LNG VALUATION
Case Study: Buying LNG Supply From a US Exporter It is useful to illustrate the application of the portfolio valuation capability in a case study which focuses on
a European gas player looking at the value and risks associated with signing an LNG supply contract with a US exporter.
A US export contract provides access to Henry Hub (HH) indexed gas. The contract has the advantage of being a supply source that can be managed (both physically and financially) against a liquid hub and forward market. But contracting gas from a US exporter will typically involve paying a premium to hub prices (e.g. 115% HH) and a capacity fee. So there is an important value consideration in signing the contract. There is also an important risk consideration since the contract involves buying gas on a different price basis (HH) to end user demand (NBP/TTF) for power stations and retail load.
Contract value is driven by regional price spreads between the US (HH), Europe (NBP/TTF) and Asia. This is in
part a question of the evolution of global gas market fundamentals. For example if the flow of gas from the US to Europe remains constrained by lack of US liquefaction capacity then the NBP/TTF - HH price spread may exceed the transport differential i.e. access to HH gas has intrinsic value. But as well as fundamental considerations there are also specific portfolio value issues.
From the perspective of a European supplier, HH indexation offers a liquid/hedgeable alternative to oil
indexed supply which can be attractive if the supplier is constrained in their ability to buy gas indexed to NBP/ TTF (i.e. the price basis for sale to end users). A US export contract also adds hedgeable hub based supply flexibility to an LNG portfolio that can unlock portfolio constraints e.g. the HH indexed gas could be swapped within the portfolio with a source of Middle Eastern supply with a destination clause constraint and then sold on to an Asian buyer at a premium.
An LNG portfolio valuation capability provides a structured means of analysing the value impact of all the issues as described. Stage 2 to 3 involves adding the ability to:
• Simulate the evolution of market prices (e.g. HH, NBP, TTF, crude, exchange rates) incorporating views on market fundamentals (e.g. the evolution of hub price correlations and volatility)
• Allowing the representation of specific portfolio hedging and optimisation strategies (e.g. the
rolling intrinsic hedging of portfolio exposures)
• The ability to re-optimise portfolio flexibility and adjust hedge positions in response to
changes in market prices and exchange rates. While there are considerable advantages from
being able to capture these factors, there is no need to develop this capability until the LNG portfolio
to multiple supply and demand sources which are linked by access to shipping capacity.
Analytical Capability to Generate
Portfolio Value Ultimately the development of a portfolio
valuation capability is about generating numbers that inform portfolio investment decisions to create value. The capability should capture existing portfolio exposures and quantify associated value and risk. It should facilitate analysis of the impact of changes in market fundamentals on portfolio value. It should also quantify the incremental value of structural portfolio changes such as asset investments, changes in contract terms or changes in hedging / optimisation strategies. But perhaps the most
... the development of a portfolio valuation
capability is about generating numbers that inform portfolio investment decisions to create value
strategy and exposures reach a level of complexity that warrants it. This is typically at the point that a company is developing a portfolio with exposure
overlooked benefit of this capability is that it focuses key stakeholders (asset developers, originators, risk managers and traders) on
developing a common understanding of the LNG portfolio and identifying opportunities to create value. •
David Stokes & Olly Spinks are Directors with Timera Energy. Timera Energy offers senior consulting expertise on value and risk in global LNG, European power and
gas markets. They are experts in the analysis of energy assets, contracts and portfolios and the markets in which they operate.
www.timera-energy.com
This article is a follow-on from “Investing in LNG Growth” by the same authors which appeared in the December 2012 edition:
http://www.commodities-now.com/store.html?page=shop.product_details&flypage=flypage.tpl&product_id=313
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