Singapore: Green Light For LNG Into Singapore

Following an extensive feasibility study, the Singapore Energy Market Authority (EMA) has released a final report regarding the importation of LNG into Singapore which recommends the development of an LNG receiving terminal in Singapore with significant private sector involvement.

In January 2006, the EMA appointed Tokyo Gas Engineering Co Ltd to undertake a feasibility study in relation to importing LNG into Singapore. The final report¹ was issued by the EMA on 7 August. It covers matters such as terminal ownership structure, government involvement, LNG procurement, regulatory framework and technical characteristics of the terminal.

Although the detail of the terminal structure and the LNG supply remains to be fully developed and a consultation process is ongoing,we expect that a bidding process will be launched in Q3 2007 with the issue of a request for proposal (RFP).

Currently, natural gas is transported to power generation facilities in Singapore from Indonesia and Malaysia via 3 main pipelines. By a northern pipeline, Senoko Power Ltd imports approximately 150 mmscfds of natural gas per day from gas fields in Malaysia. Another pipeline from Indonesia's West Natuna gas fields supplies approximately 325 mmscfds of natural gas per day to SembCorp Gas Pte Ltd. SembCorp sells to a variety of industrial users including power generators. Lastly, Gas Supply Pte Ltd transports approximately 350 mmscfds of natural gas per day from South Sumatra to Singapore. The importers of natural gas to Singapore are parties to long-term take-or-pay gas sale agreements which are set to expire in approximately 2023.

In Singapore, natural gas is primarily used for electricity generation, with approximately 80% of Singapore's generation capacity being gas-fired.With expected increases in demand for electricity, LNG has been recommended as the best option for ensuring a reliable long-term yet competitively priced energy source to complement Singapore's existing gas supply arrangements.

In summary, the final report recommends:

• establishing a 3 mtpa (million tonnes per annum) onshore LNG receiving terminal to meet expected demand between 2012 and 2017 with a possible expansion in 2018 to 6 mtpa;
• a terminal ownership structure with no direct government participation and recommended participation thresholds for specific types of industry participants;
• establishing a Fuel Sourcing Policy to promote diversity of supply sources while ensuring a competitively priced energy market; and
• LNG procurement by either an existing gas consumer in Singapore or a potential gas supplier wishing to enter the Singaporean market.

Key aspects of the final report are summarised below.

The final report recommends a terminal with an initial capacity of 3 mtpa (with a possible expansion to 6 mtpa post 2018 depending on demand) and an initial storage capacity of 300,000m³.

The recommended storage capacity was determined having regard to the likely capacity of LNG vessels, seasonal fluctuations in demand (which are expected to be limited) and a preference that the terminal hold a strategic reserve equal to 7 days' LNG supply (which would be equivalent to 3 to 5 days of natural gas consumption in case of disruptions to the supply of piped gas). The preferred quantity of strategic reserve has been determined having reference to the incremental cost of the required terminal capacity.

It is expected that the terminal will be constructed, owned and operated by the private sector and that Government will only provide indirect support to the terminal. The EMA recommends that terminal ownership should be subject to the following principles:

• a 30% interest should be held by a designated Singapore incorporated entity such as the Singapore government-owned PowerGas (the incumbent gas transporter in the Singapore gas market);
• electricity generators and their related entities may only take an interest up to 30%; and
• electricity generators and their related entities would not be entitled to control the single largest block of voting shares in aggregate.

The terminal owner will be selected through a competitive bidding process.

The final report recommends that a licensing regime for the ownership and the operation of the LNG terminal be established, presumably under the Gas Act (Chapter 116A, Singapore Statutes), including a licence condition requiring the terminal owner to prepare a terminal access code for third party access.

With respect to third party access,we expect that access will be granted to third parties on a non-discriminatory basis in accordance with existing Singaporean regulation such as the Gas Network Code. This will ensure that the applicable open access principles to essential infrastructure are consistently applied throughout the energy supply chain.

Currently, the EMA is seeking input as to whether investors would require government support before investing in the development of the terminal. The final report discusses a number of possible government support mechanisms such as:

• the Fuel Sourcing Policy, details of which are discussed below;
• a mechanism for sharing of demand risk between the terminal owner and the Government, with government support in the form of payments for revenue shortfalls (up to a pre-agreed cap) where the terminal has unutilised capacity; and
• where the terminal is used to hold an LNG strategic reserve in case of disruptions to the supply of piped natural gas, support on the basis of a pre-determined capacity charge.

Early signs are that the Government will endorse the Fuel Sourcing Policy recommendation. Whether either or both of the other two support mechanisms discussed above are adopted will depend on feedback received during the consultation process, the Government's preferences for the structure of the Project and the bids received.

The final report acknowledges that existing gas suppliers may seek to eliminate any perceived competitive price advantages associated with LNG by reducing the price of piped natural gas. This reflects a key concern of existing market participants that pipeline assets may be stranded should LNG emerge as a cheaper feedstock for electricity generation than piped natural gas.

