TEMASEK-BACKED Pavilion Energy is throwing its considerable heft behind a newly formed Singapore price index for liquefied natural gas (LNG), potentially accelerating the speed of change in a sector that is already expected to evolve more rapidly than before in the coming years.
The LNG company said on Tuesday it plans to start placing trades using the Singapore LNG Index Group (Sling) in the next few years.
The weekly index is based on submissions from international LNG players who offer their assessment of LNG cargo prices. Launched with 13 traders in June this year, it now includes about 20 players - out of about 30 large LNG traders worldwide.
Singapore Exchange (SGX) is in the process of launching a Sling swap product, said Pavilion Energy CEOSeah Moon Ming. "Once this is ready, Pavilion Gas (a subsidiary of Pavilion Energy) will be keen to explore with interested counter-parties, both gas producers and/or buyers, on transacting cargoes on Sling, within the next one to two years."
This comes as liquidity in LNG trading picks up. Many buyers are now adopting a wait-and-see approach due to uncertainty over the oil price, and some have turned to the spot market to supplement their supply, said International Enterprise Singapore CEO Teo Eng Cheong.
Some of the key considerations for these buyers are contract flexibility, varied supply sources and diversification from oil price indexation. Traditional buyers such as major utilities may also turn into resellers by leveraging long-term contracts to create short-term sales through cargo diversions and swaps.
"All these developments are likely to stimulate more LNG trading," said Mr Teo.
Singapore today has more than 30 LNG companies with trading or business development presence, he added. Some are newly set up, while others have substantially expanded their activities here recently.
"To support trading, you will need to have a good price discovery mechanism, and an Asian LNG price will be helpful (despite more muted calls from buyers) because of the Asian premium phenomena in the past," said Mr Teo.
It is a trend that Pavilion Energy seems intent on riding. Noting that large volumes of LNG cargoes from Australia are expected to come on stream in the next six to 12 months without any destination, Mr Seah said the firm may consider trading opportunities for strips of such cargoes, especially when producers are prepared to accept Sling-index pricing.
"It could also be an opportunity for financial stakeholders, like the major Australian and international banks financing the LNG projects, to see how they could contribute to a regional LNG pricing initiative that promises more transparent and fair gas-to-gas pricing index, and thereby promote more LNG trade flows and business," Mr Seah said.
An index structured around physical locations in and around Singapore makes sense and is a good reference point as Singapore is at the heart of major shipping routes, and about half of all global LNG cargoes pass through the Strait of Malacca or South China Sea within proximity of the city-state, he added. "With a clearer price benchmarking, the region will clearly benefit."
Responding to queries from The Business Times, SGX said increased adoption of Sling - which is driven by the industry - will lead naturally to the usage of swaps.
"SGX will work closely with the industry to develop trading and clearing of Sling swaps, in the coming months and years," said head of derivatives Michael Syn.
Asked whether SGX will be planning other products around Sling, Mr Syn said that "typical risk management products would be swaps, futures and options". He added: "In the context of energy security considerations, Sling-indexation offers a potential public good: a liquid procurement market for Asian LNG which makes it easier and more predictable for sellers, and safer and more hedgeable for buyers."
Asia accounts for 76 per cent of global LNG demand. LNG contracts in the region have traditionally been linked to crude oil prices, and are mainly signed for the long term. But there have been various attempts to establish Asian LNG pricing as the speed of change in the industry picks up.
"We are clearly about to enter a period when the industry will press the fast forward button on its evolution," said Helge Lund, CEO of UK-based BG Group.
There are two key drivers to this. One is the significant volumes of LNG from the United States that will come on stream, which will "change the game" in terms of flexibility and liquidity of supply; the second is a diversification of demand as more countries, as well as marine and transport sectors, start using LNG.
Most of the growth in demand is expected to come from China, India and South-east Asia, Mr Lund said, a view that is also expressed by many others in the industry.
Concurring, Mr Teo noted that there is an emerging trend of new LNG demand from non-traditional markets. This includes new small-scale LNG in demand for industrial parks, off-grid power generation in remote areas, and the rise of LNG bunkering in Asia.
But Mr Lund said it cannot be "business as usual" any more as the energy industry stares at sustained low oil prices and an increased desire around the world to reduce carbon emission. "While it may seem paradoxical, the weak oil price environment actually makes it easier to drive the scale of the change that is required."
Gas is also a "perfect partner to renewable energy", given that gas-fuelled power stations can ramp up or reduce the generation of electricity more quickly at times when the sun is not shining or the wind not blowing, compared to coal-fuelled power plants, Mr Lund added.
At the event on Tuesday, Pavilion Energy also announced a few key agreements, such as a 10-year sales and purchase agreement with Russia's Gazprom Marketing and Trading. "We continue to strengthen our overall LNG supply portfolio to add to the company's diversity, including price indexation," said Mr Seah.
The firm has also signed two memorandums of understanding with large Asian players.
Under these agreements, it will supply LNG cargoes to China Huadian - one of the five largest state-owned power-generation companies in the country - from 2020 onwards. It will also collaborate with Japan's Jera - a joint venture between the world's second and third-largest LNG buyers Tokyo Electric Power Co (Tepco) and Chubu Electric Power - in joint LNG procurement and investment.
Giving an update on the company's plans for small-scale LNG in the region, an area Pavilion Energy had announced it was moving into last month, Mr Seah said the firm is now in talks with Singapore LNG on the use of its jetties, and several homegrown companies such as Rotary Engineering as well as the Agency for Science, Technology and Research.