Global LNG Navigating Risks in a Dynamic Market

GLOBAL LNG
NAVIGATING RISKS IN A
DYNAMIC MARKET
WHITE PAPER
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Global LNG - Navigating Risks in a Dynamic Market A ComTechAdvisory Whitepaper
© Commodity Technology Advisory LLC, 2021, All Rights Reserved.
INTRODUCTION
Liquified natural gas (LNG) has been a traded commodity for more than a century. But only in
the last couple of decades has the market expanded to meet the ever-increasing demand for
energy, through low carbon emissions energy sources. With the development of the massive
Qatar LNG facilities in the mid-1990s and the increasing demand for imported gas, global LNG
trading has grown from about 50 MTPA in 1990 to more than 350 MTPA in 2020.
Most energy commodities struggled with lower trade
and consumption volumes under the pandemic-
induced industrial shutdowns in 2020. LNG trade was,
however, up slightly at 0.4% during the year, continuing
its uninterrupted streak of year-over-year growth since
1996. However, that growth was far below rates in the
preceding years which averaged 7% since 2004.
While consistently growing, the global LNG market
appears to be at a crossroad, with new and expanded
sources of supply coming online over the next decade.
This is during an uncertain demand curve influenced
by environmental regulations, renewable energy
resources, and price volatility. Most forecasts predict
annual global LNG demand will be around 700 MT by
2040, doubling the demand of 356 MT at year end
2020. These forecast increases will be largely driven by
growing demand in the Asia Pacific markets. However,
costs for competing renewable energy sources (solar
and wind) are falling quickly. And, with an accelerating
global movement to carbon neutrality, there is growing
uncertainty in that forecast in the mid and long-term.
Many of the challenges facing the post-covid LNG
market in the near-term are focused on environmental
developments, operational constraints (including a
volatile/constrained shipping market), and financial
exposures.
2

© Commodity Technology Advisory LLC, 2021, All Rights Reserved.
Despite lower demand for almost all energies during the pandemic, the LNG market proved
resilient, with volumes up slightly from 2019 at 0.4%. The collapse of oil prices made cargos
based on oil-indexed long-term agreements more attractive than short-term and spot supplies.
Buyers returned opportunistically to the market in the second and third quarters of 2020,
purchasing cheap cargos for storage in anticipation of a recovery in oil prices.
RECENT MARKET DEVELOPMENTS
The pandemic did impact LNG demand particularly
compared to pre-pandemic forecasts expecting a
5%+ increase from 2019 to 2020. However, with the
reopening of many of the Asia Pacific markets that
began in the latter half of 2020, demand is increasing.
Through the first quarter of 2021, LNG trade in the
region appeared on pace with pre-covid forecasts,
bolstered by colder weather in January of 2021
across many Asian markets. Despite a resurgence of
the pandemic in the 3rd quarter of 2021, the pace of
growth from pre-pandemic forecasts looks to resume in
2021, particularly in the fast-growing Chinese market.
Natural gas demand is highly seasonal and relies on
a complex infrastructure of pipelines to transport from
source to market or to LNG liquification facilities.
Once liquified at these multi-billion-dollar facilities,
LNG storage and transport require costly insulated
containers, specialized loading/offloading facilities,
and a limited network of transport vessels. As such,
LNG development costs are high and operational
complexities across the supply chain often lead to
delivery constraints.
This is particularly evident when demand in markets
3

© Commodity Technology Advisory LLC, 2021, All Rights Reserved. 4
with limited gas storage capacity exceeds planning
forecasts. LNG voyage times range from a week to
over a month depending on the length and route of
the voyage. With limited offloading and regasification
capacity at the destination points, a sudden cold snap
or heat wave can lead to gas shortages and increased
price volatility. Countries in the Asian markets without
significant domestic production, and with limited
storage capacity are particularly at risk.
LNG market volatility was pronounced in 2020 and
early 2021. In the face of industrial and commercial
shutdowns across Asia, Japan Korea Marker (JKM)
spot prices hit a low of $1.825/ MMBTU in April,
resulting in numerous canceled cargos (including
177 from the US). Prices did rebound with the onset
of the winter heating season when a strong cold snap
in January 2021 in Japan and surrounding countries
dramatically increased gas demand. Heating driven
demand pushed the JKM index to an all-time high of
$32.50/ MMBTU. Though the spike was short lived,
it clearly demonstrated the sensitivity of the LNG
markets to weather. This event was compounded by
lack of storage and apparent poor supply planning -
as many operators in the region entered the winter
season with below average storage levels even in
the face of forecasts of a colder than average winter
season.
Supply chains were also impacted by the increased
demand. With many of the large Asian industrials
and utilities frantically buying cargoes to address the
shortfall in the region, a shortage of LNG vessels
emerged. This temporarily drove up charter rates from
around $50k/day to a record high of $300k/day.
Increased vessel traffic in turn delayed deliveries due
to congestion at canal crossings and ports, increasing
costs throughout the logistics chain. However, with the
passing of the cold weather in Asia and high levels of
gas in storage, charter rates fell to an all-time low of
$25k for Atlantic Basin vessels in March of this year.
The record high gas demand in January 2021 across
the Asian markets exposed the risks of limited storage
and lack of domestic supply sources in the region.
Limited supply options during a period of high demand
created prices shocks and exposed bottlenecks
across the global supply chain. Such severe weather
events, logistical interruptions (such as the Suez Canal
blockage and Panama Canal congestion), and limited
vessel availability/high freight costs have become
paramount concerns for many market players.

