Singapore Emerges as LNG Trading Hub
Image Credit: REUTERS/Issei Kato

Singapore Emerges as LNG Trading Hub


In the commodity markets, positioning is often much more important than production. Singapore’s leadership clearly understands this, and by creating the Singapore LNG Corporation (SLNG), the city state is clearly leveraging its superior geographical and intellectual position to try and become Asia’s primary gas marketing hub. Asia accounted for 71% of the world’s estimated 236 million tons of LNG trade in 2012, according to the International Group of Liquefied Gas Importers.

The Singapore SLNG

SLNG, owned by the Energy Market Authority of Singapore, is the designated vehicle for Singapore’s gas trading aspirations and operates the first liquid natural gas (LNG) terminal in Asia capable of importing and re-exporting LNG from multiple suppliers. SLNG commissioned its inaugural LNG cargo in March 2013 from Qatar and the terminal, located on Jurong Island, begin commercial operations on May 7, 2013.

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Singapore’s first objective in building an LNG terminal is to secure gas supplies for its own growing demand, and second, to become an LNG trading hub where substantial storage capacity enables buyers to purchase a wide range of cargo sizes. Managing these two objectives is difficult, since the terminal operator SLNG must balance the underlying long-term objectives of Singaporean gas consumers with the shorter term and more variable needs of trading customers. To help bridge this gap and ensure an underlying critical mass of supply, the EMA contracted British Gas to serve as an “aggregator” to help get the project underway.

In a nutshell, British Gas (BG) works on both the supply and demand sides of the market to ensure that the terminal has a “baseline” volume of LNG throughput committed that is sufficient to make operations economically viable. This requires substantial trading and market expertise, as well as ready access to a range of LNG supply sources – qualifications that BG meets via its LNG trading and marketing arms. The aggregator model also aims to make LNG storage more efficient by allowing cargoes to be sold out of a large general pool.

One of SLNG’s most important innovations is that it takes the gas that naturally “boils off” from LNG stored at -261 Fahrenheit and sells it to customers in Singapore. LNG traders then simply take their volumes from the portion of the stored gas that remains in a liquefied state. This policy keeps traders confident that they are capturing the full energy value of any cargo they bring into and sell out of Singapore’s LNG storage tanks. That confidence in turn facilitates the development of a more liquid trading market because storage terminals, buyers and sellers are aware they can now fully capture price differences and exploit arbitrage opportunities without bearing the costs of gas that boils off.

As such, market participants can now truly think in terms of gas molecules, rather than the old inflexible view of “specific cargoes held for specific customers.” Making the gas molecules fungible helps the terminal operator meet the smaller volume, shorter term demands of many trading customers. Fungible gas and active trading also captures additional economic value, since a US$1/million BTU increase in the price of natural gas means the value of gas stored in a 188,000 cubic meter SNLG storage tank would increase by US$4.5 million (assuming the tank is 90% full). Traders can now, with reduced risk, commission LNG cargoes from Singaporean tanks on short notice when, for instance, a Siberian cold snap heads toward China and South Korea and gas prices begin to rise.

Size and Sourcing

SLNG says its terminal will have an initial re-gasification capacity of 3.5 million tons per year (equal to roughly two weeks of gas consumption in Japan, the world’s largest consumer of LNG) and has the ability to expand this to 6.0 million tons per year or more if market conditions prove favorable.

Singapore LNG aims to source its supplies globally. As noted above, the terminal has handled cargo from Qatar and British Gas will also source LNG from projects in which it holds equity stakes, including Trinidad, Egypt, Nigeria and Equatorial Guinea, as well as its coal gas LNG project in Queensland, Australia, which is scheduled to come online in 2014.

Strategic Implications

The venture faces a number of significant challenges, but if it succeeds, in the emerging global LNG spot trading market, Singapore may be able to complement its existing outsize role in the Asian oil and refined products markets and become Asia’s premier natural gas trading hub as well.

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