Singapore has been identified as being the preferred location of an Asian LNG trading hub, according to a new survey by Deloitte.
The survey of over 80 senior energy industry leaders from across the Asia Pacific region conducted at the second annual Deloitte Energy Trading Summit in Singapore this week, revealed 74% believe Singapore would attain the position by 2023. China (10%) and Japan (10%) were also identified as other potential hub locations.
“Singapore fits all the criteria of an ideal trading hub,” says Mike Lynn, Deloitte oil and gas Asia Pacific regional leader. “It has a world class trading infrastructure already in place, excellent institutions, offers low geopolitical risk whilst situated in an ideal geographic location with deep and liquid financial and capital markets, in addition to an attractive tax and regulatory regime.”
As Asia evolves as a trading hub, the region will require a liquid and transparent LNG pricing benchmark. Over half (52%) of survey respondents said the Platts Japan/Korea Marker (JKM) will be the most widely adopted for spot trades in 2023, followed by the Henry Hub Natural Gas Spot Price (16%) and the SGX LNG Index Group.
Lynn says: “As the preferred spot price benchmark, and one that’s genuinely gathering traction in the Asian market, a price marker like the JKM is consistent with the move away from the traditional oil-linked pricing to a system based on gas becoming a globally traded commodity and needing its own pricing benchmark. This is a clear message Asia wants its own pricing benchmark, one that better reflects local, regional market dynamics.”
Who will be the top exporters and importers?
In terms of Asian LNG supply market leadership, the survey results suggest the likelihood of a three horse race between Australia, Qatar and the US for Asian market leadership by 2023.
“It’s a very competitive market with not much separating each of the three nations. In reality, by 2023 any of these three countries could assume market leadership in Asia,” comments Bernadette Cullinane, Deloitte Global LNG leader and Australia oil and gas lead.
“Qatar is a serious threat to Australia given its low-capital intensity operations and ability to expand relatively quickly via low-cost brownfield developments. From an American perspective, the US has its huge shale gas resource, the political will and operational flexibility. Plus, it can now benefit from the expanded Panama Canal to divert cargoes to the more lucrative Asian market – over half (52%) of our survey respondents said the expanded canal would have a positive effect on their business.”
China, Japan and South Korea are expected to be the top three LNG importers in Asia in five years’ time. This confirms the structural change in the market, namely a shift away from the traditional Japan, Korea and Taiwan customer heartland and a tilt towards China.
“China is increasing in importance as a gas nation, driven by environmental and air quality policies, a shift from coal to gas and renewables, combined with economic reforms and the shutdown of high cost, inefficient capacity,” says Cullinane.
The survey results acknowledge India as an emerging gas nation too.
Cullinane adds: “India is not as far up the maturity curve as China, but like China, the country is shifting towards lower carbon energy resources. It is anticipating a big spike in energy demand due to economic and demographic growth. LNG has a vital role to play in India’s growth story.”
LNG market balance
When asked when they expect LNG market supply and demand rebalance, almost nine out of 10 said by 2024 (up from eight out of 10 in 2017). 56% believe market equilibrium could be restored by or before 2022 (up from 42% in 2017). Only 12% point to the market remaining in surplus post 2024, which is significantly less than the 18% who felt this way in 2017.
However, there is the issue of future financing and investment to overcome. Shorter off-take contracts and uncertainty over future prices were identified as the top two challenges in LNG project financing and investment. Capital markets and disaggregation of the value chain were seen as the two key sources of financing and investing in LNG projects.
“The landscape has fundamentally changed given the shift from the old long-term offtake to short-term, flexible contracts and increased volumes traded on spot,” explains Cullinane. “The very fact final investment decisions in LNG have slowed significantly speaks to this trend. The shift to short-term contracts and away from long-term offtake has made project financing increasingly challenging, particularly greenfield.
“With volatility and geopolitical risks returning to commodity markets, this could be a big investor deterrent. Although in some ways, it underscores the need for a more liquid and active derivatives market so developers can hedge price risk.
“In terms of finance options, Singapore’s likely emergence as an Asian LNG trading hub could play a crucial role given the quality of its financial institutions and deep capital market. The disaggregation of the supply chain reflects the innovations we are seeing in LNG project design. There’s a clear preference for lower capital intensity supply solutions with modularised LNG plants offering one option to reduce financing commitments.”
Interestingly, there’s less faith in the role and ability of governments to finance LNG projects and limited confidence amongst survey respondents that lenders will take on more risk – these two options were amongst the least favoured financing and investing options for LNG projects.
Cullinane adds: “Indications are the risk appetite of lenders hasn’t materially increased. With fierce competition for capital, LNG projects need to be high quality to attract investment.”
Read the article online at: https://www.lngindustry.com/floating-lng/25052018/singapore-stakes-claim-as-future-asia-lng-trading-hub/