the lng flexibility imperative: unlocking lng competitiveness …€¦ · us shale growth and rapid...
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The LNG Flexibility Imperative:
Unlocking LNG Competitiveness and Liquidity
Through Commercial Change and Flexibility
Christopher Goncalves
Chair & Managing Director
BRG Energy
Disclaimers
• The opinions expressed in this presentation are those of the individual author(s) and do not
represent the opinions of BRG or its other employees and affiliates.
• The information provided in this presentation is incomplete without the oral briefing of the
author(s), and should not be considered out of context.
• The information provided is not intended to and does not render legal, accounting, tax, or
other professional advice or services, and no client relationship is established with BRG by
making any information available in this presentation.
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1. Commercial Outlook
2. Competition and Pricing
3. The Flexibility Imperative
Agenda
1 Commercial Outlook
Commercial Flexibility Expands Prevailing commercial trends continue to stimulate flexible LNG trade, and the future financial and commercial profile of LNG
production will be far more conducive to commercial flexibility than in the past.
• By 2025, 328 Bcma of legacy liquefaction capacity will have reached over 15 years of service and at least 164
Bcma of new, flexible North American LNG liquefaction capacity will reach COD.
This means that up to 492 Bcma (or 78% of total LNG production) could potentially be made available on a fully- or semi-
flexible basis.
• The commercial transformation of LNG supply will be matched by similar trends on the demand side. In the
largest and oldest LNG markets of East Asia and Western Europe, regulatory and market change continue to
stimulate ever greater competition between LNG and natural gas supply sources.
This will intensify buyers’ interest in commercial flexibility.
• Many new LNG importers have opted for reduced investments in smaller scale, flexible FSRU infrastructure.
This allows for relocation of the regasification terminal if domestic natural gas production, natural gas imports, or
alternative energy supplies displace LNG demand in the mid-term.
Note: The forecasts in this presentation have been updated since the paper published by the LNG 19 organizers, and differ somewhat from the prior forecasts provided previously.
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2 Competition and Pricing
Renewed Price Convergence
Sources: BRG’s Analysis based on Platts, Bloomberg, FERC/Waterborne.
Global Prices for Natural Gas and LNG
Expanded US LNG exports into a well-supplied LNG market, combined with decelerated demand growth and oil price collapse,
have driven global price re-convergence since 2015.
0
5
10
15
20
25
30
35
2008 2010 2012 2014 2016 2018
$/M
MB
tu
Brent Japan Avg. LNG Import Price JKM DES Spot Price NBP HH
US shale growth and rapid
Asian economic recovery
decoupled US gas prices
from global LNG prices
Post-Fukushima LNG
demand further increased
Asian prices
Booming shale oil and gas, US LNG
exports, and oil price collapse have
driven LNG prices down since 2015
7
Decreased Hub Price Volatility
Sources: BRG’s Analysis based on Platts, Bloomberg, FERC/Waterborne. Volatility is calculated based on 12- month moving average of monthly price returns; Brent 6-1-1 refers to rolling average
Brent prices over 6-month with one month time lag prior to application.
The decreased the volatility of hub prices relative to oil prices makes gas hub pricing an increasingly reliable index for buyers.
0%
10%
20%
30%
40%
50%
60%
70%
2002 2004 2006 2008 2010 2012 2014 2016 2018
Vo
lati
lity
(%
)
Monthly Volatility based on 12-Month Moving Average
Brent Brent (6-1-1) JKM NBP Henry Hub
Average Volatility 2002-2007 2008-2014 2015-2018
Brent (monthly) 0.08 0.07 0.09
Brent (6-1-1) 0.02 0.03 0.03
JKM (monthly) NA 0.09 0.13
NBP (monthly) 0.25 0.11 0.10
HH (monthly) 0.15 0.11 0.12
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Inter-Regional Trade Turnaround
Sources: BRG Energy analysis based on LNG Horizon model forecasts and BP Statistical Review 2011-2018 data.
