i

BEYOND THE CHICKEN AND THE EGG Small-Scale LNG in Southeast Asia and Systems Innovation

By Alexander Dodge, PhD Candidate

Norwegian University of Science and Technology

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List of Abbreviations

HFO Heavy Fuel Oil

MGO Marine Gas Oil

SSLNG Small-Scale LNG

CAPEX Capital Expenditures

LNG Liquid Natural Gas

MTPA Mega Tons Per Annum

BCM Billion Cubic Meters

ASEAN Association of Southeast Asia Nations

NOx Nitrate Oxide

SOx Sulfur Oxide

ECA

MARPOL

Emission Control Area

International Convention for the Prevention of Pollution from Ships

Table of Figures

FIGURE 1 – POTENTIAL CONFIGURATION OF A SMALL SCALE LNG VALUE CHAIN.

FIGURE 2 - LNG EXPORT AND IMPORT INFRASTRUCTURE IN INDONESIA (EXISTING, PLANNED AND POTENTIAL).

(SOURCE: DNV CLEAN TECHNOLOGY CENTRE, 2012, P. 16)

FIGURE 3 - A CONCEPTUAL FRAMEWORK FOR SYSTEMS INNOVATION

FIGURE 4 - THE MULTI-ACTOR NETWORK INVOLVED IN SOCIOTECHNICAL SYSTEMS. (SOURCE: GEELS, 2002, P.

1260)

FIGURE 5 - INTERVIEWED STAKEHOLDERS IN SSLNG

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Contents

List of Abbreviations ........................................................................................................................ ii

Table of Figures ............................................................................................................................... ii

Executive Summary ........................................................................................................................ iv

Introduction ...................................................................................................................................... 1

Meeting Energy Demand in Southeast Asia .................................................................................... 2

Fueling Maritime Transport ............................................................................................................. 6

Theory .............................................................................................................................................. 7

Deviation and Efficiencies ........................................................................................................... 7

Sociotechnical Systems and Systems Innovation. ........................................................................ 9

Sociopolitical Landscape and Disruption ................................................................................... 11

A Conceptual Framework for System Innovation ...................................................................... 14

Networks .................................................................................................................................... 16

Researching Systems Innovation ................................................................................................... 17

Analysis .......................................................................................................................................... 19

Current Energy Mix in Southeast Asia – The Sociotechnical System ....................................... 19

Beyond the Chicken and the Egg - Systems Innovation ............................................................ 20

Sociopolitical Landscape ............................................................................................................ 23

Developing Price Mechanisms and The Political Economy ...................................................... 24

Networks – Reconfiguring Supply and Demand ........................................................................ 26

Conclusion ...................................................................................................................................... 28

References ...................................................................................................................................... 29

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Executive Summary

Energy demand in Southeast Asia is expected to increase 80% by 2035 and gas

production is expected to increase 30% to 230 billion cubic meters. The rate of economic growth

and the changing role of natural gas in the region is expected to shift the global gas market to

Southeast Asia. While natural gas production in countries like Indonesia is usually exported

through long-term contracts and at large volumes, various political and economic developments

have encouraged the use of natural gas for domestic consumption. However, in some areas of

Indonesia the population is spread across archipelago islands that make conventional natural gas

distribution via pipeline expensive and legally challenging. These populations therefore tend to

rely on more expensive and polluting fuel sources such as diesel and coal. Natural gas can be

cryogenically cooled into liquid natural gas (LNG) so that it is transportable on LNG carriers.

However, conventional LNG value chains involve large and expensive liquefaction and

regasification facilities and are simply not flexible enough and not economically viable to provide

gas to small-scale markets in Southeast Asia.

This report argues the current energy systems in in Southeast Asia as a relatively stable

configuration of technologies, producer-supplier networks, regulations, standards, user practices,

financial mechanisms, etc. These configurations can be referred to as sociotechnical systems. The

external structure in which sociotechnical regimes exist is referred to as a sociopolitical landscape

which is made of heterogeneous factors such as economic growth, political coalitions,

environmental problems, and cultural and normative values. Political economies derive from

developments in sociopolitical landscapes and sociotechnical systems and can contribute to both

the enabling process and disruption of sociotechnical systems and sociopolitical landscapes.

These disruptions provide the agency for entrepreneurs, organizations, and innovative firms to

reconfigure existing sociotechnical systems in a process called systems innovation.

Small-Scale LNG (SSLNG) supply chains are a means of delivering LNG to end users

both in power generation and maritime transport (LNG as a bunker fuel) by locating satellite

liquefaction and regasification facilities closer to markets and coordinating a distribution of LNG

cargo through a combination of shipping and land transport. While SSLNG plants are less

expensive and face less legal hurdles then large-scale plants, the pass-through costs increase the

price of LNG compared to conventional LNG supply chains. However if there were a large

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enough mass of users, the pass-through costs could be more widely spread. I argue that SSLNG is

a systems innovation that requires not only developing a supply chain but also corresponding

change in user practices, regulations, infrastructure, industrial networks and culture. This report

will relate initiatives undertaken by entrepreneurs, firms and organizations in relation to wider

sociotechnical systems and sociopolitical landscapes. The report will show how systems

innovation occur as actor reconfigure elements from sociotechnical systems as documented by

the following examples in the report:

1. Fuel subsidies in Indonesia have inhibited the growth of domestic consumption of natural gas.

President Widodo scrapped fuel subsidies for gasoline and capped the subsidies for diesel in

January 2015. In order to ease the effects of reducing subsidies the government will need to

ensure access to an alternative fuel mix, and increase the use of gas for domestic

consumption. Small-Scale LNG supply chains with require short sea, route-to-route shipping

which will open a new market for LNG fueled vessels for engines producers such as Rolls

Royce.

2. Previous power outages in Singapore due to problems in gas pipelines from Indonesia and

Malaysia in Singapore have prompted the government to build jetties and storage facilities for

LNG and the development of SLNG and Pavilion Gas. Pavilion Gas has an ambition for

Singapore to become a trading hub for LNG and has started the process of developing a

Singapore price index that should make the flexible trading of LNG cargo more viable. Today

gas prices are based on oil indexation and Southeast Asia pays higher premiums for gas than

Europe or North America. New price indexing for gas should make it more feasible for small-

scale LNG actors such as Gravifloat to push forward their technologies and align themselves

in the LNG value chain. Gravifloat provides modularized LNG solutions.

3. The Singapore green tech fund for a cleaner harbor has prompted the design and planning of

LNG-powered tugboats by Keppel. While previously finding supply in Southeast Asia was

difficult, the small brokerage firm, Gaspartners is cooperating with an Australian firm to

deliver molecules to load Isocontainers with LNG storage tanks. The deal is not yet

formalized because of the lack of demand. However Gaspartners is working with Keppel to

use Isocontainers as bunker tanks for the tugboats. With the demand from the Keppel

tugboats, the supply from the Australian company can be formalized.

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Introduction

天时 地利 人和 (Heavenly timing, earthly conducive, humanly harmony)

The Chinese triad, spoken Tian Di Ren, refers to a philosophy about the harmonious

relationship between humans, nature and environment. The theory influenced the foundation of

integrated farming systems that were needed to ensure enough crops for a growing popultion.

Crops were planted by humans, raised by the earth, and fed by the heavens. Ren (Human

harmony) referred to a collective human effort and interventions in farming which involved

knowledge and technology. Together with Di (earth), this represents the relationship between

technology and the environment. Nevertheless, technology and environment needed to be

coordinated, according to Tian (heaven) which involved rainfall, seasons and timing followed by

the Chinese lunar calendar. Tian Di Ren therefore can refer to sustaining a population through a

system of coordination between humans, technology and the environment.

