Home > Carbon emissions, LNG > Singapore as a gas trading hub in Asia: opportunities and challenges

Singapore as a gas trading hub in Asia: opportunities and challenges

During the recent visit to Singapore by IEA chief economist Fatih Biroh, he suggested that it can become a regional hub for gas trading. Singapore can capitalise as the major oil trading hub in Asia to be its gas trading hub. This is even as a ‘Golden Age of Gas scenario’ (GAS) heralds in the coming decades.  The opportunities and challenges for this to take place are explored here.

A Golden Age of Gas Scenario:

Presently, some of the largest consumers of gas are in Asia – China, Japan, Iran and South Korea (Source EIA statistics). Considering LNG1 alone, Asia contributes 55% of the world trade presently. Global primary gas demand in the world is expected to increase from 3.3 tcm today to 5.1 tcm in 2035, and accounts for 25% of global energy demand. About 80% of the increases are expected from India, China and the Middle East. (source: IEA GAS report). World trade in gas is expected to increase to 620 bcm in 2035 – divided equally between pipelines and LNG.

In Singapore, oil majors and trading houses have set up gas trading desks. In Feb 2010, a first financially settled LNG swap derivative was created between Citigroup and an undisclosed oil major based on Japan Korea Marker (JKM). The JKM is a daily assessment based index published by Platts, and is the first LNG index in Asia that reflects the supply and demand fundamentals in the region. Generally, LNG prices have been priced off the Japan crude cocktail (JCC, a CIF price of imported crude into Japan including customs tax) published by the Petroleum Association of Japan. The JKM is a physical index for delivery in several Japanese and Korean ports. In Jan 2011, Platts has also introduced gas points off Australia (netback off the JKM), Middle East and the Indian west coast (netback off the Middle East).

The opportunities:

 The increased trading in LNG (from 2% 10 years ago to about 25% of supply recently), is a confluence of a few factors, namely:

  1. A recent gas supply glut worldwide
  2. The recent Fukushima nuclear accident further increasing LNG demand to replace power from displaced nuclear plants.
  3. Increased set-up of LNG infrastructure including import terminals and storage vessels in Asia
  4. The drive to expand energy sources to meet increasing energy needs and security,
  5. Cleaner nature of the gas to meet environmental targets.

In the USA, the Henry Hub settled below $3/mmBtu on the last day of the 2011. This was a drastic change from 2008 when its price was above $10/ mmBtu. A major reason for the worldwide glut in supply is unconventional gas sources contributing 47% of supply in USA and the economic downturn in Europe. This supply glut has increased the availability of spot cargoes in the market, from long term contracts (LTCs).

Most gas contracts are modelled on LTCs Take or Pay (ToP) where the buyers take a minimal contractual volume or otherwise pay a penalty. These LTCs are due to the high capital costs of the greenfields projects and typically last 10-20 years. Almost 95% are based on oil indices. A graph of Henry Hub (HH), the National Balancing Point (NBP) in Britain and the JCC prices is indicated below. Since the past 3 years, the NBP and HH prices have dipped below JCC prices. This incentivises a switch to gas-based contracts and promotes trading that reflects the supply and demand of natural gas.

Preview Changes

Figure 1: JCC, NBP and Henry Hub historical prices

The cleaner nature of the gas (emitting less carbon dioxide per Btu) has also seen its use as a short term measure against reducing global warming. However, the net effect of the displacement of nuclear energy (which doesn’t emit carbon dioxide), and increased usage of gas is still expected to raise emissions to 35 Gt leading to a 650 ppm carbon dioxide concentration and a rise of 3.5 degrees Celsius under the GAS scenario.

