McKinsey & Co
14:50 - 15:15
Tuesday, 17 September 2019
S1.1 Business Models for a Changing LNG Market
We propose to present the results of our research into the future business models that are required to succeed as the LNG market goes through a series of fundamental shifts.
The LNG market is changing rapidly with the increase in liquidity in traded LNG markets, the development of US LNG export projects, the opening of some key gas importing markets, the growth of a new set of LNG buyer markets and the growing role of renewables within the energy mix of LNG importers.
While the pace of these shifts is debatable, their direction is clear and as they gather pace they are disrupting the established business models of LNG buyers and LNG developers. LNG buyers risk disintermediation by upstreamers dealing directly with their larger customers and they face growing competition from new entrants seeking to build market share. The uncertainties they face mean major buyers are unable/unwilling to make large long term supply commitments.
At the same time, LNG developers are struggling to sanction large integrated projects in the face of competition from smaller scale US projects. New projects must match a much lower price benchmark set by US projects while also managing a set of price and volume risks that could previously be passed through to buyers.
A widespread shift towards a “Portfolio” operating model is underway but the success factors for that model are not well understood. And the implementation model may not be the same for all players given their assets, relationships and capabilities.
Future operating models
As companies across the value chain revise their strategies and redefine their operating model they face five sets of issues:
- Portfolio footprint:
- What size of portfolio is required? How many points of supply and offtake?
- How deep downstream should upstreamers go?
- How important is it to connect a diverse set of markets? to access a liquid markets?
- What is the value of physical and contractual flexibility?
- Growth pathway:
- Should players lock in “market before supply” or “supply before market”?
- What are the criteria to select new portfolio positions?
- How to manage long and short exposures?
- How to operate:
- What changes need to be made to organization size and structure, performance management, decision rights, interfaces etc?
- What new capabilities are needed?
- How should advanced analytics be deployed?
- What level of financial performance is achieved by the leading players?
- What are the key determinants of performance under this model?
- What are the implications for competitive dynamics – winner takes all vs 1,000 flowers bloom?
- How can players differentiate themselves if they cannot match the scale of market leaders?
- What characteristics might suggest an alternative model is preferred?
Sources of insight
We will draw on case studies from within the LNG industry and from other commodity industries (upstream oil, refined products, petrochemicals, iron ore) to provide insight into the growth pathway, success factors, operating approach and differentiation models. We will also make use of McKinsey’s proprietary LNG Portfolio Optimisation tool to provide insight into required portfolio footprint and expected performance.