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Pricing risks in times of uncertainty

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LNG Industry,

In the build up to the World LNG & Gas Series 14th Americas Summit and Exhibition, CWC interviewed Cheong Jin Yu, Director - Oil, Gas & Power, Singapore Exchange.

What are the pricing risks buyers and sellers face in times of uncertainty?

With large new supplies from Australia and the US entering the LNG market at a time when there is already unprecedented oversupply projected to last until 2022, market dynamics have fundamentally changed. As more cargoes find their way into the spot market, the traditional model of long-term destination-fixed supply contracts is breaking down. At the same time, oil and gas fundamentals are starting to diverge. Firstly, oil is now primarily behaving as a transportation fuel whereas gas is still primarily a power generation fuel, especially in Asia. Secondly, LNG production is projected to increase dramatically over the next few years whereas total oil output is steady with even the possibility of a net decline. This leads to oil price and spot LNG price decoupling - and we have already seen that happening. As a result, many buyers are starting to negotiate away from purely oil-indexed contracts and to include more gas-to-gas pricing in their contracts. Additionally, they are also sourcing more cargoes from the spot market and are thus paying spot prices for their purchases.

As the lines between buyers and sellers blur, how are portfolio players impacting trading?

Many buyers are now renegotiating for destination flexibility on their contracts and one Japanese buyer has even gone as far as to prepare its terminal for reloading capabilities. Combined with more un-contracted cargoes from producers entering the market, spot trading will grow over the next few years. Trading houses who are neither producers nor end-users have also become a significant presence in the market - this also fuels the growth of spot trading. A key feature of the LNG market is going to be flexibility - the ability to buy from multiple sources and also access to multiple buyers in different locations; and on top of that, the ability to buy and sell with difference pricing mechanisms. A portfolio player will be able to achieve this.

How can the industry make sure gas is competitive compared to coal, oil and renewables?

The competitive interplay between different fuel sources will bear an important influence on longer-term LNG demand. However, we may need to see greater market maturity before this can really happen. Without greater transparency and, importantly, pricing that is actually reflective of LNG market fundamentals, it is going to be difficult to have much confidence in demand forecasts that make implicit assumptions on LNG's ability to compete with other fuel sources.

What role does SGX play in the LNG trading industry?

SGX's role is to provide risk management tools for the industry and to create platforms to facilitate trading. Together with industry participants, we developed the Singapore SLInG LNG Price Index, which is the pricing benchmark for spot Asian LNG. The index has a clear and transparent methodology with over 20 participants now contributing to the price assessment. This is to help facilitate the growth and development of the spot LNG market and also to provide a gas-to-gas price which the market needs as it moves away from oil indexation. SGX also launched swaps and futures based on the Singapore SLInG price to provide risk management tools for LNG market participants.

What are you most looking forward to at the CWC World LNG & Gas Series 14th Americas Summit & Exhibition?

The US is going to become a large and significant supplier of LNG - Cheniere's cargo in February this year was the first ever LNG export from the continental US and there will be growing volumes over the next few years. Asia currently accounts for 75% of global LNG demand and is projected to continue this appetite; the dynamics and pricing of new supply sources will be important for the Asian energy landscape. The CWC Americas Summit and Exhibition will be an excellent opportunity to meet and learn from the key players at this historic moment in the US LNG industry. And, of course, I look forward to trying the famous Texan steaks.

Interview conducted by CWC Group. Edited by

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