The challenges:

In spite of greater trading in LNG recently, challenges remain for a trading hub to emerge in Asia. These are:

  1.   Divergence of gas from oil prices a temporal occurrence?
  2.   Market inertia with LTCs and relative stability of oil prices
  3.   High costs of gas transportation especially LNG freight leading to fragmented markets
  4.   Downstream market regulations

There is no guarantee that gas prices remain low over the long term. In fact, Deutsche Bank estimated that the current supply glut will last till 2014-2015. An excellent paper by Oxford Energy – “Henry Hub at $3 or $20 in 2020?” projects future natural gas price trajectory. It remains to be seen if tightness in the market shrinks LNG trading in the future, as there is less spot cargo “left from ToP” contracts.

However, trading based on gas prices still serves as an independent harbinger of gas fundamentals and a useful tool for risk management. This is tempered by the substitutability of the gas with fuel oil for power generation, LPG for domestic use and naphtha for petrochemicals manufacture.

This substitutability is the original reason for the historical usage of the JCC for gas pricing. The relative lower volatility of JCC to gas prices also encourages its use as a budgeting tool in long term planning, although an averaging monthly index can be created off the spot or forward indices. Consumer inertia by several market players is another reason with several utilities companies in Japan willing to pay a premium for gas for supply stability. Over the next 4-5 years, about a third of the LTCs in Japan are expiring representing a window opportunity for new gas indices to be used.

Existing natural gas markets remain fragmented regionally. There is the main Henry Hub in the eastern seaboard of the United States which is itself separated logistically from the California SOCAL index due to the Rocky Mountains. In Europe, there are a few fragmented gas trading hubs – NBP, the Zebrugge in Belgium and the TTF in Amsterdam.

A key reason for the fragmented markets is the relatively higher costs of transporting natural gas compared to say crude oil. Trading hubs in Europe and USA are inter-connected by gas pipelines, whilst in Asia natural gas is transported seaborne. This requires costlier refrigeration and re-gasification. The increased freight costs reduce the chances of geographical arbitrage taking place across continents unlike that of crude and crude products. It costs an estimated $2.2/mmBtu to transport LNG from the Middle East to Japan (in Sep 11) when the JKM index was ~$18/mmBtu. It must be realised though that large price differences between Europe and the Americas, and Asia have made arbitrage economics frequent in H2 2011 (primarily due to the Fukushima nuclear accident increasing demand in Japan).

Another factor that may hasten gas trading (or not ) is downstream market regulations in the key consumer markets – China, Japan and Korea. China has a recent pilot scheme (in Guangzhou and Guangxi) to liberalise city gate prices (prices sold to utilities companies in cities) although these continue to be priced off domestic fuel oil and LPG prices. The main utility company in Korea, KOGAS holds a monopoly position in the domestic market, while in Japan liberalisation efforts have been shelved.

Strategic efforts/ advantages for Singapore:

Singapore has the advantage as the main oil trading hub in Asia with existing trading infrastructure and expertise. Further, it is geographically centred between the main LNG supplier nations – Qatar, Indonesia and Australia and the main major import nations – China, Japan and Korea. This offers it a transit point advantage.

It has also invested about $1.1B for a multi-user LNG terminal with 3 storage tanks of capacity 0.54 M cubic metres scheduled for completion in 2013. This is the equivalent of 2 to 3 LNG vessels typically having capacities of 0.15 to 0.25 M cubic metres. On average, there are two LNG import vessels into Korea and Japan a day (in 2010). Most of the import capacity is however slated for domestic use with 1.5 mtpa out of the 3.5 mtpa. Thence said, since gas prices are priced off CIF into Japan and Korea where there are higher storage capacities, storage arbitrage plays are not expected to figure importantly for trading in Singapore.

As with any new market, LNG trading is expected to trudge along. The momentum is building however due to the cleaner nature of the gas, increased environmental concerns and set-up of LNG infrastructure in the region.

1 – Gas is transported as CNG, LNG (liquified natural gas) or in pressurised pipelines. Most of the gas imports in Europe and USA are transported by pipelines. In Asia, gas is traded as LNG transportation requiring cryogenic sea vessels, terminals and storage tanks.


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  1. August 21, 2012 at 8:50 am

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  1. January 7, 2012 at 10:55 am

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