The Asian market has traditionally been home to the world's largest LNG consumers, with Japan and Korea collectively consuming 52% of all LNG exported in 2012. Coupled with growing energy demands in the emerging economies of China and India, which in each case are poised to experience significant increases in LNG purchases, there is little doubt that Asia will, for the foreseeable future, continue to be a key market for LNG. What remains to be seen, however, is whether the Asian LNG market, which has been characterized by long term LNG contracts, will experience a structural shift towards a more liquid spot market, and whether, as a result, an LNG trading hub will develop in Asia. In this respect, the Southeast Asian city-state of Singapore and the location of Asia's first open-access export and import LNG terminal, has been highlighted by the International Energy Agency (IEA) as holding the most potential to develop into an LNG / natural gas trading hub for the surrounding region. This article will consider the various factors necessary for the development of an Asian LNG trading hub and the prospects of Singapore developing as this hub.
At the outset, it is worth noting that there are a number of different forms and degrees of progression in which an LNG trading hub could develop in Asia. In theory, an LNG trading hub requires two main components: a place where physical cargoes of LNG can be traded frequently giving a liquid market and price transparency; and a financial trading index (including futures) (similar to the Henry Hub futures index in the United States). Typically the development of the physical market precedes the financial market development and as an interim stage in the development of a full LNG trading hub, we may see a market with sufficient volume of short term or spot transactions to pave the way for a wider adoption of an LNG price index similar to the JKM Marker (which is discussed further below in this article). Also, there is a distinction between a physical and financial trading hub, and it is not necessarily the case that both the physical and financial hubs will be based in the same location. Furthermore, a physical trading hub may not be limited to a single location but could be potentially connected to other trading points through shared storage and terminalling facilities. Given the scale of LNG imports into Asia and in light of the efforts of different Asian countries in developing their own LNG trading capabilities (e.g., the planned conversion of the Arun facility in Indonesia to an export/import facility scheduled for 2015), there is a possibility of not just one but multiple physical trading hubs within the region. These various permutations of a trading hub are examined below in connection with the various factors which would influence the development of an LNG trading hub in Asia.
Availability of LNG Supplies
Central to the development of a trading hub would be the availability of LNG supplies for the purposes of undertaking spot and short-term trades  in such volume and number as is required to support a liquid spot LNG market. A key feature of LNG projects is the relatively high capital costs of investment, which for recently sanctioned and proposed LNG projects has been estimated on the average to be more than US$2,600 million per million tonnes per annum (Mtpa) of liquefaction capacity.  This high capital cost and the associated requirements of lenders providing the multi-billion dollar project financing have traditionally required long term take-or-pay contracts as the preferred form of LNG sale arrangement given the revenue stability provided under such terms.
While long term LNG sale contracts are likely in the near future to continue to dominate the LNG trade, there are increasing signs of a growing and sustained momentum in spot and short term LNG trades. As illustrated by the graph below, spot and short term LNG trades since 2000 have increased by over six-fold from below 5% of the LNG trade to a peak of 31% of the global LNG trade or 73.5 Mtpa in 2012. 
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Spot & Short-Term Volumes, 1995-2012
Sources: Waterborne LNG Reports, US DOE, PFC Energy Global LNG Service Apart from the Fukushima nuclear accident in 2012, the continued growth of spot/short term LNG sales in the near term will be in particular affected by the following factors:
- The increase in the number of LNG exporters (such as exporters from Papua New Guinea projects, the North American shale gas projects, and the East African export projects) and the ramp-up in the near term of LNG production by existing LNG producers (in particular Australia). Such added competition may encourage LNG sellers to accept greater flexibilities for cargo diversions and also to participate more actively in spot and short term markets for uncommitted volumes.
