Head of Gas, Asia Insight
S&P Global Platts
10:20 - 10:45
Thursday, 19 September 2019
S1.7 RESERVE: Surfing the LNG Commoditization Wave Post 2020
Surfing The LNG industry is approaching the end of its most significant expansionary phase to date, one that has driven profound fundamental shifts, and challenged traditional supply models and business strategies.
As we look into the next decade, a new wave of commoditization in global LNG trade is in the works. The direction has not changed, but the driving forces propelling it are rising higher and rolling faster.
ONE: Long-term contracts expiring en masse
More than 70 million mt in long-term contracts are expiring in the earlier half of next decade. This is likely to boost global spot trade liquidity and accelerate the switch towards term deals that are shorter, smaller, more flexible and priced not against an associated commodity, but LNG itself.
TWO: Second wave of flexible supply
While flexible volumes from a second wave of US export projects will continue to lead the push for international LNG trade liberalization, liquefaction projects across Asia Pacific, Middle East and Africa are also pursuing financing against destination-flexible contracts, and offtakers with global spot trading capabilities.
THREE: Proliferation of new financing solutions
With a potential supply shortage looming post 2020, the industry is watching closely at whether new proposed liquefaction financing solutions -- such as more flexible lending terms, larger equity investments by offtakers and more creative hedging mechanisms -- succeed in bridging the gap in expectations between customers and financiers, and accelerating the pace of FIDs in 2019 and beyond.
FOUR: A bigger, more resilient shipping fleet
As the LNG fleet grows in size -- ship orders in 2019 are on course to break 2018's all time record -- and becomes more flexible, it will continue to facilitate spot trade development, meet growing ton mile demand, largely driven by rising US LNG flows to Asia, and serve the new wave of supply expected from pre-FID export projects after 2020.
FIVE: A more liquid, transparent spot market
Five years ago, it was not uncommon for senior industry leaders to question the significance of Asia's growing spot market. Today, the region's spot fundamentals and prices are driving executive decisions across the value chain, while pricing benchmarks underpin not only spot negotiations but also longer term contracts.
SIX: Standardization efforts yield results
The struggle to drive standadization in an industry designed around rigid long-term bilateral supply contracts, and handicapped by the complex nature of transporting and storing the super chilled fuel is well documented. But growing liquidity and bold steps taken by industry stakeholders such as traders, exchanges and price reporting agencies have yielded results, boosting the efficiency of global trading practices
SEVEN: The growth of LNG derivatives has been exponential: JKM Derivative cleared volumes almost quadrupled in 2018 from a year earlier and the trend has continued into early 2019. As the paper markets develops, it becomes a virtuous circle from here: paper liquidity means transactions can be hedged, which leads to a more liquid spot market, greater transparency and more robust pricing benchmarks and risk management tools.