Global gas: Why LNG alone is not enough
Guest blog by Klaus Reinisch
The Truth about LNG
Liquefied Natural Gas or LNG is suddenly everyone’s favourite again, and I have been approached more than once recently to help setup specifically an LNG business. It seems everyone wants a slice of the pie before the LNG opportunities disappear again.
But wanting to build an LNG desk and looking to add LNG experts to your business alone is going at it the wrong way. Think about it: What is LNG? And more importantly, what really influences LNG markets, prices, supply and end-user demand? LNG is Natural Gas, nothing else. The fact that it is super-cooled for transport and needs special infrastructure, ships, and facilities doesn’t take away the fact that at the end it’s the same old methane molecules you and I heat our kettle with at home. The only difference with the emergence of traded LNG is that now large regional gas markets and many new smaller domestic gas markets are truly connected for the first time. And this is why you don’t need a specific LNG desk, but a Global Gas desk and Global Gas capability to make sense of the emerging LNG renaissance, and most importantly deliver superior profitability from the inevitable large investments and risks you need to consider when stepping into Global Gas with LNG.
The new Global Gas Paradigm
With the appearance of many new players, but especially US LNG on the global markets, it opened up new opportunities for new market entrants, making the entire global gas value chain more transparent, transactable, and more hedge-able. But this does not take away the fact that this new liquid Global Gas chain is more complex than ever, with completely diverse and often non- correlated market drivers at each step, and optionality embedded at different stages that requires global know-how and market insights.
And LNG trading, as important and hot as it is today, is just one element of this new Global Gas chain, and by no means the most profitable link in the value chain. With highly dynamic and volatile markets at the beginning of the chain in Upstream Exploration and Development, and completely different drivers at the volatile consuming end of the value chain, the profits and arbitrage and margin opportunities are rapidly shifting along the value chain, and LNG trading profitability can easily get caught out. In fact, with all the uncertainty along the chain, the winners will be the few that have a foot in most areas along the chain and can adapt quickly when profits shift from one part of this newly emerging Global Gas value chain to another.
More importantly, the new demand growth centres for natural gas are in emerging markets in Asia, Middle East, and South America. And a Global Gas play allows to plug in new markets and serve them while having the flexibility in the existing liberalised part of the chain as back-stops to mitigate risks. One simple example is having access to European LNG import and downstream gas sales as the ideal back-stop and hedging market, allowing expansions into less liquid new gas markets globally.
Implications of Global Gas
So what does the emergence of Global Gas as the preferred profitable model mean for energy market participants and more importantly energy investors?
There are a few clear strategic activities that can help deliver more profitability from this new global gas market.
The Global Energy Market Big Data Race
Unlike other commodities, natural gas demand (and supply to some extent) is highly dependent on a vast and diverse number of other related commodities and drivers. The list is endless, starting with rainfall in Brazil determining how much hydropower there will be to compete with gas-fired generation, all the way to government policy in China determining how much coal-fired heating will be converted to gas, the factors influencing the entire Global Gas chain call for a more Global Energy model instead. The only way to make sense out of these complex global interconnected energy dynamics is to build a Big Data model that tries to capture the diverse market drivers around the world.
The task of building an analytical Global Energy model is monumental, but even if you manage to just capture 20% to 30% of the global energy drivers from various data sources, believe me you are already ahead of the game. And simulations on global energy events and scenarios will be the only way to make better decisions on global energy trades and infrastructure investments in the future.
The task seems challenging but investing in a strong analytical team with good global data feeds will be the key to success for any global energy player.
The Global Gas Talent Race
Now that it is clear that a stand-alone LNG business has limitations and you need a Global Gas and Energy business to be profitable and resilient, the talent you need is also very different. Most of us have specialised in one or the other area of this Global Gas market during our careers and have become experts in one area and expect to be rewarded for this expertise. But what is needed going forward is talent that has know-how in more than one area of the chain, and preferably in more than one global market to make sense out of this integrated market.
Think about it: How many people do you know that have traded natural gas in US and Europe, but also have expertise in Chinese demand, and possibly gas storage and LNG shipping on the way? It will take special new talent that might not have superior expertise in every area but can connect the dots along the value chain and see the new opportunities before they emerge, but who are also able to see shrinking profit margins in some areas of the value chain in advance and move to restructure the business without vested interested in just one specific area of the value chain as is often the case.
This kind of talent hardly exists today, but it can be developed and trained by exposing future leaders to all the diverse areas of the global energy chain and global energy markets early on. These will be the future leaders of the next generation - global energy titans. And with new technology making virtual teams now possible, close interaction between today’s value chain teams and regional market specialists globally will become key to future success.
The Next Generation Winners of Global Gas
There are many other factors that will shape our Global Energy markets, and the sooner you realise how closely interconnected they are, the sooner you will be able to make this new global energy model work for you and extract the ever-shrinking margins from new global value chain opportunities better than your competitors.
Now this is not a game for small capital players, and investments in Global Energy models and data and development of the new Global Energy talent will take years and big pockets. But the end prize will be well worth it.
Some of the nimble trading houses and oil and gas majors are already onto this secret, but there is still plenty of room for new Global Gas and Energy champion firms and investors alike.
© Copyright July 2018 Klaus Reinisch