Inter-regional trade flows have come into balance, but by 2025 trade flows from WOS to EOS will more than double as Asian
markets outgrow the Qatari and Australian supply booms and turn to WOS supplies from North America.
Forecasts of Inter-regional LNG Trade Flows
14 23
28 26 30 27 23
35
73
97
45
59
41 33 33
38 38 40
18 15
0
20
40
60
80
100
120
2010 2011 2012 2013 2014 2015 2016 2017 2020 2025
LN
G In
ter-
Regio
na
l T
rad
e
Flo
ws (
Bcm
a)
WOS to EOS EOS to WOS
Historical Forecasts
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Accelerating Demand Growth
Sources: BRG analysis of BRG LNG Horizon model forecast, Global LNG Info, Wood Mackenzie
Note: LNG Demand includes ~1%-3% boil-off. EOS is East of Suez and WOS is West of Suez. US LNG is included in WOS LNG supply and Mideast LNG is in EOS supply.
From 2017 through 2025, total LNG demand should grow at a 5.9% CAGR to reach 630 Bcma, largely due to growth in China,
India and emerging markets – accelerating from the 4.8% CAGR of the last 8 years. With rapid supply growth, liquefaction
capacity utilization will remain below 90%.
82%
83%
84%
85%
86%
87%
88%
89%
90%
91%
2010 2012 2014 2016 2018 2020 2022 2024Liq
uefa
ction
Loa
d F
acto
rs (
%)
Global LNG Liquefaction Load Factor
Historical Forecasts
10
0
200
400
600
800
2010 2012 2014 2016 2018 2020 2022 2024
Bcm
a
Global LNG Demand and Nameplate Capacity
Europe Latin AmericaOld Asia China/India/Emerging AsiaMiddle East and Africa Boil OffNameplate Liquefaction Capacity
Historical Demand
(CAGR =4.8%)
Forecast Demand
(CAGR = 5.9%)
Stabilizing Global Price Differentials
Sources: BRG analysis of BRG LNG Horizon model forecast, Bloomberg, Platts, FERC/Waterborne.
By the early 2020s, JKM and NBP should become even more closely aligned with each other, and their spreads to HH should
decrease due to increased volumes of flexible, hub-priced US LNG supply, the enhanced depth and diversity of supply options,
and moderate oil price expectations.
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Jan-25
201
8$
/ M
MB
tu
Global Price Differentials
Spread between JKM and HH Spread between NBP and HHSpread between JKM and NBP
The convergence of NBP and JKM will increase
and stablize after 2019 as European and Asian
buyers enjoy access to ample flexible LNG
Global price convergence will increase,
driven by substantial new liquefaction
capacity coming online
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3 The Flexibility Imperative
Flexibility Value Drivers
Resources, Capabilities, Constraints Description Requirements
IT / Systems
• Access to timely price and trading information.
• Availability of dynamic systems to monitor markets.
• Requires detailed simulation of market equilibrium prices, and price volatility.
• Requires expert evaluation of a company’s ability to capture flexibility value based on the critical resources, capabilities, and constraints
HR / Experience • Market experience, relationships, and sales or
procurement resources in target markets.
Physical / Commercial Supply Chain • Physical and commercial supply and
infrastructure and/or bottlenecks.
Liquidity / Competition • Target market liquidity and competition for
LNG sales or purchases.
Looking ahead, a company’s ability to capture flexibility value will require optimizing sale and purchase transactions in light of
company constraints, market liquidity, and competition.
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Illustrative Case Assumptions Our hypothetical case for an USGC seller assumes a high degree of company capabilities to identify and capture flexibility
value, no supply chain constraints, and average industry commercial and valuation parameters.
