Oil as LNG pricing peg: SGX seeks change

TOKYO • The Singapore Exchange (SGX) wants to break the liquefied natural gas (LNG) market's reliance on oil as a pricing peg as the country seeks to solidify its role as Asia's energy trading hub.

SGX yesterday launched futures and swaps linked to its index of spot prices for LNG traded in Asia. Final settlement for the contracts will be determined by average weekly assessments gathered from producers, consumers and traders in the physical LNG market.

"Given the nascent stage of market development for LNG, the majority, if not all, of the new contracts will be traded over the counter and cleared by SGX," Ms Lily Chia, the bourse's head of product management for commodities, said in an e-mail. The exchange sees SLInG - shorthand for its FOB Singapore SGX LNG Index Group - as a pricing tool for traders, financial institutions and power companies, she said.

Singapore is home to more than 25 LNG trading desks and it is estimated that about 2,000 cargoes transit near the country each year, according to SGX. Singapore LNG Corp, which operates Singapore's first receiving terminal, has three storage tanks at its Jurong Island facility.

LNG traded in Asia has traditionally been pegged to crude prices because the region lacks a benchmark similar to Henry Hub in the United States, which the country's burgeoning LNG exporters use in sales contracts.

For Singapore to become Asia's LNG pricing hub, it will need greater physical supplies and expanded storage facilities in addition to swaps and futures, according to Wood Mackenzie.

"When Singapore talks about being a pricing hub, it is talking more about being a physical hub for gas where as a buyer and seller you can put gas in and take gas out," Mr Gavin Thompson, Wood Mackenzie's vice-president for China and North-east Asia gas and power, said in an interview.

"That price for the physical commodity is then priced into the short-term spot and long-term contracts, potentially the same way Henry Hub is priced into long-term LNG contracts."

While both oil and LNG prices have tumbled since 2014, a forecast decrease in global crude output in the medium term contrasts with LNG's "tsunami" of new production, according to Mr Adrian Lunt, an associate director of commodities at SGX. These divergent supply situations, and the growing share of LNG in global energy markets, "will likely reveal the increasingly blatant flaws" of pricing the fuel off oil, he said.

Japan's Jera Co, a joint venture between Tokyo Electric Power Co and Chubu Electric Power Co that is poised to become one of the world's biggest LNG buyers, may use the Singapore index in its term contracts, according to the company.

Korea Gas Corp is not actively using the index because it is not purchasing LNG on a spot basis, according to spokesman Song Kyu Cheol.

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A version of this article appeared in the print edition of The Straits Times on January 26, 2016, with the headline 'Oil as LNG pricing peg: SGX seeks change'. Print Edition | Subscribe