- The trend of an increasing number of LNG importing countries, which has increased since 2008 by more than 50% to include the Southeast Asian countries of Indonesia, Thailand, Malaysia, and Singapore. This wider geographical spread of LNG importing countries creates more trading points as well as opportunities for cargo swaps and diversions. Separately, the growing Chinese and Indian markets (with currently two additional terminals under development at Dabhol and Kochi), which have access to a wider basket of alternative fuels such as coal and piped natural gas, are keen to maintain supply portfolio flexibility by purchasing a greater proportion of their LNG in the form of spot cargoes.
- The emergence of the United States as an LNG exporter and the steep fall in Henry Hub prices to US$2.75/mmBtu in 2012 (which as of January 2014 stands at about US$4.5/mmBtu), which has created significant price arbitrage opportunities between the Atlantic and Pacific Basins. The present oil-linked landed LNG prices in Asia average around US$15/mmBtu, fetching a significant premium over current US Henry Hub prices, creating substantial arbitrage opportunities for spot trading into Asia. Based on certain industry estimates, assuming an LNG price indexed at fifteen percent (15%) to oil prices and with oil prices at US$ 90/bbl, there could be a potential difference of approximately US$2 to US$4.5/mmBtu between oil indexed LNG (which represents the majority of Asia's current LNG imports) and new ex-ship LNG deliveries to Asia based on Henry Hub indexation. 
- The growing number of LNG portfolio players and traders, which sell and purchase LNG under LNG sale contracts from a variety of LNG supply sources and/or purchase cargoes purely for trading purposes. In addition to traditional LNG players such as Shell, Exxon Mobil, and BG, there are now commodity trading companies engaging in the LNG trade (e.g., Gunvor and Trafigura) and investment banks with LNG trading arms (e.g., Bank of America Merrill Lynch, Goldman Sachs, etc.).
- The fall in popularity of destination restriction clauses in LNG sales contracts prohibiting the resale or diversion of LNG to other markets. Given the increasing pressure faced by destination clauses (in particular, due to EU competition law which has largely taken the view that such clauses are anti-competitive), there appears to be a growing trend towards contracts without destination restrictions, and this will be an important influence freeing up greater LNG supplies through diversions for the spot and short term LNG market.
- The increasing number of older LNG facilities that are no longer constrained by project finance requirements, which may give greater sponsor flexibility to utilize more capacity for short term and spot trades. Under standard project financing terms, such facilities would normally be required to reserve the vast majority of its capacity under long term sales contracts to ensure stable cash flows for debt service repayments.
- The increasing number of LNG vessels available for spot and short term charters, as discussed further below in this article.
In summary, there has been, and we will continue to see, a tremendous increase in the availability of LNG and the number of potential buyers for it.
While, as previously mentioned, the development of new LNG projects is likely to continue to be based on long term LNG sale and purchase agreements providing stable revenue streams, such requirement for a stable revenue stream could be met, together with recourse to appropriate hedging and other financial instruments, by a liquid LNG market on which spot cargoes are readily bought and sold (as is the case with oil field developments). The development of such market would require sellers to take the step of preserving uncommitted LNG capacity. Ultimately, there will probably not be a revolutionary change in the near future towards the adoption of short-term and spot contracts as the mainstay of LNG sale agreements, but it is likely we will see continued growth in spot LNG volumes and it should likewise be recognised that, in the future, the short-term and spot markets (if sufficiently broad and liquid) could generate the security of cashflow required to support a capital intensive project.
LNG Vessel Availability
As the global LNG market is connected through seaborne routes, a key requirement for the continued growth in the spot and short term LNG market and the development of an Asian trading hub would be the availability of LNG vessels to transport spot and short-term volumes. Given the high cost of construction for LNG vessels (which are specialized vessels designed to keep LNG in a cryogenic state over long distances), limiting factors to the growth in the spot and short term trade has been the small number of such vessels and the fact that much of their shipping capacity is normally committed under long term charter arrangements. Without a fleet of LNG vessels with capacity not committed under long-term charter deals, it will be difficult for the spot and short-term trade to grow in size.
