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03 March 2020 6 min read

Why a clear strategy is necessary to unlock the sky-high value of LNG optimisation

Peter Thompson

Peter Thompson
Senior Manager | Energy markets and analytics | London

In our last blog looking at optimisation in LNG, Mashal Jaffery discussed the importance of clarity of purpose and execution when it comes to the management of data and technology in pursuit of an optimised LNG portfolio. With a still illiquid market, high transportation costs and significant inefficiency in the trade, LNG players are increasingly focused on unlocking value through effective optimisation.

Effective optimisation in LNG requires a joined-up approach to the challenge: data management and technological solutions work only in the context of clear strategic direction and in an organisation capable of managing and delivering the optimisation sought, with effective controls and risk management in place.

In this second blog, we take a step back and reflect on some of the most fundamental questions that need to be asked right at the beginning, before an LNG portfolio holder starts to optimise: Strategic Imperatives.

Strategic Imperatives

The key dimensions of any strategy are, on the one hand, objectives and ambitions (where does an organisation want to be, what does it want to do…) and on the other enablers and constraints (where is the market, what is the organisation capable of, what changes are possible / desirable).

The starting point for any organisation setting out to optimise its LNG portfolio should be a review of objectives and ambitions. Different organisations start this journey at different points, and have different maturity levels, and therefore the aspiration of an optimised LNG portfolio can mean different things. For some, this can be as simple as optimisation of destination: ensuring that LNG cargoes are traded into markets that offer the best possible prices. In others, it can mean ensuring costs associated with shipping and other elements are minimised and infrastructure utilised as efficiently as possible. In more complex portfolios it may include trading off between pipeline gas and LNG to meet customer needs and finding ways to maximise opportunity whilst managing risk. It could further include utilising contractual flexibility and physical asset positions to generate and monetise flexibility as options.

All of these versions of optimisation are valid and whilst some organisations may seek just one, others will look to embrace as many as possible.

Thus, starting with the question ‘what exactly are we trying to achieve’, and defining objectives and ambitions sets the basis to understand what sort of change is needed, and what solutions support such a change.

At this stage it is critical to also assess enablers and constraints, such as:

  • Assets: contracts, physical assets, home markets
  • Organisational culture, set-up, modus operandi
  • Overarching corporate strategy / value drivers / set up (i.e. how central is LNG to the organisation? How much management focus will it get?)
  • Wider portfolio of gas / energy assets (i.e. where does LNG sit alongside other interests of the business? Must it be optimised as part of a wider commodities portfolio?)
  • Risk appetite / approach to risk
  • Opportunity – finding oneself with an asset that opens an opportunity up more by luck than design – exploitation of such positions requires the right corporate culture
  • And, crucially: external market conditions including competition, market liberalisation, changing of status quo etc.

Conclusions

So before committing time and money to identifying and implementing change programmes – for people, technology or processes – it is critical to develop a clear view of exactly what is being sought through improved optimisation. What are immediate objectives and where, ultimately, do we wish to get to. What does optimisation mean to us?

Implementing effective optimisation is difficult and unlikely to be fully served by an ‘off the shelf’ solution. By clearly working out exactly what good looks like, it is then possible to develop solutions enabled by operations and governance (set-up, processes, culture, people, controls, incentives) and data and systems (these serve the goal, are in harmony with operations / governance and ultimately facilitate the solution): all elements working in harmony.