LNG trading transformed

80 Pages·2017·12.38 MB·English

Dawn of a global
commodity
LNG trading transformed
October 2017
LNG industry fnally coming of age
Drivers and inhibitors of commoditization
Thriving in a commoditized LNG market
Shifting strategies in a new business landscape
Thoughts from the LNG industry
Video interviews with Jera, BP, Cheniere, Anadarko, RWE, Pakistan LNG
LNG market analysis and forecasts
From across the S&P Global group
www.platts.com
2 © 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
Contents
October 2017 Introduction .................................................................................................. 4
Executive summary ...................................................................................... 6
Lead Author
Thriving in a commoditized LNG market
Abache Abreu
LNG News & Analysis Key takeaways .............................................................................................. 8
S&P Global Platts Foreword ..................................................................................................... 10
Editors Thoughts from the industry ........................................................................ 12
Ross McCracken Video interviews with Jera, BP, Cheniere, Anadarko, RWE, Pakistan LNG
Energy Economist LNG commoditization and the JKM evolution ............................................. 14
S&P Global Platts Timeline of the LNG industry
Stuart Elliot Risks evolve for new US LNG projects ......................................................... 16
Generating fuels news
Flexibility at sea ......................................................................................... 20
S&P Global Platts
Moving regulatory targets in age of Trump .................................................. 24
Mriganka Jaipuriyar
Associate Editorial Director
S&P Global Platts Global forces of LNG commoditization
Contributors World map of LNG ....................................................................................... 26
Marc Howson, Paul Bartholomew, Richard Legacy Asia ................................................................................................. 28
Langberg, Michael Ferguson, Rachel Adams- Time to fex buying power
Heard, Chris Newkumet, Eriko Amaha, Emerging Asia ............................................................................................. 34
Kenneth Foo, Max Gostelow, Luke Stobbart,
Future market balancers?
Desmond Wong, J Robinson, Ingrid Furtado,
James O’Connell, Wyatt Wong, Edwin Loh and China .......................................................................................................... 38
Michael Tsahalis An uneven playing feld
India ............................................................................................................ 42
With analysis and forecasts from across
the S&P Global group. Feeding the tiger; the search for market-priced LNG
Australia ..................................................................................................... 48
Design and Production A pivot toward fexibility
Amelie Yergeau and Martina Klančišar
Middle East ................................................................................................. 52
Content Project Manager Shifting sands, changing strategies
Carrie Bharucha
Africa .......................................................................................................... 56
S&P Global Platts FLNG: a pathway to Africa’s LNG renaissance
20 Canada Square, 9th Floor
London, E14 5LH, UK Europe ........................................................................................................ 60
Through the European looking glass
President United States .............................................................................................. 66
Martin Fraenkel A revolution in the making
Chief Financial Offcer Latin America.............................................................................................. 72
Hywel Thomas Small-scale efforts driving commoditization
Chief Operating Offcer
Sue Avinir
For a richer, interactive experience, with videos, infographics and many other
Global Head of News, Metals, features, access the digital version of the LNG special report Dawn of a Global
Agriculture & Head of Asia Content Commodity by scanning the QR code with your smartphone or visiting
Sarah Cottle www.platts.com/lng-report
© 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 3
Introduction
The LNG industry is well into its third and most signifcant expansionary
phase, one in which supply is racing ahead of demand. But to turn an old
adage on its head: there is nothing like low prices to cure low prices.
The industry’s expansion is part and parcel of two overarching trends: the
gradual spread of gas-on-gas competition that has emanated from both the
US and North West Europe for more than a decade, and the global transition
to lower emission energy sources, which is making LNG a key fuel of choice
for many countries seeking to address chronic energy defcits.
LNG is well but ambiguously placed. It can bring the cleanest of fossil fuels
to global markets and expansion has de-risked the supply chain. But when it
Abache Abreu arrives it must compete with local gas, other domestic sources of energy and
Senior Editor, LNG News & Analysis,
Asia-Pacifc and Middle East alternative imported fuels.
S&P Global Platts Moreover, the supply of LNG is only as good as the weakest link in the chain.
It requires heavy investment from both seller and buyer alike.
