Singapore: Progress continues

Author: | Published: 1 Oct 2008
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For a country without indigenous energy reserves, there has been a significant amount of activity in the energy industry in Singapore over the last year. We have also seen developments in the New Electricity Market of Singapore (NEMS) and, significantly, the commencement by Temasek Holdings of the divestment of all three of its wholly owned power generation companies (Gencos), namely Tuas Power Ltd, Senoko Power Ltd and PowerSeraya Ltd.

We have seen a continuation of the drive towards a liberalisation of the gas market (an aspiration first announced by the Singapore government back in 2000, with the general aim of opening up competition in the gas market and establishing greater security of gas supply). Significantly, we have seen during the course of 2008 the appointment, by Singapore's Energy Market Authority (EMA), of PowerGas as the developer of a three million tonnes per annum (mpta), S$1.5 billion ($1.05 billion) liquefied natural gas (LNG) terminal on Jurong Island. This is an important step for Singapore, which will enable it to diversify its energy sources and reduce its reliance on pipeline gas from neighbouring Malaysia and Indonesia. In April of this year, the EMA also appointed BG Asia Pacific Pte Ltd (part of the London-listed BG Group) as the sole LNG aggregator, another important milestone for Singapore.

Steps are being taken to ensure that Singapore remains the regional hub for oil refining and distribution in south-east Asia, and a number of petrochemical projects are planned for Jurong Island. Developments are also being made regarding the construction of a series of very large subterranean tunnels designed to store millions of cubic metres of petroleum and related products.

Electricity market developments

Historically, the electricity industry in Singapore was a single, vertically integrated, government owned utility until it was split into separate generation, transmission and distribution/retail functions in the mid-nineties, a process that resulted in the Gencos being put under the direct or indirect ownership of Temasek. The long-awaited privatisation of the Singapore electricity market is now well and truly under way with the commencement by Temasek of divestment of the Gencos.

Genco divestment

In October 2007, Temasek commenced the divestment exercise by putting Tuas Power up for sale. Tuas Power was the smallest (and youngest) of Temasek's Gencos and its sale, notwithstanding the credit issues in the worldwide market, attracted strong interest, with reportedly up to nine contenders shortlisted for the final round. It is understood that Asian, Australasian, European and Middle Eastern contenders were eventually shortlisted. In March this year, it was announced that Tuas Power had been sold to the Huaneng Group, China's biggest power producer, for a cash consideration of S$4.235 billion.

While the details of the Huaneng financing are confidential, it has been reported that an 18-month bridging facility for S$2.25 billion was arranged by BNP, Calyon, DBS, Fortis, OCBC and SMBC.

At the time of writing, Temasek announced that a Marubeni-led consortium (called Lion Power) had been chosen as the winner of the divestment of Senoko Power Ltd, the largest Singapore Genco (generating approximately 30% of Singapore's electricity), for a price of approximately S$4 billion. It is understood that Marubeni has a 30% stake in the Lion Power consortium, which also includes French firm GDF Suez (30%), Japan's Kansai Electric Power and Kyushu Electric Power (15% each) and the Japan Bank for International Cooperation (10%). Temasek had shortlisted five bidders for the divestment of Senoko, understood (although not confirmed by Temasek) to have been (in addition to Marubeni) Keppel Corp (of Singapore), One Energy (a Hong Kong/Japanese interest JV), Tata Power (of India) and YTL Power (of Malaysia).

Before the announcement of the winning bidder for Senoko there had been significant activity in the loan market, with many banks speaking with would-be bidders about debt financing to back the acquisition. It had been reported that interested banks included Bank of Tokyo-Mitsubishi, UFJ, BNP, Calyon, DBS, DZ, Fortis, Mizuho, Natixis, OCBC, SMBC, SCB and West LB. A further development on the financing front was the possibility of Temasek itself assisting with arranging finance for the proposed sale in the form of a two-year bridging loan. It is thought that such an arrangement would not need to be utilised by the Marubeni-led consortium, which would be able to call upon the assistance of several interested (and cash rich) Japanese banks although, at the time of writing, the precise details of the financing had not been publicly released.

An interesting aspect of the divestment exercise to date is that, in terms of price and bidding tension, it has been reasonably unaffected by credit woes, although the proposed Temasek assistance for the Senoko Genco would seem designed to ease such tension. The divestments have also occurred in a market where the electricity generating capacity in Singapore, which is expected to reach 10,500 MW during the course of this year, is double the peak demand of 5,100 MW. The overcapacity is an issue that would ordinarily have been considered of concern by banks, but industry officials in Singapore have not seen this as a dampener on Temasek's divestment. It is also being argued that gas-based electricity generation (the most efficient generation mode) is actually only just enough to meet peak electricity demand.

The final Genco, PowerSeraya, will likely be divested during the course of 2009. Temasek's initial deadline for the divestment of all three Gencos was the end of 2009, but the programme is running well ahead of schedule and sources have suggested that this final divestment could be accelerated.

