ASIA GAS 2008 CONFERENCE Asia’s Natural Gas and LNG Market - Singapore Case Study : The New “International Market Tony Taylor

ASIA GAS 2008 CONFERENCEASIA GAS 2008 CONFERENCE

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

Tony TaylorTony Taylor

Asia’s Natural Gas and LNG Market - Singapore Asia’s Natural Gas and LNG Market - Singapore Case StudyCase Study

ASIA GAS 2008 CONFERENCEASIA GAS 2008 CONFERENCE 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



IntroductionIntroduction



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



Asia-Pacific : ASEAN Countries + Australia



Asia Pacific GasOutlook and LNGAsia Pacific GasOutlook and LNG



Asia-Pacific Gas Outlook

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 Natural Gas Demand



Characterisation of Major Asian Gas Markets

Country Demand(BCM/a)*

Ranking PNG orLNG

Indigenous Gas Years in Operation

Liberalised

Cambodia 0 11 N/A Yes N/A No

China 56 2 Both Yes >40 No

Indonesia 40 3 PNG Yes >40 No

Japan 80 1 LNG No >40 No

Korea (South) 34 5 LNG No 22 No

Malaysia 40 3 PNG Yes 36 No

Philippines 2.6 9 PNG Yes 6 No

Singapore 6.6 8 PNG No 16 Almost

Taiwan 12 7 LNG No >40 No

Thailand 30 6 Both* Yes 26 No

Vietnam ~1 10 PNG Yes 2 No

Source Data from BP World Energy Statistics (2007)

* From 2009



Gas Market Trendsand Development

Gas Market Trendsand Development



Asia-Pacific context - factors that define gas market, competitive markets

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)



World Natural Gas Prices March 2008

Asia-Pacific pays the highest gas price



Competition ….Singapore’s liberalised market

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.



Government policies/Investment potential

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



Competition with other fuels

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



Other renewables0.2%

Biomass13.0%

Hydro2.0%

Nuclear0.8%

Gas2.4%

Coal62.8%

Powergeneration

55%

Industry26%

Residential4%

Other15%

Oil18.8%

Natural gas is subordinate to coal…

China’s Fuel Mix (Source : IEA)

1.742 Mtoe



China’s Projected Natural Gas Demand

…however, China’s natural gas demand is growing significantly



Singapore’s entranceinto the LNG arena

Singapore’s entranceinto the LNG arena



Singapore’s LNG progress

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 Transmission & Distribution Network

Tuas Keppel

SerayaIPC

South Sumatra Gas

West Natuna Gas

Main Transmission NetworkJIT Transmission NetworkTown Gas Transmission Network

Sakra

Malaysia Gas Senoko

Malaysia Gas Keppel



Characteristics of Singapore’s LNG Terminal

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



Singapore’s credentials as an International Player

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 as an International Market for LNG

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



LNG Trading – will itapproach oil trading?LNG Trading – will it

approach oil trading?



Oil & Gas Trading Development

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



Fundamental differences between LNG and oil

Characteristic Oil LNG

Physical state at RT and Atm Pressure

liquid gas / liquid at -160 deg.C

Transport Drum or tank Cryogenic tank

Cost of transport to market Moderate High

Global market Mature Immature

Trading Local/International markets Predominantly localised markets but becoming International

High Demand Sectors Power, transport, chemicals, heating Power, Chemicals



LNG & Gas Trading Hubs

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.



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



Short Term Cargoes moving from Atlantic Basin to Asia 2007

Source : LNG Focus



Environmental Impactsand Alternate energy

Environmental Impactsand Alternate energy



Environmental Impacts - Gas and Alternate energy

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



SummarySummary



Summary – the future is bright 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



THANK YOUTHANK YOU

TRI-ZEN International

Singapore and

Bangkok Hong Kong Jakarta Melbourne Mumbai Perth Shanghai

www.tri-zen.com

Tony Taylor is currently based in London with energy

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ASIA GAS 2008 CONFERENCE Asia’s Natural Gas and LNG Market - Singapore Case Study : The New “International Market Tony Taylor