EVEN as Singapore puts in place the building blocks to become a trading and pricing hub for liquefied natural gas (LNG), current market conditions mean that volumes in the spot market - crucial for its development as a hub - might dip in 2015.
Nevertheless, such short-term fluctuations would not derail the country's ambitions, as it looks set to ride a wave of supply expected to come on stream in a few years, say market observers.
Most gas prices in Asia - which consume 75 per cent of the world's LNG - are indexed to oil. With crude oil price having fallen some 40 per cent since June, and as oversupply looms, prices for LNG in Asia are expected to fall up to 30 per cent this year, Reuters reported, citing a survey of analysts and consultants.
"If oil prices continue to remain low in 2015, buyers are not incentivised to purchase volumes in the spot market," said Chong Zhi Xin, a senior gas and power analyst for Wood Mackenzie. Liquidity in the spot market, which accounts for about 15 per cent of total trade in Asia compared to 30 per cent globally, is important for Singapore to develop as a trading hub.
The plunge in the oil price coincides with a surge in supply.
The first exports from the Queensland Curtis LNG project in Australia are to arrive in Asia this month , marking the start of a new flow of LNG from the country. Three other Australian projects - Gladstone LNG, Gorgon and Australia Pacific LNG - have a targeted start-up date of the second half of this year, as does Cheniere Energy's Sabine Pass liquefaction facility in the United States.
The greater supply, however, would not lift liquidity in the spot market by much.
"Much of it has been sold into long-term contracts, which means buyers will be taking more term LNG, leaving less space for spot cargoes," said Tony Regan, oil and gas consultant at consultancy Tri-Zen International.
Others are more optimistic. Lower Asian spot prices, which have fallen to below US$10 per million British thermal units (mmBtu), could draw more third-party traders to the spot market, said Tony Taylor, research director at energy consultancy IHS.
"Companies like Pavilion Energy who have been testing their newfound skills in trading LNG would see this as an opportunity to trade at a lower cost," he said. "Singapore has invested a lot of effort to put out the red carpet to invite the LNG companies here. This gives them a lot to look at."
Some 25 companies have set up LNG trading desks in Singapore, among them Germany's Eon and Glencore Xstrata. BG Group, Britain's third-largest natural gas producer, last year moved its global headquarters for marketing LNG and oil to Singapore.
New outfit Pavilion Energy, set up by Temasek Holdings to trade LNG in 2013, made large strides into the sector in its first full year of operations. Besides a new joint venture to acquire, manage and charter LNG carriers, it sealed a 10-year deal with Total to receive 0.7 million tonnes a year from 2018, and a 20-year contract with BP to buy 0.4 million tonnes of LNG annually from 2019.
The firm is also spearheading an effort with partners such as Singapore Exchange, government agencies and other industry players to develop a Singapore LNG price index.
Despite news reports suggesting that lower oil prices could dent Asia's push for a pricing mechanism, the volatility in the oil price reflects a need for more transparent and stable gas pricing, said Pavilion Energy's CEO Seah Moon Ming.
"We need an independent regional natural gas price index so that regional LNG pricing is transparent and better reflects actual gas market dynamics - and that will not be excessively impacted by oil market volatility," he said. "Moving from oil-linked to gas-linked pricing, just like Henry Hub (in the US) and National Balancing Point pricing (in Europe), will also allow for transparent gas pricing across the globe, for both suppliers and buyers.
"So the pace at which a Singapore LNG price marker evolves will depend on how quickly the regional gas industry recognises the need for more transparent and stable gas-to-gas pricing."
The increased market activity comes as Singapore continues to build up its LNG infrastructure.
The country last year officially opened its first LNG terminal on Jurong Island and revealed plans for a second one in the east.
This is expected to have a similar capacity to the first, though it is not likely to be completed till early next decade.
At the same time, expansion works are ongoing at the Singapore LNG terminal. A fourth tank being built will double its send-out capacity to about 11 million tonnes a year, from the current six million tonnes.
A second jetty which can accommodate LNG carriers ranging from 60,000 cubic metres to 265,000 cubic metres in size had been built earlier in 2014, while a third one for vessels from 10,000 cubic metres to 40,000 cubic metres is under construction.
These are significant steps forward in the view of HerbertSmithFreehills' head of energy in South-east Asia Richard Nelson and associate Nick Kouvaritakis.
"Such developments will help Singapore to become a hub for LNG trading in South-east Asia, in that the terminal will be able to accommodate a wide range of different LNG ships, cargo sizes and also provide a full range of operational services for such LNG ships," they said.
At the end of 2014, the Energy Market Authority also closed the first step of its selection process for up to two new LNG importers, who would each import one million tonnes. Pavilion Energy, Sembcorp and Keppel Corp are among those reported to have indicated interest. Up to three will be shortlisted by the end of first quarter of 2015, and two appointed by the end of the year.
BG Group won the contract to supply the first three million tonnes, and has contracted 2.7 million tonnes as at end-July.
Trading hubs, however, are not created by policy or regulation, said Tri-zen's Mr Regan. "Trading hubs are created by trade and traders," he said. "They evolve because the location is at a focal point for natural gas flows and trading."
To this end, a further surge in supply from 2019 would bring on more liquidity in Asia, for which Singapore would be well prepared.
In 2020, US and Australia would each have an LNG production capacity of 80 million tonnes, near the 77.7 million tonnes that Qatar would export in 2014, said Wood Mackenzie's Mr Chong.
"The government is quite shrewd. They are putting together the framework for the ease of trading, regulatory environment, infrastructure and transparency," he said. "In a matter of six years, you have all this supply that would need to find buyers, which would improve liquidity in the Asia market."