NEMS

The NEMS has concluded its first five years of operations. Since starting operation on January 1 2003, the NEMS has shown continuous growth and change, with wholesale prices moving in line with the fundamentals of supply and demand. On the whole, market reforms have increased competition among industry participants and market liberalisation has resulted in downward pressure on electricity prices (somewhat cushioning the impact of oil prices).

The entry of new participants (Keppel Merlimau Cogen and two wholesale market traders, Air Products and Diamond Energy) has increased competition in the energy and reserve markets. Over the last five years, the market has also seen increased generating and load capacity. The NEMS has added the incentives necessary for more efficient power generation, which has resulted in a structural shift from oil to cleaner natural gas-fired combined cycle gas turbine generation.

Gas market developments

The Singapore government first announced its intention to liberalise the gas market in March 2000 and since then, with the gradual implementation of an appropriate regulatory framework (most of the provisions of the Gas Act have now come into force in Singapore), we have seen an evolving gas market with new sources of natural gas coming on stream and new entrants emerging in the market, to the extent that Singapore could now be considered one of the more deregulated gas markets in the Asia-Pacific region. Indeed, at the time of writing, the Gas Transportation System Solution (GTSS) was about to be opened (perhaps as early as mid September 2008), meaning that all natural gas, whether piped from Malaysia and Indonesia or shipped by LNG tankers, will be intermingled and transported by a managed inland gas pipeline network to all end-users. The Gas Act in Singapore had been amended by the Singapore government earlier in 2008 to facilitate more open, competitive access for gas retailers and importers.

With the expansion of re-gasification infrastructure in Asia and the globalisation of markets generally, LNG is slowly revolutionising the gas industry in the region. As noted above, a stated objective of the Singapore government is to boost the security of its natural gas supply and diversify away from its reliance on PNG imports from Indonesia and Malaysia. To this end, we have seen two key developments in the gas market in Singapore over the last year, being the aggregating of LNG and the LNG terminal on Jurong Island.

Aggregating LNG

On September 4 2007, the EMA launched a two-stage selection process to select an LNG aggregator by April 2008. A total of 18 proposals involving 22 companies were received, with the first stage closed at the end of 2007, from which five companies were shortlisted. In April 2008, the EMA announced that BG Asia Pacific Pte Ltd (BG) was the successful bidder. BG's appointment is understood to be for a period of 20 years from 2012 (it is hoped to coincide with the completion of the LNG terminal). In appointing BG, the EMA cited "BG's security of supply from BG's diverse LNG supply portfolio at a competitive price and also its capability to grow the Singapore gas market". BG will initially have a monopoly on gas imports, as the EMA has imposed a moratorium on piped natural gas in the lead up to the LNG terminal commissioning. BG is actively developing a proposed coal seam gas to LNG project in Queensland, Australia, and has launched a hostile takeover of Origin Energy, Australia's largest owner of coal seam gas reserves, with a view to meeting its regional LNG supply commitments.

LNG terminal development

As noted above, PowerGas (a wholly owned subsidiary of Singapore Power) was appointed earlier this year as the developer of a 3 mpta, S$1.5 billion LNG terminal on Jurong Island, a project scheduled for completion between 2012 and 2014. Following a tender process, Gaz de France has joined up with PowerGas to jointly develop the facility (it has been publicly announced that Gaz de France will hold a 30% stake in the venture). The technical, operational and commercial arrangements for the use of the terminal will be defined more fully in a terminal use agreement to be entered into between PowerGas and the aggregator, BG. This is an important step for Singapore, which does not, as yet, have LNG receiving/re-gasification facilities and brings the Singapore government's LNG strategy closer to fruition.

Oil refining and distribution hub

The history of Singapore's oil industry dates back to the 1800s, when companies such as the predecessors to Shell and ExxonMobil located trading operations here. Singapore remains Asia's price discovery and trading centre for oil products and the country retains a premier position as a major oil refining and distribution centre (total physical trade alone in 2006 amounted to over S$400 billion). Jurong Island in particular is the site of numerous petrochemical and related industrial plants and plans are afoot for projects aimed at increasing the usage and development of the island.

Jurong Island

To date, there are over 90 leading petroleum, petrochemical, utilities, storage and terminalling companies that have reportedly invested more that S$31 billion in fixed assets on Jurong Island, thus also making Singapore one of the key business hubs in south-east Asia for these companies. In particular, going forward, participants have considered the need for new large-scale multi-utility projects on the island, which could include biomass clean coal cogeneration, natural gas, desalination and waste water treatment plants.

Jurong Island is also being utilised for the creation of petrochemical storage facilities. Known as the Jurong Rock Cavern (JRC), construction work is now in progress and, once completed by 2014, will be used for the storage of millions of cubic metres of petroleum and related products. The Jurong Town Corporation (JTC), the landlord for the site, is now in the process of procuring through a competitive tender process an operator to manage, operate and maintain the JRC over a long-term concession period. It is hoped that the JRC proposal will create a timely competitive advantage for Singapore in attracting new manufacturing projects by providing an environment where investors can grow and become more competitive.