However, recently the shipping industry has seen a trend of vessels being ordered without a charter deal, in part due to the growth of the LNG spot market. It has been reported that nearly half the LNG vessels ordered 2012 did not have a charter deal.  When commissioned, these vessels will significantly boost the available transportation capacity for the short term and spot trade. Furthermore, as a result of the number of LNG vessels expected to come online without a charter detail and the possibility of delays in certain export projects in Australia, spot charter rates (which have fallen from US$150,000-160,000 in 2012 to about US$110,000/day in the first quarter of 2013 ) may continue to reduce further. Amongst other things, lower charter rates could help maintain the incentives for the spot trade to arbitrage price differentials between Atlantic and Pacific LNG markets (to the extent that these remain in future). Nevertheless, it remains to be seen whether such fleet availability for spot and short term trade (and lower charter rates) will persist once the anticipated wave of LNG export projects in Australia and the North America are fully commissioned in the latter part of this decade.
LNG Receiving Terminals
In no small part, the development of a vibrant and sustainable trading hub in Asia will depend on the presence of a large network of LNG receiving terminals creating multiple and diverse trading points. Across Asia, there are a growing number of LNG receiving terminals with recent additions being, the Haizra (India), Zhejiang Ningbo (China), Jurong Island (Singapore), and Malacca (Malaysia) terminals commissioned in 2013, as well as the Nusantara (Indonesia) and Ma Ta Phut (Thailand) terminals that were commissioned in 2012. As it stands, Asia already holds the majority of the world's regasification capacity, with nearly 50% of worldwide capacity held by North Asian terminals alone.
For the development of a trading hub, LNG receiving terminals are required that permit third party access as well as either the ability to re-export cargoes or connectivity with regional pipeline networks. At present, the majority of LNG import terminals in the Asia Pacific region generally do not allow for third party/open access, with the bulk of their capacity being purpose-built and dedicated for a single or limited number of users. The majority of the world's import terminals with reloading capabilities are located in Europe and North America. In this respect, the commissioning of the Singapore LNG terminal is a significant development as it is Asia's first multi-user, open-access terminal with re-export capability. There are a number of other factors worth noting in assessing the terminal's potential to promote Singapore as an LNG trading hub:
- The Singapore LNG terminal's strategic location in the Strait of Malacca and the South China Sea where over half of global LNG passes through each year. To capitalize on Singapore's geographical position, vessels used to deliver cargoes from the Middle-East (and in the future, East Africa) into North Asia could on their ballast voyages take LNG deliveries from Asia-Pacific export projects and import these cargoes into the Singapore. Such cargo movements could add to volume of the regional short term and spot trades.
- With its existing two storage tanks, the LNG terminal has an existing capacity of 3.5 Mtpa, which will shortly increase to 6 Mtpa with the commissioning of a third tank, a second jetty, and expanded regasification facilities. The terminal's throughput capacity will further rise to 9 Mtpa (being far in excess of BG's aggregator franchise of 3 Mtpa) when the anticipated fourth tank and its related regasification facilities are constructed. Taking into account the terminal's overall capacity, the Singapore LNG terminal should have significant excess capacity to facilitate spot trading, although it is worth noting that EMA's recent consultation paper  relating to the award of next exclusive franchise of LNG supplies  mentions that a temporary cap may be imposed on LNG spot imports (i.e., at 10% of the prevailing total contracted term gas imports (including both LNG and piped natural gas) to Singapore). Furthermore, if the moratorium on pipeline gas is lifted in future, further terminal capacity could potentially be released by increasing piped natural gas supplies to Singapore (and reducing local LNG consumption) during high demand seasons in North Asia.
- The Singapore LNG terminal is capable of receiving LNG vessels up to a maximum size of 270,000 cubic meters, including Q-Max vessels carrying Qatari cargoes. Given that most LNG terminals in Japan are sized to receive cargoes up to 150,000 cubic meters, Singapore LNG terminal could obtain larger cargoes and bulk-break such cargoes into smaller quantities, which may then be traded on a spot basis into the Japanese or other regional import markets.
