LNG market continues evolution as innovative risk management solutions emerge

Denis Korolev's picture
Denis Korolev, CEO, octolng®
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A peer-to-peer OTC trading platform for physical LNG called octolng® focused on spot and short-to mid-term LNG trade has been developed by Octo Trading Solutions AG, a Swiss-based task force of energy market and IT experts.

Interested to hear more about new technologies further progressing trading ahead of EAGC & CEE, taking place 7-9 November in Berlin, Gastech Insights spoke with CEO of octolng®, Denis Korolev. 

Gastech Insights: What is octolng® ?

Denis Korolev: At the core of the platform is a smart-contract based engine facilitating real-time execution and allowing role-based multi-level trade approval. By leveraging new capabilities brought to the market by blockchain technology the platform also offers post-trading support functionality throughout the trade lifecycle in an expeditious and cost-efficient way by integrating all critical segments of physical LNG value chain, streamlining middle- and back-office processes and reducing transactional and operational risks and costs. octolng® also introduces a new dimension of credit risk management and advanced legal environment through partnering with leading international financial institutions and law firms.

Driven by the paramount goal of improving efficiency and increasing cost savings for the entire LNG industry, octolng® is supervised by a not-for-profit association of market participants and offers its members exclusive rights to use the platform to support their business, as well as to participate in the exchange of ideas and implementation of best practices to further improve the octolng® trading platform and associated services.

Gastech Insights: How is LNG trading evolving, and what do traders need to watch out for?

Denis Korolev: To summarise LNG market development in a few words, it may be said that LNG trade is generally undergoing structural quality change. This change is brought by a number of factors, notably:

  1. The LNG market is getting increasingly populated by smaller emerging buyers characterised by higher price sensitivity and higher credit risk
  2. Trading margins are getting generally thinner, which drives greater demand for industry cost optimisation.

This results in a need for new techniques and technologies for the adoption of advanced risk management patterns (including balancing and re-balancing/optimisation of trade portfolios), as well as to secure margins in the environment of stronger price convergence and increasingly limited price arbitrage opportunities. 

Gastech Insights: Is it possible for a truly liquid spot market to develop in such a capital-intensive, geographically constrained sector still reliant on long-term contracts for financing?

Denis Korolev: First of all, it would probably be wrong to assume that long-term contracting will ever disappear from the LNG business. Having said that, it should be noted that the very nature of LT contracts has undergone dramatic change in recent years. Reducing contract durations, smaller contractual volumes, eradication of destination restrictions, a gradual increase of contractual flexibility – all those developments in the LT contracting actually underpin the development of a tradable spot market. This market will exist alongside the long-term contracts in complementary way and will offer all categories of players in the LNG landscape – producers/suppliers, consumers/buyers and traders – a set of instruments to unlock additional monetisation capabilities, adopt more flexible marketing strategies (which will in fact reinforce security of LNG project financing, rather than undermine it) and generally improve market resilience to avoid price shocks. 

Gastech Insights: The LNG market has seen huge swings in recent years. What risk management tools are available for hedging cargoes?

Denis Korolev: The choice of risk management tools remains extremely limited and is represented essentially by a handful of derivative financial products based on two LNG indexes: JKM (JKM LNG (Platts) Future Contract) tradable at ICE and SLInG (SGX LNG Index Group represented by six financial futures and swaps contracts) tradable at SGX. Recognising the important role these products play in the otherwise deserted landscape of the LNG hedging instrumentaria, it should still be noted that the nature of those products, as well as their current liquidity, would not allow a comprehensive hedging strategy to be implemented. Therefore, they are being used to complement in-house portfolio balancing and risk mitigation policies of trading houses and larger portfolio players, while other categories of market participants remain very much exposed to market risks (including those arising as a result of the remaining diversity of LNG pricing patterns). Development of a tradable and liquid physical spot market will bring extended risk management solutions to those other categories of market participants.

Gastech Insights: Can you explain how blockchain and other digital advances will transform the industry?

Denis Korolev: Now that the hype wave of various cryptocurrencies – the first instance of the practical application of blockchain technology – is receding, more attention is given to other uses of blockchain technology, especially in the energy trading and LNG business. Experiments involving the use of blockchain to “modernise” traditional businesses – including trade financing, shipping, logistics and cargo management – indicate that blockchain technology is capable of significantly streamlining post-trade processes and notably reducing associated costs and operational risks. The next significant development of blockchain use that energy trading might importantly benefit from would be regulatory compliance and reporting, which will further save company resources and cut costs.  

Gastech Insights: What are the advantages of using your platform rather than the traditional bilateral OTC method?

Denis Korolev: octolng® brings higher market transparency, reliable price discovery and price benchmarking to optimise procurement and supply portfolios, replacing obscure and time-consuming bilateral negotiating process that tie up significant corporate resources and increase costs. Being instrumental for LNG consumers/buyers – especially emerging low credit rating buyers – in obtaining access to supply diversification and flexibility, improved volume risk management and lower market access barriers, octolng® at the same time supports portfolio players and trading houses in their efforts to increase their footprint in physical LNG supply. About 50% of the total volume of LNG sold by international oil and gas companies is now marketed through portfolio sales rather than traditional point-to-point sales, according to management consulting firm BCG. Access to the octolng® platform functionality further improves portfolio optimisation for those market participants, as well as allows them to develop additional hedging opportunities.

Last, but not least, the octolng® platform provides additional opportunities for LNG producers to monetise their resources and to attain a viable alternative for securing project financing. An indispensable element is that it represents a collaborative platform with the LNG market community (acting through a purpose-built not-for-profit association) which can then shape the future LNG marketplace by developing best practices and implementing them directly.

Gastech Insights: You are speaking on Traders’ Day at the upcoming EAGC event in Berlin. Why should gas market participants attend the conference?

Denis Korolev: EAGC has long since developed into a keystone market event that consolidates decision-makers and strategy developers representing companies and organisations that ultimately shape the energy environment. The conference provides a venue for high-level discussion of market trends, developments and challenges and represents an important forum for business networking. Apart from offering a platform for discovering new business opportunities, EAGC is clearly one of the most important events for sharing best practices developed by energy market participants, obtaining input from market regulators and ultimately improving natural gas’ prospects in the energy balance of the future world. 

If you would like to hear more about the European gas and LNG market from a trading perspective, register to attend EAGC | CEE, 7-9 November in Berlin to participate in the Traders Day discussions on 7th November. Do not miss out and book your place today.

Image courtesy of octolng®