Honourable Minister Duban, distinguished guests, ladies and gentlemen, good morning.
Today, natural gas is well-accepted as the cleanest burning fossil fuel. In its liquefied form, it is readily transported across oceans aboard LNG ships, to reach demand centres around the world. Recent geopolitical developments in Ukraine and the dispute with its traditional gas supplier over payments, have once again highlighted the importance of energy security and the need to have reliable access to natural gas.
For us in Asia, LNG is becoming a critical energy resource. Asia is the fastest-growing region in the world today. It already has 60% of the world’s population, and will add another 500 million people (or roughly an entire European Union) over the next 15 years. Asia, in particular China, will continue to be a key economic pillar of the world. The appetite for cleaner energy will grow stronger, as countries and governments come to realise the importance of balancing economic and environmental objectives.
LNG's Global Potential
Asia will therefore play a pivotal role in the global demand for LNG. As it is, we already account for 75% of global LNG demand.
In China, LNG imports in the first half of 2014 increased by nearly 25% compared to the same period last year. In July alone, we saw a 36% jump in LNG import into China compared to July 2013. This could be part of the strong demand curve trending up in China. The number of Chinese LNG import terminals have also increased. Today, China has a total of 10 import terminals, with a combined capacity of more than 37 Million Tonnes per Anunm (Mtpa).
Earlier this year, there were two high-profile Chinese deals which caught the attention of the international gas community. The first was the US$400 billion-dollar Russia-China piped natural gas supply deal, signed in the presence of the Presidents of the two countries. And the second was the portfolio supply deal struck between one of China’s National Oil Companies, CNOOC and BP. These two supply deals, which represent almost 30 Mtpa equivalent of LNG supply, will satisfy only a small percentage of China’s growing demand. China will continue to be starved of gas.
I have been engaging China for the last 20 years, and the one thing I know about the Chinese market is that it is “BIG”; and has the potential to be “BIGGER”. Today, gas constitutes just 5% of the overall energy mix in China. In OECD countries, gas usage averages 20%, while the global average stands at 20%.
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% gas usage over the next 10 years. This translates to about 50 Mtpa of imported LNG, after discounting for pipeline gas and domestic unconventionals – making it one of the biggest LNG market in the world. And if the Chinese face challenges in meeting their highly aggressive shale gas production targets by 2020, the opportunity for imported LNG could be even bigger.
In parallel, the National Development & Reform Commission (NDRC) is also targeting for renewable energy to form 15% of the overall energy mix by 2020 where nuclear power is expected to play a principal role. Should there be technology challenges or safety concerns over the implementation of nuclear plants in China, I believe LNG will be the most suitable “clean energy” substitute.
What does this mean for international LNG suppliers? I think it is all very positive. China knows that it needs to procure more LNG volumes in order to meet its growing gas demands. It is therefore making it commercially sustainable for more Chinese LNG importers to do so. For instance, the NDRC has been raising the prices of city gate gas, so that the price of domestic gas supply better reflects the supply from the international market, and makes imported LNG more competitive for domestic use. The Chinese Government is adopting what is called a “小步快走战略” or “small and quick step” approach to domestic gas reform. So we have seen how the NDRC has raised non-residential city gate gas prices twice, in July 2013 and recently in September 2014. And city gate prices will continue to be adjusted upwards until end 2015.
China aside, Japan, South Korea and Taiwan, or the traditional Asian “JKT” LNG importers, will remain heavy energy importers. Japan is currently the world's largest LNG importer and accounts for about 30% of global LNG demand. About one-fifth of the 87 Mtpa imported by Japan last year were spot volume. The high fuel cost is certainly taking a toll on Japan trade balance, turning a trade surplus of USD$60 billion to trade deficit of USD$110 billion between 2010 and 2013. This has pushed Japan to work on getting its nuclear power generation capacity back on track. On that note, I understand that more than one-quarter of Japan nuclear plants will have to be scrapped. Japan will also not be able to restart its other nuclear capacity fully due to the time, effort and resources needed for retrofits before they can be returned to service. We have just heard news that two Kyushu Electric nuclear units have been declared safe to restart soon.
South Korea, second behind Japan in terms of global LNG import, saw a similar situation with LNG demand having risen since November 2012, following nuclear plant shutdowns due to safety concerns on reactor parts. The country imports more than 40 Mtpa of LNG, and high LNG import costs have also been an increasing topic of concern. Last year, KOGAS announced plans to team up with South Korean LNG importers to help drive down LNG import costs.
Here in Singapore, we are looking to expand LNG imports beyond the initial 3 Mtpa to meet longer-term energy requirements. Other Asian countries like Bangladesh, Vietnam and Philippines have also begun to source and import LNG. This year, we saw Papua New Guinea ship their first LNG cargo to Japan. When the LNG plant there runs at full capacity, we can expect to see more LNG exports. While these volumes may have some impact on the market, it will meet only a fraction of Asia’s total demand. Asia will need to continue to source for more LNG supply.
Asia should not have to look too far for LNG supply. Australia’s potential to overtake Qatar as the world’s largest LNG exporter is fast being realised. With 800 Trillion cubic feet (Tcf) of gas reserves and over US$200 billion worth of projects, Australia will soon become a major supply centre. In July this year, Australia overtook Qatar as China’s largest supplier with a 76% increase in volume year on year. We are also seeing renewed interest on the other side of the Indian Ocean in Africa, where over 500 Tcf of gas have been discovered. This alone could support Asia’s LNG demand for about 50 years, based on current demand.
The spotlight on the US, as a competitive source of gas indexed to Henry Hub prices, will shine brighter. We can expect an additional 100 Mtpa of planned natural gas export from the U.S. starting in year 2018. This year, the US energy authorities have already approved 2 LNG projects: Cameron LNG and Freeport LNG. The addition of US LNG molecules will provide good supply optionality for Asian customers.
