Mr S Iswaran at the LNG Supplies for Asian Markets 2006 Conference

SPEECH BY MR S ISWARAN, MINISTER OF STATE FOR TRADE AND INDUSTRY AT LNG SUPPLIES FOR ASIAN MARKETS 2006 CONFERENCE HELD ON 7 SEP 2006 AT 9 AM, GOODWOOD PARK HOTEL SINGAPORE

ENERGY DIVERSIFICATION – THE WAY FORWARD

His Excellency, Dr Nejad Hosseinian, Deputy Minister for International Affairs from the Islamic Republic of Iran,

The conference co-chairmen, Dr Andy Flower and Dr Fereidun Fesharaki,

Distinguished guests,

Ladies and gentlemen,

I am delighted to be here this morning to address a distinguished, multi-national audience at this year’s LNG Supplies for Asian Markets conference.The theme of this year’s conference – “Tight Supplies, Price Convergence & Increasing Competition: Challenges for Asia” is indeed apt as the world grapples with rising oil prices, and increasingly turns its attention to other sources to meet growing energy needs.

Energy Demand Outstrips Supply

Global demand for energy is increasing at a faster pace than ever before.Strong global economic growth has driven up energy consumption across all fuels.According to the US Energy Information Administration (EIA), global energy consumption is projected to grow by an average rate of 2% per year until 2030.This translates to a 71% increase from consumption levels in 2003.The most rapid growth in energy demand is expected to come from China and India, at 4% per year.

In the last few years, the increase in energy demand has not been matched by a commensurate increase in energy supply.In particular, global oil production capacity is almost fully contracted, with little spare capacity left.New developments in refining capacity will also take several years to come on stream.As we are all well aware, oil prices have previously crossed US$70/bbl and could rise further if there are any supply disruptions.The rise in oil prices has also led to increasing demand for LNG as countries look for alternative and cheaper sources of fuel.Hence, there has been increasing attention on LNG in recent years.

Although LNG has been around since the 1980s, much of it was only traded in Asia.This was because the primary importers – Japan, South Korea, and Taiwan – had little or no domestic gas production capacity.In contrast, importers in Europe and the U.S. had an abundant supply of indigenous gas.Today, with the current trend of rising energy demand, it is of no surprise that LNG is increasingly attractive to economies which are situated far from the sources of oil and gas, and those looking to diversify their energy sources.

Asia’s LNG Challenges

LNG players in Asia today face 3 primary challenges: Tight Supplies, Price Convergence and Increasing Competition – as reflected in this conference’s theme.These challenges impact both the LNG importing and exporting countries in Asia.

LNG supplies are expected to tighten in the Asian market in the coming years.Presently, Brunei Darussalam, Malaysia, Indonesia, Australia, Qatar, the UAE, and Oman are major suppliers to the Asian LNG market.According to an article in the International Herald Tribune on 10 August 2006, LNG sales in Indonesia are expected to fall by 19% this year.Producers like Chevron are reportedly running out of gas faster than expected, and are thus unable to meet the commitments to customers in Asia.This would aggravate the supply situation, especially when Indonesia has been the world’s top LNG supplier for three decades.[1]

Other factors have also contributed to the tight supplies.A case in point is the delay in the Australian Gorgon LNG project due to the Western Australian Environmental Protection Agency’s concerns over the fate of the rare and threatened flatback turtle. Such delays will cause further imbalance between the supply and demand for LNG in Asia.

On the other hand, Asia’s demand for LNG is rising rapidly. In 2002, Japan, South Korea and Taiwan accounted for 68%, or 3.6 trillion cubic feet of global LNG imports.By 2004, with the inclusion of India, Asia imported 4.3 trillion cubic feet of LNG.China’s began its import of LNG in May this year with its newly commissioned terminal in Shenzhen city.The second LNG receiving terminal, in FujianProvince, is expected to start-up in early 2008.

With rising demand for LNG in Asia and supply remaining tight, the net result is higher prices. Also, we are beginning to observe that LNG markets have become more intertwined. There are emerging signs of greater convergence of LNG prices in Asia with those in Europe and the US.

Greater International Attention on Energy Security, Diversification and Conservation

Given the tight energy supplies and high prices, countries are beginning to pay greater attention to energy security, diversification of energy sources and supplies, as well as conservation.This has led to a stronger focus on energy in the diplomatic strategies of many countries.

For example, the Japanese Prime Minister, Mr Junichiro Koizumi, recently visited countries in Central Asia like Kazakhstan and Uzbekistan, with energy as his top priority.Similarly, China is also actively engaging in energy diplomacy with oil and gas producing countries.

Even energy-exporting countries are pursuing policies to diversify fuel types and technology, and are seeking to maximise their use of indigenous energy resources.For example, Indonesia has announced that it has earmarked 6 million hectares of land for the development of biofuel, including the use of palm oil.Malaysia has also announced plans to build a large biodiesel plant in Johor with an annual production capacity of 120,000 tons.In fact, both Malaysia and Indonesia, the world's top palm oil producers, have set aside 40% of their palm oil production for the biodiesel industry.

In the area of conservation, an Energy Review report published in the UK in July this year emphasised the need for energy efficiency and conservation. Energy conservation is also widely practiced in the Scandinavian countries.For example, Sweden’s building regulations require that all new buildings meet certain minimum energy efficiency standards.Sweden has also announced in Febuary this year that it is working towards an oil-free economy by 2020.

What Singapore is doing

How is Singapore responding to the new energy environment? Like other countries, we are concerned over the tight demand-supply situation and high energy prices.This is especially so given that we have no resources of our own and need to import all our oil and gas.

