LNG Portfolio Optimization: Challenge, Opportunity and Necessity
The LNG business is restructuring rapidly as it moves from its rigidity of the 1970s and 80s, towards a merchant market that could evolve at some point in the late 2020s or 2030s, mirroring what happened in the North American and European pipeline markets decades earlier. As part of this process, increased volumes of LNG are being traded, both spot and under mid and short-term contracts, controlled by traders, aggregators and portfolio companies. A key element of this new model is ‘trading’, the buying and selling of LNG cargoes (or strips of cargoes) on shorter term contracts of less than three years duration. To play in this segment of the LNG business, companies secure positions in one part, or multiple parts, of the LNG value chain. Once these positions have been secured, companies then seek to ‘optimize’ their LNG position or ‘LNG book’. This optimization process is often seen, or referred to, as a ‘black box’ with companies using their portfolio of supply and sales contracts, together with shipping capacity, to maximise returns through optimizing their flows of LNG. In this paper, Mashal Jaffery and Peter Thompson of Baringa Partners endeavour to open up the ‘black box’ of LNG cargo optimization, setting out why such optimization is important to today’s LNG business model, how companies can carry it out and what approaches can be taken and what tools can be used to support it effectively.