Distinguished Guests

Ladies and Gentlemen

Welcome

1.            A very good morning.  It is my pleasure to join you for the 11th edition of the LNG Supplies for Asian Markets (LNGA) conference.  Given the volatility in the market over the past year, LNGA presents a timely platform for us to discuss the challenges facing the Asian gas sector and the path forward.

 

Developments in the Oil Market

2.            When we gathered at LNGA last year, West Texas Intermediate (WTI) crude prices were US$53 per barrel.  A month ago in mid-February, prices had fallen to a twelve-year low of US$26 per barrel.  Today, while crude prices have rebounded to US$38 per barrel, it remains to be seen whether prices will continue to rise ahead of bearish expectations. I am certain this question is uppermost on everyone’s mind.

3.            Notwithstanding the recent price rally, many analysts think that the low oil price environment will persist for a while longer for two reasons.  

4.            First, global oil production levels are likely to remain high. Major oil producers like Saudi Arabia, Iraq and Russia remain committed to maintaining production levels in an over-supplied market.  Iran, which had its nuclear-related sanctions lifted in January 2016, has also restored its oil production to pre-sanction levels.  In addition, domestic oil production from the US and Canada continues to be driven by advancements in fracking technologies.  Moreover, oil majors have sought to cut costs rather than reduce production to avoid a greater fall in operating revenue.  Consequently, the International Energy Agency (IEA) projects that global oil supply is likely to increase by 1.5 million barrels a day in the second quarter of this year, with supply continuing to rise over the rest of the year.

5.            Second, demand for oil will likely remain weak on the back of a slowing Chinese economy, with Japan’s plan to restart some of its nuclear plants also dampening demand in the near-term.

6.            As a result of these factors, crude prices are expected to stay within the range of US$30-50/barrel for 2016.

 

Implications for the Gas Market

7.            The low oil price environment has had an inevitable impact on the Asian gas market as most Asian gas contracts are indexed to oil prices.  As a result, Asian gas buyers have benefitted from lower gas prices in the short term.  Looking further ahead, the medium term outlook for the Asian gas market remains soft on the back of weaker demand and sustained supply.

8.            Despite the lower prices, demand for LNG has fallen, with traditional importers such as Japan, Korea and Taiwan switching to alternative fuels such as nuclear and coal due to Japan’s ongoing plans to restart its nuclear reactors, a slowing South Korean economy and the availability of cheaper coal.

9.            On the supply-side, new LNG supplies from Australia, Papua New Guinea and the US have come online.  For example, Cheniere Energy’s Sabine Pass terminal exported the first shipment of US shale gas in February 2016.  Analysts expect more LNG projects in the US and around the world to commence deliveries in the next few years.

10.         Against this demand/supply backdrop, and in the absence of any ‘black swan’ events, an excess supply of LNG looks set to be emerging in the market.  Bloomberg estimates that global LNG supply may reach 500 Mtpa by 2025, 40% higher than the expected LNG demand of 370 Mtpa.  I have no doubt that we will hear diverse views on this subject from the experts and industry leaders gathered at this forum.

11.         Nevertheless, an excess of supply with the attendant low gas prices holds far-reaching implications for the energy landscape in the longer-term.

Infrastructure Investment Decisions

12.         First, depressed LNG prices will significantly influence investment decisions.  At the Singapore International Energy Week (SIEW) in October last year, Dr Fatih Birol, Executive Director of the IEA, highlighted that low oil prices have led to a 20% decrease in upstream oil and gas investments in 2015 and many upstream projects which have not obtained FID will be delayed or cancelled in 2016.  Many LNG project developers are also embracing smaller scale projects with diminished project complexity and unit costs.

13.         If there is sustained under-investment and investments trail growing demand, there will be longer-term consequences for energy security and price.

Diversification of pricing and contracting strategies

14.         Second, there could be changes to LNG contracting strategies here in Asia.  Buyers are increasingly reluctant to lock themselves into large-volume long-term contracts, favouring instead deals that offer greater flexibility in contracting durations and volumes.  Looking at the longer-term, it remains to be seen whether Asian gas buyers and sellers will resume their push for gas-on-gas pricing.  Although the current low oil prices may have diminished Asian gas buyers’ urgency to diversify away from oil indexation, it does not remove the fundamental need for an alternative pricing mechanism that better reflects gas market fundamentals and ensures security of supply.  From the sellers’ perspective, gas-on-gas pricing may also remain relevant as low oil prices would otherwise make it difficult for LNG sellers to earn a reasonable rate of return from oil-indexed contracts. 

