A new Deloitte report identifies structural changes underway in the global LNG market that may compel changes in accepted business models. Sheer size, essential to success to this point, will give way to adaptability and nimbleness in a more complex global natural gas market, the firm said.
Deloitte described several business models that could develop to exploit the evolving market. Among them:
- “Move to the middle:” In this case, buyers evolve into traders and liquefiers expand their reach to be capacity marketers;
- Advantage to traders: An expanding market with more activity would tilt toward operators with the most developed trading and marketing capability, such as trading and portfolio players;
- Emphasis on hubs: Trading hubs offer a more efficient means to clarify prices, connect supply to demand and optimize physical shipping;
- Risk management: Fragmented markets in particular could benefit from access to physical services provided by market hubs;
- Creative financing: The new global market will rely on construction and enhancement of enabling technologies like floating storage and regasification units, floating LNG, micro-LNG and bunkering; and
- Restructured contracts: A more nimble marketplace will require more flexible shipping, shorter terms and creative pricing, allowing for new financing models.
Deloitte foresees global concerns over carbon emissions as a major demand driver for LNG. However, the slew of projects scheduled to come onstream in the next few years has led to excess liquefaction capacity. Deloitte sees both positive and negative impacts from this development.
“As business models adapt, there is opportunity for a more inclusive LNG market that provides natural gas to a broad number of people at an affordable cost,” the report said. “Navigating that new world profitably could be a challenge.”
Buyer flexibility will play a critical role, Deloitte emphasized. It cited Petronet’s renegotiation of its 25-year contract with Qatar-based RasGas in which the supplier agreed to waive a penalty and chop the price of recent deliveries to Petronet in half.
Entrance to the sector has been limited because only scale can provide profitability in this very expensive business. Cheniere Energy Inc. (NYSE MKT: LNG), for example, spent more than $20 billion on its sprawling Sabine Pass, La., export facility.
But Cheniere was a trailblazer in this sector, and the anticipation of a global glut of LNG will open up new opportunities. Traditional models were restricted to destination-limited contracts. Not only are those contracts being scrutinized as potentially anti-competitive by agencies such as the Japan Fair Trade Commission, they represent a system that excludes potential buyers who don’t want to make large-volume purchases.
“With the glut of Australian and U.S. LNG entering the market, both traders and smaller or infrequent buyers have begun playing a role in the trade,” Deloitte said. “That role is almost certain to grow.”
Joseph Markman can be reached at jmarkman@hartenergy.com or @JHMarkman.
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