OREANDA-NEWS. April 07, 2016. Historically, gas markets first developed locally around producing gas basins (“town gas”). Construction of long-distance pipelines subsequently provided greater market reach and facilitated more significant growth for gas markets. However, as distances grow pipelines tend to become uneconomic. And in particular, in the case of some key current and future Asian demand centres, pipelines are impossible. The value of the LNG market lies in its ability to ‘connect’ gas resources with demand on a more global scale.

While the LNG market is already over 50 years old, it is arguably only just on the cusp of facilitating a more globalised gas market. In the past 15 years, LNG as a proportion of  global natural gas trade has almost doubled to approximately 10%. In Asia, this proportion is substantially higher at over 35%. With substantial LNG supply growth coming on-stream in the next few years, LNG’s proportion of world gas trade will continue to rise, and connectivity between regional gas prices will increase.

Fragmentation to catalyse market development

Today, the LNG market remains highly concentrated with the five largest importing countries accounting for almost three-quarters of global LNG demand. This compares to less than 50% in the case of global natural gas or oil consumption. As more liquefaction and regasification capacity is developed, the global LNG market is likely to become more fragmented.

While greater fragmentation will represent a major change to what has historically been a very concentrated and long-term contract-dependent market, it may also be one of the key factors that spurs development of a more flexible spot market and the rise of benchmark LNG pricing. Growing spot market volumes will serve to further enhance the quality and credibility of LNG spot indices, while also enabling longer-term contracts to become increasingly linked to genuine LNG price assessments. This would enable the dual achievement of both security of off-take/supply as well as assurance over appropriate market price formation which, importantly, reflects LNG supply-demand fundamentals.

The complexity of longer-term demand uncertainties

Greater flexibility is a clear trend in recent LNG contracts, and trade flows will be less predictable as a result. Destination clauses are becoming are thing of the past. Contracts increasingly allow suppliers to source from global portfolios rather than specific projects alone. Origin Energy recently signed a deal with ENN that provides flexibility to supply from its portfolio interests optimised with third-party purchases. This suggests the spot market is already adopting a greater and more broader role in market price formation in LNG.

Longer-term demand uncertainties however add a layer of complexity in developing an Asian benchmark that can stand the test of time. For example, Japan has been a key driver of LNG demand in past years, particularly after cessation of nuclear capacity following the Fukushima disaster in 2011. However, LNG imports have since been on a clear declining trend as the country restarts nuclear reactors. Power sector deregulation in Japan may lead to some relative preference for cheaper coal imports, while the country’s solar industry has also been growing rapidly.

Across other key consumers, South Korean LNG demand has also been declining. In China, LNG demand declined in 2015 after years of double-digit growth. Future Chinese demand for LNG may hinge somewhat on pricing levels, domestic market structure and how much of the country’s requirements can be sourced from pipelines. Furthermore, any meaningful development of its vast shale deposits in the next decade also poses potential to drive a secular decline in LNG demand. In the face of such uncertainties, a strategically located virtual hub-based price discovery centre may be most suitable over the longer-term.  


SLInG – poised for an evolving market

The FOB Singapore SGX LNG Index Group (‘SLInG’) is a spot index for the Asian LNG market, and represents the average of expert assessments, after excluding outliers, contributed by a balanced portfolio of physical market participants (producers, consumers and traders). Further details on the SLInG index and methodology are available on the EMC website here.  

SLInG’s unique value proposition to the LNG market lies in its geographic location and flexible methodology. Singapore is geographically positioned at the epicentre of growing trade flows. In addition, looking forward, its flexible methodology incorporating both FOB (origin) and DES (destination) transactions into its price assessment helps facilitate a credible and market-representative Asian spot price even as market fundamentals and trade patterns continue to evolve.  


 

For further details on SLInG, please contact the following:
Glenda Soh: T. +65 6236 5375 | E. glenda.soh@sgx.com
Lily Chia: T. +65 6236 8770 | M. +65 9117 2520 | E. lily.chia@sgx.com

For a complimentary SLInG subscription (up to end 2017), please email lngindexdata@emcsg.com.
SLInG prices are also available on Bloomberg at {ALLX SLNG }.


Recent LNG Publications:
- SGX Iron Ore Monthly Report – Mar 2016 (EN CN)
- SGX Freight Monthly Report – Mar 2016 (EN CN)
- SGX Oil & Gas Monthly Report – Mar 2016 (EN)
- Evolving Dynamics in Seaborne Iron Ore Pricing (EN CN)
- Creating An Asian Market for LNG – Introduction to SLInG (EN)
- Creating An Asian Market for LNG – Infographic (EN)
- Rising Supply Concentration in Iron Ore (EN)
- Commodities – Navigating the Storm (EN)
- SLInG – Positioned for the Future (EN)
- SLInG Frequently Asked Questions (EN)

Historical SGX Commodities articles may be found at the Knowledge Centre section of our website here.