Abstract

In much of the economic development literature, there is a presumption that the development

process is naturally associated with deepened regional economic integration. This is a

presumption without foundation. In the case of natural gas in Southeast Asia, what has in fact

occurred is a process of regional dis-integration as domestic supplies of natural gas in

producing countries such as Myanmar, Malaysia and Indonesia are increasingly constrained

and pipeline supplies to neighbouring countries are expected to dwindle or cease altogether

and supply contracts are not renewed. Grand visions of the Trans-ASEAN Gas Pipeline

(TAGP) – the region’s most ambitious mega-project are just that, and the TAGP project has

been made redundant by technological developments, market evolution and policy

preferences among key regional governments. The concept of LNG trading hubs – in which

Singapore has invested substantially -- which has received significant attention more recently,

both in policy and industry circles, faces equally challenging hurdles. Developments in the

past few years have made it apparent that the ability to directly import LNG has become a

preferred option among ASEAN member countries.

Keywords
cross-border infrastructure; Liquified Natural Gas (LNG); gas trading hubs; regional

economic integration

1
Introduction

Infrastructure development and logistics are essential for increased intra-regional flows of

goods, services and investments. The ‘nerves’ and ‘sinews’ of regional economic integration

are the roads, bridges, ports, railways, and civil aviation, energy, and information and

telecommunication networks. Cross-border infrastructure (CBI) development to enhance

regional cooperation and economic integration is a staple topic of discussion in most

multilateral forums. There have been a series of policy declarations, summit agreements and

concords in the many ASEAN communiqués that refer to the promotion of CBI

development.

The region’s most ambitious mega-project, the trans-ASEAN Gas Pipeline (TAGP) aims to

connect the gas reserves of the Andaman Sea, Gulf of Thailand and South China Sea to the

urban and industrial demand centres of Southeast Asia. The economics prospects for the

TAGP are poor, dependent as it is on the uncertain development of the vast but costly

reserves of the East Natuna basin. Developments in the past few years have made it apparent

that the ability to directly import LNG has become a preferred option among ASEAN

member countries. It facilitates access to gas supply quickly and at low cost, to meet the

energy needs of the association’s member economies. Thus the example of Singapore that has

built LNG re-gasification facilities to reduce its reliance on piped natural gas imports from

Malaysia and Indonesia illustrates these arguments. If it is not likely that the TAGP project as

envisioned by ASEAN officials will be a major factor in CBI investment commitments in the

region, the concept of LNG trading hubs which has received significant attention more

recently, both in policy and industry circles, faces equally challenging hurdles.

In section 1, a brief over-view of the integration of Southeast Asia to international trade and

investment flows beginning in the second half of the 19 th century sets the historical context.

2
Section 2 covers the growth of the natural gas industry in the region that took off with the

large LNG export facilities in Brunei, Indonesia and Malaysia since the mid-1970s. Section 3

describes the current status of intra-ASEAN gas integration via cross-border pipelines. The

proposed TAGP project which aims for regional integration in the natural gas trade and the

constraints it faces in coming to fruition is assessed in Section 4. Section 5 looks at initiatives

to set up trading hubs in the region as an alternative route to regional integration. We end

with concluding remarks in Section 5.

1: Early Economic Integration of Southeast Asia

Historical scholarship over the past few decades has established that Southeast Asia was

much more prominent in world trade during the early modern era than was previously

assumed. Commodities, capital, and labour may have flowed in greater quantities and across

greater distances to and from Southeast Asia between 1400 and 1800 than to and from any

other region in the world.1 Southeast Asia was a principal arena in global trade throughout the

nineteenth century, not just after 1850, when the British and French began to consolidate and

formalize their rule in the region. Two factors played a pivotal role in the emergence of

modern Southeast Asia. First was the opening of the Suez Canal in 1869 which opened the

East of Suez trade to steamships, and at a stroke put Singapore, the region’s entrepôt, as an

important layover for sea-borne traffic headed East. The second factor was the phenomenal

rise in the global industrial demand for primary commodities in the latter part of the 19th

1
For instance, see Frank, Andre Gunder. 1998. ReOrient: Global Economy in the Asian Age. Berkeley:
University of California Press; Reid, Anthony. 1988-93. Southeast Asia in the Age of Commerce 1450-1680. 2
vols. New Haven, CT: Yale University Press. Both sources cited in Coclanis, P. and Doshi, T., 2000.
“Globalization in Southeast Asia”, in The Annals of the American Academy of Political and Social Sciences,
Volume: 570 issue: 1, page(s): 49-64, July, 2000.

