A dramatic fall in crude oil prices, reduced advantage from cheap feedstocks, a shifting competitive landscape, and other challenges are forcing GCC chemical producers to rethink the way they have done business for decades. Taking a cue from chemical industries in both the East and West, GCC companies are exploring a variety of solutions that are showing strong potential for sustainable growth in the future.
The LNG industry is bracing itself for a new era of buyer power, driven by slowing traditional demand, the proliferation of new LNG supply projects and rolling off of long-term, oil-indexed contracts. At the same time, a reduction in regas costs and the role of gas as an accelerator to clean energy systems, including growing electrification as well as increased transportation and heating use, also presents opportunities for suppliers.
On the supply side, new supply and supply options are combining with uncontracted volumes to drive down prices. On the demand side, buyer power has emerged. For now, buyers have the advantage and are making smaller, shorter term deals. New buyers attracted to lower cost and flexible supply continue to enter the market and are starting to absorb some of this wave of new LNG supply.
The days of high international oil, high LNG prices and the singular arbitrage value of placing Henry Hub gas in such markets are an ever distant memory. Oversupply has coincided with the fall in oil price and the LNG glut has brought LNG prices down and narrowed the arbitrage with Henry Hub prices. A more commoditized market with new players is spawning more variety of pricing. US suppliers continue to offer formulas based on Henry Hub prices. Singapore is promoting itself as a pricing hub and price reporting agencies now quote Middle East assessments (based on delivery to Egypt) alongside the established JKT (Japan-Korea-Taiwan) price. New hubs create market tools for managing price risk via hedging and options, but will take time to attract liquidity.
Greater buyer power, an excess of uncontracted LNG, a greater diversity of players and more flexible import infrastructure is driving a shift toward increased spot trade and shorter term contracts. In the short-term, suppliers will be challenged with existing cost structures and may perceive this as negative. However, in the medium-term, it makes LNG more attractive to buyers, so those that can improve their competitive costs have a greater addressable market.
Suppliers are coming under pressure to remove destination clauses, which forbids reselling to other locations. Removal of these clauses frees up buyers to resell when they are overcommitted or simply when a better trading opportunity presents. This will help buyers optimize their portfolios, extend buyers into the trading space and in turn, create further competition for existing traders as well as suppliers seeking to place their volumes in markets in competition with buyers/traders.
Jeremy Kay, Global Strategy Leader, ENR, KPMG in the UK
Christopher Young, Director, Oil & Gas Strategy, KPMG in the UK