LNG supply in a transforming industry: 4 considerations for buyers

Mary Hemmingsen's picture
Mary Hemmingsen, EVP and CFO, Northwest Innovation Works
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*This article was contributed by Mary Hemmingsen when she worked at KPMG as Partner, National Sector Leader, LNG, Power and Utilities. 

As discussed in my previous article “LNG demand in a transforming industry: 6 considerations for sellers”, the global LNG market is transforming. LNG importers are becoming exporters and vice versa, but low prices threaten new projects and the profitability of existing ones.

In light of today’s current industry scenario, we have set out 4 considerations for LNG buyers:

  • Understand bargaining positions: The current market provides buyers an upper hand. Long-term buyers need to balance the desirable objectives of portfolio diversification and supply, including jurisdictional, commercial models, terms, and investment along the value chain; matching LNG pricing basis with their downstream customers; and flexibility.
  • Balance contract portfolio: Shorter terms reduce the risk of over-committing to purchases with uncertain demand. Reloading is an option, given more flexible LNG markets, but exposes the reseller to the risk of mismatches between long-term and spot prices. A bundle of contracts of different suppliers, periods and pricing bases can help, as can a greater role for intermediary trading companies who can manage demand risk across their portfolio.
  • Engage on end-use regulation and policy advocacy: LNG demand is strongly influenced by regulation and government policy. Examples include the public commissioning of LNG import facilities, targets for fuel mix or diversity of suppliers, air quality regulations, carbon pricing and greenhouse gas emission standards and cleaner transportation policies. Government-to-government negotiations may be required between major LNG sellers and importers, to give regulatory development and operation certainty and to broadly ensure gas a role in the market.
  • Create buyer alliances: Create buyer alliances to reduce duplication of redundant demand and strengthen negotiating positions. JERA may point the way to future buyer alliances, for instance as proposed between Chubu Electric of Japan and GAIL of India, and between Tokyo Gas and Korea Gas11. In considering buyer alliances, issues regarding minority interests held by many buyers in LNG liquefaction plants and/or the LNG value chain, need to be further explored. For example, do all buyers in the buyer alliance cooperate on such shareholding and the accompanying LNG purchase commitments? Successful buyer alliances, however would have to consider the issue of minority interests held by many companies in LNG liquefaction plants – would they cooperate on such shareholdings and the accompanying LNG purchase commitments? Buyer alliances may also raise competition law/anti-trust concerns, which would require specific legal advice. As well, the potential response of LNG sellers to buyer's alliances will need to be considered. Alliances between north-east Asian and Middle East buyers might help match seasonal demand patterns.

The LNG industry is cyclical, even more so than many commodity markets. Even with a more flexible industry, LNG projects remain very long-term endeavours which cannot easily adjust to rapid changes in underlying oil and gas prices. There are major uncertainties over future supply: in the short-term, the number of projects proposed far exceeds the number needed to meet demand.

On top of the natural shifts in supply and demand, it is exposed to sweeping and sudden changes in geopolitics, regulation, recessions, economic competitiveness, technology, natural disasters, and progress in alternative energy sources. In the face of this long-term cyclicity, suppliers — existing and new — will have to make sure they can weather difficult times, while being prepared for the upswing. Key approaches that suppliers will have to make to match buyers expectations include: Maintain a rigorous cost discipline - Engage with strategic patience - Ensure portfolio flexibility and form winning partnerships.

Join the Conversation: Do you agree with Mary? What are your top considerations for buyers? Share your views.

Mary presented at the Gastech conference last year. Interested in speaking at our upcoming Gastech Japan 2017 Conference? Submit a Gas & LNG Project Progress & Updates Abstract, the Call for Papers in Now Open. Our Governing Body will review and then vote on the successful chosen papers. With no political agenda or obligation to any over-arching organisations, Gastech’s Governing Body is free to advise and select the very best possible content for the conference agenda.

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Photo Courtesy of KPMG