- The plans to construct a third jetty at the Singapore LNG terminal that will be capable of accepting small LNG ships and barges in the range of 10,000 to 40,000 cubic metres. This could be used to facilitate intra-regional spot trade in LNG within Southeast Asia (for instance, Indonesia which has been forecasted to be importing LNG by 2018) to places which are unable to support larger scale LNG imports or are not able to accommodate larger size LNG vessels.
Separately, one other factor that could affect Singapore's development as an LNG trading hub would be competition with other neighboring countries' importing LNG terminals. In particular, Malaysia has been likewise attempting to promote itself as a potential hub for the trading of LNG with the development of the Pengerang Integrated Petroleum Complex that will house an LNG importing terminal with exporting capabilities and an initial storage capacity of five million cubic meters. However, the presence of such import terminals in the region may not necessarily be detrimental to Singapore's potential to develop as an LNG trading hub. One interesting concept, which has not yet been discussed in much detail, is the possibility of a combined storage facility inventory offered by the terminals in Malaysia, Singapore and/or Indonesia (e.g., the proposed Arun importing terminal in Aceh) – such an arrangement would significantly expand the flexibility of storage inventories amongst the 3 terminals, given their relative proximity, especially between the Pengerang and Singapore terminals which are separated only by the Johor Straits. Under this scenario, LNG importers and traders could potentially import and offtake their LNG from different terminal points, depending on the availability of capacity in the terminal, and the sales and shipping requirements of such terminal users. Related to this concept would also be the possibility of the Singapore LNG terminal (together with the cooperation of other importing terminals) utilizing depleted gas reservoirs (e.g., Aceh, Indonesia) in the nearby region for storage of natural gas. That being said, a cooperative framework to utilize LNG terminalling and storage facilities in multiple jurisdictions would require significant coordination across different technical, commercial and operational aspects, and it would no doubt be a challenging project to implement.
Pipeline Connectivity and Market Size
One of the issues surrounding the development of an Asian trading hub for LNG has been the relative lack of overall pipeline interconnectivity in Asia allowing for cross-border gas flows. In other regions, natural gas pricing points (whether Henry Hub in the United States or the National Balancing Point in the United Kingdom) have developed in geographical regions with well-connected pipeline networks and ready access to diverse supplies and multiple buyers. In the near term, the prospects for the establishment of such a network within Asia appear to be minimal due to differing factors including the varying stages of market development, and the need for consensus on pipeline tariff as well as jurisdictional and legal issues relating to the regulatory framework. While the development a Trans-ASEAN pipeline system has been mooted for a number of years, the concept is still very much in a nascent state for the reasons discussed, and although there are existing trans-national pipelines within Asia (including the recently commissioned Myanmar-China pipeline), these are largely limited connections from point to point, and they do not form part of a wider interconnected regional network.
With respect to Singapore developing as a gas trading hub, one of the more obvious limitations is its relatively small domestic gas market, and its lack of ready access to a wider Asian market through a regional pipeline network. While Singapore currently has two pipelines supplying gas from Malaysia and another two pipelines supplying gas from Indonesia, it is not clear if and how these pipelines can be used to reverse-flow regasified LNG from Singapore, and whether, in any case, such a scenario would be commercially viable given the price differentials between natural gas supplies (where in Malaysia and Indonesia such gas remains heavily subsidized) and also the fact that Malaysia is developing LNG import terminals with the ambition to develop its own LNG trading capabilities. However, the development of a gas trading hub (in the sense of a natural gas hub point connected by pipeline to other regions) is not necessarily a prerequisite for a hub for trading of LNG, which is generally traded through vessel cargoes instead of pipeline. While the size of the domestic market is no doubt an important factor and one which will remain physically constrained in Singapore, Singapore's strength as a potential trading hub will have to depend more on its ability to create opportunities to extract value from the regional and international LNG supply chain, rather than the sheer size of the local consumer base. Such value creation opportunities exist in light of Singapore's potential to expand trading activities, by amongst other things (as mentioned), the Singapore LNG terminal's ability to provide a destination point for backhaul voyages, bulk-breaking services, and the facilitation of LNG intra-regional trade.
