In late August, Singapore’s Temasek-backed natural gas company Pavilion Energy bought an LNG cargo from China’s state-owned China National Offshore Oil Corp., in a yuan-denominated transaction, according to the Shanghai-based trading platform SHPGX that executed the deal.
The deal was Pavilion Energy’s first publicly reported purchase of LNG in yuan from a Chinese oil and gas major. It occurred against the backdrop of Beijing’s push to boost the role of the yuan to compete with the US dollar, and sought the support of a widening gamut of countries to do so.
Recently, Beijing’s efforts to bring more countries closer to its sphere of influence underpinned the expansion of BRICS to include influential petrostates like Saudi Arabia, the UAE and Iran. Later in September, the G20 is likely to move ahead with the proposed inclusion of the African Union, a region key to trade growth and supply of critical minerals for energy transition.
This US-China decoupling and resulting trade frictions are undoubtedly shaping the evolution of commodities markets and trading hubs like Singapore, well beyond just Chinese investor interest in energy assets on the table in the city state.
The International Monetary Fund expects global fragmentation and trade restrictions to reduce global economic output by as much as 7% in the long term, or about $7.4 trillion in today’s dollars. This is equal to the combined size of the French and German economies, and three times sub-Saharan Africa’s annual output.
But hubs don’t just thrive on trade. Singapore has the clout to shield the forces that underpin global trade, helping resist what the Monetary Authority of Singapore has called a “geo-economic fragmentation.” For instance, petrostates like Saudi Arabia, the UAE and Qatar — with a growing share of oil and gas demand from India, China and increasingly Southeast Asia — are keen on expanding their Singapore operations to diversify in the region.
Commodity trading hubs have always been fluid as the center of gravity in oil and gas markets has constantly shifted. The current energy landscape will stress-test this fluidity, as we are seeing tectonic shifts not just in conventional fossil fuels but also new energy sources.
Geopolitics of climate change and energy transition
Trading houses and commodity firms are generally equipped to handle short-term disruptive events, with sophisticated risk assessment teams constantly modelling the probability of sudden market shifts. These firms also profit from the resulting volatility.
But few companies are adequately prepared for broader changes that have deeper ramifications. The power wrangling between the US and China could disrupt energy markets for longer and more permanently than even the nationalization of Middle East oil assets almost half a century ago, that expelled Western oil majors from the region for exploiting reserves.
And whether commodities traders can model the onset of the Anthropocene, a new geological epoch in the history of our planet characterized by human impact, is like asking dinosaurs to predict the ice age. Still, old energy hierarchies are set to give way to new ones, presenting opportunities for Singapore and Southeast Asia.
For instance, it is now well understood that to unlock the full potential of renewable energy, areas with surplus renewables need to be interconnected with demand centers, over a sizeable geographic region through a modernized electricity grid and transmission system.
Multiple energy sources such as wind, solar, hydro, and even nuclear and fossil fuels are needed to balance the grid with storage options.
No single ASEAN country can do this on its own but what will work is a regional structure that mimics the EU’s energy economy; one that cuts across countries, including sources such as French nuclear, Norwegian hydro, Germany’s wind and solar and even legacy coal and gas.
This is an opportunity to advance the decades old ASEAN Power Grid that has been in deadlock due to political hurdles and apprehensions about energy security. Singapore has already initiated some plans to import electricity from some ASEAN states but offers significant resources to take the grid forward.
This is because an interconnected grid needs to be backed by a sophisticated power market and the active trading of forward electricity contracts to give price signals to grid-connected operators. The financial and commodities ecosystem for such a market, and combining it with fossil fuels and carbon trading, is offered by Singapore.
A power trading hub also has its risks — climate change driven extreme weather events such as droughts and typhoons in one corner of Vietnam could impact a hawker center in Yishun, Singapore. On the other hand, it allows…
Read More: Stress testing a commodity trading hub