Asian LNG Trading Hub

Brian Hicks

Written By Brian Hicks

Posted February 27, 2013

The International Energy Agency believes that Singapore is the most likely hub in Asia for natural gas trades with the capability of reducing government intervention. Asian governments currently maintain natural gas prices at levels higher than anywhere else in the world.

Singapore has a new LNG terminal with up to seven storage tanks and a capacity of 20 million tons that will begin receiving LNG from Qatar in Q1 this year, Bloomberg reports. The facility is all set to service tankers and generally raise import capacity well beyond what is needed in that country. By decoupling transmission from other gas or power infrastructures and adopting a more aloof approach, Singapore is leading the way.

From Bloomberg:

“Singapore is really quite under way to establish the right infrastructure and the right market mechanisms, although there is still some more to do,” Maria van der Hoeven, the IEA’s executive director, said today in an interview with Bloomberg Television.

Costs over in Asia are so high that natural gas purchasers pay a 500% premium compared to U.S. buyers. But high prices and inadequate facilities are what can be expected as long as the governments of various nations continue to favor state-owned companies as a way to restrict imports.

The competitive and freer markets of the U.S. and Europe result, as they have, in much better access to supplies at far lower costs. This is especially important, as Platts reports via the IEA, now that Asia is likely to consume 790 billion cubic meters of gas annually by 2015.

Right now, long-term contracts are the norm rather than spot cargoes that reflect supply and demand for LNG. Some 88 percent of all natural gas sold in Asia was related to oil prices rather than gas as of 2010.

Meanwhile in the U.S., price is linked to the Henry Hub, which along with the extensive pipeline infrastructure and the ongoing shale boom has helped keep costs down—the benchmark on Monday was $3.414 per million British thermal units, Bloomberg reports.

In Asia, it is expected that an analogous system will emerge. A move away from long-term contracts is being led by Japan, which has devised the Japan Crude Cocktail to try and calculate LNG costs. But were Japan to begin purchasing based on openly traded hub prices, then the nation’s gas costs are likely to drop by almost $10 billion annually.

This is where Singapore can come in. The country is noted for its government’s hands-off approach, which, in this context, is a very good thing and would allow Singapore to become a regional gas-trading leader. Other contenders include Japan, China, and South Korea, Bloomberg reports, but the infrastructure in those nations is comparatively undeveloped thus far.

However, many North American energy firms are betting in a big way on Asian natural gas demand—and if this new IEA report holds true, then that demand may be somewhat overstated. To wit, the massive price difference may not last for much longer if the above developments come to pass.

Should Singapore meet any success in opening up the gas market, prices will have to come down to more competitive levels.

This would also mean the decline of Asian monopolies and state favoritism, a decoupling from the price of oil, and the development of an Asian natural gas trading hub, all of which would lead to gas users and speculators bidding on future supplies and ultimately bringing prices closer to levels common in North America.

It would also mean a major setback for Canadian and American firms that are, right now, investing in a big way in natural gas exports to Asia. Just last week, for example, the British Columbia government estimated LNG prices worldwide to be 2.5 times higher than national rates for the next two decades, as the Vancouver Sun reports—a highly optimistic estimate, given what we’ve just discussed above.

At least in the short term, according to the Vancouver Sun, the current balance of power is likely to hold. What’s important here is that the developments in Singapore are shaping up to imply big things for the Asian natural gas market some years down the line.

But Singapore is also an anomaly in Asia in terms of its approach to government and its relative success in constructing an efficient society. It’s unlikely that other nations could quickly imitate its success; nevertheless, what Singapore is doing will undoubtedly cause an overturning in the Asian gas market in the next few years.

Angel Publishing Investor Club Discord - Chat Now

Brian Hicks Premium


Hydrogen Fuel Cells: The Downfall of Tesla?

Lithium has been the front-runner in the battery technology market for years, but that is all coming to an end. Elon Musk is against them, but Jeff Bezos is investing heavily in them. Hydrogen Fuel Cells will turn the battery market upside down and we've discovered a tiny company that is going to make it happen...

Sign up to receive your free report. After signing up, you'll begin receiving the Energy and Capital e-letter daily.