Trading and Financial Structures
As mentioned earlier, an LNG trading hub could develop in terms of a physical trade and/or financial trade. Given Singapore's prominent position as one of the world's leading financial centres and the recent commissioning of the Singapore LNG terminal, there is some anticipation that Singapore (apart from developing as a hub for the physical trade in LNG) will also see the corresponding growth in LNG-related paper or financial trade amongst industry players and financial institutions within the country. With an increasing volume of physical trade in spot cargoes, market players will need to manage risk exposures arising from spot transactions through hedges and other financial instruments, and this could in turn possibly facilitate the development of a broader financial trade, as well as a trading platform in Asia for LNG or natural gas futures or derivatives.
While firm plans to list LNG futures contracts have yet to be announced, the Singapore Exchange has reportedly been gauging interest in a proposal to start LNG futures trading through discussions with local power utilities and foreign trading companies. With regards to such development of a financial trade in LNG, Singapore has an important advantage in that it is already Asia's largest oil trading center as well as among the world's largest financial and currency trading centres. Furthermore, there is already a growing presence of gas and LNG trading companies being set up in Singapore, with BP, BG Group, Shell, Gazprom, Trafigura, and Glencore, amongst others, having commenced or expanded local gas/LNG trading operations in recent years. Furthermore, the establishment of Pavilion Energy, the new LNG unit of Singapore's state-owned investment company Temasek Holding, is likely to boost the LNG trading capabilities in Singapore with its plans to undertake LNG trading in Asia. That being said, it is worth noting that other countries are also moving towards the establishment of similar trading platforms. For instance, the Shanghai Futures Exchange has recently set up the Shanghai International Energy Exchange that will handle energy futures trading (including contracts for natural gas) within Shanghai's new Free Trade Zone, and the Japanese government has announced that the Tokyo Commodity Exchange will list natural gas futures contracts by 2015. Hence, although Singapore does enjoy a number of important advantages, it is by no means certain that Singapore will develop into the first or primary hub for financial trades in LNG related products.
From Singapore's perspective, one benefit arising from the development of the financial trade in LNG would be the fact that such trading is not subject to same physical limitations as would be the physical trading activities carried out through the Singapore LNG terminal (i.e., storage and throughput limitations). To support the paper trade in Singapore, the physical liquidity in spot traded cargoes could arise from the overall trading volume in the Asian market and not only the volume of cargoes physically traded through Singapore itself. In any event, the key factor is that there must be sufficient liquidity in spot LNG volumes before it becomes viable to develop a paper or financial trade for such commodity, whether in Singapore or elsewhere. In this respect, although spot and short term trading volumes have arisen to over 30% of the global trade in 2012, it remains to be seen if spot trading activity will continue to grow on a steady trajectory, and whether a hub for financial trading with reference to LNG will develop in Asia.
Government Regulation and National Policy
Government regulation and involvement in the LNG and gas industry is yet another important factor influencing the prospects for the development of a regional trading hub. For the established LNG importing countries of Japan, South Korea, and Taiwan, their interests in ensuring security of supply has been one of the driving forces behind their national oil companies or power companies entering into sale and purchase agreements on a long term basis. A shift to a purchasing model with a higher proportion of short term and spot term volumes would require a change in policy mindset that sees spot trading and the development of a liquid market in LNG as being complementary to supply security, for instance, by enabling countries to more readily procure LNG spot cargoes to address unforeseen circumstances (e.g., the Fukushima nuclear accident) and also to moderate price risks by balancing supply portfolios between long term and short term cargoes. In part, such a shift in policy could be encouraged by the increasing number of LNG production sources and the volumes produced therefrom.