Australia, Qatar, and the US comprise the current “Big 3” in LNG production. Their combined
exports account for about 56% or 200 MT of the global supply of 356 MT. The next largest
exporter, Russia, provided about 8.5% or 30 MT of the global supply in 2020. Other producers in
the Pacific basin, including Indonesia and Malaysia (excluding Russia production in the region),
produce about 16% or 57 MT of the global supply1
.
SUPPLY-SIDE DYNAMICS
Australia briefly assumed the mantle of the largest
supplier of LNG in November 2018, with 6.5 million
tons (or about 312 BCF) of LNG delivered to the
Asian markets. Qatar, which shipped 6.2 million tons
(or 298 BCF) that same month, quickly regained the
title as several plants returned to production after
completing maintenance projects. However, with
several new facilities commissioned in 2019, Australia
reclaimed the title again in 2020 by exporting 77.8
MT that year compared to Qatar’s 77.1 MT. Though
Australia has several additional projects nearing
final investment decision (FID), long term capacity
growth is questionable given proposed environmental
regulations that could halt expansion of gas exploration
and production in the country.
Qatar recently launched a $29B USD expansion
program for their North Field facilities. With production
expected to grow to 110 MT by 2026, Qatar will
certainly regain the title of the largest exporter by
2024 when production starts ramping up. The nation
enjoys both a significant price advantage versus other
suppliers and a geographic position that gives it ready
access to both the Asian and European markets.
These advantages provide a breakeven cost as low as
$4/ MMBTU delivered to the Asia markets2
(compared
to greater than $5 for Russian and as much as $8 for
US supplied LNG).
In early 2021, Russia approved a massive new long-
term development program to increase their LNG
production capacity to 140 MT per year (20% of the
global supply) by 2035 across their Atlantic Basin and
Pacific Rim assets. These projects have had difficulty
finding customers willing to commit to the long-term
oil-indexed supply agreements. Given low interest to
date, the Russian operators’ ambitions may have to be
scaled back or delayed.
1
GIIGNL 2021 Annual Report
2
https://www.reuters.com/article/us-qatar-lng-exports-analysis/analysis-qatar-tightens-global-gas-market-grip-with-bold-expansion-moves-idUSKBN2B80EZ

Australia and the US have been the leaders in growing
incremental LNG supplies since 2019 (with the US
adding 11 MT in 2020 alone). Looking forward, the
Qatari North Field expansion, and Russia’s Yamal and
Gydan Peninsulas projects could lead the headlines
in the LNG market over the next decade. If those
projects move ahead as planned, Russia and Qatar
will vie for the title of the world’s largest supplier over
the next several years. The two countries do enjoy
locational advantages, and relatively low-cost gas
supplies. Their investment in new LNG production
could derail other nations’ projects currently in the
planning stages. However, as both continue to pursue
long-term, oil-linked agreements to finance their
development efforts, existing producers in the US are
less threatened than other regions.
US LNG producers can provide more flexible delivery
terms, prices indexed to abundant domestic natural
gas, and a perception of a more reliable political and
commercial environment. These advantages make
US producers attractive swing suppliers for LNG
end-users, portfolio buyers, and traders looking to
diversify their portfolios. That said, several proposed
US projects are on hold or have been canceled in the
wake of market uncertainty.
Extreme price volatility (record low oil-indexed prices
in 2020 and record high spot prices in early 2021) has
temporarily made the longer-term supply agreements
more attractive to large Asian LNG buyers. Supply
shortfalls are forecast to emerge after 2030, and
some US-based projects that had been delayed are
expected to resume development. Several should
reach FID in 2021 and 2022.
Should demand for LNG continue to grow as currently
forecast, the US will remain well positioned to grow
traders for several decades. Despite some delays, many
projects continue development and construction along
the Gulf Coast. The EIA expects that some 55 MT
of LNG capacity will be added before 2030. With
these additions, total US export capacity is expected
to be 104 MT. There remains some uncertainty around
the timing of new additions and several of the dozen
plus approved new projects may not materialize. For
example, the Exelon-backed Annova project recently
halted development in Texas, with the company citing
“changes in the global LNG market” as the reason for
its failure.3
3
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/lng-project-tracker-commercial-talks-pick-up-as-field-of-developers-
shrinks-63454465

