Pek Hak Bin heads the Energy & Natural Resources practice at KPMG in Singapore. In 2013, he stepped down as the Country President and Chairman for BP’s operations in Singapore. A finance-trained oil & gas executive, Mr Pek has worked in different disciplines of the energy industry in a career spanning more than 20 years.
1. What are the major trends that will shape Asia’s energy landscape leading up to 2020?
Global energy demand is heavily focused on Asia, with various demand forecasts illustrating that China, India and Southeast Asia will be the main drivers reshaping global energy consumption leading up to 2020.
Although coal will continue to play a substantial role, the energy mix within Asia is diversifying and natural gas, particularly LNG, will become a major contributor to many countries’ energy frameworks as the region modernizes.
The rise in shale gas production from North America has caused a supply and demand mismatch in the natural gas market. In turn, this has created a disparity in LNG spot prices among the US, Europe and Asia, with Asian gas prices trading approximately four times higher than US gas. Nonetheless, it is likely that the US Department of Energy will sanction increasing quantities of LNG exports into Asia Pacific over the next five years. With Australian LNG exports due to come online in 2015, we can expect a healthy supply of LNG delivered to Asia by 2020.
Nuclear power also cannot be underestimated as Asia faces the challenges of securing cost-effective power and raising its standard of energy efficiency. China and India have spearheaded reactor expansion and various Asian countries are now following suit, developing their own nuclear fuel cycle. However, the industry must learn from the Fukushima accident and focus on ensuring operational safety and organisational governance, in order for nuclear to be a safe and economically viable option.
In Southeast Asia, Myanmar is an example of a country that offers significant hydrocarbon supply potential. The country has taken bold steps to liberalise its oil and gas sector, attracting international investment and interest. With correct external support, we believe that Myanmar could emerge as a key regional hydrocarbon player.
2. As Asia escalates its demand for LNG, can Singapore position itself as the region’s premier LNG hub?
The current energy challenge to ensure sustainable access to affordable and low carbon power is driving the development of Asia’s LNG industry, especially with LNG demand expected to rise three-fold over the next 20 years. Underpinning the impact of LNG in Asia’s energy mix is the ability to develop a cohesive regional infrastructure, based on interconnection and trade flow efficiency. We believe Singapore could lead the development of Asia’s LNG industry.
LNG has traditionally been traded on a bilateral basis, with gas pricing based on an increasingly uncompetitive oil index. Consequently, there is a growing demand for an LNG price index in the region. Currently, only 15 percent of the gas supply traded is on a spot basis and as such, there is a need for spot trading capabilities.
Singapore, which opened its first LNG Terminal with a throughput capacity of six million tonnes per annum in 2013 and is considering the construction of a second, is well-positioned to facilitate that need. The LNG terminal had an initial throughput capacity in May 2013 of 3.5 million tonnes per annum (mtpa) with two tanks. This capacity increased to 6 mtpa in 2014 with the completion of the third tank, additional jetties and regasification facilities. Plans were announced in October 2012 for a fourth tank and associated regasification facilities to be added to the terminal, to raise its throughput capacity to 9 mtpa.
Geographically located at a strategic choke point in Asia, Singapore has a number of strong attributes to support its ambition to become the regional gas trading hub. The city-state’s political neutrality, mature legal and regulatory environment, longstanding fiscal incentives, as well as its established physical and paper trading expertise, have already attracted a host of companies to launch LNG trading offices in Singapore.
3. Different segments of Asia’s downstream oil and gas industry have experienced mixed fortunes in recent years. The petrochemicals industry has grown, whilst refining margins have tightened. Why is this the case?
Asia’s refining community is bracing itself for a difficult period. As a result of an increase in the region’s refining capacity, petroleum product supply is exceeding local demand. A number of smaller downstream assets are struggling to be economical because they lack economies of scale and feedstock prices have remained remarkably high and also stable – further tightening margins.
The story for petrochemicals is different. Rising standards of living, urbanisation and industrialisation mean that demand for global petrochemicals in Asia could grow faster than GDP.2 Over the next decade, it is anticipated that two-thirds of global chemical growth will stem from Asia.
