demand. This represents annualised growth of 1.6% over the next two decades.  LNG demand growth is expected to be stronger, at around five percent per year through 2020. In particular, Asia has become the world's largest importing region, and its appetite for gas continues to grow in tandem with its economic development.

Against this backdrop, it is timely to discuss today's conference theme "Rising demand for LNG vs consumer price resistance: can there be a compromise?"

Historically, Asia's LNG contracts have predominantly been long-term contracts indexed to oil prices.  This has meant that Asian gas buyers are affected by movements in oil prices, even when the fundamentals of the gas market remain unchanged.  This is in contrast to the more liquid regional markets in North America and Europe, where buyers have access to gas-on-gas pricing.

With LNG playing a larger role in Asia's energy mix, Asian countries are pressing for more competitive LNG prices.  To this end, Asian buyers are contemplating and beginning to employ strategies such as buying gas as a bloc and investing upstream.  Some Asian countries are also seeking to develop an Asian trading hub to facilitate price discovery, and developing financial instruments such as LNG futures contracts to manage risk.

As Asia's demand grows and countries take concrete steps to develop the marketplace, I believe a competitive and more liquid gas market, so to speak, will emerge in Asia.  This will ensure long-term sustainable growth for the Asian gas market, to the benefit of both sellers and buyers.

We have also put in place a comprehensive strategy to grow our gas market and support gas-related businesses in Singapore.

Singapore will introduce a Competitive Licensing Framework (CLF) to appoint new LNG importers to meet our domestic gas needs, beyond the first tranche of 3 million tonnes per annum (Mtpa) awarded to BG.

Under the CLF, Singapore will award LNG import licences on a tranche-by-tranche basis to meet our growing demand.  This will allow us to respond flexibly to changing domestic needs, opportunities arising from global market trends, and the emergence of new suppliers.

Last December, the Energy Market Authority, or EMA, released its draft determination paper on this new import framework.  EMA has received feedback from almost 30 companies.  Overall, industry players support the proposed CLF.  Potential suppliers have also continued to express strong interest in the opportunity to supply LNG to Singapore.

EMA will release its final determination paper for the post-3 Mtpa LNG Import Framework shortly by the end of this week.

Taking into consideration industry feedback, EMA will launch a Request-for-Proposals (RFP) process in the second quarter of 2014 to invite companies to submit proposals to supply Singapore's next tranche of LNG.  The RFP will allow us to appoint LNG importers who can provide competitively-priced and secure LNG supplies.  It will be a two-stage process, to ensure that there is sufficient time for potential suppliers to first finalise and submit their proposals, and then to negotiate with gas buyers to aggregate demand.

In the first stage, EMA will seek proposals that demonstrate supply security and price-competitiveness for the imported LNG.  Beyond the price formula, EMA will study other factors such as mechanisms to manage price volatility, price indexation diversity, and flexibility in contract terms, in evaluating the proposals.  EMA expects to shortlist up to three potential suppliers for the second stage of the RFP process.

In the second stage, shortlisted parties will be required to negotiate with potential buyers to secure binding commitments for LNG purchases.  These shortlisted parties will then be evaluated on their ability to successfully aggregate buyers' demand, and the attractiveness of their baseline gas sales agreement (GSA) for future buyers.

Ultimately, depending on the quality of the proposals and the strength of the demand, EMA will appoint up to two importers. Each appointed importer will have an exclusive franchise of 3 years, or until it has contracted up to 1 Mtpa of LNG, whichever comes sooner.

To complement the CLF, a new Spot Import Policy will be introduced to regulate spot import for domestic use.  Under the policy, domestic gas buyers will be allocated annual spot credits, as a percentage of their long-term gas import volumes.  These credits will have a validity period of one year, and will be tradable.
EMA proposes to start with a spot import cap of 10 per cent.  This is to strike a balance between the objectives of according buyers greater flexibility while allowing Singapore's nascent LNG market to develop and stabilise over the next few years.  EMA will review this cap as the market develops and gains more experience.

More than 20 companies have already established or expanded their LNG desks in Singapore, with activities ranging from market research, trading, marketing, origination, operations and risk management functions.  In addition, there are LNG service firms such as shipbrokers, law firms and price reporting agencies growing their operations here to support the LNG industry.

We hope to see more market players establish a presence in Singapore.  This will not only support the growth of the domestic gas market, but will also allow Singapore to contribute to efforts to build deeper regional gas markets by serving as a trading and pricing hub for LNG.


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