The continuing construction of regasification terminals around the globe points to ongoing
confidence in the long-term viability of LNG. According to the International Group of Liquefied
Natural Gas Importers (GIIGNL), global regasification capacity reached 947 MTPA at the end of
2020. This reflects an addition of almost 26 MTPA over 2019, with 8 new regasification terminals
coming online. With regasification terminals now located in 43 countries, an increasingly
diversified demand base should support long-term growth.
DEMAND OUTLOOK HAS UNCERTAINTY
As much as 40% of LNG is now traded under spot
or short-term contacts, mainly without destination
limitations. The growth in the spot markets will help
ensure LNG cargos can be redirected to address
market imbalances. More traders are entering the
market and portfolio buyers are taking larger positions
in newly developed LNG production facilities. So, spot
and short-term trading will likely continue to grow and
provide the flexibility of supply that could encourage
additional regasification terminal development. This
could open additional markets and stimulate natural
gas demand, particularly in developing countries.
Virtually all forecasts indicate the Asia markets
(particularly China and India) will be drivers of global
LNG growth. Demand in the region is expected to
more than double by 2040. China recently announced
their commitment to become carbon neutral by 2060.
To achieve this goal, natural gas (both domestically
produced and imported via pipeline) and LNG will be
relied on heavily to replace their coal fired generation
fleet. This is in addition to their current massive
investments in renewables required to fuel the
country’s fast-growing economy.
Europe, with 19 LNG terminals, has emerged as a
swing consumer for global LNG traders. The continent
has a large gas storage capacity and can access
additional supplies via pipeline from Russia. The
ability to opportunistically switch between suppliers
was well demonstrated in 2020 as European buyers
purchased excess LNG cargos that were redirected
from the Asian markets at the height of the pandemic.
These opportunistic purchases allowed them to fill the
regions’ natural gas storage quickly (from 56% full in
April to 96% full in September) at a lower cost than
competing Russian pipeline gas. Despite forecasts of
low demand growth through 2040, Europe’s ability
to switch between gas suppliers will ensure it plays
a significant role in helping to stabilize global LNG
prices.
Industrial and commercial uses for LNG continue to
develop and expand. Growing demand in the mid-term
could come from developing countries and small-scale
retail LNG. Nations in Africa, South America, and the
Pacific Rim have relied on bottled LPG, biomass, or
coal for fuel, and retail LNG would undoubtedly offer a
cleaner alternative.

LNG is also gaining new market share as a marine fuel
in recent years. Spurred in large part by IMO 2020
regulations, conversions of existing vessels from
bunker fuel to LNG is picking up pace. Construction
of new LNG fired vessels, including container ships,
ferries, and dredges is increasing. With approximately
190 LNG fired ships in operation at the end of 2020,
the fleet of LNG fueled ships is expected to double
to more than 400 by year end 2023, doubling
consumption to 3.5 MT. LNG is increasingly finding
utility as a motor fuel for trucks and buses, particularly
in China and Europe. It’s estimated that China’s fleet
of trucks and buses fueled by LNG has more than
doubled in the last 5 years, growing from about 220 K
in 2016 to almost 590 K in 2020.4
And, with China’s
net-zero carbon by 2060 commitment, conversions
of their large motor fleets to LNG as a motor fuel will
accelerate.
Despite these developments, the picture for future
market growth isn’t certain. There is a growing
chorus of calls to decarbonize energy supplies by
most industrialized countries. Even with relatively low
carbon emissions compared to other hydrocarbon
fuels, future demand growth for natural gas and LNG
is facing headwinds brought by the ongoing energy
transition. Though clearly a good alternative to coal
for power generation in developing countries, many
environmental groups continue to push for total
decarbonization of energy supplies.
Green hydrogen, produced through electrolysis of
water using electricity produced from renewable
power sources, is increasingly viewed as a cleaner
alternative to natural gas. Hydrogen can be used
as a primary fuel (burned) for power generation or
industrial consumption, or for use in zero-emission
fuel cells for small scale, distributed power generation
and transportation. Green hydrogen is more expensive
to develop and produce than hydrogen derived from
natural gas. Still, it is receiving significant investment
such as the recently announced NortH2 consortium
(comprised of Equinor, RWE, Gasunie, Groningen
Seaports, and Shell Nederland). This group intends
to transport hydrogen via repurposed natural gas
pipelines in the Netherlands to surrounding countries
for industrial use. This project, powered by an under-
development North Sea windfarm, will only displace
natural gas derived hydrogen currently being
consumed in the region. The project, if successful,
could help spur additional investments in repurposing
existing gas infrastructure and accelerate the transition
from fossil fuels. Transportation (via fuel cells) and
industrial hydrogen consumers such as iron and steel
producers will likely be the first and largest users of
green hydrogen.
4
https://www.shell.com/promos/energy-and-innovation/download-the-shell-lng-outlook-2021/_jcr_content.
stream/1614823770264/2b5b3fdaa9feba85dadc9b3408c200f26eadf85f/lng-outlook-2021-final-pack-updated.pdf

