Asia’s Natural Gas and LNG Market - Singapore Case Study : The New “International Market

1. Asia’s Natural Gas and LNG Market - Singapore Case Study : The New “International Market Tony Taylor

2. Contents • Introduction • Asia Pacific Gas Outlook and LNG • Gas Market Trends and Development • Singapore’s entrance into the LNG arena • LNG Trading – will it approach oil trading? • Environmental impacts and Alternate energy • Summary

3. Introduction

4. Asia Pacific is on a steep growth trend and energy is needed to drive it. Coal and oil have been the bedrock of Asia’s growth – but natural gas, has made/is making, a significant contribution to the fuel mix Asia-Pacific’s growth has in the past been characterised by Japan, Korea and Taiwan…which provided the initial centres of high LNG demand China and India have entered the fray and their demand growth for energy is re-shaping the global energy markets. Natural gas in the form of LNG is at the forefront …and to quote Bob Dylan… “the times they are a changing” The Times are Changing

5. Asia-Pacific : ASEAN Countries + Australia

6. Asia Pacific GasOutlook and LNG

7. Supply is tight in Asia-Pac region Indonesia’s gas production is in decline and new reserves need to be brought on stream China’s gas reserves are substantial but so is their demand, and they will continue to be a net importer of gas Japan, Korea and Taiwan have dominated world demand for LNG with the majority of its supply from Indonesia and Malaysia. Both of these supply areas are in decline and new sources are being sought from Australia, Middle East and possibly Africa Potential new markets … Philippines, Indonesia, Vietnam…Singapore LNG prices continue to be linked to oil price (directly/indirectly) and have hit new highs. Asia-Pacific Gas Outlook

8. Asia-Pacific Natural Gas Demand

9. Characterisation of Major Asian Gas Markets Source Data from BP World Energy Statistics (2007) * From 2009

10. Gas Market Trends and Development

11. Demand in excess of 1 bcm/a showing high potential for growth e.g. Japan, China, Indonesia, Malaysia, South Korea, Thailand, Taiwan, Singapore and Philippines Choice of supplier (i.e. upstream gas purchases) Influence of international market price Access to infrastructure (e.g. pipelines, LNG Re-Gasification Terminals) Asia-Pacific context - factors that define gas market, competitive markets

12. World Natural Gas Prices March 2008 Asia-Pacific pays the highest gas price

13. Singapore has forged ahead with gas market liberalisation and is about to launch its liberalised gas market in July 2008. Singapore will be introducing a Gas Network Code, Licenses for Importing, Shipping, Retailing and Transporting gas. It has introduced and modified a Gas Act which embodies the gas market in law. It has encouraged the importation of LNG to complement its existing supplies of pipeline natural gas. Gas market liberalisation has accompanied the liberalisation of the Power Market …which is largely fuelled by gas. Competition ….Singapore’s liberalised market

14. Government policies will shape the Asia- Pacific natural gas market. ASEAN member countries such as Cambodia, Indonesia, Malaysia, Philippines, Singapore and Vietnam have developed policies that influence the supply and utilisation of natural gas. However, these policies, by definition, are focused on national consumption. An overall A-P organisation might emerge to form a regional policy and trading of natural gas to optimise national resources and ensure A-P’s supply and utilisation of natural gas is arranged to give a net-benefit to the region. ASEAN is a body which has effectively tried to shape and improve member countries’ acquisition and utilisation of energy. Through ASCOPE (ASEAN Council of Petroleum), it has created initiatives such as the Trans ASEAN Gas Pipeline which set out to link all member countries through a network of gas pipelines to benefit ASEAN as a geographic region in its production and utilisation of gas. However arrangements are bi-lateral and more urgency is needed for such initiatives Government policies/Investment potential

15. Asia-Pacific’s economy has been built with coal and fuel oil as the dominant fuels – China is a prime example Natural gas is relatively immature by comparison but has established itself through LNG imports to Japan, Korea and Taiwan Price and the environmental concerns have recently given rise to biofuels using food crops such as rice, palm oil and sugar cane as the base energy source. However, the biofuels environmental credentials and the rise in staple food prices like rice, may well halt the growth of biofuels as a viable alternative to fossil fuels Natural gas remains the least harmful of all fossil fuels to the environment and will likely spearhead Asia-Pacific’s continued economic growth China is emerging as the driving force in the A-P region, gradually becoming the leading trading partner for A-P countries. China has a growing and diverse demand for energy Competition with other fuels

16. China’s Fuel Mix(Source : IEA) 1.742 Mtoe Natural gas is subordinate to coal…

17. China’s Projected Natural Gas Demand …however, China’s natural gas demand is growing significantly

18. Singapore’s entrance into the LNG arena

19. Feasibility study conducted by Tokyo Gas Engineering in 2005/6 recommended a 3mtpa LNG Re-Gasification Terminal for Singapore in 2012 – expandable to 6 mtpa by 2024 The rationale for the Terminal was : - Security of Supply - Diversity of supply …to complement and support Singapore’s existing pipeline natural gas supply The challenge was to secure an LNG supply in a tight market for delivery from 2012 at a price that made sense for a long term arrangement ..10-20 years Singapore is also challenged to become a gas trading hub in the long term Singapore’s LNG progress

20. Malaysia Gas Senoko Malaysia Gas Keppel Keppel Tuas Singapore’s Transmission & Distribution Network IPC Seraya Main Transmission NetworkJIT Transmission NetworkTown Gas Transmission Network Sakra South Sumatra Gas West Natuna Gas

