European utilities and LNG supply – between a rock and a hard place

Some companies in Europe have built up massive regasification portfolios with no supply coming forward. They are exposed. They could turn vice into virtue and become the next generation of LNG players rather than doing what never really worked in a market.

Assume that you are getting a phone call from a lawyer in a developing country telling you that a very wealthy widow is trying to transfer funds to Europe but cannot do so officially. You just need to transfer 6000 EURO into an account to unblock the transfer and in exchange, you would get a portion of the fortune.

What a scam would you think! A variation of that is currently at work in the LNG world and it works much better than expected.

Since 2005 several European traders turned utilities have built up pretty large LNG receiving capacity portfolios. They trusted that LNG supply would come forth automatically once they could show their flashy new terminals. Many of them have started to lose copious amounts of money by now. Much of the bought capacity lies idle.

Desperate as those buyers in waiting are, they often fall prey to the unscrupulous. Those who make you believe that mimicking those who supposedly do it right would be the path to salvation. Nothing could be further from the truth.

In their defense, the now-established portfolio players have built their positions in a vastly different commercial environment to deal with. They benefited from almost perfect monopolies in their markets masking any economic shortfalls in any project. Easy to take a 20-year exposure then. Besides, natural gas was seen as a nuisance rather than a precious commodity so sellers behaved nicely and were very cooperation-minded. Their focus was getting rid of something unwanted rather than haggling for revenues on a priced commodity.

It’s all different for post-2005 newcomers. They have to build up those supply chains under market pressures with “hard to deal with” sellers. I am sure that most old LNG players wouldn’t have succeeded under those circumstances. Knowing this helps to understand the situation, but it does not cut through the real problem. The situation (and comparison with the established players) is also not fair but since when was fairness part of the equation?

A significant portion of the blame lies with the capacity takers themselves. Some built up great teams capable of dealing with LNG technically or on the logistics side. Not a wrong move as those teams are critical for a well-oiled LNG business. Many have stocked up on LNG traders to play the spot market. This is more debatable considering the condition the worldwide LNG spot market is in. Besides, a trader looks for the best deal always and if this is not the market behind your terminal capacity, he is not going to solve the problem. Lastly, trading is an optimization activity on top of a functioning underlying market. In LNG there is no such market yet but that will be the subject of another post.

The most important piece missing were those able to put together those politically, technically, and economically complex supply projects and chains. That’s always a long shot and requires hardcore business developers not afraid of a Black eye (or two). It also requires thinking strategically – meaning real long-term with that. Traders always stare at the next bonus. Long-term thinking is not even part of their world. Most LNG supply chain projects will produce commercial effects long after the retirement of the original negotiation team.

Also, one must get used to the fact that not every single lead will turn into a business. If one in 10 leads turns into a business you are lucky. But those leads are expensive to build and very time-consuming. This requires funding a lead hunter team that has the capabilities to deal with those issues. No simple market analysts with a hands-off approach. And you will be forced to deal with lots of bad leads. Don’t throw good money after bad because you don’t allow your business development team to kill a dead lead because of company policy.

How to turn the position those capacity takers are saddled with today from a money loser into a revenue maker tomorrow?

For a start, this is not only “not easy“. It is the hardest thing that energy professionals may face today. The Asian market spoiled the sellers and got them used to high prices and deferential buyers willing to do almost anything. It also sucks the spot market dry.

The market will turn, there is no question. The current imbalance favoring the seller is unnatural and will eventually give way. But how long until that happens? Don’t hold your breath.

LNG buyers (especially those newcomers in Europe) need to start thinking like upstream companies. That does not mean going upstream. The upstream world also has changed significantly during the last 10 years from an IOC-dominated world into a complex world where many smaller specialist players bring standards and cost-cutting to this formerly hermetically closed world. There is a reason why the big boys go for the technologically challenging hard to reach offshore oil and gas. Competition is less cutthroat there.

This is not the place one wants to be in – but mimicking their way of thinking helps. It’s not rare for an upstream company to have a small team of lobbyists dispatched to a country considered of strategic importance. Those people return very frequently and develop project leads. Again, most of those leads fail but the few that turn into a full project will pay for the rest and cut profits.

As I already expressed in another post. LNG buyers don’t have to become upstream players. How that works will be explained in another post so stay tuned. But helping new projects into their shoes would certainly help to get you a better position on the buying table. Read African LNG and LNG supply issues for more.