3
century, with Malaya emerging as the British Empire’s “dollar earning arsenal” with its boom

in tin and rubber exports.2

By the 1870s, the region's importance was further enhanced by the "Victorian Internet"- the

transoceanic telegraph cable – which linked the region ever more closely to growing

international markets, particularly in Europe. Technological improvements and cost

reductions in transoceanic navigation facilitated ever greater economic streams and flows. As

mainly European capital poured in, Southeast Asian commodities - rice, sugar, cotton, coffee,

tin, teak, and rubber - poured out. Labour migration from South India and South China gained

in scale and importance. Until the worldwide depression of the 1930s and World War II,

much of Southeast Asia was as global as any part of the world. Indeed, the earliest textbook

case of small open economies benefitting from an export-oriented growth strategy is drawn

from the region.3

For over two centuries, much of the area had been under the political control of one or

another of the European colonial powers. Through both formal and informal means, these

powers established close economic, political, and cultural ties between themselves and their

respective colonies. The logic of economic development beginning in the 2nd half of the 19th

century, primarily involving the export of primary commodities such as Malaya’s rubber and

tin or Indonesia’s crude oil, impeded economic integration among neighbouring parts of the

region organized under different European flags. As a result, the various constituent parts of

what we now call Southeast Asia often had much closer links with European ports and

European capital than they did with one another.

2
Rudner, Martin., 1994. Malaysian Development: A Retrospective, Ottawa: Carleton University Press.
3
The most prominent example is Hla Myint, a Burmese economist noted as a pioneer of development
economics who was among the first to emphasize an export-oriented model for small, open economies as an
engine of growth.

4
The integration of the Southeast Asian region into the international economy was thus not

accompanied by cross-border infrastructure (CBI) development beyond that which was

required for the outward flow of primary commodities and the inward flow of capital goods

and manufactured consumer products. Trade and logistics development, to be sure, took place

under spheres of influence exercised by colonial administrators and the great trading

companies such as the British East India and the Dutch East Indies companies operating

under royal charters. In Southeast Asia, this meant the development of ports and roads to

bring primary products to export markets in Europe primarily, and to bring consumer and

industrial manufactured goods and capital into the colonies. The emergence of Singapore as

entrepot for the Southeast Asian hinterland thus played a critical role in Southeast Asia’s

limited regional economic integration prior to decolonization.4

2. Liquified Natural Gas in Southeast Asia

Natural gas is a low-density energy resource when compared to oil and coal. It is also much

more difficult to transport and distribute. With the 1970s oil price shocks and relatively high

oil prices for extended periods of time, natural gas has become an increasingly important fuel

for the power generation sector in the past few decades although coal remains a major

contributor as well. Since the advent of highly efficient combined cycle gas turbines (CCGT)

in the late 1980s, the use of natural gas in the power generation sector has risen substantially

to displace oil in the power generation sector globally. Natural gas’ key characteristic of

cleanliness of combustion makes its particularly attractive as a fuel, given that urban

pollution and climate change concerns have become policy priorities in many countries.

The development of natural gas industry in Southeast Asia is a recent phenomenon. Gas

played little or no role in the early development of the oil industry in Southeast Asia. The oil

4
The rise of Singapore as an entrepôt in the region’s economic history is comprehensively surveyed by Huff,
The Economic Growth of Singapore Trade and Development in the Twentieth Century, Cambridge, UK:
Cambridge University Press, 1994.

5
discoveries in Indonesia, Brunei and Malaysia led to the rapid development of the oil sector

in each of these countries. Natural gas, which was found usually as a by-product of oil

production as associated gas, was either flared or used to support enhanced oil production via

gas injection. Small quantities were used to support oil field facilities power requirements.

The natural gas industry in Southeast Asia came into its own only as commercial ventures

involving very large investments in liquefaction, shipping, re-gasification and downstream

distribution facilities became successfully established.

The massive $940 million (or over $3.5 billion in 2005 dollars) Arun plant in Indonesia with

a design capacity for 9 million tons per annum (mtpa), for example, was built early on in the

evolution of the modern global LNG industry in the mid-1970s. Arun LNG had a willing and

able buyer (Japan) which was willing to invest in order to diversify its fuel source for power

generation. Far from domestic population and industrial centres, the huge Arun gas-field

(with 16 trillion cubic feet of reserves originally in place) had an insufficient domestic

market. Potential demand centres from elsewhere in South or East Asia were not ready to

finance capital intensive projects to import LNG. The Arun project makes for an interesting

case study of how timing can affect the ultimate outcome of investment alternatives. In the

mid-1970s, only Japan in East Asia had the financial capacity and the ability to absorb such

large quantums of gas for its energy requirements, and schemes for domestic or regional

utilization by building a local pipeline infrastructure were rightly deemed to be inferior

alternatives.5

5
Von der Mehden, F and Lewis, S., “Liquified natural gas from Indonesia: the Arun project”, in Natural Gas
and Geopolitics: From 1970 to 2040 (edited by Victor, D., Jaffe, A., and Hayes, M.) Cambridge University
Press, 2006.

6
Table 1: World’s Largest LNG Exporters 2009

LNG Exports (Mn Tons)

2009 2016
Qatar 36.6 77.2
Malaysia 21.9 25.0
Indonesia 19.2 18.6
Australia 17.9 44.3
Algeria 15.5 11.5
Trinidad & Tobago 14.6 10.6
Nigeria 11.8 18.6
Egypt 9.5 0.5
Oman 8.5 8.1
Brunei 6.5 6.3
Others 17.6 37.3
179. 258.
World
6 0

Source: BP Statistical Review of World Energy, June 2017 accessed at

https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review-

2017/bp-statistical-review-of-world-energy-2017-full-report.pdf

Table 1 above lists the largest 10 LNG exporters in 2009 and the altered status in 2016.

