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LNG in a changing world

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LNG Industry,

LNG has existed for over 50 years as a mode of transport for large amounts of natural gas over long distances. In 1964, the first commercial trade between Algeria and the UK started. In the beginning, the LNG trade was essentially a few isolated, intra-regional trades, with exporters being national oil companies, often in cooperation with large oil majors, and the importers were large utilities or pipeline operators needing gas to feed the growing economies.

Over the next 50 years, the LNG industry grew into a global stage with 245 million t of LNG being traded by a wide variety of players, both big and small. In these 50 years, the basics of the business have not changed much. LNG is exported under a long-term supply contract from the LNG plant to an import facility, often using LNG carriers built specifically for that particular trade. These long-term LNG supply contracts generally have a 20 – 25-year term and are often extended by another five or ten years (when gas reserves allow). These contracts are indexed to oil prices, usually with a floor price and a ceiling price to protect the producers and the offtakers, respectively. The LNG supply contracts used to be rigid in terms of offtake volume flexibility and often contained take-or-pay obligations for the buyer, as well as destination clauses, which limited the ability to trade LNG volumes that were excess to demand. All of this was done to ensure adequate returns on the massive capital investments required to build the LNG plants and the LNG carriers. This economic reality still holds true today. Large LNG plants can cost up to anywhere from US$15 billion to US$35 billion before cost overruns.

In the last decade, the LNG supply contracts have started to allow for greater flexibility to be more in line with the demands of today’s customers. Many LNG offtakers face seasonal demand fluctuations due to the summer air conditioning loads or the winter heating season, which they would like to see reflected in their contracts. Pricing LNG to major pipeline gas benchmark prices has been suggested as an alternative to oil price indexing, especially during the time when oil prices were approximately US$100/bbl. LNG producers regularly have spot cargoes available that are excess to contracted supplies. These spot cargoes are usually sold through tenders. With more LNG producers in the market, the number of spot cargoes also increased. Seeing an opportunity for trade, commodity traders such as Gunvor and Vitol have entered the LNG market, buying and selling LNG cargoes around the world. A number of oil majors have also begun to trade LNG on a portfolio basis; cargoes from their own LNG plants and from positions they have taken in other LNG plants are distributed to their offtakers and to spot cargo buyers. All of this has increased the liquidity in the LNG market.

In 2015, approximately 28% of the total LNG volume was traded on a spot or short-term basis against 16% in 2006. This allows LNG buyers to ...

This article was originally published in the October issue of LNG Industry. To read the full article, sign in or register to become a member for free.

Written by Alexander Harsema-Mensonides, Braemar, USA.

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