Setting up of the Energy Policy Group

Energy policy is complex and multi-faceted.Singapore has to maintain a fine balance between the sometimes conflicting objectives of economic competitiveness, environmental sustainability and energy security.Energy policy does not fall solely within the purview of a single Government ministry.Rather, it cuts across a wide range of departments. A holistic approach is needed.

We have therefore established an inter-ministry Energy Policy Group (or EPG) to formulate and co-ordinate our national energy strategies.The EPG is led by the Ministry of Trade and Industry, and involves several key ministries and agencies such as the Ministry of the Environment and Water Resources, the Ministry of Foreign Affairs, the Ministry of Transport, the Ministry of Finance, the Energy Market Authority, the Economic Development Board, the National Environment Agency, the Land Transport Authority, and the Building and Construction Authority.

The establishment of the EPG is timely as energy is increasingly becoming a strategic issue economically, politically and environmentally.The EPG, being an inter-agency group, will be able to better coordinate energy and energy-related strategies and policies with a “Whole-Of-Government” approach amongst different ministries and agencies.

The EPG looks at energy issues holistically, covering the four perspectives of Economic Competitiveness, Environmental Sustainability, Energy Industry Development and Energy Security.

Energy cost competitiveness

Let me start with economic competitiveness.Energy is a fundamental input in a modern economy.Without energy, our economy would grind to a halt.Energy is also a significant cost item for our businesses.High energy costs will impede our ability to attract investments, especially energy intensive industries such as petrochemicals and semiconductors, which are key pillars of our economy.Likewise, the Government has to ensure that energy supplies remain affordable to consumers.

To reduce the cost of electricity, the Government has liberalised the electricity markets in Singapore, to introduce greater competition.We are already seeing the fruits of this labour.Competition has helped to moderate electricity costs, even while global oil prices have soared.It has also led to greater use of gas, which is more cost efficient and cleaner than oil, in electricity generation.Five years ago, steam plants fuelled 70% of our electricity demand, as compared to 26% for gas. Today, gas generates 80% of Singapore’s electricity, versus less than 20% for steam plants.

Even as the Government attempts to bring down energy costs, we must be careful not to go too far.Subsidies, for example, distort the market, and lead to over-consumption of energy.Faced with artificially low energy costs, businesses and consumers would have less incentive to conserve energy.Hence, Singapore has decided to leave it to the market to determine energy prices.

Environmental Sustainability

Another key consideration is environmental sustainability. Singapore is a city-state.As one of the most densely-populated cities in the world, we need to have strict pollution control regulations to safeguard our environment and the liveability of our city.In addition, the Government is also encouraging energy conservation as it has the twin effect of curbing growth in energy demand, and encouraging environmental sustainability.For example, the Energy Efficiency Improvement Assistance Scheme (EASe) incentivises companies to engage specialists to study their energy consumption and recommend measures to save energy.

Internationally, Singapore participates in international climate change fora such as the United Nations Framework Convention on Climate Change (UNFCCC) and its Kyoto Protocol (KP).These fora enable us to take part in international cooperation and also to learn from best practices world-wide.Benchmarking our energy and carbon intensity against those of other countries will facilitate the formulation and implementation of energy policies that take into account environmental sustainability as well as economic competitiveness.

Energy Industry Development

Moving on to the development of the industry, Singapore has also recognised economic opportunities in the energy sector.This applies not only in the conventional sectors such as oil and gas, but also in newer alternative energy sources such as solar, wind and biomass.For example, Conergy, a leading renewable energy company from Germany, has set-up its Asia-Pacific HQ in Singapore[2], to tap into the region's growing demand for energy.Similarly, Vestas, the world leader in wind technology, has recently decided to establish a Research and Development centre in Singapore. The centre will commence operations in the first half of 2007

For us to take advantage of the growing opportunities in the energy sector, we need to develop the necessary manpower and research and development capabilities.A sound infrastructure to support this economic growth must also be in place.

Energy Security

Energy security is a key priority in the energy policy of many countries.Singapore is no exception.To achieve security of supply, we intend to diversify our fuel sources so that we are not over-reliant on any single source for our energy needs.

Today, for oil, we are able to import from anywhere in the world. This allows us to tap the international markets for the most competitive source of supply. However, for gas, we only have piped natural gas currently, which limits our supply source to the immediate region. With electricity demand in Singapore expected to grow by about 4% per annum, Singapore will need more gas than what we have currently contracted for.Hence, we have recently announced that we will be meeting our new gas demands from LNG.We expect the LNG terminal to have an operational capacity of 3 million tonnes per annum (mtpa), with the possibility of an expansion in its baseload capacity to 6 mtpa when needed. Prices, supply and demand will drive the actual timing of the introduction of LNG.

Request for Feedback

Our Energy Market Authority is in the midst of collating feedback from the industry on the technical requirements of the LNG terminal, the regulatory model and the business model.I would like to encourage you to give your views, which will help the Energy Market Authority to formulate its Request for Proposal to invite prospective investors to competitively bid for the building and operation of the LNG terminal.The RFP is targeted for launch in the second half of 2007.

Conclusion

Amidst the challenges faced by all countries in the global energy arena, Singapore will continue to strive to improve the competitiveness and robustness of our energy sector.Our goal is to keep energy prices competitive to provide an attractive and stable environment for long-term growth.Our energy policies for the future will take into account Singapore’s energy security, economic competitiveness and environmental sustainability.

I wish you all a fruitful conference.

Thank you.

[1] Source: LNG World Shipping Journal, 11 Aug 06

[2] Source: Channel NewsAsia, 31 Aug 06