Indonesia enjoyed the status of being the world’s largest exporter of liquefied natural gas for

22 years, until Qatar took top spot in 2006. The country now faces issues of increased

domestic demand and constrained supplies, both in oil and gas. In recent years, Indonesia has

been effectively reducing its contractual LNG deliveries to its traditional Northeast Asian

customers in Japan, Korea and Taiwan as field depletion in Sumatra and East Kalimantan has

constrained the country’s LNG production capacity. Malaysia was the second-largest LNG

exporter in the world in 2009. Its exports are mainly to Japan, South Korea, and Taiwan. Like

Indonesia, Malaysia is also facing the challenge of meeting growing domestic demand for gas

while servicing its LNG and pipeline export obligations in the context of resource constraint.

7
The sources for gas supply - offshore areas of Terengganu, Sabah, and Sarawak – have

plateaued and are facing a slump in production.

3 Intra-ASEAN integration in the Natural Gas Sector

Southeast Asia is among the fastest growing economic regions in the world over the past

three decades. Rapid economic growth in the region has been accompanied by rising demand

for energy, and in particular, electricity. Natural gas use in Southeast Asia has experienced

rapid growth in the power generation, industrial and household sectors, and the outlook is for

continued if somewhat slower growth in the medium term. According to the IEA’s Southeast

Asia energy outlook report, natural gas demand in Southeast Asia will grow at a rate of 2%

per year over the period to 2040, significantly slower from the more than 6% per year over

the past 25 years.6 Nevertheless, gas demand continues to increase faster than production in

the region, a trend that will turn the region as a whole into a net importer of gas by the 2020s,

particularly now that carbon emission mitigation has become a factor of consideration in the

setting of national energy policies everywhere. Replacing coal with natural gas for power

generation, for example, cuts carbon emissions by half.7

While the large LNG export projects of Brunei, Indonesia and Malaysia were the most

significant industrial developments integrating the region’s gas sector with global markets,

the increased use of natural gas for domestic use also saw rapid growth, especially in

Malaysia and Thailand. A majority of the existing natural gas pipelines serves to connect

producing gas fields to gas treatment plants and domestic power generation, industry and

household users.

6
International Energy Agency, (2017), “Southeast Asia Energy Outlook 2017”, accessed at www.iea.org.
7
See, for instance, Union of Concerned Scientists, “Environmental Impacts of Natural Gas”, accessed at
http://www.ucsusa.org/clean-energy/coal-and-other-fossil-fuels/environmental-impacts-of-natural-
gas#.Wgev32iCw2w

8
Intra-ASEAN trade in natural gas is limited and accounts for a small proportion of natural gas

consumed or exported from ASEAN. Currently, there are 8 cross border natural gas pipelines

that are operating, with a total length of over 2,500 km (see Table 2 below). The cross border

pipelines connect Peninsula Malaysia to Singapore (delivering gas from 1992); Myanmar to

Thailand from the Yadana (1999) and Yetagun (2000) fields, Indonesia to Singapore with

two pipelines, one from West Natuna (2001) and the other from South Sumatra (2003); and

Thailand to Malaysia from the Joint Development Area in the Gulf of Thailand (2006). 8 An

estimated $14.2 billion has already been invested in some 3,900 km of bilateral pipelines in

2008.9

Table 2: Details of Existing Cross-Border Pipelines in South East Asia

Distance Commissioning Capacity

Current gas pipelines
(km) date (mcf/d)
Peninsular Malaysia - Singapore 5 1991 150
Yadana (Myanmar) - Ratchaburi (Thailand) 470 1999 200
Yetagun (Myanmar) - Ratchaburi (Thailand) 340 2000 260
West Natuna (Indonesia) – Singapore 660 2001 325
West Natuna (Indonesia) - Duyong (Malaysia) 100 2001 250
South Sumatra (Indonesia) – Singapore 470 2003 350
Malaysia - Thailand Joint Development Area (JDA) 270 2005 1,020
Malaysia - Singapore 4 2006 110
Malaysia – Vietnam Joint Development Area (JDA) 325 2007 n/a

Source: International Energy Agency, (2010), “Medium-Term Oil and Gas Markets 2010”,

Paris, France,p.268; Sovacool, B.K., Energy policy and cooperation in Southeast Asia.

Energy Policy 37 (2009), p.2360

8
See “Natural Gas Infrastructure Development: Southeast Asia”, Asia Pacific Research Centre, 2000; various
press reports.
9
“ASEAN and ASCOPE lay foundation for growth”, Petromin Pipeliner (January – March 2011), accessed at
http://www.pm-pipeliner.safan.com/mag/ppl0311/r12.pdf

9
The successful financing and construction of these cross-border pipelines have occurred on

the basis of consortia that involve a range of private and public sector stakeholders in the

energy sector, not as part of state-led multilateral negotiations envisioned by ASEAN

communiqués and Action Plans for the TAGP project. Finance by multi-lateral agencies such

as the ADB have played a role in some of the pipeline projects involving the less developed

member countries of ASEAN with weak fiscal systems such as Indonesia. 10 Nonetheless,

existing investments in cross-border gas pipelines in Southeast Asia are the result of

successful negotiations between sovereign owners of natural gas resources in the region and

the international oil and gas companies who typically provide private equity and commercial

debt instruments along with the requisite technology and expertise to exploit such resources.

