Singapore prides itself on being the jewel in south east Asia and represents a vibrant fusion of east and west. While its population is derived from a mix of Malaysian, Thai, Chinese and Indonesian settlers its position as a major energy trading capital owes much to the west. Most of the so-called Wall Street refiners have offices in Singapore, as do the major European banks. Similarly the major western oil companies and energy trading companies all have offices in the city-state.
In terms of its position as a major energy trading capital Singapore relies heavily on direction from London and New York. The Singapore Exchange, formed last by the merger of the Singapore International Monetary Exchange (Simex) and the Stock Exchange, has had little success with listed energy futures contracts. Its gas oil and fuel oil contracts, originally listed on Simex, are effectively illiquid and its only liquid energy contract is Brent futures which is traded on a mutual offset system with London’s International Petroleum Exchange, enabling Brent to be traded almost 24 hours a day.
The listing of energy contracts in Singapore followed the success of similar contracts on the New York Mercantile Exchange and London’s IPE. Similarly its development of oil swaps on the over-the-counter market followed on from initiatives from the US and European markets. Now Singapore is following the lead of the western markets in the development of electronic commerce applications for its energy trading. Of all the countries in south east Asia, Singapore prides itself as being the best prepared for the e-commerce evolution. Certainly the city-state has always been a haven for technophiles. But it is one thing to be at the cutting edge of technological innovations and another to apply it to the energy trading markets. This is the challenge now faced by Singapore.
At face value Singapore is in a win-win situation. Over the past two years as the peak of expectation has built in the west on e-commerce applications Singapore has been able to analyse the various successes and failures. It has been able to assess the merits of different market models and different technologies and choose the ones that best meet the needs of its market. This is the easy part. The hard part is in adapting to the new trading culture required for the e-commerce age.
Unlike the US and Europe, trading in south east Asia is mainly based on personal relationships. In the US most counterparts to trades have little difficulty in trading over the Internet with anonymous counterparts. A similar culture is evident in Europe, although not on the same scale. But in south east Asia the basis for trading is firmly built on relationships, either face to face or via voice. To move away from this base to an Internet base where the value of relationships is diminished will likely prove to be the major hurdle to electronic energy trading in Singapore.
The importance of relationships in trading is evident in the development of SwapNet, the Internet trading platform conceived and developed in Singapore. Unlike many other platforms it is a hybrid system comprising both electronic and voice transactions. And although its very first trade was an electronic trade the majority of subsequent transactions have been voice transactions. It is also interesting to note that although initially developed for the southeast Asia market, SwapNet now sees its major development in the European market. Indeed its registered office is in Dublin.
As there are no ‘local’ e-commerce energy trading platforms in Singapore, or the south east Asia market, the region will be heavily dictated to by the west. Successful Internet energy trading platforms such as EnronOnline have moved into the Asia Pacific market from its US base, and other platforms, including IntercontinentalExchange, are following suit. With no ‘local’ market platforms the region will have to use those platforms initially developed in the west.
With the electronic trading infrastructure already being introduced into the region the real issue is – will the region use it? The issue is perhaps similar to that of the energy trading pits and open outcry. Pit traders on both Nymex and IPE are keen to retain their traditional trading platforms, but accept that the new technology of the Internet will eventually replace it. In the south east Asia energy market the issue is not so much will, but when will e-commerce replace traditional trading platforms. To achieve this requires the region to change its traditional energy trading culture. And the process has already commenced.
Thailand looks to convergence and e-commerce
It is not just the Singapore market that has identified the opportunities afforded by electronic trading. Thailand’s energy corporations Petroleum Authority of Thailand (PTT) and Electricity Generation Authority of Thailand (EGAT) are both actively addressing the issue of e-commerce within their trading applications. But in tandem with e-commerce the Thai market is also looking ahead at the prospects for energy market convergence.
Of all the markets in south east Asia, Thailand has the greatest opportunity for a convergent energy market structure. In that region the country has the highest consumption of electricity, which is generally recognised as the energy market catalyst for convergence. But to achieve a convergent market structure requires competition in the constituent energy product markets. This will be achieved with the liberalisation of the gas and electricity sectors and the completion of the privatisation of PTT and EGAT towards the end of 2001.
Already PTT is assessing the opportunities of supplying electricity once gas markets are liberalised, effectively putting it in competition with EGAT, to effect a convergent market structure. But EGAT can similarly converge from electricity supply into the oil markets, which would be of benefit to the Thai market, providing robust competition. And the facilitator of both processes is likely to be e-commerce and the Internet.