SIEW 2014: Singapore Grows As Asian Trading Nexus

Singapore’s reputation as an LNG center continues to rise as industry players with Asian market ambitions set up trading desks in the island state. Building on its legacy producing assets in Malaysia and Brunei, Royal Dutch Shell was the first player to establish a desk in Singapore back in 2005 and has steadily increased its presence in the country. Japanese trader Itochu followed with a small representative office two years later. But the trend really gathered momentum with the entry in 2009 of Russia’s Gazprom and others trading operations with profit and loss responsibility. “At the beginning you had the likes of Itochu with one or two guys looking to pick up market intel but without their own P&L statements,” one veteran trader says. “The market only paid attention after Gazprom came into the picture and immediately staffed up to market its spot cargoes from Sakhalin 2.” Others quickly followed, with BP setting up shop in 2010 backed by a full team of traders, originators, operations staff, shipping personnel and risk management experts. By 2013, Singapore was host to more than 20 LNG trading desks and the list is expected to grow further.

While Singapore is catching up fast, London is still the leading trading nexus. Traders operating out of the UK capital have ready access to destination-free cargoes in the Atlantic basin as well as reload opportunities from European terminals. “The UK remains the place where physical trading actually happens with more than 30 trading desks and growing,” the trader notes. “In any case, you don’t get flexible cargoes as easily east of Suez, so we probably won’t see much trading until US volumes hit the market.” Noble Group is among the players reportedly hoping to get back into the game this year, with plans to restart a trading desk in London. The commodities trader recently hired a trading team from Merrill Lynch-Bank of America, while Glencore picked up three traders from Morgan Stanley to staff its London desk – after many investment banks were forced to reduce or close trading operations due to regulatory changes (see LNG in World Markets, Jun ’13).

Gazprom’s recent announcement that it was listing on the Singapore bourse, together with BG’s decision to move its supply and trading operations from the UK to the island state, have underpinned Singapore’s reputation as a growing LNG center. The government also deserves credit for this trading success. “These moves have undoubtedly been helped by the government’s Global Trader Scheme. The cost savings for having a trading office in Singapore compared to places like London are quite substantial,” one official explains. Singapore’s GTS scheme includes a concessionary tax rate of 5% to 10% on trading income for five years and is renewable upon expiry. “Even if your company doesn’t qualify for the GTS, all you need to do is move your regional headquarters to Singapore and you can also receive the lower tax rate, although it will only be for three years,” the official adds. To qualify for GTS status, companies need to have a minimum annual turnover of US$100 million, with at least one individual each for origination, marketing and risk management.

The government’s priority, however, remains squarely on energy security. “Singapore’s second terminal will also be underpinned by energy security rather than for trading,” a local regulatory source notes. “We’re happy as long as the deals are booked here even if none of the cargoes actually reach our terminals.” On June 30, Singapore’s Energy Market Authority released a tender for potential aggregators to supply up to 1 MMt/y each under a three-year exclusive import franchise. This volume will supplement the 3 MMt/y already covered under BG’s initial license. During the first stage of this Request for Proposals, which extends through December 31, the EMA will shortlist as many as three potential bidders. In the RFP’s second stage, shortlisted parties will negotiate gas sale agreements with buyers followed by the appointment of the successful bidders by the end of 2015. The EMA puts Singapore’s incremental demand for LNG at 0.6-1.7 MMt/y by 2018 and 6.9-9 MMt/y by 2025.

In late 2013, Chevron established a full-fledged LNG desk in Singapore. It has already bagged a couple of spot cargo transactions and is in the process of beefing up its office with additional shipping staff. Woodside is another recent entrant, with its Singapore operation chartering a ship for spot and short-term sales from its Pluto project as well as limited quantities of equity output beginning next year from North West Shelf, the firm’s other Australian venture (see related article above). These will eventually be supplemented by the 0.85 MMt/y its trading outfit has now purchased on FOB terms from Cheniere Energy’s proposed Corpus Christi project in Texas. “Woodside has long had ambitions to become a portfolio player, trading LNG rather than just being an Australian producer and marketer,” says another source. “When Woodside exited Israel, it needed to act quickly and the new deal with Cheniere makes sense in that context.” Last month, Woodside bowed out of a preliminary agreement to join Noble Energy and its Israeli partners in the Leviathan field.

ExxonMobil beefed up its local office this year to help market early cargoes from its PNG LNG project in Papua New Guinea, and the US major is running the venture’s shipping and scheduling operations out of Singapore. Japan’s Inpex has established a presence on the island prior to startup of its Ichthys project in Australia from 2017, although most of its trading activity will still be conducted from the company’s home office in Japan. The influx of companies setting up shop in Singapore is set to continue in 2015 with state-owned PetroChina heard to be eyeing office space locally after establishing a trading operation in London earlier this year. Novatek is another player said to be considering a desk in Singapore, presumably to market the 2.2 MMt/y or so the firm stands to receive from its Yamal LNG project in the Russian Arctic. Since the bulk of this volume is destined for Asia, a trading presence in the region is probably necessary.

But Singapore’s most prominent debutant is Pavilion Energy, who only set up its trading outfit in October. Pavilion Gas has already concluded its first spot deal by inserting itself into a transaction chain for a Sakhalin 2 cargo sold to a buyer in Japan. “Although the spot deal was probably a loss-making exercise, it showed their intent,” the trader notes. “Pavilion was extremely eager for this deal and pushed Shell to sell them the cargo just to show they could do it.” The local player, owned by Singapore’s sovereign wealth fund Temasek, is also the frontrunner to land one of the two import licenses offered under the EMA’s recently released RFP. Last month, Pavilion signed a sale and purchase agreement with Total covering 0.7 MMt/y in portfolio supply, raising the volume from the initial 0.5 MMt/y. The position could be a gamble, particularly if demand in Singapore stagnates, but was seen by Pavilion as necessary to meet the requirements of the tender process (see LNG in World Markets, Jan ’14). Pavilion has also taken a 20% stake in three gas blocks offshore Tanzania and has signed a joint venture with BW Group to acquire and charter LNG vessels.

There are limits to how far Singapore can grow. One driver behind the enthusiasm to establish a foothold in Singapore is its position as the most likely – or at least most suitable – place in which to launch an Asian LNG hub, for both bunkering and cargo purposes. Singapore is situated in the center of the main shipping lines, it is accessible to markets in Japan, China and Korea and it is already a transportation center with a port system that could easily host an LNG storage hub. But Singapore is not like Rotterdam and other oil hubs that have emerged for the simple reason that supplies are plentiful, cheap and available in the area. Singapore’s LNG imports are still insignificant in terms of global volume. And they are also expensive. Given boil-off considerations and the dominance of fixed-destination contracts in Asia, this situation is unlikely to change at least in the near term. 

By : Poten & Partners