cancel
Showing results for 
Search instead for 
Did you mean: 
cancel
Showing results for 
Search instead for 
Did you mean: 

LNG - an emerging commodity market!

Moderator

The global Liquefied Natural Gas market is, and has been for a while, in transformation. It’s perhaps the fastest growing energy market in the world.

Last year Global Trade Review posted an article where they stated that we are witnessing the birth and emergence of a new commodity market.

The US energy information administration (EIA) reported in their June 2018 issue that the global LNG trade continues to grow.

In 2017 the global trade in LNG reached 38,2 billion cubic feet per day, which is the highest yearly increase (10%) since 2010 according to the International Association of Liquefied Natural Gas Importers.

Australia and the United States are among the countries with the largest increase in exports. But also Angola, Nigeria, Russia, Malaysia and Brunei experience an increase.

On the import side Japan is by far the largest buyer but China had the largest growth globally in 2017. Asian countries accounted for 74% of the total increase.

Producer forecast expect global LNG trade to grow by 50% in 2020 compared to volumes in 2014.                                                                      (https://www.eia.gov/todayinenergy)

pexels-photo-799096.jpg

 

 

As supply is racing ahead of demand, and the world focus on lower emission energy sources, the LNG industry is expanding. There are many reasons why supply is in abundance.

For example, global trade review states that the Fukushima accident in Japan 2011 had an effect on governments around the world as they switched off nuclear plants and speculated that gas would take its place as an energy source fuel.

New supply has come on stream from the US and Australia where shale revolution saw it transform from importer to exporter.

As a result, we have seen a reduction in gas prices when the growing demand hasn’t been able to keep up with the supply.

 

This is pushing the producers to offer more flexibility in a market that has traditionally been quite stiff and dominated by a small number of big players. The competitive space that the independent commodity traders are taking advantage of is a result of this imbalance.

 

 

Both dry and super-cooled gas normally sell under long-term contracts that lock in producers and consumers, leaving little room for intermediaries.

Mainly because it used to be considered high risk as it needs production, liquefaction, transport, import facilities, storage and distribution in order to move from seller to buyer. And when it arrives it must compete with local gas and other sources of energy.

But an onging supply glut in the market make buyers somewhat hesitant to enter long-term commitments as they have lost out in the past when value of LNG has been dragged down because of the plunge in oil prices in 2014.

Contracts entered 20 years ago are now coming up for expiry and producers struggle to renew and replace them.

 

As a response to the changing market producers have been forced to adapt as buyers demand more flexibility. For example, Japanese buyers will from now on not enter new long term contracts with destination restrictions, i.e. clauses that regulate where a cargo must be delivered and limit buyers from reselling excess gas.

Also existing contracts are pushed to renegotiate.

 

Another driver of the growth is the increased use of floating storage and regasification units (FSRUs). This attracts new markets as this means lower upfront costs and increased mobility.

According to Oxford Energy Institute the capital cost for a FSRU is about 40-50% less than an onshore terminal, and they are often leased as the vessel is normally owned by a shipping company and can therefore be reassigned on project completion. This is a major advantage over onshore terminals which require a big land and construction cost. And with a flexible asset like FSRU it’s easier to meet seasonal demands in different parts of the world.

As an example, the same terminal that is used in Kuwait from March to November when gas demand for air conditioning is high is used as a LNG export tanker during the winter months.

The tankers has become larger and can now carry up to 6 MTPA.

In the beginning the import market was ruled by South Korea, Taiwan and Japan. Now many countries have established import terminals, and due to the FSRU’s traders see their opportunity to act as aggregators managing portfolios on short-term basis.

 

 

Commodity traders see lots of opportunities opening up in trading in order to absorb the excess LNG.

Trading houses have been doing very well in Egypt, Bangladesh, Pakistan and Angola. Especially Trafigura and Gunvor have increased their investment into LNG infrastructure. By working closer with national energy companies they have integrated themselves along the supply chain.

 

Trafigura have launched a master sales and purchase agreement (MSPA) in LNG trade. This is a way to standardize terms and conditions which offers transparency and better conditions for new entrants, all of which work towards boosting liquidity in the sector.

Another liquidity boost is the growing number of price indexes and derivatives markets in tune with LNG.

 

Head of trade finance in Trafigura explains that also the financing side is changing. They help educating the banks they work with to understand how the trade works as it differs from other commodities.

Trafigura LNG head Hadi Hallouche tells global trade review that this market itself has grown in liquidity and in number of players. Lots of companies are now trading LNG, both national companies and private equity funds. (https://www.gtreview.com/magazine/volume-16issue)

 

Just a few years ago the market consisted of big companies like BP, Shell and Chevron. Companies with no need for commodity trade finance. Now, with more and smaller players, more and more banks enter the LNG territory.

And there’s a rising interest from various banks to learn more and support trade for this commodity as it is considered environmentally friendly.

 

Even though LNG trade is growing there’s still no established exchange that provides spot prices or futures contract prices. And most contracts are still largely negotiated on a contract by contract basis with no transparency.

But the market is slowly opening up and it will be interesting to follow the expansion.

When China in 2017 decided to go from coal to gas for environmental reasons the demand was lifted outside of the usual winter peaks. Financial Times stated in the beginning of June that Chinese LNG import is up 60% compared to the same period in 2016.

This might affect the supply glut that was expected to last for another decade, we might even face a supply shortness like we have seen with other commodities in the past. For example when China increased their import of iron and copper.

This is undoubtedly an interesting market to follow in the near future.