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S'pore ultimate winner in selection of LNG importers
The Business Times
Nov 02, 2016

IT was a decision many years in the making. And while clinching the import licence for the next tranche of liquefied natural gas into Singapore was a huge win for Pavilion Energy and Shell, the country itself has become the ultimate winner through the new appointments announced last week.

Pavilion Energy and Shell had been selected on the basis of the reliability, flexibility and competitive pricing of their LNG supplies, Minister for Trade and Industry (Industry) S Iswaran said at the Singapore International Energy Week that ended last Friday.

Each company will be awarded an exclusive franchise of three years from next year, or until it has sold one million tonnes a year of LNG, whichever comes first.

Amid an oversupplied market, this was good news for both Shell, the largest LNG producer in the world, and Pavilion Energy, the new kid on the block backed by Temasek Holdings.

As Vandana Hari, founder of boutique energy research firm Vanda Insights noted: "It's a buyer's market, with stiff competition between suppliers, so winning the Singapore supply deal is a feather in the cap of Pavilion Gas (subsidiary of Pavilion Energy) and Shell."

For Pavilion Energy in particular, the win will have a transformational effect, giving it a business that can provide stable cashflows and an outlet for the many purchase deals it has signed. Wood Mackenzie analyst Chong Zhi Xin estimates the franchise to be worth US$340 million a year, at current prices.

The LNG import business will also act as an anchor for Pavilion Energy's other businesses such as LNG bunkering and break-bulking, he said.

"Operationally, it makes sense when you deliver a cargo into Singapore for use, you could also use some of that for break-bulking or LNG as for trucking and bunker fuel . . . If they didn't have this, it would have been very difficult for them to develop the other businesses," he told The Business Times. "The margins they have to charge would probably be higher."

Even for a behemoth like Shell, the licence represents its first step into South-east Asia - regarded by many as a key LNG growth market as traditional markets such as Japan and South Korea decline - after the acquisition of BG that cemented its ambitions in LNG, he added.

Singapore is also not just any feather in the cap: its creditworthiness sets it apart from other new LNG buyers.

"Singapore is a strong creditworthy market," said Marc Howson, senior managing editor of natural gas and LNG at S&P Global Platts. "And if you look out into the 2020s, it could be a growth LNG market if piped gas is not renewed in existing quantities."

Mr Iswaran told reporters last week that the government would let the market decide whether to continue importing piped natural gas when the current contracts with Malaysia and Indonesia expire around 2022.

The LNG licence win by both companies has not come easy; the process started almost five years ago, when the Energy Market Authority (EMA) began consultations with the industry in 2012 on how to go about securing future supplies of LNG as the first tranche of LNG imports by BG became almost fully contracted out.

Under consideration then were two different models: to either have a regulated sole importer, or a BG-plus-three model.

The first, adopted by Asian importers such as South Korea, Japan, Taiwan and Thailand, was said by some industry players to allow for scale in procurement, resulting in more favourable LNG prices and terms, and simplifies negotiations on LNG terminal access and operational issues.

The BG-plus-three model, meanwhile, opens the way for multiple importers and allows for price discovery, others said. This model is seen in the European Union and the United States.

After two rounds of consultation over two years, the latter was chosen, and EMA in mid-2014 launched a two-step Request for Proposal to select up to two importers.

As part of the process, LNG players had to show that they were able to secure customers for the LNG and also support Singapore in its trading hub ambitions, among others.

As former senior Japanese government official Masakazu Toyoda, now CEO of think-tank The Institute of Energy Economics Japan, noted in an interview with BT, the bids by both companies show their interest in helping to build the LNG sector in Singapore.

The Republic, therefore, is the ultimate winner in the appointment of Pavilion Energy and Shell; on the one hand, a homegrown player is now able to develop its business and scale up further, and on the other, a major player with a history of LNG innovation may potentially kickstart new offerings in the region through the Republic as the market continues to evolve and develop.

These come on top of the enhanced energy security position Singapore will have as they bring in LNG from a range of countries around the world, and the benefits for gas consumers through cheaper and more flexible LNG contract terms.

With the LNG market at the cusp of an era in which the speed of change will increase dramatically, Singapore's tranche-by-tranche approach also promises future benefits to the country as new trends develop.

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