Where commercial criteria of risk and reward simultaneously satisfy policy makers’

perceptions of the national interest in the exploitation of gas resources, projects will reach

final investment decisions. If cross-border transport of gas help commercialize otherwise

‘stranded’ gas resources, by allowing gas to reach credit-worthy customers with long term

sales and purchase agreements, then cross-border pipelines will get built.

4. The Trans ASEAN Gas Pipeline (TAGP) vision

Energy was identified as a key area for ASEAN cooperation early on since the association’s

founding. In the aftermath of the oil crisis in 1973, the heads of ASEAN member countries

formed the ASEAN Council on Petroleum (ASCOPE) in October 1975, to promote

cooperation among its member countries in times of emergency due to oil shortages. Initially,

cooperation was viewed as a way of enhancing energy security. In the past decade climate

change and the environment are also viewed as factors in support of a regional approach to

10
See, for instance, Asian Development Bank, 2008. “Loan 1357 – INO: Gas transmission and distribution
project.”, accessed at http://www.adb.org/Documents/Environment/ino/ino_gas_transmission.pdf

10
utilizing natural gas to reduce reliance on dirtier coal which remains an important fuel for the

region.11

ASEAN Vision 2020 called for an “energy-integrated” Southeast Asia which would

“establish interconnecting arrangements in the field of energy and utilities for electricity,

natural gas and water within ASEAN through the ASEAN Power Grid and a Trans-ASEAN

Gas Pipeline and Water Pipeline, and promote cooperation in energy efficiency and

conservation, as well as the development of new and renewable energy resources”. 12 The

“ASEAN Plan of Action for Energy Cooperation (APAEC) 2010 – 2015” covers the energy

component of the ASEAN Economic Community Blueprint 2015 signed by ASEAN Leaders

in November 2007. 13 The Plan aims to “enhance energy security and sustainability for the

ASEAN region including health, safety and environment through accelerated implementation

of action plans, including: a) ASEAN Power Grid, b) Trans-ASEAN Gas Pipeline, c) Coal

and Clean Coal Technology, d) Renewable Energy, e) Energy Efficiency and Conservation,

f) Regional Energy Policy and Planning, and g) Civilian Nuclear Energy”.

The region’s most ambitious mega-project, the TAGP aims to connect the gas reserves of the

Andaman Sea, Gulf of Thailand and South China Sea to the urban and industrial demand

centres of Southeast Asia. Among its objectives are to ensure the reliability of gas supply to

ASEAN members, encourage the use of an environmentally cleaner fuel and to reduce

dependence on oil and coal where economically substitutable. ASEAN formed the TAGP

taskforce in 1999, and ASEAN members signed an MOU on the project in 2002. According

to APAEC 2010-2015, the “updated ASCOPE-TAGP Masterplan 2000” involves the

construction of 4,500 kilometres of pipelines worth US$7 billion. There are a range of other

11
Southeast Asia is, after India, the fasting growing demand region for coal in the world. See International
Energy Agency, 2017. “Southeast Asia Energy Outlook”.
12
“ASEAN Vision 2020”, op cit.
13
See “ASEAN Plan of Action for Energy Cooperation (APAEC) 2010 – 2015”, accessed at
http://www.asean.org/22675.pdf

11
estimates regarding the size and cost of TAGP, with one source citing $16 billion of

investments for 5,100 km of new pipelines.14 Potential link-ups with East and South Asia

could increase investment requirements to over $65 billion, according to another source. 15

With the increasingly binding constraints on natural gas supplies in the region, in the context

of growing domestic demand, extensive new pipeline development for transporting natural

gas in Southeast Asia is unlikely. Indonesia’s giant East Natuna field (formerly known as

Natuna D. Alpha) in the South China Sea, the region’s largest gas field by far with an

estimated 46 tcf of recoverable gas, is seen as the lynchpin of the TAGP. 16 Among the

pipelines envisaged in the TAGP, East Natuna is expected to supply gas via pipelines to

Vietnam, Malaysia, Indonesia (Java) and Thailand. Excluding the “deferred” proposed

pipeline to the Philippines, the gas reserves of the East Natuna field are expected to support

demand centres in 4 countries via about 4,500 km of pipeline networks.

However, given the very high CO2 content of East Natuna’s gas reserves (up to 70% of total

estimated reserves of over 220 tcf), exploiting the reserves will be technically and

economically challenging. Official projections for gas production from the field see first

output only after 2020, reflecting the sheer scale and complexity of any project to exploit the

East Natuna field.17 In the current context where there are a number of large LNG projects at

various stages of construction and planning in the US, Australia, East Africa and elsewhere,

the eventual development and exploitation of East Natuna remains unlikely.

In sum, the prospects for the TAGP project look dim in the medium term to 2020, dependent

as it is on the uncertain development of the vast but costly reserves of the East Natuna basin.

14

15

16
See, for instance, “ASEAN Plan of Action for Energy Cooperation (APAEC) 2010 – 2015”, op. cit.
17
In December 2010, Pertamina, the Indonesian national oil company, appointed ExxonMobil, together with
Petronas and Total S.A., as partners in the development of the East Natuna gas block. See Maulia, E.
“Politicians question ExxonMobil’s presence in East Natuna”, The Jakarta Post, January 27, 2011.