Capabilities and Constraints USGC Seller
Ability to consistently identify and execute
optimal trades in light of capabilities,
market liquidity, competition1 High
LNG shipping capacity constraint None
LNG supply/upstream feed gas constraint None
Note: There are other methods to evaluate capabilities in more detail based on company resources and expertise (current or projected), competition, market liquidity, market share, etc.
General Assumptions Asian Buyer
Discount Rate 8%
Supply Source / Region US
Oil Slope for DES Contract 12.5%
Crude Oil Price Forecast (2020-2025 avg.) 2018 $64 / bbl
HH Gas Price Forecast (2020-2025 avg.) 2018 $2.94 /
MMBtu
LNG Tanker Size (for shipping cost /
netback calculations) 155,000 cm
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Illustrative Case Study of USGC Seller For a hypothetical USGC seller, we analyzed a 10 Bcma LNG portfolio of Henry Hub linked SPAs available for resale in
2020-2025.
HANDLE WITH CARE
THIS ANALYSIS IS ILLUSTRATIVE AND SHOULD NOT BE UNDERSTOOD TO ESTIMATE A GENERIC VALUE OF FLEXIBILITY.
EACH BUYER’S OR SELLER’S UNIQUE SITUATION AND CAPABILITIES DETERMINE THE ACTUAL VALUE OF FLEXBILITY.
# Sale
Strategy Flexibility Volumes Sales Value - NPV
Flexibility
Value
1 LTC
Restricted
volume and
Destination
10 Bcma All discounted LTC netback revenue Difference between
the NPV of the full
portfolio value of sale
strategy #2 minus
sale strategy #1 2 Spot Basis
Full volume and
destination 10 Bcma
The highest probability result for the cargo netbacks
of a highly effective trader’s LNG delivery to the best
short-term markets
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Illustrative Flexibility Valuation for USGC Seller
• The chart on the left shows the probability distribution of
the value of volume and destination flexibility.
• There is an approximate 50% chance that the flex value
above the LTC would be above or below $137 million.
• The resulting flexibility value uplift is approximately
$0.06/ MMBtu for the full ACQ.
Expected Profit
Option #1
($MM USD)
Expected Profit
Option #2
($MM USD)
Flexibility
Value
($MM USD)
Implied Uplift
($/MMBtu)
9,597 9,460 137 0.06
Flex Value - High Trader Effectiveness
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0%
20%
40%
60%
80%
100%
120%
0
2
4
6
8
10
12
14
54
64
74
84
93
103
113
122
132
142
152
161
171
181
190
200
210
219
229
Cu
mu
lative
Pro
ba
bili
ty %
Fre
qu
en
cy
Short Term Trading Value, Million $
Frequency Cumulative %
Expected
Flex Value -
$137 million
Price and Flexibility Imperatives
• On the supply side, the maturation of global LNG liquefaction capacity as well as the recent boom in North American
LNG exports now enables suppliers to offer greater flexibility.
A large segment of global LNG supply is produced by terminals whose original investment is largely or fully amortized, meaning that
these sellers have more financial flexibility to engage in short-term trading than during their early years of operation.
Further, North American suppliers can now procure feed gas from some of the world’s largest and most liquid natural gas hub markets,
meaning that these suppliers no longer need inflexible LTCs to underwrite substantial upstream investments in natural gas production.
• On the demand side, buyers continue to seek greater flexibility in tandem with the removal of destination restrictions,
greater use of short-term supplies, and proliferation of smaller scale FSRU infrastructure.
• These supply and demand dynamics will require industry players to master the flexibility imperative by effectively
identifying, quantifying, and negotiating the value of flexibility:
– For sale and purchase strategies based on a greater use of short-term contracts, greater use of FOB over DES supply, and/or greater
engagement in LNG trading and resale for excess or uncontracted supplies.
– Use of new conceptual frameworks and analytic tools for contract (re)negotiation and strategic portfolio planning and optimization.
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As LNG is now a very substantial segment of the global gas industry, the amount of value available from new commercial
flexibility demanded by buyers and offered from sellers is enormous.
