Singapore Trading Hub May Put Cap on Costliest LNG, IEA Says

LNG import jetty, image (c) Singapore LNG

(Bloomberg) — Singapore is the most likely hub for trading liquefied natural gas and reducing the government interference that keeps Asia’s prices higher than anywhere else in the world, according to the International Energy Agency.

A new LNG terminal in Singapore, set to receive its initial cargo from Qatar in the first quarter, will serve a wide array of tankers and boost import capacity “far beyond” domestic consumption, the IEA said today in a report. The city-state, Asia’s oil-trading center, is also creating an example for Asia by unbundling transmission from other gas and power infrastructure and taking a “hands off” approach, according the IEA, an energy adviser to 28 nations.

“Singapore is really quite under way to establish the right infrastructure and the right market mechanisms, although there is still some more to do,” Maria van der Hoeven, the IEA’s executive director, said today in an interview with Bloomberg Television.

Gas buyers in Asia now pay about five times as much as U.S. consumers. They will be stuck with higher costs and insufficient facilities for receiving, processing and transporting LNG as long as governments promote state-owned companies and try to restrict imports, the IEA said.

Lower prices in the U.S. and Europe reflect competitive and deregulated markets as much as better access to low-cost supplies, the group said.

Linked to Oil

Asia is forecast to consume 790 billion cubic meters a year of gas by 2015, making it the world’s second-biggest market, according to IEA analysts led by Warner ten Kate. Imports are dominated by long-term contracts linked to the price of oil rather than spot cargoes reflecting the supply and demand for LNG, gas that is chilled to liquid form for transport on tankers.

About 88 percent of natural gas sold in Asia was tied to oil rather than gas in 2010, a figure that has changed little since 2005, the IEA said. Asian buyers began using oil indexing for contracts because there was no existing LNG market in the region, and gas was viewed as an alternative for crude in power generation, according to the IEA.

Henry Hub

Sellers have come to rely on long-term, oil-linked contracts to assure their returns on the investments needed to develop gas fields and export infrastructure, while buyers use oil markets to hedge LNG contracts, the IEA said.

Prices are lower in the U.S. because trades are linked to the Henry Hub, a physical delivery point in Louisiana for New York Mercantile Exchange contracts, the IEA said. A network of North America pipelines and “the shale gas revolution,” keeps costs down, the IEA said. The U.S. benchmark price for gas settled yesterday at $3.414 per million British thermal units, up 1.9 percent in 2013.

The U.K. is relying on a “virtual hub” known as the National Balancing Point rather than a physical hub, the IEA said. This benchmark, designed to reflect gas prices throughout Britain without transportation costs, settled yesterday at the equivalent of about $10.28 per million British thermal units.

An Asian hub would probably follow a Henry Hub-style physical model, since it would primarily be used for trading liquefied gas stored in tanks, as opposed to gas in its natural state delivered via pipelines, Laszlo Varro, the head of the IEA’s gas, coal and power markets division, said in an interview today in Tokyo.

Japan’s Record High

Japan, the world’s biggest user of LNG, has been leading the call to get away from long-term contracts, especially after the nuclear disaster at Fukushima in March 2011 increased the countries reliance on fossil fuels.

The Japan Crude Cocktail, a basket of prices for oil imported into the country and used to calculate LNG prices, rose to almost $127 a barrel in April, its highest level since hitting a record of more than $135 in July 2008, according to finance ministry data compiled by Bloomberg.

The average LNG price paid by Japanese buyers in July reached the equivalent of $18.07 per million Btu, a record, according to finance ministry data. Japan paid $15.79 in December, according to the most recent data from the finance ministry, down 5.2 percent from a year earlier.

Japan could have it’s gas bill cut by $10 billion a year if its purchased were based on openly traded hub prices, Van der Hoeven said. The country paid 6 trillion yen ($65.3 billion) for LNG in 2012, according to finance ministry.

Singapore Advantage

“The most important thing is to see to it that prices can be going down and that there is a better convergence between the prices in the U.S., European and Asian markets,” she said.

Global spot prices for LNG prices will rise through 2015 and begin to drop in 2016 and 2017 as new supply comes online, according to a Feb. 19 report from a Goldman Sachs Group Inc. Asian buyers, primarily China and India, will drive LNG prices higher in a new bullish cycle starting in 2020, it said.

Asia will be saddled with the world’s highest prices until it develops an LNG trading hub and transparent pricing, according to the IEA.

Singapore is best-suited for regional gas trading because government interference in markets is limited, allowing fundamentals to set prices, the IEA said. The city-state is also introducing wholesale pricing for natural gas.

Myriad energy trading companies are based in Singapore, the IEA said. “Financial LNG swaps were introduced by banks in Singapore in 2010,” the IEA said. “Financial parties serving global commodity markets are already in place and well- positioned to serve emerging natural gas trade.”

Other Hubs

The master plan for Singapore’s LNG terminal calls for as many as seven storage tanks and a peak capacity of 20 million tons, Neil McGregor, chief executive officer for Singapore LNG Corp., said in Feb. 20 interview. The company is currently considering a fourth gas storage tank big enough to fit four A380 jumbo jets to lower storage costs and hold cargoes from a 266,000 cubic-meter Q-Max LNG ship, he said.

Singapore’s main disadvantage is the relatively small size of its domestic market, the IEA said. “This could limit the number of players in the wholesale market, but a well-connected hub could serve the region well beyond the city-state.”

Japan, South Korea and China are other potential LNG hubs, the IEA said. They also lack features needed for a functioning wholesale market, such as third-party access to terminal capacity, the IEA said.

“Asia is large enough, both geographically and market- wise, to have more than one trading hub,” Varro said.

– Mike Anderson and Jacob Adelman, Copyright 2013 Bloomberg.