ZE at EnergyRisk Conference in Singapore

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I attended the 2012 EnergyRisk conference in Singapore at the end of September.  This event is always well organized and attracts a variety of participants in the energy markets: from Power generators to palm oil trading companies; from risk managers and compliance officers to traders and analysts.  While this diversity was reflected in the broad spectrum of subjects covered, two themes caught my interest and were actively discussed between presentations.

1) The evolution of Asian LNG market.

The Asian LNG market has so far been dominated by North Asia (Japan, Korea and Taiwan are amongst the biggest consumers of LNG) and by long term, oil-indexed contracts.  Many participants however, expect an increase in spot liquidity following the opening of the new Singapore LNG terminal in Q2 next year, combined with announcements of similar plans for new terminals in Indonesia, Malaysia, Philippines and Vietnam. This would in turn bring the market to the 30% threshold required to revive the sluggish Swap market and spur the creation of South East Asian based benchmarks by Platts, Argus and ICIS.

This should push local power generation companies to develop the ability to “fuel switch“ (currently most of the fuel used in power generation in Singapore comes from piped gas). The question is whether regional producers will, in the long run, support a free spot market or prefer mid to long term contracts, given their large investments in production facilities?

2) The impact of the Dodd Franck Act and related legislations in Asia

While most global oil company executives on the panel said they support the DFA, they also expressed concerns about unintended consequences for end users, such as  an increase in the cost of hedging.  From a risk management practice standpoint, this would incentivize companies to review their hedge program and pay more attention to “natural” or operational hedges  as opposed to financial hedges (such as when price risk can be passed on to the customers, or when two business units have opposite exposure to the same risk).

For local energy and commodity companies, which only started to increase hedging their exposure relatively recently, one of main concerns is their lack of familiarity and implementation concerns regarding settlement, reporting  and collateral issues.

The Singapore regulator is currently examining these concerns to determine whether Energy Swaps should simply be excluded from the initial scope of the  local equivalent of the DFA. Generally speaking the CFO of a major Indian energy firm brought up concerns about the reach of the CFTC and its  impacts on US companies  and more generally the possibility of “regulatory arbitrage” as some countries like Singapore and Hong kong seem to favor a lighter touch while India will not implement an equivalent regulation at all.

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