Give to get – a winning way in LNG

Insanity is doing the same thing over and over again and expecting different results. We all know the quote from Einstein. But that’s what happens in LNG all the time. Here is an alternative proposal.

Are you concerned with how milk is being produced when you go to buy some in the supermarket? Probably not, and it would not matter much.

The same would be true for most stuff that you can buy, no matter if you are a simple consumer or a business person using the stuff you buy for your business in turn.

In LNG, as usual, things are different. Very different.

For a starter. There is no long-term LNG available if you are not prepared to pay steep premiums to the market. And that’s an unhealthy situation as those premiums make the LNG more expensive than what the market gives you for it. Yes, you understand me well. The likelihood that except if there is a hidden revenue source nobody sees, every drop of LNG so bought is a pure loss to the buyer is high.

Let’s put down a mental note that the situation is somewhat different in the spot or short-term LNG even if the mechanisms described here would do no harm to some traders.

If you still really, really need long-term LNG supply – then there is only one way. Behave like an upstream company. Go, help LNG projects get into their shoes with some roughneck business development. You will retort that as a buyer, that is not your business and you should not have to do that. Very true. But you sill need the LNG – and – there is none available. And just sitting there waiting for good things to happen is no good business plan. So – if this is your only choice, however ugly it looks, you might well give it a try. Because it sure is not as ugly as a certain failure.

Give to get means that you give a kicker – some starting aid to an LNG project to make it more of a real thing. That jump-starting aid can be through many diverse measures. Classically that would be through a dedicated team that behaves like an upstream hunter seeker cell. This team will either seek out promising LNG project proposals or start at zero and go for feed-gas. That requires business development funding which must be done at the risk of full loss.

One must be aware that not every project lead will materialize as a project. I usually apply my seven rules. This is one of my real simple no-brainers. You develop seven credible leads to have good chances for one real hit. I have not invented this rule. It comes from the angel investment world. An angel usually sniffs out seven prospects, invests in them, feeds them with contacts, gives them a shoulder to cry on when things are hard, and takes care of them to make every single one of them THE potential superstar. He believes that every single one of the seven could be the winner. If he has doubts about one (in the hunter-seeker phase), he must cut it loose as then he does not have seven real prospects.

The same is true for the seven prospects for an LNG project. Don’t get too bothered by the number seven. Every single prospect must be so real that you would stand up for it and bet that this would be THE ONE superstar. Besides, the angel always knows that one of the seven will be a star and that this superstar will pay for the expense of all the others plus a healthy return, two will make their money without star qualities and the other four will be duds, and the investment will be lost.

The angel understands that and is comfortable with it. Natural gas utility buyers have a much harder time with this reality. Every hit has to score as there are very seldom any alternatives being developed. This is unrealistic but unrealistic expectations are unfortunately a staple of the LNG world.

Back to “Give to get”. The buyer usually does not want to take a financial or physical upstream position. Firstly it’s very capital intensive and also because he usually is ill-equipped (human resources and competencies wise) to go upstream. It requires a special skill set that is very onerous to acquire. Fortunately, some companies are willing to jump in. Someone will have to find them and that’s again one of the roles of the team in giving the LNG project a shot in the arm.

National authorities and feed-gas owners will have to be engaged, EPC and EPCM companies to be found and potential lenders must be engaged to have the ingredients for a project. Before the project becomes real, there must be an agreement between the LNG buyer (the one who gives), the eventual project development company (the one who gets), and the host government that the buyer will, in recompense for his efforts, have an agreed on deal when it comes to allocating the resulting LNG.

Remember, only one in seven (you may pick your number) might be a hit. And also remember that there is no guarantee that any of them will work out. But the alternative is often not even the slimmest hope of LNG so you may pick your poison.

Give a helping hand to get LNG. A winning formula for me.