LNG trading and the potential for an Asian hub
(Picture credit: EMA)
So what exactly is a gas trading hub? Mr VV Roa, Managing Director of Galway Group Asia, shared recently that this is essentially a pricing point for trades of standardised contracts; similar to the Henry hub in Louisiana.
A trading hub has the ability to affect physical trades, he told audiences at EMART Asia during SIEW 2011. For a successful trading hub to develop there should be significant demand for energy in neighbouring markets to create the infrastructure facilities required for trade to take place.
For infrastructure development, a junction of pipelines has to be in place at an optimal geographical location. In some cases, this may require a strong regulatory system to be present. Both infrastructure development and the necessary regulatory backup help to create sufficient volume and volatility for paper trades to take place when price discovery and contract flexibility are introduced.
In addition to infrastructure and system requirements, contract flexibility is required to serve different buyers and sellers, and there should be both short-term and long-term contracts with different quantums and delivery options.
Current LNG trade and its evolvement
Mr Roa further shared at the EMART Asia session that there are growing LNG re-export activities from US terminals with reloading facilities. Currently, there are healthy levels of commodity trading taking place and significant multi-directional flow of LNG around the globe compared with the one-directional flow from the Middle East to North Asia in the past.
Although improvements can be seen in the level of international trade, there is no price convergence and different prices are established globally. Asia presents a perfect opportunity to further develop LNG trading because the region consumes about 50 percent of the flexible quantities of LNG traded.
Moving forward, new Asian terminals will further facilitate regional trading in Asia, especially by 2018 with increasing demand and tightening supply conditions.
The price and texture of regional flows matter to the development of an LNG trading hub. With the prospect of five to eight new terminals coming up by 2020, there would be sufficient aggregated capacity on the supply side to create a new and transient Asian market. However, the level of cooperation between Asian buyers has important impact because power price affordability in developing markets will impact the market size for flexible quantities traded.
Potential for Singapore to be an Asian hub
What is the potential for Singapore to be an Asian hub for LNG trading? Assuming there is no restriction on growth of supply, demand for LNG is expected to grow from 3MMTPA to 8-10MMTPA for Singapore. Furthermore, the development of Jurong Island terminal as an open access and multi-user terminal and the natural fit for terminals in Singapore further develop our potential for LNG trading.
However, there may be other limiting factors for the development of Singapore as an Asian hub. This includes the inability to effectuate physical trades, emerging competitors such as Malaysia, and the increasing demand growth in North Asia. Furthermore, the tightening conditions on the supply side coupled with demand for long-term contracts and the lack of seasonal demand in the domestic market might further impede market development.
Potential implications of a regional LNG hub
Looking forward, Mr Roa shared that the development of a regional LNG hub will facilitate the process of greater price discovery. In the longer term, suppliers would also gain sufficient comfort to sanction finance investment decisions with higher merchant off-take profiles and lenders' blessings.
Regional power producers would be able to sanction more projects because more flexible LNG supply deals are available. To successfully develop a regional LNG hub, flexibility in addition to pricing are the keys as contracts need to provide sufficient variations to cater to buyers and sellers. Moving forward, interest in financial trades is expected to increase as physical trade grows.
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