Market Scenario: A Key Driver for LNG Value Chain

Nov 1, 2016

Introduction

The global Liquefied Natural Gas (LNG) industry is a highly complex and integrated value chain covering liquefaction, shipping, regasification, storage and supply to end-customers (wholesale and retail consumers).  In addition, the applicable LNG supply chain infrastructure is highly capital intensive (CAPEX) and in many cases having an economic and operating life of multiple decades.  Accordingly, LNG projects must undergo various critical phases of Development, Execution, and Operations.

Key Market Fundamentals

LNG projects follow some very basic and key market fundamentals which must be adhered in order to assure and enhance project viability and sustainability.  Typically, to meet the requirements of both equity investors and debt lenders as well as regulatory requirements, LNG project sponsors undertake a very detailed market assessment during the early planning and feasibility stages of the project development phase.  This key task is required in order to ensure “bankability” of the LNG value chain thereby providing high comfort levels to both equity investors, debt lenders and other key stakeholders.

The primary emphasis of the methodology and approach for LNG market assessment broadly covers key elements including, but not limited to; Supply Scenario; Demand Scenario; Influencing Factors; Gas Balance; Gas Customer Analysis; Alternative Fuels/Feedstock Scenario; Infrastructure Aspects; Natural Gas Tariff and; LNG Project Viability.  Each of these integral elements require substantive data gathering and research, definitive assessment, analysis, and evaluation of existing, probable, possible and potential scenarios and cases.

In many instances, calculated and true demand must be determined as well as influencing impact of elasticity of Supply and Demand.  Other key areas which must be addressed in a detailed market assessment can include, but not limited to, commodity indexation; alternative fuels and feedstock tariff price structure with competitive pricing; potential for fuels and feedstock switchover to natural gas from either coal, crude oil and hydrocarbon refined products; infrastructure capacity, limitations and expansion; economic impact and prospects for growth and; end-customer creditworthiness.  As an example, the following figure is a typical methodology and approach for an LNG market assessment.

The required LNG market assessment must also be based on both quantitative analysis and quantitative modeling which is undertaken with various key assumptions, influencing factors and indices as well as graphical representation resulting in determination of combinations and permutations of optimistic, most likely, and floor case(s) market scenarios.

The results of a value-added quality market assessment serve as a basis and critical input into an LNG project’s technical, economic, commercial and regulatory policy analysis which can satisfactorily demonstrate investment objectives, project viability and likeliness of the project to succeed.

As articulated above, LNG projects also have an intricate interrelationship between market scenario and technical, economic and commercial viability as well as sound transactional contracts coupled with asset management, operations and maintenance.  Thus, LNG projects also cover a very broad “end-to-end” asset supply chain from raw materials, fuels, feedstock and energy sources to a wide variety of demographics and market segmentation covering end-customers (wholesale and retail consumers).

Summary

Any successful major LNG project is critically dependent upon a value-added market assessment. Such LNG market studies are inherently based upon quantitative analysis and quantitative modeling of key market fundamentals which serve as a critical input to determining an LNG project’s long-term viability, sustainability and “bankability”.