21. Initially sized for a capacity of 3 mtpa – building from an initial throughput of ~1 mtpa in 2012 to 3 mtpa by 2018 BG Group has been appointed as the LNG Aggregator for the Terminal to take care of all of Singapore’s LNG needs up to 3 mtpa The LNG Terminal will be operated under Third Party Access rules – although unlikely subject to the full rigours of the forthcoming Gas Network Code Terminal operation is licensed activity and Singapore’s PowerGas has been appointed the Terminal Operator The LNG Aggregator will negotiate LNG sales to large End Users (e.g. Power Stations, Chemical Processing companies) and Gas Aggregators (e.g. GSPL, SembGas) Singapore has introduced a PNG Import Policy which seeks to limit further imports of PNG and to build up demand for LNG Characteristics of Singapore’s LNG Terminal

22. Singapore has several factors in its favour for being a Gas and LNG centre for the Asia-Pacific Region… It is already a thriving centre for oil refining and trading of oil products It has a legal, corporate governance and financial structure that matches other international cities such as London, New York, Geneva and Tokyo It has 4 pipeline natural gas importation routes that complement an LNG supply It is geographically well positioned for East-West trade routes It will be (July 2008) the only country in Asia-Pacific that has a de-regulated gas market – with rules and legal structure for the marketing, trading and settlement of gas contracts No other countries in the Asia-Pacific region can lay claim to such credentials! Singapore’s credentials as an International Player

23. Whilst Singapore’s expected demand for LNG is relatively low, the case for Singapore setting an International Marker price for LNG is not so implausible Singapore has a well- functioning international centre for oil refining and an active market for trading of oil products There are 4 pipeline natural gas importation contracts with a gas price linked to oil (HSFO/MSFO) Singapore’s import control policy on PNG could effectively cause PNG and LNG prices in Singapore to converge…thereby providing the elements of some transparency for setting PNG and LNG prices If and when Singapore gains liquidity in LNG trades, a marker price may be then linked to an average price of Singapore LNG trades depending on the extent of liquidity Singapore as an International Market for LNG

24. LNG Trading – will itapproach oil trading?

25. The crude oil market has been fully functional for 25 years. Economists have become familiar with Brent and West Texas Intermediate oil prices as well as fuel oil quoted on the Rotterdam and Singapore spot markets Natural gas has a tough time to live up to the ubiquitous oil market, as it requires infrastructure put in place which limits flexibility, but its trading credentials have been strengthened by bringing sources of supply to far off markets through LNG However, whilst LNG has globalised the gas industry, it can never match the fungibility of oil. Natural gas will never be a commodity in the same context as oil, however, LNG provides choices that did not exist with pipeline natural gas Spot cargoes to Japan, Korea and Atlantic Basin markets are growing and, as more ships become available, a credible spot market will develop further Oil & Gas Trading Development

26. Fundamental differences between LNG and oil

27. LNG Trading Hubs were originally viewed by the Industry as fanciful. However, the case for them is growing : Early long-term SPAs are nearing the end of term and replacement contracts, with price mechanisms set against US$100+/bbl oil, are difficult to negotiate – a short term trading arrangement or spot market allows an interim solution – the market finds its own level Upstream gas treatment and liquefaction facilities costs have mostly been recovered – new SPAs can be provided on marginal cost basis. More LNG Tanker capacity has been built – some without long term contracts. Buyers can access LNG on a short term basis without long term commitments ….however, the price is likely to be high. Singapore’s central location is well placed as an LNG & Gas Trading Hub. LNG & Gas Trading Hubs

28. US LNG Imports 2007 LNG prices in Europe and Asia were more attractive than Henry Hub prices – cargoes moved east - inter-region LNG trade picks up… Source : LNG Focus

29. Short Term Cargoes moving from Atlantic Basin to Asia 2007 Source : LNG Focus

30. Environmental Impacts and Alternate energy

31. Awareness of the impact of fossil fuels on the environment in Asia-Pacific is growing Natural gas is a cleaner fuel but the lack of delivery infrastructure, growing world demand (which elevates price) and availability of the dominant fuels (fuel oil/coal) in the region makes it harder to displace these “dirty” fuels Biofuels (fuels made from sugar cane, palm oil and rice etc) have emerged as a strong alternative – particularly as the land in tropical Asia is conducive for extensive cultivation of these crops. However, the environmental credentials are suspect and with current processes they have the undesirable effect of pushing up prices of staple foods The wind, solar, wave projects for electricity generation which are proliferating in Europe and North America do not see the same potential in Asia Pacific. These forms of power generation (even with the latest technology) are generally more expensive than the traditional coal, fuel oil or natural gas fuelled generation. Asia-Pacific’s economy is not yet sufficiently robust to afford these alternative energy forms Environmental Impacts - Gas and Alternate energy

32. Summary

33. Asia Pacific is on a steep upward climb and energy is needed to drive it Natural Gas/LNG will increasingly grow in importance …but lack of supply may drive up price to a level which cuts demand and “puts on the brakes” Singapore’s forthcoming liberalisation of its gas market and established supply of PNG from two foreign sources (Malaysia and Indonesia) will provide the basic elements of an “international maker price” for LNG when the terminal is operational in 2012. Singapore is likely to develop into a Gas / LNG Trading Hub in the future Alternative, non-fossil fuel energy is too expensive for Asia Pacific economies and coal, fuel oil and natural gas will dominate A-P’s fuel mix. Natural gas will gradually take a larger share of A-P’s energy market Summary – the future is bright

34. THANK YOUTRI-ZEN International Singapore and Bangkok Hong Kong Jakarta Melbourne Mumbai Perth Shanghaiwww.tri-zen.comTony Taylor is currently based in London withenergy