 

Implications for Singapore – Maximizing Opportunities and Managing Downsides

15.         Amidst this challenging and uncertain environment, Singapore, as an energy price-taker, will continue to adopt policies that will help enhance market flexibility and our ability to respond nimbly to changing global developments. 

 

POST-3 MTPA RFP

16.         Our Competitive Licensing Framework for LNG imports adopts a tranche-by-tranche approach of importing future supplies.  This allows Singapore to benefit from the emergence of new trends, suppliers and price indices in the market.

17.         We are currently in Stage Two of our Post-3 Mtpa Request for Proposal (RFP) process.  Once submitted, EMA will evaluate the proposals from the shortlisted companies Pavilion Gas, Sembcorp Industries and Shell, before appointing up to two parties to be our LNG importer(s).

 

SPOT IMPORT POLICY

18.         To complement the Competitive Licensing Framework and provide buyers with more options for gas supplies, EMA has announced that it will allow interested parties to import spot LNG cargoes for domestic use after the conclusion of BG’s exclusive franchise.  Under the spot LNG Import Policy, a gas buyer would be given annual credits to import up to 10% of its total long-term contracted quantities in the form of spot cargoes.  EMA is currently reviewing this policy with a view to providing gas buyers with greater flexibility.

 

SECONDARY GAS TRADING MARKET

19.         Another key initiative that we are developing is the Secondary Gas Trading Market (SGTM).  The SGTM will allow gas users to on-sell excess gas to optimise their gas supply portfolios.  This will also encourage price discovery, which would complement Singapore’ efforts to develop into a hub for gas trading activities.

20.         In the fourth quarter of 2015, EMA consulted the industry on a proposed market design and implementation roadmap for an SGTM in Singapore.  Based on industry feedback gathered thus far, I understand that there is broad support for the initiative.  EMA will continue to work with industry to further develop the details for implementing the SGTM in Singapore; industry support is key to the SGTM’s success.

 

LNG TRADING AND BUNKERING

21.         Beyond meeting domestic needs, Singapore has seen strong and steady growth in our LNG trading sector.  Today, there are more than 30 LNG companies with an LNG trading or business development presence in Singapore.  And, we continue to see interest from more companies to establish their LNG trading presence in Singapore.

22.         The Government is working on a range of other initiatives to support the development of a gas trading hub here.  This includes enhancing our LNG infrastructure for energy security and to support a wide spectrum of ancillary LNG activities; developing the Terminal Access Code to ensure efficient use of our LNG terminal; and supporting industry-led initiatives to facilitate price discovery.

23.         On this note, the SGX launched the Singapore LNG Index Group (SLInG) index last year, in response to growing demand and increased trade flows of LNG in the Asia Pacific region.  SLInG is an assessment-based LNG pricing index by a diverse group of players along the LNG value chain.  More recently, futures and swaps were launched using this new index.  The introduction of an Asia-centric LNG index is timely.  It provides a platform for price discovery and risk management options for traders, which is essential especially given the high volatility in the LNG market today.

24.         In January this year, the Maritime Port Authority of Singapore (MPA) awarded two LNG bunker supplier licences to Pavilion Gas and a joint proposal of Keppel Offshore & Marine and Shell.  EMA and SLNG will work closely with MPA and the two licence holders to develop the necessary infrastructure to start supplying LNG bunker to vessels in the port of Singapore by early 2017.

25.         In these and other aspects, the Singapore Government will continue to develop polices and work with stakeholders to grow Singapore’s LNG sector. 

 

Conclusion

26.         In a period of ever increasing volatility and uncertainty, sellers, buyers, and policy-makers alike must continue to work together for the enhancement and long term sustainability of the gas industry.  I hope that you will use the opportunity provided by this LNGA conference to exchange views on the gas market, and share your thoughts on how we can collectively address the challenges and opportunities arising from the current market environment and developments.  With that, I wish everyone a productive and insightful session at LNGA 2016.

27.         Thank you.