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Supporting the supply chain

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LNG Industry,


Natural gas and LNG have important roles in the world’s energy supply. There are several different stages throughout the supply chain of LNG and it must be effectively tracked at each stage, from the initial stage as natural gas, to transportation to a liquefaction plant, to shipment in liquid form to be regasified. Support for the changing forms of natural gas and its global nature are unique challenges in the supply chain.

Delivering LNG requires sophisticated software to manage the entire LNG lifecycle from capturing physical transactions to scheduling and tracking the movement of LNG. LNG companies need a seamless process for efficient scheduling of natural gas that is to be liquefied and regasified.

Time for ROI

Over the last 15 years, companies have invested heavily in the infrastructure required to convert natural gas to liquid form for storage and transport to deliver LNG. Billions of dollars have been spent to build terminals and ships. Companies that have made the investment in equipment for LNG production are looking to maximise return on investment (ROI). The key to profitability for these companies is the accurate tracking of movement of product and forward prices to manage the complicated process of LNG. Once a company has committed to supplying LNG, it needs to optimise operations or suffer potential losses.

Providers of LNG require energy trading and risk management (ETRM) software to manage the entire LNG lifecycle from capturing physical transactions to scheduling and tracking best available positions. Everyone within the organisation (including traders, schedulers, and accountants) should have the real-time data needed to deliver the efficient, profitable scheduling of LNG.

ETRM software requirements for LNG

Any multi-faceted software platform used to manage LNG must support both natural gas and liquids. A side product that can result from extracting natural gas out of the ground is natural gas liquids (NGLs), so the software platform should also support NGLs (such as butane and propane). It is not unusual for contracts to specify the inclusion of NGLs with LNG.

Any software platform used to manage LNG should be able to do the following:

  • Handle both natural gas and liquids, as well as NGLs.
  • Support NGLs and the midstream of NGL deals, including processing and fractionation.
  • Control the entire LNG lifecycle from liquefaction to regasification.
  • Model the input, output, costs, and losses of both liquefaction and regasification.
  • Manage all components of the storage and transportation contracts.
  • Analyse positions and exposures including mark-to-market valuation, value at risk, backtesting, stress testing, and profit and loss (P&L).
  • Track all transaction data to manage foreign exchange (FX) exposures.
  • Support spread trades, such as calendar spreads or time spreads.

Managing the complexities of LNG

The management of LNG is more complex than many other commodities and requires customised software to support the process. What makes the process of producing LNG unique is that it changes form (gas to liquid), frequently spans continents with multiple parties involved (both private and government), and takes much longer than the supply chain of other commodities. With other commodities, a buyer purchases a specified quantity (perhaps with a certain quality level) and the source of the commodity is not much of a factor. However, with LNG, a buyer owns those specific molecules from the start of the supply chain until the end. Imagine the scenario with the process starting in North America where the natural gas is taken from the ground, and then the final regasification takes place in the Far East. For effective operations, it is critical that producers of LNG track the product at each stage in the supply chain.

Trying not to get burned

Multiple contracts are used to manage the production of LNG – one for getting the natural gas from the ground to the terminal for liquefaction and another for the regasification process. These contracts specify which party pays for losses that can occur during the various stages of the process. Losses can occur throughout the supply chain during liquefaction, transportation, and regasification due to spillage and evaporation (boil-off). Each of these must be tracked so that there are no surprises at the end of the process over who pays what fees or what the agreed upon price was.

Losses can result from temperature variance during shipment and can be as much as 5%. In addition to losses, the fuel being shipped may also be used to run the ship. This shipping cost is considered part of the loss that occurs within the supply chain. Therefore, the amount of LNG at the start of shipment is always more than the resulting quantity when the shipment arrives.

The LNG cast of characters

There are multiple parties involved in the process. LNG producers generally extract the natural gas out of the ground and transport it to the terminal for liquefaction. LNG operators typically take responsibility at that point and perform the liquefaction and then ship it out. There may be an additional party involved who markets the LNG. Furthermore, there may be additional players at the other end of the supply chain.

In addition to the details of the contracts, there are other obligations that must be managed. For example, when shipping through international waters, there are title transfers that must be tracked along with any taxes and fees. Since this is a global supply chain, the rules of other governments must be accounted for. For instance, the following factors may come into play when managing a global shipping operation: how a ship can conduct itself in a port; how it conducts itself as it crosses international waters; what rights it has as it approaches a port; what rules it must follow while waiting to dock; and considerations during high tide vs low tide. Other factors include political concerns and compliance. Therefore, any software used to manage the process of LNG must support multiple countries and multiple currencies.

An over simplification of the LNG process is to say that it is a process of managing supply contracts and transportation. Whilst this is true, it is an extremely complicated process, with many line items and a significant amount of documentation that must be tracked.

A single system of record

To support the investment of infrastructure to convert natural gas to LNG, companies require a comprehensive software solution to manage the operational storage and transportation contracts so that they can effectively oversee their price risk and position management.

A single, integrated system of record ensures a company can manage its entire supply chain. Without this, there is a risk that poor decisions may be made when one part of the business is unaware of what the other part of the business is doing. A single system of record ensures a company knows its costs throughout the supply chain.

Contracts specify the value of the cargo – the price of the molecules going in. Once the product is regasified at the other end, the price is typically stipulated by the cost of oil, gas hub prices, or spot market trades. As described earlier, certain losses during transport can be assumed. Companies involved in LNG must stay on top of their physical and financial positions to protect themselves from market price volatility. Companies need to know their position when transporting the natural gas to the terminal, loading it onto the ship, transporting it across the ocean, and delivering it to the other terminal for regasification. There are many decisions to be made throughout the process, and companies need to make the best decisions regarding when to move or sell. For each of these steps, companies must know what fees and losses can occur and the resulting prices. A few pennies of discrepancy in large volume LNG deals can result in significant losses.

Conclusion

Next-generation ETRM software that supports the entire supply chain of multiple commodities, including natural gas, LNG, and NGLs, will enable LNG companies to protect profit margins. A single, integrated system that efficiently manages the physical movement of product and all of the details required to track LNG in real-time provides the critical business intelligence and analysis information necesary to make optimal decisions around trade execution, position management, and scheduling.

Many changes are occurring in the LNG market. Global LNG buyers are shying away from oil indexed, long-term agreements. A growing fleet of non-dedicated tankers is emerging. The sources of supply are changing. In this environment of constantly changing market conditions, software that provides the best decision support will enable companies to thrive.

Written by Andrew Bout, Eka Software, Canada. Edited by David Rowlands

Read the article online at: https://www.lngindustry.com/special-reports/08032016/supporting-the-supply-chain-12345678910/


 

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