While not specifically on Jurong Island itself, recent studies by the JTC have concluded that huge floating platforms (known as very large floating structures or VLFs) are feasible for storage purposes (3000 cubic metres per platform) and oil traders and related companies have already expressed strong interest in the VLFs as a means to increase storage space in land-scarce Singapore.

It would be fair to say that the combination of the multi-utility proposals, the JRC and the VLFs will contribute towards defining Singapore as an oil refining and distribution hub.

Clean energy

Moves are also afoot for the development of clean energy in Singapore: we have seen over the course of the last year various government initiatives aimed at making Singapore a global clean energy hub where clean energy products and solutions are developed and exported globally. A government office, the Clean Energy Programme Office (CEPO) has been established to assist the development of the clean energy industry in the country and it has been stated that there is a desire to value add close to $2 billion by 2015 across areas including solar power, fuel cells, wind power, energy efficiency and carbon services. It is interesting to note that some European entities are already using Singapore as a base to cater to Europe's growing biofuel requirements. The Finnish oil refiner Neste Oil announced earlier in the year that they will complete their largest bio-diesel plant in Singapore by 2010.

Regional developments

Indonesia, Vietnam and Thailand

The energy sector of Indonesia has been characterised by renewed interest in recent licensing rounds, and a number of E&P companies have entered into production-sharing contracts to explore new frontier deep water basins. While Indonesia has struggled to meet its supply commitments from the Bontang LNG plant with LNG buyers, price discussions are continuing with the Western Buyer group of Japanese buyers for extensions to their existing LNG contracts at substantially reduced volumes. The government has recently approved a plan of development for new offshore fields in East Kalimantan, which will be developed for supply by Chevron to the Bontang LNG plant. High oil prices and growing energy demand in Java have also resulted in increased momentum for the long-delayed LNG import terminal projects, which were being separately developed by PGN and PLN. Recently, PGN, PLN and Pertamina signed a memorandum of understanding to develop an LNG import terminal in Java, and it is expected that the terminal will in part be supplied from LNG produced at Bontang in the future. The Tangguh LNG project is nearing completion, although the government is in the process of seeking to renegotiate the LNG price in its LNG sale and purchase contracts with its current buyers, which were agreed at a time of low oil prices and in an LNG buyer's market.

A big focus is the development of coal bed methane (CBM) projects, particularly in Kalimantan. Indonesia's first CBM cooperation contracts are, at the time of writing, being negotiated with both petroleum production-sharing contractors and coal mine concession incumbents, who are given priority under Indonesia's 2006 CBM regulations.

In Vietnam, notwithstanding significant proven oil reserves, the country still has no refining capacity, although its first plant is due for completion in 2009 (the Dung Quat oil refinery). Plans are afoot for several more refinery projects in the near future and various international consortia have already expressed interest. The much awaited round of new independent power projects (IPPs) is expected to commence shortly, with the first proposed new plant being the 2000MW coal-fired plant being built by AES Corp, the US group, in Quang Ninh province. The project was let on a build, own, transfer (BOT) basis and is due for completion in 2010.

In Thailand, while it is understood that the government has been discussing proposals to compete with Singapore as a regional processing and transportation hub for the oil industry, we have not yet seen any real progress made. Exploratory oil concessions continue to be granted, with the last round bidding process ending halfway through 2008. The latest IPP bidding exercise was completed at the end of 2007, resulting in four winning bidders for two new coal-fired plants and two new gas-fired plants. Gheco-One (supported by KfW, SMBC and Standard Chartered) and Thai-based National Power Supply won coal-fired licences and J-Power (supported by Mizuho Bank) and Siam Energy won licences for the gas-fired plants. It has been reported, however, that, with the increased capacity to be generated from these new plants, the next round of IPP licence tenders will be at least several years away.

There has been significant activity in the energy, oil and gas industries, in both Singapore and the south-east Asian region, over the last year. In recent years, Singapore in particular has taken some important steps to fixing its place as a genuine hub for energy activities in south-east Asia and it would be fair to say that there are plans for this to continue at a good pace, notwithstanding some of the wider slow-down issues in the market. Singapore has also proven to be a good base for regional work, largely stemming from the fact of the presence of so many international companies in the energy, oil and gas industries, together with financial houses and advisers located in the country. We can expect this progress to continue.

Author biography

Julien Reidy

Lovells Lee & Lee

Julien is a senior associate in Lovells' Singapore office. He has extensive experience in advising both public and private sector participants on energy and infrastructure projects. Before joining the firm in early 2007, Julien worked in London for six years and has advised sponsors, lenders and government authorities, in relation to energy and infrastructure projects.