12
While there have been several studies commissioned on the viability of the TAGP and

Memoranda of Understanding have been signed by energy ministers at ASEAN meetings, it

is generally expected that further pipeline development will be piecemeal and incremental,

constrained by the fact that all cross-border pipeline projects, with heavy capital

requirements, require a conjunction of regulatory, commercial and technical conditions for

successful private sector participation.

5. LNG Imports and Trading Hubs

The most notable development in the region’s natural gas sector in the past few years has

been the spate of new LNG regasification terminals that have been built, under construction

or planned (Table 3). ASEAN governments see LNG imports as offering the better and faster

option in meeting domestic energy requirements. Technological progress in the fabrication of

floating LNG regasification terminals allow for even quicker turnaround times to first gas

imports.18 Among the countries in Southeast Asia that have operating LNG import terminals

are Indonesia, Malaysia, Singapore and Thailand. Among those in the planning stages include

the Philippines, Vietnam and Myanmar.

18
See, for instance, IEA, 2011. “The Golden Age of Gas: a special report”, accessed at
http://www.iea.org/weo/docs/weo2011/WEO2011_GoldenAgeofGasReport.pdf

13
Table 3: Regional LNG regasification terminals

Operating Regasification Terminals in ASEAN Countries

Country Terminal Name Year Nameplate Owners Type
Started Capacity
(MTPA)
Thailand Map Ta Phut 2011 5.0 PTT 100% Onshore
Indonesia Nusuntara 2012 3.8 Pertamina 60% Floating
PGN 40%
Singapore Singapore LNG 2013 6.0 EMA 100% Onshore
Malaysia Lekas LNG Malacca 2013 3.8 Petronas 100% Offshore
Indonesia Lampung LNG 2015 1.8 PGN 100% Onshore
Indonesia Arun LNG 2015 3.0 Pertamina 70% Onshore
Regional Govt
30%
Regasification Terminals under Construction in ASEAN Countries
Philippines Pagbilao LNG 2017 3.0 Energy World Onshore
100%
Malaysia Pangerang LNG 2018 3.5 Petronas 65% Onshore
Others 35%

Source: International Group of Liquified Natural Gas Importers (GIIGNL), “2017 LNG

Annual Report” accessed at http://www.giignl.org/publications

Countries such as Indonesia, Philippines and Vietnam have long faced difficulties in

supplying electricity to remote locations with relatively small demand loads. Small diesel

generating sets are often the only alternative, as it is not economically viable to deliver

natural gas by pipelines which require scale. The other traditional means of delivering natural

gas, as LNG in large cryogenic carriers, would require a scale of operations (including large

berths, storage capacity and vessels) far in excess of that needed for the countless islands and

remote locations distributed across the Southeast Asian archipelagos and long coastlines.

14
The demand for small scale LNG is poised to grow in the region as governments look to fuel

smaller power plants and industrial developments in remote areas not connected to pipelines

or the national grid with natural gas. This would reduce reliance on expensive diesel-fuelled

power generation. Small scale LNG is also seen as a source of gas supplies for quickly

ramping up electricity production, directly replacing household liquefied petroleum gas

(LPG) use or for direct supply to industry in remote areas and islands. According to one

study, it is estimated that by 2020, demand in eastern Indonesia, the southern Philippines, and

northern Vietnam could require over 120 small 50-megawatt (MW) power plants. 19 These

power plants could require up to 60 small-scale LNG carriers to supply LNG to the region.20

Traditionally, the typical LNG project has bas been very large-scale in capital expenditures,

scale of operations and capacities of components in the value chain (liquefaction, storage,

shipping and regasification). A typical-sized liquefaction train has a throughput of 5 - 7

million tonne per annum (mtpa) train, and plants with several trains may produce over 30

mtpa per year. The LNG is shipped in large cryogenic LNG carriers with 125,000 - 244,000

cubic metres of storage capacity. It is delivered into large receiving (and regasification)

terminals of between 5 and 10 mtpa LNG which dispatch the natural gas by pipeline to major

utility and industrial users. Over the past decade, technological progress has made small and

medium-scale LNG projects economically viable in a variety of conditions, as the

diseconomies of small scale are increasingly being mitigated. 21 The industry defines small

scale liquefaction and regasification facilities as plants with a capacity of less than 1 mtpa;

small LNG carriers are those with capacity of less than 30,000 cubic metres. 22 Small scale

19
These findings came from the Joint Industry Project, or JIP, initiated by DNV during Singapore Maritime
Week in 2010, and which involved sixteen participants from the LNG industry. See Karen Boman, “Study
Examines Prospects for Small Scale LNG in SE Asia”, Downstream Today, 24 March 2011
20
LNG vessels of standard size (~140,000 m3) and newer larger carriers (up to 270,000 m3) have been the
mainstay of long-term LNG sales. Short haul, small LNG carriers of 10,000–30,000 m3 (or even smaller)
operate in parts of Europe and Japan for short sailing times and coastal LNG transportation.
21
Regan, T. “Small scale LNG: Emerging technologies for small scale grids”, presentation to ESI Thinktank
Roundtable, Singapore International Energy Week, 27 October 2017.
22
See International Gas Union (IGU), 2012 – 2015 Triennium Work Report “Small Scale LNG”, June 2015.