It needs gas production, liquefaction, transport, import facilities, storage and
then distribution infrastructure before a single, chilly molecule can reach the
end user. And it needs effcient markets at each and every point along the
line. A market distortion in one element can have huge ramifcations all the
way back up to the supplier.
The high risk this entails has historically promoted infexible supply
agreements, necessary to provide investment certainty, but LNG is
increasingly landing not in regulated but liberalized, competitive markets.
The juxtaposition of external infexible supply and internal competition
cannot help but create stresses and strains that are ultimately
unsustainable.
It is not just a “buyers’ market” in temporary supply and demand terms; it is a
market that is structurally changing at both the point of production and the
point of consumption.
This poses major challenges for the traditional LNG supply model, but
within it also provides the seeds of resolution.
The industry’s expansion is making LNG a global commodity in its
own right, but to consolidate that trend new markets must be
opened, and that means extending LNG supply chains into
less credit-worthy, higher-risk markets and into
industries relatively new to LNG, such as maritime and
land transport.
It is a simple equation: in both these markets,
and in existing, liberalizing markets, LNG must
be at least as fexible as its competitors to
succeed.
4 © 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
This inevitably shifts the focus of risk from buyers to sellers. The
question then becomes how to mitigate this new risk, and the
answer lies, as in other markets, in the development of
improved fnancial architecture, greater market liquidity,
and transparency, which allow risk to be shared by third
parties, whether fnancial institutions, pension
funds, traders or otherwise.
That transformation is taking place, and
innovation and adaptation are required to
transition from the infexible, supply
agreements of the past into a more
versatile and nimble industry
capable of opening the doors
to new markets.
The growing pains are
sometimes acute, but
the LNG industry
is fnally
coming of
age.
© 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 5
Executive summary
Thriving in a commoditized LNG market
The reconfguration of supply and and deregulation in their domestic Nowhere have the disadvantages of
demand in the LNG industry is on markets, a combination that is rigid contracts become more
course to change the nature of forcing them to prioritize apparent than in India, where
global trading drastically and proftability and risk management downstream price sensitivity
permanently. over security of supply in their LNG increases the risk of term deliveries
The traditional ways of doing purchases. Japan, South Korea and becoming uncompetitive, or China,
business, based on destination- Taiwan represent about half of where the struggle of state-owned
restricted, oil-indexed long-term global LNG consumption, an companies to absorb take-or-pay,
contracts, are disappearing, making indication of their strong bargaining oil-priced volumes is hindering the
room for enhanced fexibility and power in a buyers’ market and the country’s efforts to turn third-party
interconnectivity, promoting a more critical role they will continue to access guidelines into law. More
liquid, competitive and transparent play in reshaping the way LNG is supply fexibility, greater
marketplace. traded. Some have already entered infrastructure access and domestic
the trading space in a bid to boost prices that more closely refect LNG
Suppliers, challenged with high
optimization capabilities, and are fundamentals would help these
production costs or waiting to Asian majors open immense
building hedging expertise to
come on stream once the surplus opportunities for both domestic and
mitigate risk should the market
erodes and prices recover, may see international LNG stakeholders.
tighten and prices rise.
this as negative. But new
Traders have become key facilitators
opportunities are also up for grabs In emerging import markets,
of LNG commoditization, having
for those able to respond fast. particularly across South and
helped increase competition, cargo
Accepting that buyers’ willingness Southeast Asia, the prospect of
churn and the interconnected nature
to sign long-term deals largely plentiful, cheap LNG for years to
of the physical markets, while
depends on their ability to reduce come is encouraging the
actively supporting growth in the
risk through destination flexibility development of a new wave of
derivatives space. Trading can only
is a step towards securing new fexible regasifcation terminals,
grow from here, fueled by a wave of
contracts and project FIDs into the amid favorable policies that support
fexible supplies, shipping liquidity
2020s. Continued investment in a growing role for gas in the energy
and the emergence of new untapped
emerging markets should help mix. Investment is pouring in as
markets, but its nature is also
producers diversify downstream demand from Northeast Asia and the
changing. Competition is growing, as
portfolios and create outlets to Middle East slows and international
buyers and suppliers are entering the
absorb growing global supplies. investors appear less constrained by
trading space, while enhanced price
Entering further into the value conventional standards of
transparency is eroding trading
chain would boost their ability to creditworthiness. The level of
margins. Increasing fexible supplies
optimize cargoes and capture spot success and participation of these
from North America, Middle East and
value, while supporting the markets in the future LNG sector will
Asia-Pacifc are reducing regional
development of the LNG ultimately depend on the
and seasonal price differentials,
derivatives market could help limit continuation of strong government
leading to fewer arbitrage
future exposure to price volatility. policy initiatives to limit coal
opportunities. As competition
Legacy buyers in northeast Asia dependency, accelerate energy sharpens and margins shrink,
have seen the supply glut coincide pricing reforms and pursue more diversifying portfolios into new
with slowing consumption growth fexible LNG contracts. geographies should boost traders’
6 © 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
ability to respond fast to short
arbitrage windows, while expanding
across the supply chain could ensure
continued access to both strategic
information and new buyers.
