Singapore aims high as Asia's LNG trading hub

Singapore aims high as Asia's LNG trading hub

The growing importance of adopting cleaner ways to generate electricity worldwide has brought liquefied natural gas (LNG) into the spotlight as one of the most affordable and less environmentally damaging fuels. Singapore, with its strategic location, has bold plans to grow into the preferred trading hub for LNG in Asia.

Singapore is already Asia's leading oil pricing and oil trading hub and therefore already has considerable infrastructure in place: It gathers major buyers, sellers and decision makers in the same place; it has a pool of highly skilled human capital in a multilingual environment, wide availability of financial and trading instruments, internationally recognised legal, regulatory and tax frameworks, and attractive fiscal policies and incentives.

Singapore made its first LNG imports in March 2013 and currently has three storage tanks with total throughput capacity of six million tonnes per annum (Mtpa). Further expansion began at the end of 2014, with regasification facilities to be completed by 2017 and a fourth storage tank by 2018, increasing the annual capacity to 11 Mtpa.

In December 2014, Singapore's Energy Market Authority (EMA) received nine bids from 10 companies to supply LNG to Singapore. From these, four LNG aggregators were shortlisted: BG Singapore Gas Marketing, Pavilion Gas Pte, Sembcorp Industries, and Shell Eastern Petroleum. The EMA will appoint up to two companies to import LNG into Singapore by end-February 2016. Diversification is important as 95 per cent of Singapore's electricity is generated through natural gas.

At end-January 2016, Singapore Exchange (SGX) launched a mix of financial instruments to allow more flexibility on LNG contracts. These contracts will be the first based on a price index created in Singapore and expected to become the new benchmark for LNG pricing in Asia. The index is named after Singapore's most famous drink - SLInG (for SGX LNG Index Group).

The SLInG will be used to develop products such as financial swaps for hedging purposes, and eventually in developing a physical delivery mechanism in Asia. Trading house Trafigura and Pavilion Gas, a subsidiary of Pavilion Energy, the LNG unit of Singapore's state-owned investment company Temasek Holdings, made the first trade of 10,000 million British thermal units (mmBtu) of LNG using the SLinG.

The plan to become an LNG hub in the region gains momentum with the growing trend in South-east Asia to adopt small-scale LNG solutions. The region has numerous small and remote islands, and as such small LNG-processing plants would be the only way to provide gas to locations not connected to the gas pipelines network.

Singapore will use its growing storage capacity to receive large LNG shipments and distribute them to smaller LNG tankers that will then supply the regional market. The past years saw a growing demand for LNG contracts on volumes smaller than one million tonnes a year. Pavilion Energy and companies such as Shell, Tokyo Gas and Indonesian Pertamina are investing heavily in small-scale LNG solutions.

Currently, Singapore imports and trades LNG from Australia. In the near future, the city-state will take advantage of the proximity to East Africa and become a large importer of LNG from Mozambique and Tanzania. These two countries started investing in natural gas exploration, and are now just a few years away from having all the infrastructure and production ready to start pumping natural gas to the LNG tankers in port terminals in the region.

EAST AFRICAN NATURAL GAS

Mozambique and Tanzania, both facing the Indian Ocean in the east of Africa, hold enormous reserves of natural gas. Mozambique has proven reserves of 100 trillion cubic feet, and was ranked 14th in 2014 among the countries with the largest natural gas reserves, according to the US Central Intelligence Agency. Tanzania, with reserves of 55 trillion cubic feet, has enough gas to meet about 11 years of demand from US homes.

The huge potential in both countries' sub-surface is still to be fully exploited. Currently, Mozambique's natural gas production is only 152 billion cubic feet per year, making the country the 54th largest producer in the world. Tanzania ranks much lower, producing only 35 billion cubic feet of gas per year.

More than US$30 billion are expected to be invested in the natural gas sector in Mozambique to build capacity to produce 20 million tonnes per year of LNG, with first exports due to start in 2019-2020. In Tanzania, Petroleum Development Corp has plans to construct an LNG plant with a capacity to process 10 million tonnes of gas per year, to be completed by 2020.

McKinsey estimates a regional potential of about 400GW of gas-generated power by 2040, with Mozambique, Nigeria and Tanzania accounting for 60 per cent of the total.

IMPACT ON MOZAMBIQUE AND TANZANIA

Tanzania and Mozambique face a unique opportunity - that is, to blossom and experience a boom in development. But will these countries be able to manage the immense and sudden influx of wealth the "gas dollars" will bring? Or will they fall victim to the "resource curse"?

There is a good chance natural gas exploration will increase inequality in both these countries and, even more seriously, it could raise the potential for conflict. Both Mozambique and Tanzania have seen signs of political upheaval in recent years. This is very likely to intensify with the increase in gas revenues. In Mozambique, once gas starts being exported, estimated to be around 2020, the government is expected to earn around US$20 billion a year from the developments, which would be triple the country's current annual budget.

International investors are doubtful whether the governments of these countries will be able to handle such amounts of money, given the relatively under-developed institutions to ensure transparency and accountability.

A strong and consistent improvement in education, an expansion of social welfare and a realistic plan to diversify the economy for sustainable growth beyond the gas boom would be paramount. Otherwise, Mozambique and Tanzania risk following the path of countries such as Angola, where an International Monetary Fund fiscal audit was unable to account for hundreds of millions of dollars of oil revenues. Or Nigeria, Cameroon and the Republic of the Congo, where the oil wealth has failed to generate development, and has instead generated deep-seated corruption that retards growth .

THE SINGAPORE LINK

Singapore will link natural gas producers in East Africa to buyers in Asia, providing an organised marketplace for LNG in the region, and as such following a switchboard business model. Mozambique and Tanzania will be the main players in the West, developing their natural gas production capabilities to meet the growing demand for this type of fuel in Asia.

Singapore will make the bridge between East and West. By taking advantage of its strategic position and by investing heavily in building up storage capacity for LNG, the city-state will in no time become the main LNG trading and distribution point in the region.


This article was first published on Feb 24, 2016.
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