15
storage of LNG in modular tanks with capacity in the 10,000 to 40,000 m3 range have come

into use in recent projects.

Given the geographical and population distribution characteristics of parts of the ASEAN

region, the demand and supply of LNG in region will be focused on small-scale production

and consumption. With growing demand and improvements in technology, new market

segments for smaller LNG vessels, short sailing time, and small receiving terminals are

becoming viable. For instance, Indonesian’s state energy firm Pertamina and state power firm

PLN announced in 2011 that they plan to build eight “mini” LNG receiving terminals in

eastern Indonesia, with a total capacity of 1.4 million tonnes a year. 23 As both demand and

supply of LNG within the region become focused on smaller, quick start-up projects to

exploit smaller stranded gas fields and to meet demand in remote or off-grid locations, intra-

regional gas trade is likely to grow in the medium term. “Short haul” trade in LNG, referring

to trade within 1,500 nautical miles and short sailing times of 3–4 days, covers distances from

Singapore to Malaysia, Indonesia, the Philippines, Thailand, Myanmar, and Vietnam.

In Asia, gas sales contracts -- both pipeline and LNG -- remain oil-indexed (usually to the

Japan Custom-cleared Crude, or JCC, price which reflects the average price of crude oil

imports into Japan). Asian LNG pricing relies on long-term, oil price-indexed export

contracts, and hence it does not enjoy the diversification in its exposure to prices of the two

fuels. There is no Asia-Pacific Basin gas price index analogous to the real-time spot price

determination at the United Kingdom’s National Balancing Point (NBP) and United States’

Henry Hub (in Louisiana) which serve the Atlantic Basin gas markets. U.S. gas prices are set

by “gas-on-gas” competition within the large but hitherto isolated North American market. In

Europe, there is a progressive shift from oil indexation to spot-based pricing, particularly in

23
“Pertamina, PLN to Build 8 Mini LNG Terminals”, Business Times (Singapore), 25 March 2011.

16
northwest Europe, where spot gas trading hubs, such as the NBP and Title Transfer Facility

(TTF) in the Netherlands, are well-established.24

Vast new supplies of gas have been enabled by the “shale revolution” in the US as well as

several new LNG plants coming onstream in Australia and elsewhere. With a global surplus

in natural gas supplies and relatively low LNG prices, gas sales contracts which used to be

long term (typically 20 years or more) take-or-pay contracts are increasingly being replaced

by shorter, more flexible contractual terms. According to the International Gas Union (IGU),

global spot and short-term LNG trades (defined as sales contracts of less than 4 years in

duration) since 2000 have increased by over six-fold from below 5 per cent of the LNG trade

to a peak of 31 per cent of the global LNG trade or 73.5 Mtpa in 2012; currently it constitutes

for over 25% of global LNG sales.25 The increasing trend of new LNG vessels being ordered

for construction on “speculation” (i.e., without underlying long-term charter deals to pay for

such orders) will also boost the fleet availability for spot and short-term LNG cargo trades. If

a significant spot and short-term trade in LNG cargoes were to develop in the region centred

on a trading hub with adequate storage and trading liquidity, it could emerge as a source of

price discovery for LNG cargoes in the wider region. This, in turn, could have a significant

impact on regional LNG sales and price-review negotiations, weakening the long-established

link to an oil price index. Thus, the development of a regional hub for traded short-term LNG

could lead to the emergence of an Asian gas-price index.

A number of Asian LNG importing countries have expressed intentions to promote the

creation of a “trading hub” as a means of encouraging liquidity and price discovery in the

spot trading market for LNG in the region. For Japanese and South Korean utilities, the

world’s biggest buyers of LNG, the creation of a liquid LNG trading hub will allow them to
24
Patrick Heather and Beatrice Petrovich, 2017. “European traded gas hubs: an updated analysis on liquidity,
maturity and barriers to market integration”, Oxford Institute of Energy Studies, accessed as
www.oxfordenergy.org
25
International Gas Union (IGU), “2017 World LNG Report” accessed at https://www.igu.org/ .

17
purchase cargoes of specific sizes at short notice and would allow them a basis to hedge their

price exposure.26 Japan, China, and Singapore are now developing regional trading hubs in

Asia Pacific markets and have launched LNG pricing indexes to increase transparency in

price discovery.27 For example, the Japanese government has developed a comprehensive

strategy to liberalize its domestic natural gas market and launched major initiatives to

encourage private-sector participation in the development of an LNG trading hub and a

pricing index.28 Japan’s Fair Trade Commission recently outlawed resale restrictions and

destination clauses in long-term LNG contracts that could fundamentally shift how LNG is

contracted and traded in Asia.29 All three countries have established benchmark LNG pricing

indexes and announced various financial instruments to be traded on domestic commodity

exchanges to encourage LNG price discovery and transparency.

