Singapore - The next one to two years presents "a clear window" for the Singapore liquefied natural gas (LNG) price index to be accepted as the Asian benchmark, said the Singapore Exchange on Thursday, as it outlined the next phases expected in its development.
It said in a report that the liquid LNG spot market in Asia would take time to evolve, but that many of the crucial elements were already emerging; these included a shift towards shorter-term contracts, a move away from oil indexation, removal of destination restrictions on cargoes and increased flexibility of gas specification at destination.
David Carlson, an SGX senior business development manager, and members of its commodities team Cheong Jin Yu and Adrian Lunt wrote: "The development of Sling (Singapore LNG Index Group) as a true gas price for LNG in Asia has been timely and there is a clear window over the next one to two years for it to gather acceptance and become the reference price for spot and hedge trade in the Asia-Pacific."
This year, the exchange expects spot cargoes to be indexed to the Sling, especially those from new uncontracted Australian and US LNG projects and cargoes from buyers who have over-bought and are looking to on-sell the excess volumes.
It also foresees an over-the-counter (OTC) swap market developing to meet the need for hedging purposes, and a forward price curve being developed.
By next year, screen trading will start once liquidity builds, said SGX's timeline.
The ambitious roadmap for the index follows on the heels of Jan 25 launch of the first futures and swaps contracts based on Sling.
Trafigura, the world's largest LNG trader, and Singapore-based Pavilion Energy made the first trade, which involved 10,000 million British thermal units (mmBtu) of free-on-board (FOB) LNG swaps for March.
This was reportedly worth US$50,000, and represents a fraction of standard physical LNG cargo.
The derivatives contracts by the exchange represents another step into the battle with Tokyo's Japan OTC Exchange to create a pricing product that will gain acceptance among LNG players in the Asia-Pacific, which accounts for three quarters of the global LNG trade.
Market participants have estimated a longer timeframe for liquidity to develop in the LNG market - in which 70 per cent is made up of long-term trades - and for a pricing benchmark to be established in Asia.
Statoil senior vice-president for marketing and trading Tor Martin Anfinnsen told The Business Times late last year: "I would expect that, even with some big and powerful LNG buyers and sellers involved and committed to this, it would still take five years plus - at least - before you have something that will start to evolve on its own volition."
He said he based this on his observations of the time it has taken for the gas-pricing hubs in the US and UK to develop. He added: "I could be proven horribly wrong on that. Let's put it this way: We would be positively impressed if it took shorter."
This article was first published on Feb 5, 2016.
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