Southeast Asia is a region with considerable economic growth and energy demand is set

to increase substantially. Despite the high-energy demand, many parts of the population have yet

to access electricity. Remote islands and complicated terrain make it expensive and difficult for

connecting remote areas to main power grids. In addition, the high-energy demand will result in

the need for fossil fuels that are both polluting and contribute to global CO2 production. Natural

gas is a cleaner and abundant fuel source in Southeast Asia; however, conventional supply

systems are far too expensive and face political hurdles to deal with energy issues in Southeast

Asia. Hence the need for a more flexible and sustainable system to both expand access to natural

gas recourses.

In this paper, I will present of story of Small-Scale Liquid Natural Gas (SSLNG), which is

a means of cryogenically cooling natural gas and then accessing remotely distributed markets via

a supply chain of maritime bunkering, road transport and small-scale regasification and power

plants. While SSLNG has yet to gain a considerable market share, several initiatives from

different actors point to a future where SSLNG is prevalent. In addition to SSLNG for power

generation, a completely new field for LNG as a bunker fuel for maritime transport is developing.

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At the present demand is low, as plant operators and ship-owners have yet to build gas-powered

turbines due to the lack of a viable supply chain. Bunker operators and other suppliers have yet to

invest in a supply chain infrastructure because of low demand. Hence, there is a chicken and the

egg problem where there is uncertainty on whether SSLNG will start with supply or demand.

Many market reports and stakeholders in SSLNG refer to issues of politics, regulations,

technology, economics, markets, etc. However, despite a comprehensive set of information

regarding the prospects of SSLNG, these reports often lack the connection between what happens

on a ground level (i.e. entrepreneurs, firms, authorities and their initiatives) and what happens on

a political and economic level. I argue that there is a need to conceptualize theoretically how

SSLNG may occur and what processes are at play. In order to do this I refer to the technology

transitions literature in order to develop a model that gives a relational understanding towards

how actors reconfigure existing systems in a process called systems innovation. By understanding

SSLNG as a systems innovation, I argue that we can go beyond the chicken and the egg problem,

and instead answer how actors, technologies, environment, politics, economics, regulations,

habits, etc. come together in order to transition out of old energy systems and into new ones.

Meeting Energy Demand in Southeast Asia

The global energy system is shifting its center of gravity to Asia. In 2035, energy demand

in ASEAN is expected to increase 80% (International Energy Agency, 2013). With a high rate of

economic growth and development, questions on how to supply portions of the population who

have yet to access main energy grids is a significant issue. While the region has various energy

recourse endowments, a decline in oil production calls for a shift in the current energy mix.

Natural Gas will likely play a significant role in meeting these challenges; however, conventional

supply systems are unable to deliver to the rising markets where natural gas is needed.

Rethinking how natural gas is distributed and supplied is required.

The annual average rate of growth over 2016 to 2020 in ASEAN is expected to be 5.2%

(OECD, 2015). The economic growth in Southeast Asia has significant implications for energy

demand in the region. Indonesia is the largest energy user in the region with 36% of the overall

demand. In 2011 the energy demand was 550 million tons of oil equivalent (MTOE),

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representing 4.2% of global demand. Energy demand per capita is nevertheless low, as one-fifth

of its 600 million people do not have access to electricity (International Energy Agency, 2013).

Providing electricity proves to be major challenge in Southeast Asia. Sections of the

population cannot access centralized electricity networks or local (distributed) power supply

systems (DNV Clean Technology Centre, 2012). Populations in eastern Indonesia, parts of the

Philippines, Vietnam and Myanmar, Laos and Cambodia lack access due to geographical

challenges such as mountains, islands, forests, etc. Grid extension is therefore expensive, as is

establishing local off-grid power supply systems. In addition, the off-grid systems are difficult to

operate, and the technical skills required may not be readily available.

Three-quarters of the primary energy mix in Southeast Asia consists of fossil fuels. Oil

remains the dominant fuel at 37% of the primary energy mix in 201l. Natural gas comes in

second at 21% of the primary energy mix. Renewable energies represent 12% of the primary

energy mix. Although Southeast Asia is facing a decline in oil production, it also has significant

gas reserves. Countries like Thailand and Malaysia, for example, use gas for 60% of the power

generation (Shirdhar, 2009). Southeast Asia has 7.5 trillion cubic meters (tcm) of proven gas

reserves, the majority of which are in Indonesia and Malaysia. Total gas production in the region

is expected to grow by 30%, from 203 billion cubic meters (bcm) in 2011 to 260 bcm in in 2035

(International Energy Agency, 2013).

Gas can be transported through transmission pipelines that links gas supplier to demand

centers and distribution networks. However as said before there are geographical challenges to

this, in addition to environmental and political barriers such as terms of access and right of way.

The small volumes that would be transported to smaller and marginal gas fields make long

distance pipeline transmission un-economical. Nevertheless, natural gas is becoming increasingly

available and is a viable economic and cleaner alternative to heavier fossil fuels. Natural gas,

which is mainly methane, is made of lighter hydrocarbons. Contaminants such as sulfur and

nitrogen particles are removed in the production process. Therefore, natural is less polluting and

emits less CO2 then other fossil fuels. However, as a gas at stable temperatures it harder and

more expensive to handle.

By cryogenically cooling natural gas into a liquid at -162C, it can be transported via

seaways or on land by road or railways. Today liquid natural gas (LNG) is usually received in

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large quantities and through long-term contracts. The installed capacity for conventional LNG

plants is approximately 300 Megatons per Annum (MTPA) (International Gas Union, 2015). The

conventional large-scale LNG system benefits from economies of scale, despite substantial

infrastructure costs. Delivering to small markets therefore faces a huge hurdle, as developing a

supply chain to access remote areas will be relatively expensive unless there is a high user

demand.

Small-Scale LNG (SSLNG) supply chains are a means of delivering LNG to end users

(power plants, fertilizer producers, industry, transport, etc.) in areas that cannot be reached

through conventional natural gas value chains. SSLNG plants can be located closer to markets

then conventional large-scale plants and therefore reduce transport time and costs. The

International Gas Union (2015) defines SSLNG as liquefaction and regasification facilities at a

capacity of less than 1 MTPA. SSLNG carriers are defined as having a storage capacity of 30,000

cubic meters. Small-Scale LNG can also be important for the maritime sector where the potential

to use LNG as a clean transport fuel is significant, but the lack of infrastructure is a hinder for

development and the switching costs can be expensive (DNV-GL, 2014). Although the

technology and solutions are readily available, the market is slow to develop due to the expense

of establishing small-scale LNG facilities, mainly due to the lack of scale. There also is a need to

coordinate actors across the supply chain in order to ensure a stable supply and end user value.

However coordinating actors remains a challenge when the demand for SSLNG is not yet

prevalent. Such actors would include LNG producers, Ship Owners, Terminal Owners/Operators,

End Users (Industry, Maritime, Power companies), etc.

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Figure 1 – Potential Configuration of a Small Scale LNG value Chain.

A large challenge for SSLNG is to overcome customer concerns regarding the lack of supply

alternatives available. In addition, SSLNG opportunities require a complete supply chain from

well to end user, and therefore elements of the supply chain must be operated and designed

effectively and competitively.

