LNG – Banishment from paradise

Anyone studying the history of humankind from its beginnings to this very day will reach a point where he wonders what makes humans tick. Many times, a collectivity, a state, a people reaches a point of relative wealth and well-being. They are safe on the outside and the inside, their economy is thriving, cultural life is at an all-time high and few suffer basic needs. And then, often for no plain reason at all, they seem to go bonkers and kick it all to the curb.

Humans – it seems – are not made for eternal bliss. 

I found the description given of this condition by Agent Smith from the first part of the Matrix revealing. I won’t go into the intricacies of the Matrix here. If you have not seen it yet stop reading at once and throw yourself in front of a television. This is movie history.

Back to the storyline. 

Morpheus, the leader of the renegades was captured by Agent Smith, the perceived leader of some secret agents, who interrogates him now. During the interrogation, Smith holds a monologue:

“Have you ever stood and stared at it, marveled at its beauty, its genius? Billions of people just living out their lives, oblivious. Did you know that the first Matrix was designed to be a perfect human world? Where none suffered. Where everyone would be happy. It was a disaster. No one would accept the program. Entire crops were lost. Some believed that we lacked the programming language to describe your perfect world. But I believe that as a species, human beings define their reality through misery and suffering.”

This is no different for LNG. For the first almost 50 years of LNG as a store of energy that was shipped over oceans, every single project and almost every single cargo of LNG was part of one big ant farm. A picture of perfection where everything functioned like clockwork.

Anything that might have disturbed this perfect clockwork was frowned upon.

Seller and Buyer met long before the first drop of LNG was being processed and agreed upon a deal that would pre-determine the fate of every cargo, and every BTU of LNG resulting from it. 

The Soviet Union should have loved the inner workings of LNG. Everything was planned out long in advance. No straying from the plan was possible or conceivable. And those plans were not for a mere 5 years – they put decades into an iron clan concrete shell that it was impossible to escape from. The results were certain.

Buyers wanted this ultra-stiff arrangement as they needed to be sure to get the gas. LNG was a replacement pipeline for them. There was no world market to speak of. They were more afraid of lights going out for lack of primary energy than they salivated at the potential chance of making a windfall from a quick and smart deal. 

Security of supply was paramount. The cost elements of the chain were of secondary importance at best. Buyers had their respective end-users in a headlock through monopolies. Whatever cost there was had to be borne by consumers.

Sellers also wanted those deals as often LNG was the only way to monetize their gas reserves. Gas was considered trash at the time and countries with little oil but plenty of gas such as Qatar were considered the unlucky bunch. They looked with envy at their big and lucky oil brethren.

Their LNG projects were also very expensive to build so they needed security of payment – for decades again. Any hiatus in cash flow was seen as potentially catastrophic. 

Prices for LNG had floors to make sure that the cash always came in. They also had ceilings to allow the buyer to recapture the potential losses he made when the floor kicked in. Everything and everyone was out for cooperation and balance. 

The parties were as sheltered as possible from any risk as there was no market to speak of. Every project and every supply line was a piece of art chiseled into the fabric of reality for its purpose. That made it hard to generalize and compare projects but that was also not important. 

Spot LNG did not exist as a significant activity. LNG projects existed for their own sake. It was a little garden of Eden. A well-structured LNG project was coupon clipping for decades. 

This was a situation of bliss as once the hard work of getting things into motion was done, it was Groundhog Day. Every day.

Make no mistake. Those active in LNG were as keen to be way more creative as we are. Only, the odds for things to go wrong were much bigger. Plus, real opportunities were rare so why bother? 

And then, it stopped. LNG broke the shackles that protected it from the evils of the real market. It tasted the metaphorical forbidden fruit. 

Last week we saw the chain of events that led to the situation that we are in today. A situation with a historic overhang of uncommitted LNG. This overhang is still growing as if the devil chased every single project that could not get FID fast enough.

A week before we saw that LNG was a long-term business at its core. We also saw that developers ignore this long-term nature at their peril. 

This might lead to the idea that paradise was ended by a cataclysm and that shale plus what happened after shale were to blame. The events from shale through Fukushima to today indeed upended the industry. However, they were not responsible for the evolutionary forces within LNG.

The old LNG world before shale was a bit like the dinosaurs in their dying days. Mighty beasts that were admired for their sheer size and awesomeness. But their days were numbered. 

Would the dinos have gone without an asteroid hitting Earth? You bet. They had their days and Earth was ready for a new paradigm, the age of the mammal. The dinosaur’s world was already changing deeply before the asteroid. The only thing the rock from space did was step on the accelerator. It put urgency into the process and made sure that there was no going back. 

It also cleared the field to allow new species to fill the myriad niches this projectile from space created.

Shale did that to the old LNG world. But LNG had already been changing from within long before shale. LNG trading became a thing. Onboard regasification promised flexibility. Megaships and mega-trains promised economies of scale. New propulsion techniques and onboard re-liquefaction popped out and went away – in part at least. New business models were played with. There was life in them ossified supply lines. 

The sleepy garden of Eden LNG thrived in for almost half a century was rapidly giving way to the chaos and the insanity of markets.

Where there was order, there now was chaos. Where there was a certainty, fingernail-biting nervousness kicked in. Where there was cooperation, gaming the contract was the new name of the game. 

So, LNG had it coming. Shale or not, the evolutionary forces within the energy world could not be contained anymore. Shale and the events thereafter put this process on steroids.

What is it now? Is it better to forget past LNG and soldier on into a glorious future? Or will we suffer greatly and come to regret that we strayed from the path of past virtue?

It would be unwise to forget about the fundamental nature of LNG. LNG is a complex supply chain. The most complex supply chain for any energy commodity. Where else does one handle a boiling cryo-liquid? Dither and your product disappears.

And complexity brings risks and a price tag. A price tag we won’t be able to avoid as the current drive towards a cleaner planet will push LNG into the limelight. In time, LNG will become a fuel almost as important to the world economy as diesel is today.

We need to keep our past experiences with LNG on top of our minds when we design new projects and trades. But we cannot be weighed down by this legacy as we need to reinvent the business many times over. 

The LNG world of tomorrow will still carry the genes of old LNG as we carry the genes from the dinosaurs within us. LNG has been banished from the sleepy paradise. That’s a good thing.