Identifying LNG trading opportunities as volumes and flexibility grow

For more than two decades, the global liquefied natural gas (LNG) industry has been growing rapidly to the point where trading reached 290 million tons in 2017, according to the International LNG Importer’s Group, GIIGNL.

Wave after wave of new production has swept into the market — notably from Qatar (currently the world’s biggest producer), Australia (now challenging Qatar for pole position) and the United States, which, thanks to the remarkable North American shale gas revolution, is hot on the heels of both its main competitors.

New liquefaction capacity has also been coming on stream in Malaysia and Russia and the queue to develop substantial new supply capacity includes Mozambique, Nigeria, Canada and Russia, along with the large player expansion (Qatar, Australia and the U.S).

More growth in the pipeline

LNG supply grew by almost 10 percent in 2017 alone, according to GIIGNL. Indeed, GIIGNL says 2017 was a “year for pioneers,” with the start up of the world’s first floating liquefaction project, Malaysia’s PFLNG Satu; the first exports from the Arctic as the Yamal LNG project began in Russia; and the first operation of LNG bunkering vessels in Europe.

Growth continues with numerous liquefaction facilities already under construction due to come online by the early 2020s.

Fears that production growth on this scale might lead to oversupply have so far proved groundless. Demand has been growing much faster than expected, especially in China, which has overtaken South Korea to become the world’s second-largest LNG importer, with Japan holding on to first place.

LNG trading dynamics getting ever more complex

But volume growth, impressive as it has been, is far from being the only significant change in the LNG business. What used to be a “liner trade” — with dedicated ships plying between a given liquefaction plant and a given regasification terminal — has given way to more complex patterns of LNG trading.

As a consequence, the demands made on the systems used to conduct LNG trading and to manage risk are getting ever more onerous, and there are clear benefits in implementing energy trading and risk management (ETRM) software systems dedicated to managing the complete LNG value chain.

For decades, LNG sales and purchase agreements (SPAs) were long term, with pricing mechanisms tying the price of LNG to that of crude oil, and destination restriction clauses that forbade buyers from reselling cargos. The terms of these contracts were so rigid that LNG projects were sometimes described as “virtual pipelines.”

Long-term SPAs still play a crucial role in the industry, especially in underpinning the capital-intensive economics of new projects, which generally require some degree of project finance. But contracts have become increasingly flexible, particularly with regard to destination, with pricing mechanisms becoming more diverse and the proportion of spot and short-term trading continuing to rise.

According to GIIGNL, spot and short-term imports, defined as volumes delivered under contracts with a duration of four years or less, increased by 2.1 million tons last year to 77.6 million tons, a 27 percent share of the market.

GIIGNL defines “pure spot” LNG imports as LNG deliveries that occurred less than three months from the transaction date. These imports reached 59 million tons in 2017, a fifth of total volumes. “Spot imports were facilitated by LNG contracts with destination flexibility, by increased contracting for portfolio trade and by the growing volumes handled by traders,” says GIIGNL.

Why an integrated approach to trading matters

Making the most of the opportunities presented by these market developments, while effectively managing risk, is especially challenging in the LNG business because of the need to manage the end-to-end value chain. This is particularly true of the projects in the U.S., which generally aren’t integrated into the upstream but rather source their gas supply from the pipeline network.

Trading was much more straightforward in the days when almost all LNG supply took the form of “liner trade.” Generally liquefaction facilities were integrated into their own upstream gas production facilities and cargos were shipped from one fixed point to another. It was feasible to manage trade of this simplicity with spreadsheets or enterprise resource planning (ERP) systems.

Today, LNG trading takes place in a very different world and an integrated ETRM system has become essential if all available opportunities are to be exploited in real time, given the market insight that this demands.

Consider the various elements that need to be managed. A reliable gas supply needs to be sourced, and pipeline capacity booked to ensure it can be transported to the liquefaction plant. Once natural gas has been liquefied, the LNG needs to be stored and storage tanks need to be carefully managed to ensure they do not reach capacity before an LNG tanker arrives to load a cargo, and finally a counterparty needs to be arranged to accept the delivered cargo.

LNG shipping management is much more complex today because of the greater number of industry players, the growing number of possible destinations, the port fees and canal charges that need to be paid and the need to ensure that an LNG tanker will be compatible with facilities at the destination port. The chosen ETRM system should be able to interface with the specialized systems that are used to manage LNG shipping and the annual delivery program (ADP) of a liquefaction plant.

At the other end of the journey, there is again the need to manage storage while the LNG is regasified and delivered into pipeline networks or loaded onto LNG trucks.

A single source of truth

All the while, industry players need to keep an eye on costs and on opportunities that might arise to divert an LNG tanker to a more lucrative location, given the short-term movements that take place in LNG prices and the opportunities these create for arbitrage. Such diversions have become an increasingly common feature of the LNG business but they require a detailed understanding of real-time positions, which an advanced ETRM system is well-suited to provide.

Today’s cloud-based ETRM systems provide complete front-office to back-office capabilities for LNG supply, transport and trading, and can handle physical gas and LNG as well as financial trading and hedging. The benefits include aggregated views of positions, risk and, ultimately, of cargo profit and loss.