Asian LNG price benchmark might be slow to take off: Vitol

Singapore

IT might take a longer time for a liquefied natural gas (LNG) price benchmark to take off in Asia because Asians are not used to leading in price setting, according to one of the largest independent traders in the super-chilled fuel.

"In the energy space, Asian consumers are still price-takers; they don't want to lead the market," said Kho Hui Meng, the Asian chief for Vitol, the largest independent oil trader in the world.

Mr Kho pointed, as an example, to how oil futures have always struggled to take off in Asia. The Singapore Exchange's (SGX) fuel oil futures have seen little interest for years. China, which had been hoping to establish its own crude futures contract on the Shanghai International Energy Exchange and was working on these plans for a few years, has quietly shelved them due to market resistance, Reuters reported late last month.

The reason for this difficulty, said Mr Kho in an interview with The Business Times, is that there is less risk-taking in the Asian markets as compared to the West.

In Asia, due to the oil price shock in the 1970s and the attendant concerns over supply security that persist till today, trades are often fixed well in advance, he said. "There's not enough flexibility for people to move around and optimise the supply chain. You need to have a more diverse market like in US where people don't buy so far ahead."

Still, the LNG derivative market will grow in time, he believes. "We just have to be patient."

Against a backdrop of growing opportunities fuelled by rising global supply and scattered pockets of demand, trading houses such as Vitol, Trafigura, Gunvor Group and Noble Group have emerged as increasingly key players in a market previously dominated by oil majors and gas producers. Vitol was among the first to trade LNG when it started eight to nine years ago; the group delivered two million tonnes of the fuel in 2015.

The group participates in the Singapore LNG price index - known as the Singapore Sling - by submitting its prices, but does not trade the contract on the SGX as it is not liquid.

Mr Kho would not be drawn into commenting on the competition among Singapore, Japan and China to become the price-setter for LNG. "Whichever works, I will join," he said.

In his view, the main problem with the LNG sector in Asia now is that trades go one way: there are only sellers and no buyers because of overwhelming supply. He expects this situation to continue for the next two to three years.

Meanwhile, LNG infrastructure in the region - which requires hefty amounts of capital investment - is severely lacking. But this is not necessarily an area Vitol would put resources in because there are many other opportunities, particularly in the downstream oil sector, where the group can reap returns much more quickly, he said.

Just last December, the group agreed, with its private equity partner Helios Investment Partners, to take over the 20 per cent that they do not yet own in an African petrol joint venture from Royal Dutch Shell for US$250 million.

The number of such opportunities in the downstream oil sector, however, is shrinking as the oil price recovers, and oil majors previously looking to divest assets change their mind, said Mr Kho.

Aside from the uncertainty surrounding the Trump administration in the US, he is optimistic on the oil market this year. Demand for oil from Asia is expected to be healthy, he said, adding that petrol consumption will rise in tandem with the number of vehicles in Asia.

The same goes for the Africa region, he added. Vitol has a 37.8 per cent in a US$7.9 billlion oil and gas project off Ghana's coast - the largest upstream project it has undertaken to date. The group, with its project partners, Italy's Eni and Ghana National Petroleum Corp, last Friday named a floating production, storage and offloading vessel built in the Keppel shipyard that will be used off Ghana.

The project is expected to produce enough gas to supply to Ghana's power sector till 2036 and beyond, and will be the first in Africa where the hydrocarbons are used domestically rather than exported, said Vitol.

Nevertheless, the group still considers trading the core of its business, said Mr Kho. "These are bits and pieces that enhance what we do."

Vitol trades over six million barrels of crude oil and products a day, and in 2015 made US$168 billion in revenue. The group's Singapore office, established in 1979, serves as the regional headquarters.