On the fnancial side, the ability of
lenders to adjust to the new market
Highlights
environment will be crucial to
ensuring a continuous fow of Suppliers: Accepting that buyers’
willingness to sign new deals depends on
fnance in the new marketplace,
their ability to reduce risk through greater
and avoid a supply shortage later
fexibility is a step towards securing new
into the 2020s once the current contracts and project FIDs
wave of projects reach completion.
Legacy buyers: Building optimization and
Lenders have been used to funding hedging capabilities should help mitigate
projects supported by rigid oil- the risk emanating from deregulation
and slowing consumption growth in their
linked contracts supplying
domestic markets
regulated downstream monopolies.
Emerging buyers: Thriving in the new
With that old world order ebbing,
market will depend on strong policies aimed
LNG sector fnance will largely
at limiting coal dependency, accelerating
depend on acceptance of the energy pricing reforms and pursuing more
fexible LNG contracts
increasingly pivotal role of spot
markets, with improved operational Traders: Diversifying portfolios across the
supply chain and into new geographies
effciencies supporting LNG
should boost access to new demand
economics and stronger pricing
centers and the ability to respond fast to
benchmarks strengthening the short arbitrage windows
market’s hedging capabilities.
Lenders: Financing will depend on
acceptance of the growing role of
By the early 2020s, LNG industry
spot markets, with robust pricing
stakeholders will be facing a very
benchmarks strengthening the market’s
different market from the one we hedging capabilities
know today, and there are many
reasons to be optimistic. A liquid,
fexible and transparent spot
market will be key to breaking price
segmentation, improving fair
competition, boosting energy
accessibility for new markets, and
facilitating the increasingly vital
role gas is set to play in the future
energy mix of a post-COP 21 world.
© 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 7
Key takeaways
Interconnectivity internal domestic market conditions offer by fnding
competition means sellers must build innovative ways of mitigating the
The emergence of US LNG and
new relationships and change their changing allocation of risk.
Australian coal seam gas-based
value propositions to address the Aggregating both demand and
LNG production have created
requirements of the new conditions supply allows trading entities to
signifcantly larger direct
emerging in these markets. break the direct link between a
connections between the domestic single LNG source and buyer, and
gas markets and exports of LNG at the same time enhance security
producing countries. At the same Risk allocation of supply. Of equal, if not greater,
time, the expansion of LNG trade The allocation of risk is shifting to importance, it allows them the
has formed bi-directional price different parts of the supply chain; fexibility to take maximum
transmission mechanisms buyers face new risks in their home advantage of temporary periods of
between previously fragmented markets, and are pushing that risk scarcity pricing in any of the
regional markets. Some countries back up the supply chain to LNG growing number of LNG markets.
are now both LNG exporters and suppliers, making the traditional
importers. LNG supply model – long-term,
Flexibility
oil-indexed, take-or-pay contracts
Liberalization with destination restrictions – no When taken together, the changes
longer ft for purpose. on the supply side and in these
On the demand side, legacy LNG different import markets create a
markets are liberalizing, creating a new and fast-evolving environment
Aggregation
much more diverse and competitive in which the point-to-point,
environment, in which LNG is just one Traders and portfolio LNG bilateral trade model of the past no
competing energy source. More suppliers are grasping the longer meets requirements. As a
actors on the buy side sensitive to opportunities these new result, suppliers need to develop
8 © 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved.
