GPD Systems, LLC
16:50 - 17:15
Thursday, 19 September 2019
S1.10 Reserve: Applying the Brent Template to Overcome Challenges Confronting LNG Commerce
As more nations pivot to natural gas for their baseload energy needs, much of this incremental demand lies beyond the reach of producer pipelines. To satisfy the fuel needs of these overseas economies, the LNG industry has responded by rapidly expanding the infrastructure necessary to liquefy and transport increasing volumes of gas by marine vessel. In stark contrast, the pace of change in the commercial sector, where the LNG value chain is ultimately monetized, continues to frustrate many in the industry. While customers, investors and regulators push for a transparent benchmark price and flexible commercial alternatives to traditional long-term supply agreements, growth in these shorter-duration contracts remains constrained. The absence of industry-standard contract terms and conditions is often cited as a contributing factor. When faced with a similar challenge decades ago, the crude oil industry successfully responded by launching its Brent contract. This presentation will explain why contract standardization is important and how a modified Brent template can be used to create a transparent global natural gas benchmark price, while enabling the LNG industry to overcome its other commercial challenges.
Over the years, Brent traders have appreciated the ease of transacting commerce in a liquid and transparent marketplace. However, the process used to generate the Brent benchmark is far from perfect. The methodology flaw lies with the cash-settled Brent futures contract, which is not a source or outlet for the underlying commodity, and cannot assure futures/physical-forward price convergence. Determined to correct these legacy Brent market deficiencies when proposing a model for the LNG marketplace, the author introduces the “three-legged stool”, a solution which seamlessly links spot and physical-forward LNG contract terms with a patented physical-settlement futures contract. Futures delivery takes place free on-board (FOB) buyer’s vessel at an export terminal chosen by the seller, from a global basket of exchange-approved facilities. This provision assures LNG futures market participants with open post-expiry cargo-sized positions, are matched by the exchange clearinghouse for guaranteed physical delivery.
Additionally, to overcome the inefficiencies of individually negotiated bilatteral trades and supplier/purchaser agreements, the author will unveil a set of industry-standard general terms and conditions for LNG futures, spot and physical-forward trades modeled after the successful Brent crude template. Finally, the case will be made why the global natural gas benchmark generated by this new model is likely to encourage significantly more LNG trading volume and destination flexibility, while increasing short-term and spot market contract liquidity.