China is the lead protagonist in shaping Asia’s petrochemical supply industry. As part of its five-year plan to enhance energy self-sufficiency and accelerate growth of high-end materials and products, China has expanded its petrochemical capacity considerably. This has ramifications for other countries – the capacity competition represents a challenge to North Asian suppliers who will likely need to revise their strategies.
The petrochemical industry is a fast-evolving sector, shaped by continuous technological advancement. The shale boom has unlocked emerging, cost-effective and lighter feedstocks: LPG, LNG and shale gas feedstocks have revitalised competition from the U.S. and Middle East. Ultimately, Asian petrochemical suppliers need to innovate and enhance the capabilities of their chemical plants. They must also look into diversifying their feedstock base to stay competitive.
4. What systemic challenges are ASEAN energy entities facing and how can Singapore support these entities?
ASEAN is one of the world’s fastest-growing energy markets, and energy companies are striving to capture the region’s nascent potential.
To meet the region’s surging demand forecast and robust economic growth outlook, ASEAN’s energy infrastructure requires substantial investment and financial expertise. With Southeast Asia’s energy demand anticipated to surge by 80 percent, a window of opportunity has arisen for tank capacity investments in Southeast Asia.
Singapore, with its mature financial platform, port efficiency and connection with the oil and gas industry, has led Southeast Asia’s storage & trading industry for decades. Although large swathes of storage investment are being redirected into the neighboring states of Indonesia and Malaysia, the additional regional tank capacity also presents an opportunity for Singapore. By 2015, storage capacity within the Malacca Straits will surpass the world’s largest oil trading hubs – Amsterdam, Rotterdam and Antwerp. The extra storage will enhance trading flexibility, boosting liquidity and supporting Singapore’s ambition to remain Asia’s premier oil and gas trading hub.
Energy costs in ASEAN are a concern for companies. The absolute energy cost is not necessarily an investment deterrent, but the relative difference compared to regions such as the US and Europe is stifling regional investment. With regional energy efficiency standards being low, this is an area of vast investment potential and is increasingly on the radar of various governments.
The Singapore Government is a strong proponent of energy efficiency. As it has done in other fields, Singapore can take a regional lead in energy efficiency and be the role model for other Asian states to follow.
Due to Singapore’s many competitive advantages and constantly evolving capabilities, many of our clients have chosen to locate their regional headquarters here. For this reason, in July 2013, KPMG expanded our Houston Global Energy Institute (GEI) into Singapore to extend our support to our clients and the many stakeholders who are participating in the Asia Pacific growth story.
5. How can KPMG’s Energy and Natural Resources (ENR) practice help oil and gas companies capitalize on ASEAN’s evolving energy story?
KPMG’s ENR platform supports clients in achieving strategic growth. We aim to help clients navigate around industry barriers and assist them along a path of sustainable expansion.
KPMG is a global network of professional services firms, with a breadth of experience in corporate finance, business transformation, M&A, capital raising, cost reduction, operational efficiency and risk management. Consequently, when a client faces a challenge, we pull together a multi-disciplinary, cross-border team which has the necessary skill-set to address specific needs.
The GEI presents our clients with a knowledge-sharing platform offering the latest industry thinking. In addition to providing materials such as publications and opinion pieces, the GEI hosts conferences, business club events and regional webcasts to ensure we cover topical industry trends. Ultimately, through leveraging KPMG’s deep pool of energy specialists, one of the principal missions of the GEI is to connect with clients and transfer knowledge into the industry’s hands efficiently and quickly.
Two examples of where we are providing expertise for the energy sector are in Commodity Risk Management and Cyber Security.
In 2012, a proposal to transfer regulatory oversight of commodity derivatives under IE Singapore’s
Commodity Trading Act (CTA) to the Monetary Authority of Singapore’s Securities Futures Act was approved. The primary reason for this transfer is that the CTA was no longer deemed as adequate to address the evolving complexities of the commodities industry.
This transition, expected to come into effect by end of this year, will have a direct impact on commodity players. KPMG has an experienced commodity risk management team that can support this change.
Furthermore, as businesses adopt an increasingly digital approach, the ENR sector is becoming more exposed to cyber attacks. Indeed, cyber threats have never been more pervasive and attack damages never more real. KPMG has a team of IT security specialists that can help ENR companies enhance their cyber security.