The Singapore government has vigorously supported the development of an LNG trading hub

by constructing the region’s first multi-user LNG import, storage, and regasification terminal

and putting in place the necessary regulatory framework. 30 The government will allow the

leasing of capacity in its third tank for trading purposes. As an incentive, the government

introduced a concessionary tax rate of 5 per cent on LNG trading income for companies

under the Global Trader Programme (GTP) in May 2007. 31 SLNG, the terminal operator, sees

a rise in small regasification and storage terminals for off-grid power generation in the region

as an opportunity to develop short-haul trading opportunities in the Southeast Asian region. 32

The terminal would provide the flexibility to barge small volumes of LNG, of between
26
Henning Gloystein and Osamu Tsukimori, 2016. “Asian exchanges set to hit the gas on LNG trading”,
Reuters, November 25, 2016.
27
US Energy Information Administration, 2017. “Perspectives on the Development of LNG Market Hubs in the
Asia Pacific Region”, March 2017.
28
Mike Corkhill, 2016. “Japan prepares for global LNG hub role”, LNG Shipping, 12 May 2016
29
Robin Harding and David Sheppard, 2017. “Japan outlaws restrictions on resale of LNG cargoes”, Financial
Times, June 28, 2017
30
Tilak K. Doshi, 2015. Singapore in a Post-Kyoto World: Energy, Environment and the Economy, Institute of
Southeast Asian Studies, Singapore.
31
Ministry of Trade and Industry Singapore, “National Energy Policy Report: LNG Trading” (Singapore: MTI,
2007), p. 61.
32
“Singapore Sets Sights on LNG Hub”, Petroleum Economist, 22 March 2011.

18
10,000 m3 to 40,000 m3, to remote markets intra-regionally. As floating liquefaction

becomes more widespread in the region, output from smaller gas fields in the region could

also be aggregated in the Singapore terminal for distribution to other markets.

Success will, of course, depend on a number of factors that are not within Singapore’s

control. Singapore has a small domestic gas market and (as shown above) Southeast Asia

lacks a regional pipeline network which would allow for flexible cross-border flows. The

impacts of a small domestic market and the lack of a regional gas pipeline network are

worsened by the policy to limit the quantity of LNG imported into Singapore as spot cargoes

to 10 per cent of the total imported. Arguably, this cap would limit liquidity when long-term

contracted LNG demand growth in Singapore is not expected to grow rapidly. The

development of the small-scale LNG for intra-regional trade in ASEAN will be a relatively

long term process. Given the on-going delays in building regasification terminals for

receiving imported LNG in Myanmar, Indonesia, Vietnam and the Philippines, it could easily

take a decade or longer before it becomes clear whether regional trade will be adequate for a

regional LNG trading hub to flourish.

This outlook assumes that protectionist barriers to trade in LNG do not constrain the

development of a Singapore trading hub. In ASEAN as elsewhere, the pressure on

government agencies to promote domestic industrial development in the natural resource

extractive sector through protectionist legislation is well researched. 33 In the specific case of

LNG, this is apparent in the recent statements by Indonesian authorities that a non-binding

heads of agreement they signed with Singapore “did not mean that they were going to buy

LNG from Singapore”.34 Thus, it is expected that some ASEAN member countries would

33
For instance, see Doshi, Tilak K. “Supply Side Perspectives: Cooperation and Competition in the Extractive
Industries (EI) Sector”, PECC Signature Project: Extractive Industries Project, 2014 accessed at
http://www.pecc.org/resources/minerals-a-energy/2158-cooperation-and-competition-in-the-extractive-
industries-sector-perspectives-from-demand-and-supply-sides
34
Francis Chan, 2017. “Indonesia 'not buying LNG from Singapore'”, The Straits Times, September 16, 2017.

19
require the local fabrication of components in the small scale LNG value chain. There are

positive developments that could help in integrating LNG trading in the ASEAN region – for

example, Malaysia and Indonesia could import LNG via Singapore’s LNG regasification

terminal by reversing the existing natural gas pipelines connecting both countries to

Singapore. However, most industry observers are sceptical of the prospects for pipeline

reversal, given the protectionist impulse in government policy. Economic nationalism might

favour policies that support the domestic location of the LNG logistics chain even if they are

more expensive than utilizing the existing facilities at the Singapore LNG import terminal.

The proposed LNG market hubs in Japan, China, and Singapore face considerable challenges.

In particular, the lack of third-party access to infrastructure and limited pipeline connectivity

within and between countries pose constraints. To attract a diverse set of trading participants

and reduce the dominating role of large incumbent traders, a regulatory environment that

assures third-party access to natural gas infrastructure (pipelines, regasification facilities,

storage) and promotes transparent LNG pricing based on trading liquidity is necessary. The

vast majority of Asian LNG trade in short-term contracts and spot cargoes are focused in

Northeast Asia where the largest LNG importers such as Japan, South Korea and China are

located.35 Northeast Asian LNG importers as well as other large LNG importers in the region

such as India can source spot market cargoes directly from Europe, Australia and the Middle

East without the need of a trading hub.

