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Singaporeans Are Stuck with high Natural Gas Prices

24 Jan 2008

Natural Gas price dropped from US$12/= to about US$8/= whereas crude oil price dropped less than 10%. It is time for Singaporeans to switch supplies from electricity or fuel oil to natural gas but we can’t.

FAQ
1. Why?
Our two largest natural gas supplies, contracted by SembCorp in 1999 and Singapore Power in 2001 from Indonesia, are pegged to the fuel oil price for a period of 22 years and 20 years respectively. These supplies are mainly for power generation.

2. Why the Peg?
It is believed that the pegs were commercial decisions made during the signing of the agreements. Fuel oil price stayed around US$20 per barrel for nearly 10 years when the agreement was signed in 1999/2001. The oil price hiked after 2003.

3. What Happened to the Natural Gas Prices recently?
The natural gas and oil are commodities traded at New York Mercantile Exchange(NYMEX). Natural gas price, determined mainly by supply and demand in US, has been very volatile. The price dipped badly because there was more than usual natural gas inventory (supply) in the US. The mild weather in the US has less demand for natural gas.

5. Does it mean that Singaporeans have been taken for a ride?
Analysts believed the dip in natural gas price is short term because the fundamentals have not been changed; also, the lower price will reduce drilling activities and this will put pressure on the supply. They believe that the long term natural gas price would stay tied to the fuel oil price.

6. What happened to the Liquefied Natural Gas (LNG)?
Singapore has planned to import LNG as an alternative source of supply but more for domestic consumption. She has appointed PowerGas to develop a LNG terminal in Jurong Island of Singapore. The details can be found here.

7. Will we get Cheaper Natural Gas with LNG?
Unlikely, not until we have competitions for the supply of LNG. In order to incentivise the LNG operators for their investment, the Singapore Government has regulated a new control i.e. no new licence for natural gas supplier/operator. This control will not be lifted until the LNG’s consumption in Singapore has reached an acceptable level (3 MTPA or million tons per annum-see note) or after 2018, whichever is earlier.

Conclusion
Singaporeans are stuck with the present natural gas price that will be pegged to the fuel oil prices for a long long time.

Note:
Singapore presently requires natural gas, equivalent to about 7 MTPA of LNG, for her electricity generation, basing on 3.3 MTPA per 2000 MW demand.

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