Infrastructure projects for SSLNG are often simpler and require less capital expenditures

than conventional LNG plants (International Gas Union, 2015). Modular designs for SSLNG

plants can reduce capital expenditures, CAPEX, and provide flexibility through off-site

fabrication. There is less of a need for specialized equipment, and the time between project

concept and turnkey plant delivery is short. However on $/tonne per annum basis, the CAPEX for

SSLNG are not necessarily competitive with Large Scale LNG business. In order for SSLNG to

be competitive, then several challenges along the supply chain need to be solved such as

standardization, unmanned facilities (in order to reduce operating expenditures), boil off gas

solutions, storage tank and containments solutions, etc.

Countries in Southeast Asia with remote populations spread across islands or coastlines

will also need a means of LNG delivery by sea transport. Carriers fitted with LNG storage tanks

that can run “Milk Runs” across islands and coastlines. The enabling of LNG transport by sea

runs parallel to the development of LNG as a bunker fuel for maritime transport.

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Fueling Maritime Transport

Developing a small-scale LNG supply chain also has significant implications for the

maritime sector in addition to the energy sector. In order to develop a small-scale LNG

infrastructure across a set of dispersed island, for example, there is a need for a form of short sea,

route to route shipping which would require LNG maritime bunkering. LNG as a transport fuel is

becoming a hot topic as regulations on pollutants, such as emission control areas (ECA) develop

the need for cleaner fuels then the dominant heavy fuel oils (HFO) and Marine Gas Oils (MGO).

Access to a supply infrastructure is a key obstacle, however as global energy systems shift

towards natural gas, the prospect that LNG will be available as a transport fuel is prevalent.

While ECA regulations under MARPOL Annex IV are in place in Europe and North America,

whether or not Singapore will comply with the act is uncertain. Uncertainty regarding future

regulations and government commitments is an obstacle for developing LNG maritime bunkering

in Southeast Asia.

Compared to HFO, LNG emits 85% less nitrogen oxides (NOx) and Sulfur Oxides (SOx),

in addition to 30% less Carbon Dioxide (International Gas Union, 2015). The use of LNG has a

ship fuel is significant in the reduction of local air pollution and carbon footprints. A report by

DNV GL predicts that the costs of fuel for heavy fuel oil engines will increase as regulations on

Sulphur content will take place (DNV-GL, 2015). While ships can introduce SOx scrubbers,

these systems are costly and increase fuel consumption by 2-3%. Oil to Gas consumption ratio is

also set to decrease as the consumption of gas is likely to increase and gas reserves are more

prevalent.

However, a major barrier to the use of LNG as a bunkering fuel is the lack of

infrastructure, which creates uncertainty regarding the long-term availability of fuel. Ship owners

will not invest in ships running on LNG if the infrastructure is not in place, and energy providers

will not finance infrastructure without first securing customers. This conundrum is often referred

to as the chicken and the egg problem. Nevertheless, the number of ships that run on LNG are

continuously growing. As of May 2015, there are 63 LNG fueled ships in operation, and 76

newbuildings confirmed (DNV-GL, 2015). The majority of these ships are found in Norway,

which is often cited as having the largest SSLNG business in Europe. LNG bunkering is

stimulated by the environmental NOx agreement 2008-2017, where a fund receives an amount

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per NOx kilogram emitted by the shipping industry and invests in NOx reduction for domestic

emission between Norwegian ports (International Gas Union, 2015).

The development of SSLNG in Norway provides an important demonstration towards the

feasibility of building a SSLNG supply chain. Presently in Norway via a logistical network of

LNG by marine and road transport, it is possible to provide LNG to end customers throughout the

country. Regulations and the NOx fund provided the incentive for ship-owners to refit or build

their ships with LNG gas turbine engines. However, such an intervention by the state is unlikely

to occur in Southeast Asia, unless there was viable economic and political reasons.

What does SSLNG in Norway, or anywhere else for that matter, have to do with SSLNG

in Southeast Asia? Many of the stakeholders in the SSLNG business in Norway are also involved

with SSLNG in Asia. Several equipment suppliers involved in Southeast Asia have engineering

and design in Norway. Understanding how these global supply systems interact with the

development of SSLNG in Southeast Asia will be an avenue for further research.

Theory

Deviation and Efficiencies

Entrepreneurship can be best described as a deviation. In a world where pre-existing

infrastructures, supply chains, customer relations and technological systems remain relevant and

to a certain degree efficient, entrepreneurs deviate from relevant structures to create temporary

inefficiencies in markets (Garud & Karnøe, 2001). Entrepreneurs are fully aware of these

inefficiencies but at the same time aware that the deviation is necessary to create new futures.

Small-Scale LNG Bunkering and Distribution is an inefficiency for the time being. Low

demand coupled with high capital expenditures for the supply-chain infrastructure is relatively

inefficient compared to the conventional large-scale LNG value chains. While a SSLNG supply

chain could have the capability to reach a wider base of users such as small-scale power plants or

maritime bunkering, the current demand for LNG is low due to the lack of infrastructure.

Nevertheless, entrepreneurship requires enrolling others in complicated projects on the prospects

of new markets.

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In regards to maritime bunkering, heavy fuel oils (HFO) and marine gas oils (MGO)

remain a market with increasing returns (Arthur, 1989 in Martin & Sunley, 2006). Increasing

returns refer to a product which become dominant in the market and where the economic agent

selling the product is able to spread costs over a large base of users and therefore enjoys high

margins. For the time being HFO and MGO are readily available in almost all locations where

maritime bunkering is necessary. The availability of HFO and MGO allows a degree of flexibility

to ship-owners and charterers to change routes or to resell ships to new locations, anywhere in the

world. Meanwhile LNG as a bunker fuel is only available at a few select locations. Building an

infrastructure for LNG distribution is costly, and the capital expenditures (CAPEX) could only be

justified if the demand was available, or if there was some prospect for demand.

Refitting ships with LNG engines and supply systems would also require a significant

conversion cost. Building new ships with LNG engines is also more expensive than conventional

diesel engines (DNV-GL, 2015). Nevertheless, operating expenses for LNG engines are lower

due to lower maintenance costs, reduced port fees, and potentially lower fuel costs. The price for

an LNG engine and system could be reduced if there were a mass of users. While the lifecycle

costs for an LNG engine at the current fueling price would justify the conversion costs, the pass-

through costs (distribution and infrastructure) associated with the high CAPEX for supply

infrastructure are an obstacle. If there were a large base of users for a supply infrastructure, the

pass-through costs for LNG bunkering would be lower per user.

I argue that another obstacle for the shipping industry to adopt LNG as a fuel is path

dependency. Path Dependency is an evolutionary concept in economics that explains why

industries continue on a certain path, or use certain technologies despite the availability of

prospectively more efficient technologies (Martin & Sunley, 2006). Although LNG as a bunker

fuel is cleaner and requires lower maintenance costs, the ship industry is currently following a

path where MGO and HFO is prevalent. Path-dependency refers to the events in an industry

history that determines a direction for firm practices, methods, designs, etc. Choices made in the

past are embodied in current technologies, firm assets, competence and expertise. Innovation

occurs but often incrementally and with a tendency to strengthen the current path. Paul David

(1985 in Martin & Sunley, 2006) argues that path dependency also applies to technological

change in that 1) Dominant technologies are determined by historical coincidences 2) Standards

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become established which reproduce the choices of technologies 3) Reproduction occurs despite

the existence of better technology 4) Technologies are therefore embedded in social systems.

Entrepreneurs therefore must not only offer a technological alternative where LNG is

more attractive then MGO or HFO, but they must also attempt to create a deviation from the path

dependency in the shipping industry. Doing so will require a systems innovation and the

involvement of a network of stakeholders. However in order to explain a systems innovation, we

must also understand the stability of current systems.

