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 or multiple parts of the LNG value chain. Once these positions have been secured, companies seek to optimise their LNG position or ‘LNG book’. This optimisation process is often referred to as a ‘black box’ with companies using their portfolio of supply and sales contracts, together with shipping capacity, to maximise returns through optimising 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 optimisation, setting out why such optimisation 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.
This article was first published by The Oxford Institute of Energy Studies in October 2020.
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In addition, Mashal and Peter recently spoke in more depth about the messages in this report on The Oxford Institute of Energy Studies' recent podcast: "LNG Portfoilo Optimization: Challenge, Opportunity and Necessity". To listen to the podcast, click here.