GAS ASIA SUMMIT OPENING REMARKS BY MR S ISWARAN, MINISTER FOR TRADE AND INDUSTRY (INDUSTRY), AT THE SINGAPORE INTERNATIONAL ENERGY WEEK 2016, ON WEDNESDAY, 26 OCTOBER 2016, 9:00 AM, SANDS EXPO & CONVENTION CENTRE, MARINA BAY SANDS
Distinguished Guests
Ladies and Gentlemen
Welcome
1. Good morning. It is my pleasure to join you at the 4th edition of the Gas Asia Summit.
Global Developments
2. The global economic outlook remains uncertain, on the back of China’s slowdown and volatile financial markets. More recently, the European Central Bank and the International Monetary Fund noted that Brexit will further exacerbate global uncertainty, with its full economic impact yet to be felt.
3. The global gas market has been affected by this weak and uncertain global economic outlook. With Asia accounting for more than seventy per cent of global Liquefied Natural Gas (LNG) demand, the LNG market has seen weaker than expected demand from buyers in China, Japan and Korea. At the same time, Australia and the US are set to supply close to 140 Mtpa of LNG over the next five years, which will increase global LNG supply by over fifty percent. These demand and supply-side factors have led many analysts to believe that the Asian gas market will remain soft till the end of the decade.
Long Term Implications
4. The uncertain global outlook, coupled with excess gas supply and the attendant low gas prices, holds far-reaching implications for the longer-term energy landscape.
5. There is the prospect of diminishing investments as investors reduce their exposure to the energy sector by scaling-back capital injections. This is exacerbated by rising financing costs in a market of uncertainty as lenders expect higher risk premiums.
6. Furthermore, producers who strive to cut costs may limit upstream exploration and production activities, which will lead to a reduction in the availability and accessibility of supplies in the longer term. The industry needs to re-establish a healthy equilibrium; if not, sustained under-investment will have adverse long-term consequences on energy security and pricing.
Emerging Trends
7. Pricing and contractual trends have continued to evolve along with changing market dynamics. Most Asian gas contracts have traditionally been linked to oil prices which do not necessarily reflect gas demand and supply fundamentals. While depressed oil prices have reduced the incentive for gas buyers to push for an alternate pricing mechanism at present, there remains the need for a price marker that better reflects the cost of gas to create win-win outcomes for buyers and sellers in the longer term.
8. Buyers are actively negotiating for price review mechanisms to ensure price competitiveness over the tenure of their gas contracts. They are also increasingly reluctant to lock themselves into large-volume long-term contracts, favouring deals that offer flexibility in contract durations, volumes, and destinations.
9. From the sellers’ perspective, it is also in their interest to have prices that reflect the fundamentals of gas demand and supply. They have been open to offering shorter term contracts for surplus supply under their existing portfolios. However, it is still important for sellers to have a base-load of long-term contracts to underpin investment decisions for new liquefaction projects.
Singapore’s Gas Market Developments
10. Against this backdrop, it is important for a small country like Singapore, which is highly dependent on gas imports, to stay nimble and adaptable to emerging trends and changing global developments.
11. To this end, Singapore has embarked on a series of policy initiatives to move towards a more dynamic gas market.
12. For example, we introduced the Competitive Licensing Framework in 2014 to allow Singapore to take advantage of prevailing market trends by procuring LNG imports on a tranche-by-tranche basis. With this, EMA launched a two-stage competitive Request for Proposal (RFP) in June 2014 to appoint up to two LNG importers to supply up to 1 Mtpa each or for 3 years, whichever is earlier.
13. Earlier this week, we announced that Pavilion Gas and Shell have been appointed as the term importers for Singapore’s next tranche of LNG. These two companies emerged from the competition by offering well-diversified supply portfolios with competitive pricing and flexible contractual terms. Importantly, they demonstrated their ability to cater to varied market needs by aggregating demand from multiple buyers.