Sociotechnical Systems and Systems Innovation.

Literature on sociotechnical systems argue that we cannot understand the history of

technology only through techno-determinism (Coenen, Benneworth, & Truffer, 2012, p. 4), but

we must instead focus on the co-determinism of social, economic and technological

characteristics. The current bunkering infrastructure for maritime and the conventional large-

scale methods to distribute natural gas are sociotechnical systems. A sociotechnical system is

defined as “cluster of elements, including technology, regulations, user practices and markets,

cultural meanings, infrastructure, maintenances networks and supply networks.” (Geels, 2002, p.

4).

The Sociotechnical system is a useful concept as it allows us not only to analyze the

current material infrastructure, technologies, standards, etc. that dominate maritime bunkering

and LNG distribution, but also to look at relationships between suppliers and customers, cultures,

habits and practices that characterize the industry and consumer markets. In the case of SSLNG,

the sociotechnical system cannot be limited to any single industry. SSLNG has implications for

maritime bunkering, power-generation and industrial end-users and therefore both the

opportunities and the challenges are multi-sided. Nevertheless, maritime bunkering in Southeast

Asia at the time being shows low demand due to the lack of ships that are LNG fueled. In regards

to power-generation, there is a clear demand but significant hurdles in regards to the political and

economic situation. In addition, SSLNG for power generation faces competition with other fuel

sources such as coal and diesel. Coal and diesel, while more polluting are easier and less

expensive to handle and already have prevalent supply chains. Diesel is nevertheless expensive

especially in regards to power generation.

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As I argued before from its outset LNG bunkering and distribution will be an inefficient

market relative to the current industrial systems and supply chains. However, if LNG bunkering

was to become readily available, and there was a considerable conversion or build up of ships

that use LNG engines or supply systems, then this would result in a transition in the current

sociotechnical system. A transition in sociotechnical systems is referred to as a systems

innovation (Geels, 2002).

A systems innovation not only involves technological substitutions i.e. LNG engines

instead of diesel engines, but also a corresponding change in user practices, regulations, industrial

networks, infrastructure and cultural discourses. However, to further complicate the issue there is

also a question of the trans-local nature of transition dynamics. While a transition may occur in

one location, we could argue that institutional arrangements, power relations, governance

institutions and dynamics would require a different phenomenon in another. Culture also play a

particular role, especially when end users do not have knowledge, history or even desire to use

LNG as a fuel. Nevertheless, it is important to consider that ideas, objects and practices can travel

often through relational networks (Czarniawska-Joerges & Sevón, 2005). Relational networks are

created by regular interaction between actors that builds up into more solid connections,

pathways, and institutions. I argue that systems innovation occurs within and across localities

through these relational networks. However, systems innovation cannot occur merely from

scratch.

Path Creation refers to process in which “entrepreneurs and existing actors are

disembedded from existing technological fields as they shape emerging ones” (Garud & Karnøe,

2001, p. 10). What differentiates the Path Creation concept from the concept of innovation is that

actors are understood to come from embedded processes that create often a counter resistance. As

I argued, entrepreneurs often create inefficiencies although they are aware it is necessary to create

a new future. In a conventional large-scale LNG market with long-term contracts and large

deliveries, delivering LNG on a small-scale basis to energy, industry and maritime actors is

relatively inefficient. The resistance to SSLNG may not be necessarily explicit, but current socio-

technical systems are configured into a particular stable regime, and SSLNG requires enrolling

other actors and intermediaries from a relatively stable system into a new supply chain and

market.

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The development of SSLNG can perhaps be explained as a configuration that at its

present state consists of a few elements and linkages. Systems Innovation happens as more and

more elements (new terminals, boats running on LNG, supplier relations, etc.) accumulate and

eventually linked together into a working configuration (Geels, 2002). What is important about

path creation however is these elements and linkages are not built from scratch but are collected

and reconfigured from the existing sociotechnical systems. However, a sociotechnical system is a

relatively stable regime, as understood by path-dependency and the efficiencies of stable

configurations. Therefore, we must also understood where the agency to reconfigure stable

systems can be found.

Sociopolitical Landscape and Disruption

A sociopolitical landscape beyond the sociotechnical system is a dimension that usually

lies beyond an actor’s direct influence. A sociopolitical landscape1 involves a set of

heterogeneous factors such as economic growth, wars, emigration, political coalitions, cultural

and normative values, and environmental problems. The landscape provides an external structure

where sociotechnical systems exist. Political economy derives from the developments within

sociopolitical landscapes and sociotechnical systems. I argue that the agency2 to reconfigure

stable systems can be derived from changes in the sociopolitical landscape. Developments within

the sociopolitical landscape creates pressure on a regime and in doing so opens up multiple

dimensions, thus creating windows of opportunity for novelties. In addition, there may be

internal pressure inside the regime that also opens up windows for opportunities. However, it is

important to note that under these conceptualization actors and activities cannot simply be placed

in one dimension or the other. Reality is indeed more complicated as a network of relationships

influence an actor’s decision to act, and it is the sum of these actions that may be understood as

occurring on different levels. Nevertheless, there is an iterative process where the sociopolitical

landscape may disrupt the sociotechnical system, and vice versa.

1 I derive the concept of the sociopolitical landscape from Frank Geels sociotechnical landscape (Geels, 2002).

Sociotechnical landscapes include also infrastructure, material and spatial arrangements. However, I prefer to think

that these elements lie between sociopolitical landscapes and sociotechnical systems. 2 Agency is simply defined as the capacity to act within a certain context. I ascribe to Latour’ theory that agency is

given (Latour, 2005).

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The relationship between social, political and technological dimensions is complicated

and has profound effects on the stability or instability of any regime. Important power

relationships come into play, which both hamper and facilitate change. Since 1957, the

government of Indonesia has subsidized fuel as a means of stimulating economic development,

however in 2012 the spending on energy subsidies claimed more than one-fifth of the central

governments funding (Diop, 2014). The high budget spending therefore has become a hamper for

other important infrastructure projects. Diesel has also been used as a power source for generators

in remote locations, due to its availability and affordability under subsidies. The market price for

gasoline was 9500 Rupiah and the government provided a subsidy rate of 50%. The costs of the

subsidies increased substantially in 2005 and 2008 due to the increase in market prices. In 2008,

the government increased the prices 30%, which had then prompted a series of riots, although the

government tried to ease the impact through handouts. From 2008 to 2015 the government

initiated several subsidy cuts and in 2015, President Widodo scrapped the fuels subsidies. During

his election, President Widodo pledged to gradually cut fuel subsidies and replace 90% of diesel-

fired power plants with coal fired, gas fired, and geothermal generating plants within three years

(Argus, 2014 in Seah 2014).

The difficulty and attempts of cutting fuel subsidies show that the relationship between

sociotechnical systems and sociopolitical landscapes go far beyond technical and economic

factors. The subsidies and the prices of fuel directly effect a wider population, and in turn effect a

sociopolitical landscape. The political hurdles combined with activism and riots when the

government cut fuel subsidies showed that the sociotechnical regime is embedded in a

sociopolitical landscape that contributes to path dependency or stability in a sociotechnical

system. President Widodo was fortunate that in mid-2014 the oil-prices were low enough that

scrapping petrol subsidies did not result in widespread riots. The fuel subsidies where a major

obstacle for economic growth, and they contributed widely to the trade deficit in Indonesia.

However replacing the fuel subsidies not only required schemes such as cash handouts but also a

need for an alternative fuel mix, which therefore provides the opportunities for natural gas.

