The new LNG world demands a diversity of approaches and business models. The best companies are seizing opportunities proactively.
Tankers re-routing on last-minute commands, sanctions being imposed and withdrawn, governments threatening to intervene in markets – these present choppy waters for the global LNG business. And at the same time, there are triumphs: top CEOs flying in to sign deals, world-record production vessels setting sail, new markets opening up.
Market oversupply is a familiar cyclical phenomenon, but the LNG business is also changing fundamentally. Shocks on the geopolitical and market fronts continue, testing traditional business models.
As the LNG business expands and moves into new markets, participants have to manage new and unanticipated risks. Unlike traditional consumers — East Asia and Western Europe — many new buyers are less creditworthy and may be more vulnerable to financial and political crises, some LNG markets grow and then diminish.
The supply wave triggered in previous years of high prices continues to wash on. Alongside the more traditional Western Australia projects, US shale-to-LNG plants are bringing transformation: not only massive volumes of supply, estimated at 66 Mtpa by 2019, but a new business model, flexibility and pricing approach.
We highlighted floating liquefaction plants as a potentially transformative technology back in 20141. Petronas's PFLNG Satu loaded its first cargo in April - the world's first operational floating LNG plant - and Shell's Prelude sailed from South Korea at the end of June for its destination off of Western Australia. Golar's vessel in Cameroon expects to start operations in September.
Though some projects have been cancelled, at least two are still making progress: ENI's Coral, off of Mozambique, took final investment decision in June, and Ophir's Fortuna in Equatorial Guinea is moving ahead. FLNG continues to offer a solution for non-traditional project developers and smaller or remote resources.
However, the queue of new projects appears to thin out after 2020, paving the way for an expected tightening of the market.
LNG markets are also continuing their evolution: from resource-led to customer-led. New markets, typically smaller and less creditworthy, but offering scope for faster growth, are springing up.
LNG market developers can flourish with smaller, more heterogeneous new buyers by building a diversified, robust customer portfolio. Demand can be anchored by encouraging new gas-fired power plants and industries, understanding local demand drivers and dynamics, and payment assured by deals with international financial institutions such as the World Bank or other credit enhancement measures.
The new LNG world demands a diversity of approaches and business models. Diverse portfolios – whether as seller, trader or buyer – are needed to manage the risks of price and geopolitics.
And from the old model of arbitraging cheap stranded gas, the new world requires participants to be market-finders and market-makers. That means novel geographies, emerging segments of customer demand such as shipping and clean industrial feedstock, and being competitive to displace coal and complement variable renewable energy in growing, crowded and polluted new metropolises.
The best companies are seizing opportunities proactively. These trends show LNG players – both traditional giants, and new entrants from state concerns to small entrepreneurial firms – not just in adapting to a changing reality, but creating their future.
1Floating LNG: Revolution and evolution for the global industry? KPMG International. November 2014.