The EMA has recognised that the lowest gas price does not always amount to the best outcome and may result in the destruction of value and the creation of a stranded asset, being either the pipeline or the LNG receiving terminal. Further, price competitiveness is not the sole objective of LNG importation into Singapore. A key objective is to diversify supply sources and as a result improve security of supply. Singapore's Minister of Trade and Industry, Lim Hng Kiang, stated earlier this week that "[Singapore] needs to diversify our energy sources to ensure that we are not overreliant on a single source.".

To address the impact of the importation of LNG on the Singapore energy market, the EMA recommends that the Government implement a Fuel Sourcing Policy which will provide a framework on the long-term use of various fuels used for electricity generation. In order to ensure that the Fuel Sourcing Policy results in diversification of sources away from piped natural gas, the report recommends that the Fuel Sourcing Policy should cap piped natural gas imports to a maximum of 60% of the fuel supply for electricity generation in Singapore. It is hoped that this will prevent gas buyers from favouring piped natural gas over LNG where LNG is priced higher than piped natural gas, and thus support the viability of the LNG terminal in the initial stages.

It is expected that the Fuel Sourcing Policy will be implemented by way of introducing a gas importation licensing regime or amending the conditions contained in an electricity generator's generation licence. Practically, these conditions may be difficult for a generator to comply with if demand for natural gas does not increase as assumed in the final report. Gas buyers in the Singapore market are tied to long-term take-or-pay contracts (generally until 2023) and conditions of these contracts may impose liabilities on buyers seeking to purchase gas from alternate supply sources.

The final report summarises the evaluation process undertaken in relation to preferred LNG suppliers. Existing and greenfields LNG projects were considered and the EMA placed preference on projects that could offer low transportation costs, relatively low country risk and supply availability. For these reasons, 4 of the top 5 ranked suppliers were Australian LNG projects (the other being Qatar).

Prior to the issue of the final report, speculation existed that Singapore, based on its geographical location, could become the Asian hub for LNG trading. The final report has dismissed this speculation stating that it would be highly unlikely that trading would be feasible, given that significant excess tank capacity would be required which would be unfeasible given the predicted gas demand for Singapore.

Interestingly, the final report considers the benefits, by way of decreased transportation costs, if Singapore was to cooperate with other LNG customers in the region and implement backhaul arrangements. For example, in the case of an FOB LNG delivery from Qatar to Japan, after delivery of the cargo in Japan, the LNG vessel could, the final report suggests, be routed to Australia to load a cargo for delivery in Singapore, before returning to Qatar to reload. This would more efficiently use the capacity of the vessel and the reduced transportation costs would be shared between Singapore and the relevant LNG customer. Obviously, implementation of an arrangement of this nature would require the consent of the LNG supplier and LNG customer under, in this example, the Qatar to Japan LNG sale and purchase agreement, in order that loading and unloading schedules under that agreement would not be disturbed.

The final report indicates that Singapore is keen to be involved in the LNG transportation business. As a result of this, the final report indicates that Singapore should maintain a preference for FOB LNG supply arrangements. Various options regarding vessel procurement, including chartering and availability of refurbished vessels are considered. However, no firm recommendations have been made.

The recommended Project Schedule contained in the final report provides for the issue of an RFP to build, own and operate the receiving terminal and, separately, the identification of baseload users for the terminal.

At this stage, it is expected to be open for bidders (whether bidding individually or in consortium) to respond to the RFP with a proposal to build, own and operate the receiving terminal alone or together with a proposal on the proposed LNG supply and gas offtake arrangements.

Subject to the recommended ownership restrictions described above, a bidding consortium could comprise any combination of local gas offtakers, LNG suppliers seeking to gain access to the Singaporean market, financial investors, or infrastructure developers.

The EMA are keen to receive comments from interested parties on the matters dealt with in the final report to assist them to frame the RFP. Potential bidders should submit comments to the EMA on or before 22 September 2006.

The EMA's next steps and timetable for implementation are:

• 22 September 2006 - Closing date for comments on final report
• Q3 2007 - Issue of RFP to build, own and operate the LNG receiving terminal
• Q1 2008 - Evaluation of proposals
• Q1 2008 - Contract award

As mentioned above, it is expected that the LNG receiving terminal will commence operation in 2012.

The development of an LNG receiving terminal in Singapore presents clear opportunities for terminal investors, financiers, LNG suppliers and contractors. The development of LNG receiving facilities is a complex area in which the ability to assess and manage risk in both the regasification segment and in the related upstream and downstream gas segments of the LNG value chain is critical.

Interested parties should invest some time in assembling a bidding consortium that has the resources, expertise and experience to manage the relevant risks. Specialist advisers can assist in risk identification and advise on appropriate risk mitigation strategies.

In addition, the introduction of a new, potentially cost effective, source of supply will have an impact on the existing gas supply arrangements for a number of Singapore energy market participants. The introduction of LNG as a new source of gas supply coupled with the current significant restructuring of the Singaporean energy market to facilitate greater competition in the gas and electricity markets will mean that existing market participants will need to carefully examine the potential impact of LNG importation on their existing supply arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.