The reason why cutting fuel subsidies helps natural gas is that they interfere with market

mechanisms and divert government recourses from investing in infrastructure (Seah, 2014). Fuel

subsides benefit mostly wealthier urban citizens who enjoy a high rate of energy usage and

13

already have access to electricity. However, for portions of the population whom do not have

access, which is a potential market for SSLNG, fuel subsidies are of little help. Since natural gas

enjoys fewer subsidies compared to oil products, then the cut in fuel subsidies helps the business

case for natural gas. Also by cutting subsidies in oil products, Indonesia can avoid cutting

subsidies in gas products. Therefore, the disruption that occurs between a sociopolitical landscape

and a sociotechnical regime provides windows of opportunity for alternative energy mixes.

The result of energy politics in Indonesia has significant implications for small-scale

LNG. Over the next 10 years, Indonesia plans to add 55 GW to its current power generation

capacity, 43,000 km of transmission network, and 400,000 km of distribution network (DNV

Clean Technology Centre, 2012, p. 1). Small-Scale LNG becomes an important aspect here as a

means of delivering power to distributed power grids across remote islands. The government is

under increasing pressure to increase domestic consumption of its natural gas recourses. The

figure below shows the existing, planned and potential LNG import and export infrastructure.

Figure 2 - LNG export and Import Infrastructure in Indonesia (Existing, Planned and Potential). (Source: DNV Clean

Technology Centre, 2012, p. 16)

Clearly, the developments in the sociopolitical landscape has implications for systems innovation

such as Small-Scale LNG. Developments on the sociopolitical landscape change the political

economy under which conditions sociotechnical systems are constrained or enabled. I also argue

that developments in the sociopolitical landscape also pertain directly to the processes of path

14

creation, as entrepreneurs are aware of these developments and build their business case around

them. Nevertheless there is a question of how can we conceptualize the dynamics between

sociopolitical landscapes, sociotechnical systems, systems innovation and path creation?

A Conceptual Framework for System Innovation

SSLNG is a systems innovation. Developing a SSLNG supply chain requires coordinating

actors along a value chain and delivering LNG at a competitive price compared to other fuel

sources. A systems innovation is the result of corresponding processes that both change and

maintain the stability of a sociotechnical system. Processes of reconfiguration of sociotechnical

elements and path dependency are pillared between path creation and the sociotechnical system.

Sociopolitical landscapes can both disrupt and are disrupted by sociotechnical systems, but also

form the political economic framework such as regulations and invested interests. The

sociopolitical landscape provides agency to processes of path creation as entrepreneurs devise

new futures that enroll elements in sociotechnical systems in a process of reconfiguration. The

result of which results into systems innovation.

Figure 3 - A Conceptual Framework for Systems Innovation

15

While the model3 is useful as a conceptualization, tool is nevertheless is a simplification

of what is a complex reality. It is important to note that path creation, sociotechnical systems, and

sociopolitical landscapes do not occur on certain levels or a hierarchy. For example, it would be

impossible to place firms, government bodies or individuals neatly into the path creation part or

the sociotechnical part, as many are a part of both. This is especially true for large firm

conglomerates, where one side of the firm’s activities can be said to fall under a process of path

creation, while another set of activities is part of a path dependent regime.

A sociotechnical system, for example, could be understood rather as a network of actors binded

by regulations, policies, business cases, financial mechanisms, standards, etc. As exampled in the

following figure. Hence, we should understand the model not as scales or levels, but

topologically through networks. The sociopolitical landscape, sociotechnical system and path

creation are “slices” involved in the wider phenomenon of systems innovation.

Figure 4 - The Multi-Actor Network Involved in Sociotechnical Systems. (Source: Geels, 2002, p. 1260)

The result is that if we are to understand how systems innovation occurs, then we need to be able

to conceptualize activities, forming of supply chains, strategies, etc. in terms of networks. I argue

that the mechanisms where actors coordinate new supply chains can be identified through

3 The model is adopted from Frank Geel’s multilevel analysis on sociotechnical transitions (Geels, 2002). However,

in Geels model technology is innovated in protected niches and eventually infiltrate sociotechnical systems. I argue

that innovation is a dynamic process that occurs between and within sociotechnical systems and processes of path

creation. I also argue that developments on the sociopolitical landscape directly give agency to processes of path

creation.

16

networking. The network perspective views any system as a set of interrelated actors, where the

actors can represent either firms or individuals. These actors are interrelated by various ties of a

certain type and degree (Borgatti & Li, 2009, p. 2).

Networks

Modern microeconomics tends to be built on models which have infinite number of

agents, whom have no power to influence price, where goods are well-defined and standardized,

and interactions between agents are mediated by the market (Cowan, 2005). Price captures all

relevant information about these standardized products, and is enough information for agents to

make decisions. However, this model overlooks that typically, agents only interact with a small

portion of the market and relationships become institutionalized. We can also argue that the

identity of who is using the product has much to say about the particular value of that product.

Gulati (1998) argues that there is value for the individual or group to reduce uncertainty in

strategic decision-making by obtaining trustworthy information. Reducing uncertainty is a main

driver for organizational actions. The relationships and patterns of ties between individuals in

their respective social networks provide important sources of information in this perspective.

Cowan (2005) argues that typically most individuals interact only with a small portion of the

population, and therefore the information an actor has is often limited and localized.

In addition, the value of technologies is dependent upon network externalities. If agents

use the same standards or technologies, then they create externalities for each other that increases

the value of a certain good. Since relationships between agents creates trust, this may also

influence the standards that agents choose to adopt. In addition to using network ties in order to

both manage uncertain environments and to improve learning capabilities in the firms, who a firm

connects to through alliances is also a result of that firm’s network. Strategic alliances can be

risky and surrounded by uncertainty, and therefore there is a need for firms to both know whom

potential partners are and to obtain information about the competences and needs of potential

partners (Gulati, 1998).

The arguments behind the networked organization ties well with the discussion around

path dependence. For example, if we argue that since technology generates increasing returns that

tends to create dominance in the market, then this dominance can be manifested through

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networks. Although better technology may exist, a particular technology may continue to be

standard among a network of agents. Networks reproduce standards because:

1) If an agent has a relationship with others that use the same standard, then the value for

the standard is quite high because of network externalities

2) If agents extend their knowledge pool through networks with others, and the others use

a particular standard, then that agent may not have the capacity to adopt a new technology

3) If an agent relies on information diffused in social networks to reduce the uncertainty

of decision-making, and if information of a new technology is not widely available, then

that agent does not have enough assurance to adopt the new technology.

Networks, however, are not static. They are continually reassembled as actors build new

alliances, meet new acquaintances and relate to other actors. The key mechanism behind

networks is that actors can influence each other. I argue that by understanding the process in

which actors use networks to coordinate, develop their strategies, and influence other actors, then

we can understand how systems innovation occurs.

Researching Systems Innovation

Systems Innovation, I argue, is a result of the collective efforts of entrepreneurs to deviate

from a path dependent and dominating sociotechnical system. However, systems innovation does

not occur in a vacuum. It is a result of disruptions between the sociopolitical and the

sociotechnical. The disruptions open opportunities where entrepreneurs can deviate and

reconfigure elements from a relatively path-dependent sociotechnical system.