14. The commencement of the new tranche of LNG imports will provide us with access to the appointed importers’ global LNG supply portfolios, which include gas from the U.S., Australia, Norway, Russia, Qatar and Brunei. This diversity of supply will further strengthen our energy security.
15. The two appointed importers also offer gas buyers more flexibility through options for shorter contract durations and alternative pricing indices to oil indexation. For instance, we have seen contracts where prices are pegged to SGX’s SLiNG or Henry Hub prices. This will provide gas buyers with more options to manage their gas portfolios and mitigate oil price volatility.
16. Together with the commencement of the new tranche of LNG imports in 2017, we will allow the import of third-party spot LNG as well as new PNG supplies on a case-by-case basis. These policies will increase the gas supply and pricing options available for buyers in Singapore.
17. For the import of spot LNG, EMA had earlier suggested allowing buyers to contract up to 10% of their gas demand as spot LNG. The industry has provided feedback that it would be better to allow spot imports on a first-come-first-serve basis, subject to a market-wide cap, to provide greater flexibility for buyers. EMA is reviewing the detailed feedback and will consult the industry later this quarter on how to operationalise the spot LNG import policy.
18. EMA is also developing a domestic Secondary Gas Trading Market (SGTM). The SGTM will provide more flexibility for gas buyers to manage their portfolios and encourage better price discovery. This will provide gas buyers more options to manage uncertainty. We have completed the first phase of detailing a roadmap to implement an SGTM. An industry working group, which will deliberate the details leading to the initiation of the SGTM, will commence discussions early next year.
19. Alongside these, there are also industry-led initiatives to support the development of the SGTM. The Energy Market Company (“EMC”) launched a Gas Trading Board (“GTB”) in September this year as an interim platform to facilitate bilateral gas trades domestically. The first trade was transacted between Pavilion Gas and PacificLight Power last week. The industry’s feedback and experience from using this platform will help the development of a successful SGTM.
20. In the area of infrastructure development, the current 6 Mtpa throughput capacity of the LNG terminal on Jurong Island will increase to 11 Mtpa by early 2017. A fourth LNG storage tank will also be completed in 2018. The expansion will allow the terminal to better cater to different demands, in addition to domestic throughput services. We are also studying options to enhance our energy security through the potential development of a second LNG terminal.
Development of Trading and Ancillary Services
21. Beyond meeting domestic needs, our LNG infrastructure is capable of supporting ancillary activities.
22. Last year, Trafigura signed a term agreement with SLNG to utilise its spare capacity for Storage and Reload activities. To date, Trafigura has conducted a number of unloads and reloads at the terminal, making use of the terminal’s ability to carry out break-bulk operations.
23. Singapore is also developing its LNG bunkering sector. The Maritime and Port Authority of Singapore (MPA) appointed two LNG bunker suppliers earlier this year – Pavilion Gas, and a joint venture between Keppel Offshore & Marine and Shell. They will commence LNG bunkering services in Singapore in the first quarter of 2017, after SLNG completes constructing an LNG truck loading facility.
24. Singapore will continue to foster a dynamic LNG ecosystem which includes supporting industry-led initiatives to facilitate price discovery and the development of a LNG trading hub in Singapore.
25. In this regard, the Singapore Exchange (SGX) has launched the Singapore SLiNG as well as the North Asia SLiNG as alternate gas price markers for the Asian market. SGX has also announced plans to launch more LNG financial derivatives next year based on these markers. Buyers, sellers and traders in the region can look forward to these exciting developments in Singapore.
26. These developments will increase the vibrancy of the Singapore gas market, and grow its regional footprint. We hope to see continued interest from companies to utilise these ancillary services and to establish their LNG trading presence in Singapore.
Conclusion
27. With ever-changing dynamics in the global gas market, policy-makers, buyers and sellers must work together and be open to explore innovative solutions to achieve the long-term sustainability of the gas industry. The Gas Asia Summit provides a good opportunity for industry experts to exchange views on the gas market, and consider how we can collectively address the challenges and opportunities in the current market environment.
28. I wish everyone a fruitful and insightful session ahead. Thank you.