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Temasek unit in tie-up to create LNG benchmark

The S'pore LNG Price Marker would delink pricing from oil market

[SINGAPORE] Asia is today the biggest consumer of liquefied natural gas (LNG) in the world - but it is burdened with a pricing mismatch.

With demand growing exponentially in a region that accounts for 75 per cent of global demand, something needs to be done.

Thus, Temasek unit Pavilion Energy has tied up with local and regional partners to fix it.

Currently, prices are largely pegged to the Japan Crude Cocktail (JCC) prices, which are often higher than gas price benchmarks in the US and Europe, and tied to crude oil prices.

But getting the price right for Asia is critically important - to help build sustainable economies and to create room for future growth and opportunities, said Pavilion chief executive officer Seah Moon Ming.

At the Asia-Pacific summit of the sixth world LNG series where global business leaders and government officials convened, he announced Pavilion's involvement in developing an Asian LNG Hub based on an Asian LNG Price Marker with various stakeholders, including the Singapore Exchange, IE Singapore, and regional governments and commodity exchanges. This initiative, he asserted, would contribute towards energy security for Asia.

The first step in realising this goal is to develop a Singapore LNG Price Marker which is independent of the oil market, that better reflects actual regional gas supply and demand dynamics and therefore provide more transparent pricing in the region.

Mr Seah suggested taking a leaf from continental US, where gas prices take reference on a "Net-Back" basis from Henry Hub (the pricing point for natural gas futures on the New York Mercantile Exchange) in Louisiana.

For the Asian Hub, the price that a regional buyer pays for an LNG cargo could be "Net-Back" to the Price Marker.

Tony Regan, principal consultant of Singapore-based energy consultancy Tri-Zen International, agreed that there was some pressure from LNG buyers to move away from the traditional contract formula, to using a specific gas price reference.

"Currently, we don't have an alternative. We don't have an Asian gas price reference at the moment. If we see that in Singapore, we will see buyers and sellers using an Asian price reference point in contracts."

Currently, Asia pays a hefty premium for LNG. In 2012, Mr Seah said, Asian buyers paid almost US$130 billion for LNG. And despite that, demand is surging.

Singapore, he said, is looking to expand LNG imports beyond the initial three million tonnes per annum to meet longer-term requirements, and Asian countries such as Bangladesh, Vietnam and the Philippines have also begun to source and import LNG.

Mr Seah added that the traditional Asian LNG importers - Japan, South Korea and Taiwan - will remain big players. Today, Japan is the world's largest LNG importer (accounting for 30 per cent of global demand), followed by Korea.

But the spotlight of Asia's ballooning LNG appetite is on China. In the first half of 2014, it increased its LNG imports by nearly 25 per cent compared to the same period in 2013, and in July 2014 alone, this demand jumped 36 per cent from July 2013.

Yet, what we see of China's fast-growing LNG consumption may still be the tip of the iceberg. Today, gas still constitutes just 5 per cent of its overall energy mix - a pale shadow of the global average of 20 per cent.

"I have been engaging with China for the last 20 years," said Mr Seah, who is also vice-chairman of China Business Group under the Singapore Business Federation, "and one thing I know about the Chinese market is that it is big, and has the potential to be bigger.

"With recent policy measures introduced by the China central government to curb pollution and to displace coal usage, it will not be hard for China to achieve 10 per cent gas usage over the next 10 years."

But between now till 2017, China will require more than US$40 billion to finance the switch from coal to natural gas, he said, thus, the need for the Asian LNG Hub.

With an LNG marketplace that is home to many trading houses, and its strategic location in the Strait of Malacca and the South China Sea that sees over 50 per cent of global LNG supplies passing through, Singapore is a "natural partner" in this initiative, said Mr Seah.