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LNG pricing: how to get it right in a volatile energy market

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Rudolf Huber
Rudolf Huber

LNG pricing and contracting is becoming increasingly complex as the global gas market evolves. Three key points: 1) Gas markets remain regional but LNG is starting to behave more like a global commodity as portfolio deals create an illusion of an integrated market. 2) The rise of flexibility in LNG threatens traditional long-term contracts tied to specific volumes and destinations, but complete change will be difficult given the large investments required in LNG infrastructure. 3) Market conditions are volatile and changing rapidly, requiring players to carefully reconsider business fundamentals and adapt strategies to remain competitive in the new LNG world.

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LNG pricing: how to get it right in a volatile energy market Rudolf Huber Gas Purchase – LNG, EconGas GmbH Rotterdam, 21st October 2008
A numbers festival 2
Attacking LNG - EconGas OMV AG Gas & Power EconGas site Gas Gas GATE CEGH Adria E&P LNG R&M Petrochemicals 3
Any Globalization there? Gas markets remain very regional Atlantic basin LNG is a price taker Pacific basin is no coherent market Portfolio deals create illusion of a global market 4
Dancing to different tunes Piped gas will continue to dominate most of the world LNG thrives on flexibility LNG needs deep pipeline markets Pipeline markets can live without LNG 5
A commodity in the making? Flexibility gives it vastly different properties Behaves more like oil than gas Noble form of gas? Transformed and interchangeable product Is it now a commodity or not? 6
Any impact there? Pipeline markets are largely immune from LNG Markets are too deep for being affected Asian islands will always be different Volume of LNG is too insignificant Will there ever be measurable impact? 7
What is spot - my instincts Any cargo out of wedlock Transactions conducted in a market Portfolio optimization creates spot Impression of liquidity Monetizes the LNG value chain 8
The straightjacket called "milk run" Not driven by business rationale Just a way to transport Needs monopoly players at both ends No spot business possible in such structures Cannot survive in a market environment 9
Breaking the milk run Security of supply driven Free movement improves supply security â–¬ Scarcity raises prices â–¬ High prices attract cargos Incentive to bring every molecule disappeared Hubs offer credible cover gas options 10
Showstoppers galore Access to terminal capacity â–¬ when you need it â–¬ where you need it Quality Transport cost Destination restrictions Market access restrictions 11
Commercial sense hits LNG Players must game portfolios Behave more like commercial entities Compartmentalized assets This generates spot business Expectations change with changed environment 12
Is the market crazy? Inflexible markets Partnership bonus Poster boy deals Sheer need overrules commercial common sense 13
Newbie's view of LNG Just another source of supply Supply diversification Competition with pipeline? Business fundamentals are not understood Risks often underrated or overstated Unclear view on what's needed to realize potential 14
The challenge We can â–¬ continue denying the evident or â–¬ adapt to it The choice is NOT to adapt or to do business as usual - it is to adapt or die Sit and wait is an outdated business model 15
Illusions The old LNG world has passed away LNG is more than just supply But the current hype on LNG will not last either Business fundamentals need careful revision 16
On the yellow brick road LNG has changed beyond recognition The sellers market makes matters difficult but not impossible Current environment has tendency to obstruct our reasoning Are we able to see if the king has no clothes? 17
Settling the score LNG projects are expensive Assured ROI's are history Financing requires strong partners Cooperation to maximize returns and minimize risk Long-term SPA is no more a pure transport tool - it must provide flexibility to the parties 18
The nanosecond LNG world Market conditions change on a whim Myriads of new players Market turns sour as quick as a dog turns angry Sound fundamentals help Level mind helps steer between the extremes 19
The butterfly effect Small causes have enormous effects Certain fundamentals still hold true Markets rule Rules of the game have changed Toto – we’re not in Kansas anymore 20
â–º EconGas GmbH ARES Tower, Donau-City-Strasse 11, 1220 Vienna, Austria www.econgas.com 21

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LNG pricing: how to get it right in a volatile energy market

  • 1. LNG pricing: how to get it right in a volatile energy market Rudolf Huber Gas Purchase – LNG, EconGas GmbH Rotterdam, 21st October 2008
  • 3. Attacking LNG - EconGas OMV AG Gas & Power EconGas site Gas Gas GATE CEGH Adria E&P LNG R&M Petrochemicals 3
  • 4. Any Globalization there? Gas markets remain very regional Atlantic basin LNG is a price taker Pacific basin is no coherent market Portfolio deals create illusion of a global market 4
  • 5. Dancing to different tunes Piped gas will continue to dominate most of the world LNG thrives on flexibility LNG needs deep pipeline markets Pipeline markets can live without LNG 5
  • 6. A commodity in the making? Flexibility gives it vastly different properties Behaves more like oil than gas Noble form of gas? Transformed and interchangeable product Is it now a commodity or not? 6
  • 7. Any impact there? Pipeline markets are largely immune from LNG Markets are too deep for being affected Asian islands will always be different Volume of LNG is too insignificant Will there ever be measurable impact? 7
  • 8. What is spot - my instincts Any cargo out of wedlock Transactions conducted in a market Portfolio optimization creates spot Impression of liquidity Monetizes the LNG value chain 8
  • 9. The straightjacket called "milk run" Not driven by business rationale Just a way to transport Needs monopoly players at both ends No spot business possible in such structures Cannot survive in a market environment 9
  • 10. Breaking the milk run Security of supply driven Free movement improves supply security â–¬ Scarcity raises prices â–¬ High prices attract cargos Incentive to bring every molecule disappeared Hubs offer credible cover gas options 10
  • 11. Showstoppers galore Access to terminal capacity â–¬ when you need it â–¬ where you need it Quality Transport cost Destination restrictions Market access restrictions 11
  • 12. Commercial sense hits LNG Players must game portfolios Behave more like commercial entities Compartmentalized assets This generates spot business Expectations change with changed environment 12
  • 13. Is the market crazy? Inflexible markets Partnership bonus Poster boy deals Sheer need overrules commercial common sense 13
  • 14. Newbie's view of LNG Just another source of supply Supply diversification Competition with pipeline? Business fundamentals are not understood Risks often underrated or overstated Unclear view on what's needed to realize potential 14
  • 15. The challenge We can â–¬ continue denying the evident or â–¬ adapt to it The choice is NOT to adapt or to do business as usual - it is to adapt or die Sit and wait is an outdated business model 15
  • 16. Illusions The old LNG world has passed away LNG is more than just supply But the current hype on LNG will not last either Business fundamentals need careful revision 16
  • 17. On the yellow brick road LNG has changed beyond recognition The sellers market makes matters difficult but not impossible Current environment has tendency to obstruct our reasoning Are we able to see if the king has no clothes? 17
  • 18. Settling the score LNG projects are expensive Assured ROI's are history Financing requires strong partners Cooperation to maximize returns and minimize risk Long-term SPA is no more a pure transport tool - it must provide flexibility to the parties 18
  • 19. The nanosecond LNG world Market conditions change on a whim Myriads of new players Market turns sour as quick as a dog turns angry Sound fundamentals help Level mind helps steer between the extremes 19
  • 20. The butterfly effect Small causes have enormous effects Certain fundamentals still hold true Markets rule Rules of the game have changed Toto – we’re not in Kansas anymore 20
  • 21. â–º EconGas GmbH ARES Tower, Donau-City-Strasse 11, 1220 Vienna, Austria www.econgas.com 21