fexible business models that can Market evolution these markets are also likely to
meet the needs of all market types deliver periods of scarcity pricing
With these changes, LNG markets
in a non-discriminatory manner. that require large supply volumes.
are evolving, albeit in different
This means shorter, less-restrictive
directions. Some are ‘fux’ markets The third type of market – baseload
contracts with new pricing
subject to rapid change — for — is the most dependable, although
mechanisms.
example in the Middle East, with not without uncertainties. Here, LNG
the development of East already occupies or promises to build
Financial architecture Mediterranean gas, and in Latin a long-term position in baseload gas
America, with the development of provision, for example in the
In this more fuid, fexible and
Argentinean shale and Brazil’s populous nations of South Asia or in
interconnected environment, both
sub-salt oil and its associated gas. the legacy markets of North Asia. The
buyers and suppliers alike require
In these markets, LNG appears expansion of gas use in key sectors,
more sophisticated fnancial
destined for an uncertain, and such as power, fertilizer production,
instruments to mitigate the changing potentially temporary, often
petrochemicals, city gas or transport,
allocation of risk. Price transparency seasonal, balancing role.
is a major and well-articulated
and liquidity are essential and it is
component of the country’s energy
Other markets are more clearly
incumbent upon Price Reporting
‘option’ markets, where LNG policy, which promises long-term
Agencies, such as S&P Global Platts,
provides a more signifcant demand growth. In these markets,
trading platforms and exchanges, and
balancing role and meets a variable there are few alternatives: those that
market participants to engage in the
proportion of baseload gas demand do exist carry signifcantly higher risk
construction of the fnancial subject to price, for example in in terms of safety, cost, local air
architecture that can mitigate the Europe and China. Pipeline gas pollution or achieving national
challenges presented by the new supply and alternative energy commitments to global climate
world of LNG trade. sources provide a price ceiling, but change mitigation.
© 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved. 9
Foreword
When it comes to understanding how energy markets will evolve in the future,
what we really need is a crystal ball. This is particularly true for LNG markets.
The LNG industry – notably the supply side – was spoilt by years of high
prices and Asia seemingly ready to absorb every drop of LNG at any price.
This drove US and Australia to build massive amounts of LNG export capacity
that is currently coming online. This comfortable vision of the future,
however, has collapsed amid growing uncertainties around future LNG
demand and lower prices. Tremendous changes lie ahead that could bring
about a complete reconfguration of the LNG business.
This Global LNG Special Report investigates the future of various regional
Anne-Sophie Corbeau
LNG markets, the potential commoditization of LNG trade and how key
Research Fellow II
King Abdullah Petroleum Studies and stakeholders are transforming their traditional business models.
Research Center This reconfguration is not only a question of supply and demand. The very
nature of LNG trade itself is changing as the industry reinvents itself.
The pre-2000 LNG “basket of kittens” that represented an industry consisting
of a few buyers and sellers engaged in friendly rivalry has been replaced by a
very competitive multiplayer environment. These days, when you attend an
LNG conference, you are likely to come across new company names in every
part of the LNG value chain. The number of countries looking at LNG imports
is going through the roof. Within traditional importing countries, new entrants
use LNG imports to gain market share through impending liberalization
processes, while traders are eager to have a role and traditional players
create their own trading entities. The LNG world is growing, and new players
bring new business models and different requirements.
The old model of a metaphorical gas pipeline foating over the sea is gone.
Flexibility is now the key: any cargo can go (almost) anywhere and change
destination mid-journey depending on regional prices.
The traditional oil indexation model is under threat, restrictions on
destination are being challenged by Japanese regulators, while buyers facing
demand uncertainties increasingly opt for shorter - less than 10 years -
contracts, smaller quantities and more destination fexibility.
Aggregators handling a portfolio of LNG supplies have become the norm.
These changes are daunting for companies investing billions of dollars in
liquefaction projects that would operate for at least 20 years. Both new and
existing buyers currently have little appetite for volumes above 1 million mt/year,
which require suppliers to fnd more buyers to support any individual train.
Beyond the question of fnding a creditworthy buyer to commit for 20 years,
uncertainties now surround the evolution of pricing and contractual frameworks.
Buyers currently have the upper hand and their priorities have changed.
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