Government policy and regulations in relation to the domestic gas market structures will also have a significant impact on the development of a trading hub. While the development of an LNG trading hub may not necessarily be strictly related to the local gas markets (especially where a significant proportion of cargoes are intended to be reloaded or otherwise re-exported), there is greater confidence that an imported LNG price reflects a transparent market pricing signal in circumstances where the wholesale price of gas in such importing country is priced on a competitive, deregulated basis. In this respect, unlike a number of other LNG importing countries in Asia (where for instance LNG/gas import, storage and transmission activities are managed by a single entity and/or gas prices are sold on a subsidized basis), the Singapore gas market is characterized by a separation of gas transportation and marketing activities with non-discriminatory access to pipeline networks, and the pricing of natural gas is left to be set by demand and supply fundamentals. In terms of developing an Asian hub for LNG trading, Singapore therefore carries the advantage of aligning most closely with a competitive gas market structure (albeit being relatively small in size).
The role of governments in promoting their countries as potential LNG trading hubs should not be understated. Apart from its infrastructural advantages and strategic location, Singapore's tax advantages are no doubt a material consideration in its potential to develop as an LNG trading hub. In this respect and subject to certain criteria including those relating to staff hiring levels and use of Singapore's banking services, trading companies setting up in Singapore can see potentially significant tax savings under Singapore's Global Traders' Program which sets taxes on trading profits as low as 5%. Similarly, Malaysia also offers a tax incentive program for the establishment of trading operations within the country, including a zero percent tax rate (subject to conditions) on LNG trading companies for the first three years of operations. However, and on this issue of tax incentives, it is worth noting that the issue of tax arbitrage is increasingly placed under scrutiny by various countries, and the actual net benefit of local tax incentives may be subject to how other foreign governments treat and assess profits generated from relevant trading activities. Ultimately, the decision of where to locate trading operations must therefore assess the overall advantages offered by a country including its physical infrastructure, the availability of financial and other professional services, its legal system and political stability, and not only the level of taxation and financial incentives offered by its government.
LNG on LNG Pricing
One potentially significant consequence of the development of an LNG trading hub could be the facilitation of a move away from oil-indexed LNG pricing towards a separate and distinct LNG pricing index. Currently, the most prominent LNG pricing index for spot cargoes is the Japan/Korea Marker (JKM), which is an Asian spot price assessment published by Platts and that is largely based on cargoes delivered DES into Japan and South Korea. According to Platts, its daily assessments are based on "confirmed spot transactions, firm bids/offers, or in the absence of liquidity, where a spot transaction would have been concluded." However, it has been said that the JKM is not a perfect substitute for transparent price discovery as there are still questions relating to how closely it reflects actual spot prices of physically traded cargoes. As a result of the low amount of physical deals conducted using JKM and the fact that the Platts benchmark (albeit based on input from market participants) does not necessarily reflect formal quotes, there is a potential for a pricing gap to exist between the JKM and the actual price of the physical traded cargo. In this connection, an Asian LNG trading hub would not only function as a center for price discovery of physically traded spot cargoes, but it could also pave the way for adoption of an exchange-based price for LNG futures. While the development of a trading hub is not necessarily tied to the establishment of an LNG pricing index (and vice versa), the development of such a trading hub (whether in Singapore or elsewhere) could nonetheless provide significant momentum to the establishment of an LNG-specific pricing index based on a transparent price discovery process.
While it is by no means certain that an LNG trading hub would establish itself within Asia, Singapore is one of the prime contenders for the location of such a trading hub due to, amongst other things, its geographical location, the capabilities of its LNG terminal and the potential synergies with its existing status as a major oil trading and financial center. However, whether such a trading hub will actually develop in Singapore or Asia itself will have to depend also on factors that are not within the control of any one country or market, such as the overall global volume of spot LNG trades and the availability of supplies from LNG production sources. One thing is certain though—the development of a trading hub, whether in Singapore or elsewhere, will have a significant impact on the LNG trade both within and outside of Asia, and the prospects for such development should be closely watched by all industry players.