LNG MARKETS
Figure 2: LNG vs Pipeline Supply Chain Complexity
against observable market price spreads. The extrinsic (or flexibility) value of the portfolio depends on the evolution of the volatility and correlation of these price spreads. Portfolio value is realised by hedging and optimising exposures from contractual terms and asset flexibility against underlying market risk factors such as oil prices, gas hub prices and exchange rates. The relationship between exposures and risk factors is illustrated in Figure 3. The challenge that LNG investors
Source: Timera Energy
Contract prices move linearly in relation to the crude benchmark. However LNG contract complexity arises from an unusually high proportion of pricing and locational flexibility in contracts. These result in non-linear relationships between contract value and underlying exposures. LNG supply contracts typically sit within a portfolio of assets spanning other components of the LNG supply chain (e.g. production, shipping and regasfication). Value creation across an LNG portfolio depends on an understanding of how contract exposures interact with underlying asset flexibility. Common sources of portfolio flexibility include:
• Options on gas hub delivery via contracted regasification capacity
• Options to purchase or sell incremental cargoes
• The ability to utilise or contract shipping capacity to move gas in response to price spread movements between markets.
To understand the value of an
incremental asset investment, it is important to understand how the asset will interact with contractual and asset flexibility in the surrounding gas portfolio.
LNG Portfolio Market Interaction It is easy to get lost in the detail of
LNG portfolio exposure complexity. Extracting value from an LNG portfolio is essentially a spread game. The intrinsic value of the portfolio can be measured
Source: Timera Energy December 2012 71
face is to understand how a broad set of fundamental market factors act on exposures to drive asset value. This is a problem that typically spans multiple geographies and commodities. It is also a problem that is best considered at a portfolio level rather than an individual asset level. The complex interaction between flexibility across portfolio components means that substantial value may be lost if assets are valued against the market on a standalone basis.
Extracting value from an LNG
portfolio is essentially a spread game Take for example the opportunity for
an Atlantic Basin based LNG portfolio to make a committed sale to an Indian buyer at a premium to European hub prices (adjusted for variable transport and processing costs). The deal may
Figure 3: LNG Portfolio Exposures & Risk Factors
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