Given the complexities and inherent risks of the global LNG market, all market participants
need to maintain a vigilant eye on the short-term to optimize profitability and have constant
awareness of mid and long-term market developments to protect value. This requires the
appropriate software to capture, value, and analyze their commercial and operational
activities and risks.
A MULTITUDE OF RISKS REQUIRES A
CLEAR VIEW OF THE MARKET
Those that also operate in the upstream or
downstream natural gas markets, either buying
natural gas feedstock for LNG production or selling
into the grid/pipelines at regasification facilities,
face additional layers of risk. Local gas prices can
introduce additional cost exposures related to the
acquisition and transmission of natural gas to/from
LNG facilities. Managing these exposures requires a
full view of LNG market conditions, including natural
gas supply/sales contracts and any embedded
optionality they may provide, such as accessing
gas from storage or alternative delivery points. This
can help reduce costs for plant operators/tollers or
maximize gas sales opportunities for gas distribution
companies and traders operating downstream from
regasification facilities.
LNG market participants that manage or charter
LNG carriers (tollers, portfolio buyers, and utilities),
have additional tracking and analytic requirements.
These include voyage planning and estimation, cost
management, and vessel scheduling. Depending on
the underlying supply agreements, they may also have
destination optionality that can allow a vessel to be
redirected mid-voyage should arbitrage opportunities
arise. Identifying and quantifying such opportunities
will require the ability to capture near-term supply
requirements, alternative supply sources, projected
costs, and prices to analyze each potential scenario.
As demonstrated in 2020, lack of storage remains a
critical chokepoint for LNG and natural gas in the Asian
markets. Given limited domestic production, countries
in the region rely heavily on a constant stream of cargo
to arrive within a tight window of time. Upsets within
the LNG logistics chain or weather-driven changes
to supply and demand can send large price swings
rippling through the global markets. Managing this
constant stream of LNG vessels requires a vigilant eye
on demand forecasts and market conditions across
crucial supply points and competing market areas,
particularly Europe. In the midterm, annual delivery
plans (ADP) must be developed and negotiated
between buyers and sellers based on the best
available forecasts of price and demand. Managing
the ADP process requires a broad view of the global
market and the ability to integrate with, and analyze,
vast streams of data necessary for decision making.

ION Commodities offers a comprehensive portfolio of
solutions for LNG covering upstream supply, storage
operations, terminal operations, cargo movements,
trading, regasification and downstream demand.
With solutions that can address the breadth of the
LNG value chain, ION is positioned to provide the
ideal solution to meet the needs of LNG market
participants across the value chain. And for any of
the LNG proven products offered by ION, clients
can add vessel management and asset optimization
capabilities that are easily integrated. With ION’s LNG
solutions, traders, liquefaction plant owners, and LNG
capacity owners are better able to aggregate, manage
and analyze the crucial data and information needed to
make commercial and operational decisions.
ION provides users the ability to manage their contracts,
trades, and positions and quantify risks from gas supply
acquisition through LNG production, transportation,
storage, regasification, and gas sales. All without relying
on spreadsheets or multiple and poorly integrated third-
party applications. With this full view of their operations,
users can run what-if scenarios to optimize their supply,
markets, and transportation routes. By having this
full view of their activities in real-time, opportunities,
constraints, and risks can be quickly identified, allowing
users to operate profitably while protecting value and
addressing commercial obligations.

ABOUT ION COMMODITIES
We’re transforming the world of commodities through
innovation. Our mission is to understand the diverse
and changing needs of your energy and commodities
business and meet those needs with advanced
technology. Wherever you are, and whatever industry
you’re in, ION Commodities solutions put you in
complete control. With decades of knowledge and
experience, we can provide proven solutions to the
challenges you’re facing. That’s why over 30,000
users worldwide have partnered with ION to sharpen
their decision-making and boost their productivity.
Want to know more? Contact us at:
commodities@iongroup.com
commodities.iongroup.com

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