And again, what does all this mean for international LNG suppliers? We are already seeing the impact of cheaper US shale gas on contracted off-take volumes in Australian projects. Buyers are less eager to lock into 20 to 25-year gas supply contracts. They prefer to have the option to buy from any source, with various pricing models (e.g. oil-linked, Henry Hub), shorter 10 to 15-year contracts, or contracts with built-in price reviews.
Trading is also becoming increasingly important. By trading, I mean the ability to optimise gas supply demand portfolios, by taking advantage of spot procurement opportunities and to be able to move cargoes around the world at short notice. Last year, more than 77 million Mtpa of LNG was traded on a spot or short-term basis, slightly more than 33% of the global LNG trade. Earlier this year, we saw a near 50% fall in the price of Asian spot cargoes to a three year low. While it posed a pricing challenge for several long-term gas producers, it was a wonderful opportunity for traders who were able to buy and store, and exploit the seasonal trade. At Pavilion Energy, we are taking trading very seriously and see this as a critical skill to manage market dynamics and volatilities, and supply cost-effectively into the Asian market. Pavilion Gas has stored an LNG cargo at the SLNG terminal for trading purposes.
An Asian LNG Hub: The First Steps
Currently, Asian buyers pay a handsome premium for LNG in Asia. In 2012, Asian buyers paid almost US$130 billion for LNG. Some global LNG players have responded that there is no such thing as “cheap LNG”.
But getting the price right for Asia is critically important – to help build sustainable economies and to create room for future growth and innovation. There is a need for Asia to access clean energy competitively, to power and sustain liveable cities for future generations. It is worth noting that between now till 2017, China would require more than US$40 billion to finance the switch from coal to natural gas.
This is where developing an Asian LNG Hub (based on an Asian LNG Price Marker), that is independent of the oil market, will better reflect actual regional gas supply & demand dynamics and therefore provide more transparent pricing in the region. Creating an Asian LNG Hub will see a vibrant and liquid LNG market develop in the region. It will motivate investment into more storage and reload facilities and foster closer co-operation in LNG procurement. This will contribute towards energy security for Asia.
Government and industry leaders need to be at the forefront of driving this Asian LNG Hub initiative. On our part, Pavilion Energy is ready to be an Industry Partner, and a Foundation Market Participant to help develop the Asian LNG Hub. In support of this Hub, there needs to be transparent LNG pricing and a platform that facilitates price discovery; as well as the development of financial instruments such as LNG futures contracts. We could take a straightforward “Cost +” or “Net-Back” approach as a means towards transparent regional LNG pricing. This is how gas prices in continental US take reference, on a “Net-Back” basis to Henry Hub in Louisiana. In the Asian Hub approach, the price that a regional Asian buyer pays for an LNG cargo will be “Net-Back” to the Price Marker at the regional trading hub.
We are currently working with several stakeholders, including the Singapore Stock Exchange, IE Singapore, and regional governments and commodity exchanges, to realise this Asian LNG Hub concept. As a start, we are trying to develop a Singapore LNG Price Marker or Reference. Once the Singapore marker is ready and accepted by the industry, physical trades across the Asian region could be transacted based on a “Cost +” or “Net-Back” approach to this price reference.
Singapore’s Role in Building an Asian LNG Hub
We believe that Singapore is a natural partner in the Asian LNG Hub initiative. Our strategic location in the Straits of Malacca and the South China Sea sees over 50% of the global LNG supplies passing through Singapore. Singapore is well-placed as a global trading hub, with a strong and vibrant LNG marketplace that is home to many established trading houses. At the official opening of the Singapore LNG Terminal in February this year, Singapore’s Prime Minister announced the Government’s plans to build a second LNG terminal. This will add geographical diversification for Singapore’s LNG import infrastructure. The Singapore LNG Terminal has also moved on to its next phase of expansion with the construction of a 4th tank, and the expanded facilities that will bring the Terminal’s throughput capacity to 9 Mtpa.
Meanwhile, Pavilion Energy is steadily building its regional LNG trading capabilities, including engaging in storage & reload transactions; as well as supporting Maritime & Port Authority of Singapore in its bunkering Initiatives. As of July 2014, we have conducted several trading transactions.
This month marks Pavilion Energy’s first anniversary since the official start of the company’s operations in September 2013. It has certainly been an exciting year for us. We have been progressing at a steady pace with several key business developments. We have taken an equity position in the Tanzania gas fields, and entered into a joint venture with BW Group to acquire, manage and charter LNG carriers. We have also secured a total of 0.7 Mtpa of LNG supply volumes from Total Gas & Power, and 0.4 Mtpa of LNG supply from the US Cameron project.
Today, Pavilion Gas would also like to announce the completion of a 20-year Sales & Purchase Agreement with BP for a total volume of 0.4 Mtpa from its Freeport Project and from its LNG portfolio. This deal with BP adds to our supply diversification and strengthens our overall LNG supply portfolio. I would also like to take this opportunity to thank all our partners and stakeholders, who believed in us and have supported us in all our efforts. We hope you would have also found the journey with us both enjoyable and exciting.
Regional Leadership, Global Partnership
I recall a Chinese proverb: 独木不成林, 单弦不成音. A single tree does not make a forest, just as a single musical note does not form a tune. LNG players need to work together to achieve a reasonable and sustainable LNG price. For the Asian LNG Hub to work well, we would need as many regional parties to come on board to support this initiative. It is a worthwhile project that will benefit all of us in the long run. We look forward to a bright and promising LNG future that will better serve our industry, our community and stakeholders.
Let me wish all participants a fruitful time in Singapore and an enriching summit ahead.