Future of Natural Gas in Asia: LNG Trading

Challenges to the development of efficient trading in Asia

Agenda
Overview of market Physical LNG value chain Financial evolution of market Singapore as an LNG trading hub

Demand Supply
Natural gas consumption has increased by more than 200% in the last two decades. Japanese consumption represented the mainstay of Asian natural gas demand, especially in LNG, until 2010, when China surpassed Japan as the largest natural gas market in Asia. Since 1998 gas production in APAC lagged behind the regional consumption.

Natural Gas demand in Asia-Pacific

Source: International Energy Agency, 2013; Developing a Natural Gas Trading Hub in Asia

Gas Trade
Pipeline
Pipeline trade is limited within Asia-Pacific region. Intra-region Inter-region

LNG
Liquefaction terminals LNG carriers Regasification terminals

Physical LNG Value Chain

Physical-Upstream
Challenge-Infrastructural rigidities in the upstream
LNG liquefaction plants are very capital intensive ventures that need to recoup these investments. This limits their availability to provide flexibility for gas markets

Opportunity-Floating LNG
Turns natural gas into liquid and shrinks its volume by 600 times, without the need to lay pipelines and build processing plants on land.

Economic Where pumping gas to shore can be prohibitively expensive, FLNG makes development economically viable. Environmental - Avoid the potential environmental impact of constructing and operating a plant on land

Physical-Downstream
Challenge-Traditional way: large-scale approach
Keep transportation costs down. However, Receiving terminals need to be relatively large.

Opportunity-Smaller-Scale Transportation
Make LNG available for smaller vessels To use a hub can improve the efficiency of transporting LNG on a smaller scale . Hub and spoke concept

SLNG

Financial Current state

Asia pricing high compared to US and Europe: Asia continues to pay between US$14-US$18 per million Btu of LNG, while Europe pays about US$10US$12 and US$3 in North America Reason: Asia LNG benchmarks against the JCC

Why this is not sustainable: buyers want to move away from oil-based Suppliers need long-term un cheap contracts to justify new infrastructure investments.

Financial Going Forward

Increasing downward pressure on prices: Short-term:
New long-term contracts being renegotiated based on HH price Argus has launched ASEA - the LNG industry's first SEA DES price indications Proposed Japan LNG Futures exchange

Mid- to long- term:

Change in the benchmark for pricing Asia contracts Balancing between need for ss: new infrastructure investments and dd: lower pricing Increased spot trading volume to supplement

Implication:
Need for Asia-centric, standardized pricing for LNG

Singapore as LNG Trading Hub

Location: Central location between demand centers in North-East Asia and supply sources in Middle East, South-East Asia and Australia.
Structural/Institutional Requirements (as defined by IEA) A hands off government approach Separation of Transportation and Commercial activities

Wholesale Price Deregulation Sufficient network capacity & non-discriminatory access to network
Competitive number of market participants Involvement of financial institutions

Conclusion
The rising energy needs of the Asian economies and the disparate pricing have brought into motion market-related changes in infrastructure to support market evolution. These developments point towards future expansion of LNG trading in Asia with Singapore serving as the regional trading and possible pricing hub.