Tuesday, November 13, 2012

A Tale of Two LNG Hubs

By Jaya Prakash

With Asia in the grip of environmental consciousness, Singapore and Malaysia are out to take each other down in the emerging battle of LNG hubs.

For most of its history, Singapore had been quite content to live as the younger and somewhat inconsequential sibling of Malaysia. Politically and economically,

Singapore was inextricably tied to Malaysia such that any historical accounts dating before 1965 – the year when Singapore broke away from its northern neighbor – were written to underscore a single union.

Singapore not only depended on Malaysia for its daily supplies of water – which ran through huge pipes linking both territories – but also on Indonesia for its supplies of oil and gas. Singapore weaned itself away from that dependence on water by perfecting a wastewater recycling system, NEWater, which would guarantee a regular and uninterrupted supply. When gas supplies from the neighboring Indonesia were suddenly disrupted in 2003, causing half the city-state of Singapore to plunge into darkness, it created a national emergency, leading Singapore to take every conceivable step necessary to break the dependency on gas.

“Our aim is to make sure that every Singapore home and all our businesses have access to reliable and competitively priced energy,” the nation’s Minister of Trade and Industry, S. Iswaran told his compatriots in February 2012.

Both Malaysia and Singapore were affected by the earthquake and tsunami that hit Japan in 2011. That calamity led a leery Tokyo to set a course to abandon nuclear energy and opt instead for liquefied natural gas (LNG).

A recent report from investment house Goldman Sachs, says Japan is on course to use some 17.6 billion cubic meters of LNG this year. That, coupled with rising awareness of LNG’s ‘clean’ properties when compared to its bunker fuel alternative, increasing reliance on the gas by fast emerging economies, and future prospects for spot trading of the commodity, have conspired to make the LNG a much sought after product.

To this end, Singapore is on track to have its first LNG terminal before June 2013.

The billion-dollar terminal is ostensibly meant to ‘diversify’ its gas supplies by accessing competitively priced gas from all over the world and achieve other economic and environmental benefits, says Singapore’s LNG chief executive, Neil McGregor. But Singapore is exploring how it can leverage the advantages wrought by geography – in other words, the very attributes that allowed it to build the world’s busiest bunkering port, seaport and airport.

The LNG terminal is widely touted as the only one of its kind in Asia catering to all vessel types, apart from the Q-flex type used traditionally for transporting gas.

The game plan, according to McGregor, is to tap extensively into all the gas fields in Australia, the Americas, Africa and end-users in Asia. All of these, it is widely believed, are part of a grandiose plan to create the conditions for the inauguration of an LNG spot trading market and the promise of jobs and income growth to the city-state.

But Singapore has other plans as well. It is hoping to become a LNG transshipment hub, as that would ensure a regime for LNG bunkering services for the modern era’s energy-efficient ships.

Sushant Gupta, a downstream analyst at energy consultancy Wood Mackenzie was quoted by Malaysian newspapers saying, “The need for storage in Asia is growing because we do see increased trade flows and a lot of new refining capacity is coming from Southeast Asia, not just China and India.”

It is too soon to predict if LNG will replace crude oil as the fuel of choice. But given the rise of environmental consciousness and the desire for fuel efficiency, it is not just Singapore that has discovered LNG, but also some of its rivals.
Malaysia has always been a key LNG exporter along with Indonesia, and now as part of its Economic Transformation Plan Malaysia hopes to capture a bigger slice of the global oil trading and storage business and deny Singapore valuable petroleum investments.

To this end, Malaysia is planning to transform the sleepy town of Pengerang in the southern state of Johor, in close proximity of Singapore, into a major oil trading hub.

It is also going all out to upstage Singapore approving a slew of petroleum related projects worth more than US$20billion, offering a zero tax rate as a major incentive.

The goal, according to analysts, is to triple independent storage capacity in Johor to 10 million cubic meters by 2017, which as it stands is Singapore’s current capacity.

But there is something else Malaysia has that Singapore lacks: Malaysia has the world’s largest fleet of LNG tankers. So when export volumes rise, the LNG pickings are Malaysia’s for the asking, while Singapore, as a leading financial center, has just the kind of infrastructure spot traders look out for.

Jaya Prakash is a freelance maritime analyst based in Singapore. He runs a journalism school in Singapore and is an alumnus of the University of South Australia.