In my project, I am taking an actor-centered approach to understanding how systems-

innovation occurs. My research involves qualitative interviews with stakeholders in SSLNG

including engine producers, supply partners, classification society, research, etc. In my

preliminary round of research, I attended a delegation hosted by my university (Norwegian

University of Science and Technology) to a technology transfer conference in Singapore. During

the delegation, I shadowed a spin-off firm from NTNU that delivers LNG transfer systems. In

addition, I arranged interviews with relevant stakeholders, many of whom also had experience or

connections with the SSLNG business in Norway. In another part of my research, I will study

18

how the Norwegian experience with SSLNG can be translated to the Southeastern Asian context,

and the role Norwegian actors can play in energy transitions.

The following table shows the stakeholders I had interviewed and their business of

operation. Their names are anonymous, but they may be recognizable based on their positions.

Firm Name Informant Business of Operation

Rolls Royce Marine Manager, Commercial

Marine

Delivers gas turbine engines and systems for maritime

use.

DNV GL Two Managers at DNV

Technology Center

Classification Society

Gaspartners pte, ltd Director and Partner Cryogenic tank operator, designer and supplier of LNG

bunkering terminals and receiving stations

Gravifloat CTO Modularized LNG Terminal Solutions

Connect LNG Entire Crew LNG Transfer Solution

Center for Offshore Research

and Engineering (CORE)

Two Professors Research Center at the National University of

Singapore

Figure 5 - Interviewed Stakeholders in SSLNG

In my interviews, I was concerned with the narratives that were told about small-scale

LNG. I sought to show how these stakeholders presented their strategies in relation to the socio-

technical systems and sociopolitical landscapes that I have defined earlier. The narratives are

stories which told of various characters, elements, events that all played into building a

framework for how small-scale LNG can be pushed forward. What I found immediately

interesting was the interconnections that was produced from these narratives. When combining

the stories from the different informants I discovered a seamless web (Bijker, Hughes, Pinch, &

Douglas, 2012) of related firms, actors, events all that provided a partial picture of the complexity

the elements that are involved and need to be reconfigured in the development of small-scale

LNG. These stories show the intentionality of stakeholder’s actions within this seamless web.

The goal of the interviews is not only to understand an actor’s intention, but also the

settings in which the intentions make sense (Czarniawska, 2004, p. 4). The interview situation

can be argued as a discussion that brings about a production of knowledge in what is understood

as a narrative mode of knowing. The narrative mode of knowing consists of organizing

experience with the help of a scheme that assumes the intentionality of human actions (Bruner,

19

1991). This scheme is referred to as a narrative or a story line where actors and intermediaries are

enrolled, and become protagonists and antagonists in the story.

What we end up with is a perception that not only forms the actor’s actions, but are also

used to enroll others in a certain form of knowledge production. It is here where networks

become important as interpretations and actors come together towards a set of actions. If we

understand how these interpretations comes from multiple angles and actors, then we can perhaps

explain how these narratives translate into stories of path creation, sociotechnical systems and

sociopolitical landscapes and the processes which pillar between.

So in other words the point of the interviews and research is to understand the

interpretation and intentionality of action, and then to discuss how this translates to co-

coordination among different actors within a network. Arguably, different actors will have

different interpretations, and therefore the question becomes how will they eventually align, and

what obstacles are in the way. The main result of these narratives distributed in networks is to

reduce uncertainty in decision-making. So for example, while the number of ships that run on

LNG is low, and therefore shows low demand, the actors I spoke to talked about narratives of the

future, where future regulations and government commitments show that the demand and supply

will eventually develop.

Analysis

Current Energy Mix in Southeast Asia – The Sociotechnical System

“If you look at the Philippines, Indonesia and the rest of Southeast Asia the key barrier is two

groups of mafias. One is the diesel mafia and the other is the coal mafia, and there is too much

invested interest in keeping those supply chains going. So unless these mafias are brought to the

table to transition out of their current fuel sources, they will have enough political power to slow

down the whole enabling process on energy mix policies” (Manager, DNV GL4)

The remark from the manager DNV GL outlines an important aspect of energy transition that

involves a two-way process between sociopolitical landscapes and sociotechnical systems. The

political system may be able to end subsidies to oil products such as diesel, which creates room

for natural gas as explained before. Nevertheless, diesel is prevalent in current energy mix, it is

still an easily available fuel, and the infrastructure is already in place. The riots after cuts in oil

4 Personal Interview, 1 Oct. 2015

20

subsidies if anything show the hold diesel has on the market and how the political economy is

closely related between sociotechnical systems and sociopolitical landscapes. If small scale LNG

or other alternative fuel sources are to be enabled politically, the narrative needs to be that diesel,

coal, gas, and renewable energies should co-exist.

Meanwhile the means to which natural gas is presently distributed also remains a part of a

sociotechnical regime. The current means of distribution is also a barrier to small-scale LNG.

Normally the big oil majors does not care about small-scale stuff. Shell bought the shares for

Gasnor (Transport Fuel Supplier) from Statoil, a major shareholder. I heard voices in Statoil

now that it probably wasn’t a good idea, but none of the other oil firms were interested. When

Shell talks about small-scale distribution that are talking about ships primarily. Our business (in

Gaspartners) is limited to 4-5000 cubic meters, while shell is talking about ships up to 12000

tons. (Partner, Gaspartners5)

The quote by Gaspartners show that the big players in LNG tend not to take interest in the

SSLNG business. This is not to say they activity work against SSLNG, but the sociotechnical

system in which these actors dominate creates a barrier for SSLNG to be feasible. There is also a

different perception on what SSLNG is.

LNG has worked in the way that there are large contracts, and large firms or state-owned

companies that have long-term contracts for LNG. It is hard to get into this business because you

can’t but small volumes. But that is going to change as more and more actors are interested in

the distribution of LNG. (CTO, Gravifloat6)

The quote by Gravifloat shows that a momentum is building up as more actors start working with

LNG. The CTO of Gravifloat presents a future where SSLNG will challenge the existing system

of contracts and relationships between state-owned firms and producers in favor of small-scale

distribution and use.

Beyond the Chicken and the Egg - Systems Innovation

“Many of the players on the value chain need to put their heads together, and that in itself is a

barrier. You can have a Norwegian company and you can have a solution, but the upstream and

the downstream parts of the equation must also be ready. It’s a complex supply chain that

requires like minded companies to come together.” (Manager, DNV GL)

The quote from DNV GL shows that a Small-Scale LNG is more than a technological innovation.

Even if solutions are available, the entire supply chain needs to also be enabled. The need for

5 Personal Interview, 28 Sept. 2015 6 Personal Interview 24 Sept. 2015

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networks are also shown as actors need to coordinate along a supply chain network that goes

beyond their own product. The manager at Rolls Royce, for example, argued:

We try to communicate to people that it is okay to go to gas, because that is the story we are

trying to tell, it can only be okay when people are assured that when the vessel is built, they are

going to be able to fuel. And it gets more complicated than that, its also about what the price

point of assurance is of that fuel, what is the training burden, how do I make sure I can operate

safely. How can I, if I want to resell the vessel, sell it globally to areas that do not that LNG.

There is a whole raft of barriers. So in our narrative we are very transparent about the barriers,

we are not selling a vacuum cleaner. If you really need a vessel, anddit is going to operate in this

place, in that time, and if there is not assurance of an LNG infrastructure, then we are not going

to push it. (Manager, Rolls Royce7)

Actors such as Rolls Royce, I argue, coordinate systems innovation through communication. The

quote from Rolls Royce shows however that the narratives the produce are framed by the

sociotechnical systems in which they are embedded. Communication therefore is more than

stories, but is a question of the reality in which they are embedded. Nevertheless, communication

remains an important aspect of coordination, and within the communication, other actors need to

be enrolled and given characteristics that bring power to the story.

