SINGAPORE -- As demand for clean energy grows in China, India and Southeast Asia, Singapore has ramped up efforts to become a regional hub for liquefied natural gas trading, capitalizing on its location as an established center of finance and trade.
The city-state took another step forward last month when the government expressed interest in building the country's second LNG terminal. The facility could be used to split up large-scale LNG shipments into smaller parcels and supply them to the region.
The new terminal would likely "realize the goal of establishing Singapore as the LNG trading hub in Asia," said Robert Sims, who heads Asia-Pacific gas and LNG research at energy consultancy Wood Mackenzie.
Asian emerging economies will likely grow more reliant on LNG, with China and India already major importers and Vietnam and the Philippines expected to start importing the fuel in the 2020s.
Japan, China, South Korea and India were the world's biggest LNG importers last year, while Qatar and Australia were the top exporters.
Global demand for LNG is expected to grow 3.6% annually to 2035, according to a recent report from McKinsey & Co. "China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand," the consultancy said. "Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet growing demand to replace declining domestic supplies."
The Philippines is preparing LNG import facilities, and Vietnam's state-owned oil companies plan to begin importing the fuel in the 2020s. Both countries produce their own gas, but rising domestic demand will outstrip domestic production, forcing them to source from overseas producers.
Singapore built its first LNG terminal in 2013, which expanded capacity. In 2018, the country introduced a spot LNG import policy that lets buyers swiftly respond to changing market demand.
The country currently generates 95% of its electricity from imported natural gas, according to Singapore's energy authority. Indonesia and Malaysia provide 71% of imports via pipeline, with the remaining 29% coming from elsewhere via ship.
But last month, Indonesia said it would stop supplying LNG from Sumatra to Singapore when the current contract expires in 2023, adding that the gas will be diverted to its domestic market. "There is still a lot of gas in Sumatra. Supplies to Singapore will end in 2023 and will be used domestically," Indonesian Energy and Mineral Resources Minister Arifin Tasrif said in a statement.
Increased domestic demand for LNG is unlikely to affect Singapore's goal of making itself an LNG hub, according to Sims of Wood Mackenzie. "However, the requirement for expansion of the existing terminal, or construction of a second facility, along with increased LNG bunkering will naturally help," he said.
London and Rotterdam are global hubs for LNG trading, while Japan and China are vying to become regional hubs for Asia.
Being a hub does not necessarily mean having energy storage facilities. Rather, it is a "place for price discovery" linking buyers and sellers, said Chang Young Ho, an associate professor in the Singapore University of Social Sciences' business school. Becoming an LNG trading hub would benefit Singapore because it would attract traders and related companies, creating jobs and using local financial institutions, similar to what the country's other hubs have done for businesses, Chang added.
Singapore has already had some success in the LNG arena. There were at least 45 LNG-related companies with offices in Singapore as of March, according to the government. Still, hurdles remain.
"The challenge of establishing Singapore as a physical trading hub is that the LNG market is not fully commoditized, and indeed discharging, storing and reloading LNG still carries a cost penalty compared to optimizing on-the-water LNG flows," Sims said.
"As a small country and LNG-demand center, it would also be more difficult to create sufficient liquidity in a spot LNG DES Singapore market, compared to the much larger Japan-Korea DES market, or the U.S. Gulf LNG f.o.b. market," he said. DES, or delivered ex-ship, means that the seller delivers goods to the buyer at the port of arrival, while f.o.b., or free on board, means that the seller retains ownership until the goods have been loaded onto a ship at the port of departure.
This year, Singapore Exchange (SGX) stopped publishing its spot LNG price indexes, which were launched in 2016 as part the country's goal of becoming a hub for the gas. This was due to low participation over the past few years amid competition from more established pricing agencies, according to a Reuters report.
Instead, SGX has focused on the carriage of LNG as an internationally traded seaborne commodity. It has created three LNG freight indexes through its Baltic Exchange subsidiary in London, with the first index being launched in March 2019.