Conclusion and Policy Implications

Despite a large literature on the imperatives for promoting ASEAN regional economic

integration, it is important to note that there is nothing in economic theory that favours

“regional” economic integration over other paths to economic development. Southeast Asian

35
Japan and South Korea together accounted for over half of all LNG consumed in the world in 2015. See BP,
2016, “Statistical Review of World Energy 2015”, accessed at http://www.bp.com/en/global/corporate/energy-
economics/statistical-review-of-world-energy.html

20
intra-regional trade and investment have played a relatively minor role in the economic

fortunes of the ASEAN countries. These countries were often far more integrated to the

centres of industrial development in Europe and the US during the colonial period. These

structural patterns persisted well into the post-colonial period and continue to do so today. In

the case of the natural gas sector in ASEAN, the direction of development is towards less

regional integration. While cross-border piped gas flows in Southeast Asia are increasingly

supply-constrained, more countries plan to build re-gasification facilities to directly import

LNG from global markets.

Gas trade is well developed in the US Gulf Coast and parts of Europe which have developed

a sufficient density of pipelines connecting various consuming regions and points of supply.

There are also very large volume pipelines connecting gas fields in the North Sea and Russia

to European markets and those in Canada to the US markets for instance. In Southeast Asia,

the existing gas pipelines mainly serve to connect offshore or on-shore gas fields to supply

domestic markets or liquefaction plants (in Indonesia, Malaysia and Brunei) to export LNG to

international markets. There are a few cross-border gas pipelines such as those supplying

Malaysian and Indonesian gas to Singapore or Myanmar to Thailand but they account for a

small share of total gas consumption or exports of the Southeast Asian region.

All large scale multi-lateral infrastructure projects face critical hurdles in the financing,

construction, operation and maintenance of networks. These include the requirements of

common technological specifications and standards; stable contractual arrangements to

handle supply, transport and distribution; open access arrangements to common

infrastructure; and norms and legal frameworks for arbitration and dispute resolution. The

TAGP project is no different, facing key challenges in all these dimensions. The

heterogeneity of ASEAN members with respect to income levels, forms of government,

stages of social and economic development, legal systems and domestic pricing regulations

21
of natural gas all pose significant challenges.36 Given the scale of the TAGP project, it has

naturally been a subject of a number of feasibility and planning studies. 37 Quite apart from

the inherent challenges that all large-scale multilateral CBI projects face, the TAGP now

faces a more basic question of relevance.

From when first conceived and discussed in the mid-1980s, 38 the prospects for the TAGP are

now subject to natural gas supply and demand fundamentals in Southeast Asia that have

changed profoundly. If the TAGP project seemed over-ambitious when it was first mooted

informally among ASEAN planners and diplomats, it now seems that the grand vision of a

regionally-interconnected grid of natural gas pipelines faces the threat of redundancy by fast-

paced developments in the natural gas industry over the past decade or so.

Singapore’s potential role as an LNG trading hub is far from assured, given that the vast

majority of Asian trade in short-term and spot LNG cargoes are focused in Northeast Asia

where the largest LNG importers such as Japan, South Korea and China are located. While

small scale LNG trade in the region will take some time to develop, the protectionist

approach of some of the ASEAN member economies may constrain the development of a

natural gas trading hub in ASEAN.

In much of the economic development literature, there is a presumption that development is

naturally associated with deepened regional economic integration. Nevertheless, as this paper

has argued, this is a presumption without foundation. In the case of natural gas in Southeast

36
Tilak K. Doshi (2013). "ASEAN Energy Integration: Interconnected Power and Gas Pipeline Grids", in
Sanchita Basu (Ed.), Enhancing ASEAN's Connectivity, Singapore, Institute of Southeast Asian Studies
(ISEAS), pg. 142-162.
37
In 1994, for example, ASEAN commissioned a regional “Masterplan Study on Natural Gas Development and
Utilization in ASEAN” with technical assistance from the EU. See ASEAN Secretariat, undated, “ASEAN Plan
of Action for Energy Cooperation 1999 – 2004”.
38
While energy cooperation in ASEAN was first mooted in the aftermath of the oil crisis in 1975 with the
formation of ASCOPE, the concept of a network of gas pipelines connecting the region was first discussed in
1986, and formally announced at an ASEAN meeting on Energy Cooperation in 1990. See Sovacool, B., 2009,
“Energy Policy and cooperation in Southeast Asia: the history, challenges and implications of the trans-ASEAN
gas pipeline (TAGP) network”, Energy Policy 37, p. 2357-8.

22
Asia, what has in fact occurred is a process of regional dis-integration as domestic supplies of

natural gas in producing countries such as Myanmar, Malaysia and Indonesia are increasingly

constrained and pipeline supplies to neighbouring countries are expected to dwindle or cease

altogether and supply contracts are not renewed. Technological developments in the small

LNG value chain as well as a greater preferred reliance of direct imports of LNG from global

markets lead countries in Southeast Asia to emphasize direct imports and domestic industrial

development in the natural resource sector.

For policy-makers in Southeast Asia, it is critical not to take regional economic integration as

a given in processes of on-going economic development. Technological developments,

market evolution and the continuing political and policy imperatives for promoting domestic

industrial developments can work against the logic of regional economic integration in major

economic sectors. This has indeed been the case with natural gas in Southeast Asia.

Dr. Tilak K Doshi, Managing Consultant

Muse, Stancil & Co. (Asia)

23
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