But what we do end up doing is saying well, do you know what’s happening in this part of the

world and what’s happening in terms of bunkering? Well of course they don’t, they are busy

operating a fleet of vessels, so our job becomes one of: Well let me introduce you to Pavilion

Gas, and let them explain what they are going to do and how they are going to price LNG. So

you end up bringing together the stakeholders together. They might already be interacting with

one of the class societies or one of the universities, so what happens is that you end up working

with a much wider stakeholder group that you don’t want to meet to sell your product, but this is

the way it has to be. (Manager, Rolls Royce)

As the manager of Rolls Royce mentions communication is closely related to networking. By

bringing actors together such as Ship Owners and Pavilion Gas (Singaporean State-Owned Gas

Broker) Rolls Royce effectively builds bridges between different clusters, or stakeholder groups

within the network. Meanwhile bunkering operators need information regarding the prospects of

demand in the LNG bunkering industry.

What has happened, or what is happening is that the people who want to provide gas the

bunkering company want to know the demand, because if they are going to put the infrastructure

down then they are going to want to know how many ships are going to use it, and at what

volume and what rate. For us we want to know when they are going to put the infrastructure and

how much is it going to be, so that we can help with the business case to create the demand. And

this is not a Mexican stand off, it is a very iterative process. (Manager, Rolls Royce)

7 Personal Interview 30 Sept. 2015

22

As I mentioned before in path dependent processes actors within networks will reproduce

standards, as certain technologies remain dominant (David 1985 in Martin & Sunley, 2006). In

addition, an actor’s capacity to adopt a technology is limited through their network. If a ship-

owner is not connected with a bunkering-operator network for LNG, then the capability to use an

LNG engine does not exist. If bunker operators are networked with prospective ship-owners who

wish to switch to LNG, then they do not have the assurances to put in the capital expenditures for

LNG facilities. All of these problems are a matter of network externalities.

However as Gulati (1999) argues, strategic alliances are formed through networks as

actors obtain information of potential partners through current partners or connections. Rolls

Royce, which has connections to different actors, therefore plays an important role in connecting

potential actors who would otherwise not be connected. The problem with the concept of the

Chicken and the Egg concept is that it places the weight of the decision-making on either party.

Either the ship-owners need to start converting, or bunker operators need to start building.

However as a explained with the sociotechnical systems concept, both ship owners and bunker

operators tend to reproduce standards such as MGO or HFO fuels due to the current regulatory,

technological and cultural frameworks in which they are embedded. In other words, there is a

relational context towards which these actors operate in which produce barriers for both parties.

Nevertheless there exist niche opportunities within a current sociotechnical system where the

barriers are not as explicit and there is room for LNG bunkering to start. The manager at Rolls

Royce argues that certain areas of operation will gain momentum first.

That’s your chicken and the egg – The reason why they ferries are did it and the reason why the

tugs are going it, is because they have more defined areas of operation, either route wise or

scope wise. However when it comes to open sea, and when you get to offshore which are

servicing assets much farther in a field, which perhaps one day will be operating in west Africa

and then to the north sea – that’s where is becomes difficult because you need a much wider

distribution of the infrastructure to enable that. (Manager, Rolls Royce)

Systems Innovation can happen when actors build momentum, enrolling actors and creating new

configurations in existing sociotechnical systems. According to Rolls Royce this will start in

niche areas of operation, where LNG bunkering is feasible in scope. The manager provided an

example of the tugboats planned and designed by Keppel (A Singapore Offshore and Shipping

Collaborate) to illustrate his point that I will discuss later.

23

The systems innovation also requires an enabling process in order to gain such a

momentum.

We want to stimulate the industry to think that way (in terms of LNG), to provide some thought

leadership around it. Try to lower the knowledge barriers that exist and help them on to

technical side to make sense of the feasibility of it. Our role is limited to enabling and

facilitating, but being independent, we are expected at least to bring people together. (Manager

DNV GL)

DNV GL takes this role as a classification society in order to enable and facilitate the process. As

we begin to see actors like Rolls Royce and DNV GL, as well as the smaller entrepreneurs, work

to bring the supply chains together, the network perspective comes in. If any single actor had

attempted to enable the industry by itself, then this would be difficult. In other words, influence is

not found simply between two actors, but is developed in networks from multiples angles and

perspectives.

What this approach shows is that it is important to understand the relational context towards

which actors operate and thereby coordinate a new configuration where it is feasible. Doing so,

however, will also require an understanding of both time and space, or where and when do new

opportunities arise.

Sociopolitical Landscape

So what we are seeing now is a very slow, gradient uptake starting to happen. We expect a

hockey stick; 2019 will be a real turning point for LNG adoption (for maritime transport)

because at that point the infrastructure will be much more prevalent. We see particularly here in

2017 there will be small scale bunkering available, as long as the government delivers on their

commitments. Places such as Indonesia recognize that because they have got such a disperse

island across so many different islands that they cant physically run pipeline across, that they

will need to move towards alternative distribution of energy. (Manager, Rolls Royce)

The manager at Rolls Royce points out that the current political landscape provides the points of

assurance where SSLNG is feasible. The developing energy politics in Indonesia runs parallel to

the development of LNG bunkering.

And the reason I am waffling about this is that you need some form of LNG transportation by

short-sea shipping to enable the connectivity and energy flow to happen…if we are going to have

some kind of LNG distribution then there is going to be a demand for small LNG cargo or

vessels, so maybe the demand is there. All of it is about trying to predict the uptake, but there is

so much uncertainty about the economy, since it is slowing down, and china is taking a bit of a

cough at the moment, so what does this mean for the whole region, we don’t know. (Manager,

Rolls Royce)

24

The story from Rolls Royce shows how the conditions on a sociopolitical landscape is connected

to development of SSLNG. While on one hand the manager paints a positive picture of LNG

adoption in 2019, on the other hand shows that this certainty lies on the sociopolitical conditions.

These sociopolitical conditions can both disrupt existing sociotechnical regimes, but also have

direct influence on SSLNG as a systems innovation.

Developing Price Mechanisms and The Political Economy

In between the sociopolitical landscape and the sociotechnical regime lies also a question

of economics, as price mechanisms are largely influenced by regulations and state-corporate

relationships that can determine pricing. The professors at the National University of Singapore

explained the political situation in Singapore

We had a power outage once or twice due to the pipelines (from Indonesia and Malaysia)

somehow not delivering gas to Jurong Island. Therefore, they realized that we could not rely on

pipelines, so therefore there is LNG. About 10 years ago the CEO of Petronas, Mari Khan, who

is trained as an accountant, but sees the business… He says the historical arrangement is all

long term contracts, because the producers need to invest, so that they can produce and get the

market share, so you have traditional customers like Japan and Korea and these are all long

term contracts, and the infrastructure is very expensive. So if Singapore had an assurance of

supply from different sources. The first contract will go to BP. At that time BP worked as an

aggregator, they were a source of gas and basically cut a price. It did not matter where they

sourced it, as long as you paid. (Professor, CORE8)

So in other words price mechanisms a meshed between sociopolitical landscapes and

sociotechnical systems.

A large challenge with the distribution of LNG in Southeast Asia are the supply

bottlenecks and high prices. Key questions are what supplies are available, the competiveness of

gas compared with coal and other energy sources, and the price to which LNG will reach the

markets. Oil Indexation is currently the main price indexation in Southeast Asia. Oil Indexation is

a good example of path dependency, where historical choices influence the current path in which

a particular technology takes. Oil Indexation started in the Netherlands when natural gas was

exported from the Groningen field in 1964 (Corbeau, Braaksma, Hussin, Yagoto, & Yamamoto,

2014). The Dutch government wanted the demand for gas to grow, yet not to sell it at too low of

a price. Therefore, they used the “netback value principle” where gas is compared with its main

alternative, which was gas or fuel oil. Oil indexation spread to Asia, particularly to Japan who

8 Personal Interview, 30 Sept. 2015

25

was importing oil in the 1960s. Today however oil in has a lower share in the energy mix, as

other fuels such as coal, nuclear and renewables are more and more prevalent. Indexing the price

of gas on oil is a hamper to the development of natural gas as a competitive fuel source on its

own.

The current price mechanisms and prospective price mechanisms are a key process in the

current sociotechnical system. The actors that I spoke to clearly stated how these developing

price mechanisms relate to their firm strategy. According to the CTO of Gravifloat he argued that

particularly in Southeast Asia there needs to be the right price mechanisms to allow LNG to come

into the market. However, he argued that LNG could become cheaper if you consider that the

price of power is 80% energy and 20% infrastructure, and the key is to optimize the energy price.

He argued that in order for LNG to become cheaper than it should be decoupled from the price of

oil. While the price of LNG lie under oil, there are premiums in regards to infrastructure building.

Several developments on the sociopolitical level point towards a future where gas will

decoupled from oil price indexing. In Singapore, for example, the national security issue

regarding receiving gas by pipelines prompted the government to explore building receiving

jetties for LNG according to the Manager at DNV GL. While it first went to the private sector,

but the private sector said they could not make money off it, so therefore the government set up

the firm SLNG and financed the whole plant. Two receiving jetties was built, with a third one

planned. However, during the process the government also built the bottom infrastructure needed

in order to build a trading hub for LNG. According to the Manager at DNV GL, while the top

infrastructure is not built yet, they are ready to build as soon as they get orders in. Pavilion

Energy will also set up a Singapore price index for LNG, based on weekly submissions from

LNG producers and their assessments on LNG cargo. Developing a new price index may shift the

Asian LNG market away from higher premiums paid compared to the rest of the world through a

clearer benchmarking and price discovery mechanism.

These developments point towards a future LNG market that also provides the agency for

firms like Gravifloat to lead a process of path creation and hence take part in a reconfiguration of

the existing sociotechnical system. However while the CTO of Gravifloat is interested in the

developing price of LNG, he notes that his customers simply want to buy Kilowatts, and it is up

to him to translate the costs of energy and infrastructure or pass-through fees into kilowatts.

26

However, the challenge is that the price for building LNG terminals are expensive. Gravifloat’s

solution in the case is to build terminal modules at shipyards which can then be transported by

sea to the desired location. The modules can then be grounded onto the seabed. This solution is

cheaper as the competence and equipment is already available at the shipyard, and the modules

can be produced at a larger scale. The gravifloat system is based on exsiting technology within

the oil and gas sector. In addition, the choice of modules can suit customer needs. However in

order to sell modules entrepreneurs face challenges of coordinating upsteam and downsteam

solutions. Gravifloat, for example, has an alliance with the corporation Siemens who develops

power stations. When Siemens sells power stations that run on LNG they cooperate with

Gravifloat. Entrepreneurs like the CTO of Gravifloat end up connecting with other firms in order

to organize networks in order to both create and connect supply and demand.

Networks – Reconfiguring Supply and Demand

Although networks are identified in order to explain systems innovation, there is also a

question of how networks are formed. Entrepreneurs in niche markets such as SSLNG need to

coordinate a network of suppliers and customers in areas where supply and demand may not

readily be available. Small firms in particular play a role.

It never ceases to amaze me that some of the smaller companies know more about these big ticket

things, which actually have little direct relevance to them, other that they know that those cogs

need to alight before they can sell their product. Talented individuals who are good at

networking, or googling, which every way it is, they all connect the dots (Manager, Rolls Royce)

The director of Gaspartners had 40 years of experience in the petrochemical industry. He has also

lived in the Asia pacific since 1995. In 2012, the director and his partner set up Gaspartners as

they saw the opportunities for Small-Scale LNG in Southeast Asia. What important to note about

the experience of the Director and other entrepreneurs in SSLNG is that their experience and

connections allows them to understand the sociotechnical systems and the markets that they seek

to create.

We saw what had been done in Norway, with Small-Scale Distribution of LNG, and thought that

this has to be applicable to other parts of the world, like Southeast Asia. So we can substitute

diesel power generators, because LNG gas turbines is cleaner and cheaper (Partner,

Gaspartners)

Gaspartners works as an operator, supplier and designer of LNG bunkering and receiving

terminals. The Director at Gaspartners told a story on how he is working to loading Isocontainers

27

and Tankers in area where the molecules needed to define the vicinity. He has contact with a

company in Australia, but he has not formalized yet a deal because the demand is not there.

Keppel has yet to build the tugboats because they are not yet assured supply.

In order to create the demand Gaspartners is working with Keppel in order to provide a

LNG supply system. While Gaspartners does not build the supply system themselves they went to

firm called Aritas in Istanbul. Aritas delivered the LNG supply systems for the Fjordline ferry

vessels in Norway. Gaspartners can equip the Keppel Tugboats with Isocontainers as LNG

bunker tanks.

However, another barrier is that the Singapore Terminal operator, SLNG has yet to

implement a solution to build the capacity for LNG tank trucks to load one of the current import

terminals. As there is uncertainty regarding interrupting the process of fueling the gas stations.

Large consumers have a certain quantity they need delivered and therefore the costs for the

operation of tapping out LNG needs to be determined. In addition, the operations will not be

profitable in the beginning.

So what the example of the Tugboats is meant to show is that on one hand entrepreneurs

use networks to connect and create supply and demand, but on the other hand their business is

related to other interrelations between actors. Nevertheless, entrepreneurs are able to coordinate

supply chains not only locally, but also throughout global markets. When using the concept of

networks to explain systems innovation we must be able to follow these interrelations in order to

paint a picture on how SSLNG will develop.

So you see, how would you describe it, lights flashing around the globe and you just

start to see it, it is not a warm glow by any stretch. We are trying to find these key projects to

show that it can be done. Nothing is more powerful then demonstration. (Manager, Rolls Royce)

While we see many initiatives for SSLNG and LNG bunkering, not only in Southeast Asia, there

is a question of how these initiatives will eventually be coordinated in order to facilitate a

transition in the sociotechnical systems.

28

Conclusion

The conceptual framework that has been developed in this report will inform later

research into the topic of Small-Scale LNG in Southeast Asia. I define SSLNG as a systems

innovation because actors and elements within an existing energy needs to be reconfigured into a

new system. This approach is high contextual and takes in account social, economic and political

areas. The model that I presented in the report asks how do developments on a sociopolitical

landscape influence a sociotechnical system both in regards to disruption and political economy. I

also note that developments in the sociopolitical system can give agency for path creating

entrepreneurs to reconfigure sociotechnical systems. I also described the stability of

sociotechnical systems through the concepts of path dependency. While the conceptual model

does not encompass the entire complexity of networks within these systems, I argue that it is at

least useful for organizing actor’s experiences and intentions in qualitative research. The next

steps will be to map out the relevant actors and elements, relate different views and “contested

futures” and identify the mechanisms that explain how systems innovation occurs.

I mentioned earlier that there also is a question of global production networks particularly

concerning suppliers. I will explore this topic in further research as it will bring a much-needed

perspective on the geography of transnational relations in what is a highly globalized industry. It

is also important to show how developments, such as SSLNG in Norway, can influence

developments in Southeast Asia.

29

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