LNG for free – who can take it?

Ever since the very first cargo of LNG was shipped a little more than 60 years ago by now, the entire LNG world was dominated by the notions of reliability and financial safety.

The dogma is that LNG terminals and ships are very big investments. Those large sums of money upfront can only be invested if there is sufficient price and market stability. Hence the omnipresent notions of Volume risk and price risk.

In classical LNG agreements, it was a given that the seller would accept price risk while the buyer accepts volume risk. So important was this all to the first decades of LNG that the dogma was virtually never challenged. Well, there were always some who raised a stink about the one or the other but it did not really change the fundamentals.

All that started to change with the growing idea of spot. Not an entirely new idea of course but it was only the last 10 years that saw the LNG spot business become significant. Not so much because the market wanted that. It was rather because successive waves of misinterpretation of the market fundamentals have created a Tsunami of LNG that hits us now.

Spot cargos used to be the exception. Oddities in a perfect dance of cargos that only had one goal – to bring the LNG safely to its pre-determined destination. No planning ever is perfect though and as the typical LNG operator errs on the side of safety, there were always cargos that were not spoken for. Success or failure when trading those wedge cargos did not do anything to the financial fabric that underpinned the entire LNG project.

The current wave of LNG is very different in nature. It is baseload LNG. LNG that is supposed to provide the funds required to pay back the colossal funds employed to build those supply lines in the first place. All those projects are in a place of crap pretty much all the time. And with all or much of it becoming spot LNG, all mechanisms to manage volume and price risk are blown to bits.

There are already voices in the oil world that can see shortage in oil storage on the horizon. This means that oil will soon run out of tanks to put it into when it’s not used. That’s a potentially hairy situation because when you are full, no further oil can be unloaded anymore. And all flexibility that is here to deal with inconsistencies in the supply chain just evaporates.

And I use the word evaporate for a reason right now. Because oil will sit in whatever tank you put it too for quite a while until used without much of a problem. LNG does not.

Because LNG is a cryo liquid, it constantly boils. As you know from water, when it boils it produces vapor. This vapor is nothing but the same boiling water – or a fraction of it – that has become a gas called steam. Let it boil long enough and all the water turns into steam leaving an empty pot behind.

That’s no different with LNG except that in this case, the steam is Natural Gas or better Boil Off gas. This means if you park an LNG tanker long enough, the cargo will eventually turn into BOG that must either be flared o vented. In any case, this results in a net loss of product.

So, what do you do when everyone is full and you need to get rid of a cargo? Because unlike oil, there is very little overcapacity in LNG shipping. And as you have seen, the product just evaporates if you leave it long enough in storage. Moreover, you need your vessel to pick up the next cargo as the liquefaction plant has tanks too and they must be prevented from overflowing.

A real pickle. The solution is simple. We won’t have to wait long for LNG cargos to be thrown on the market on negative prices. This means that sellers will look for buyers with available terminal capacity that can take the cargo and will pay them to take it. To get rid of it and as there will be competition for available receiving capacity, prices will be negative.

Until liquefaction plants decide to cut it and stop producing. Yet, that has its own share of nasty consequences so don’t hold your breath on it. 

Warren Buffet once said in a letter to the shareholders of Berkshire Hathaway “Price is what you pay, value is what you get”. The value a seller who pays to get rid of cargo gets is to liberate a transportation asset and prevent his liquefaction plant from overflowing.

We see a lot of movement on the only market that is capable to swallow excess quantities for a little while now. Asian sellers and buyers alike take positions in Europe and sometimes even open trading arms there. US-based LNG export projects would be well advised to do the same. 

They are aware that they will need the safety valve. And they do the right thing – preparing for the worst but I don’t think their thinking went as far as negative prices for their cargos. 

And information plus connections are key here as terminal capacity in North-Western Europe, the most liquid market – starts to become scarce. Yes, it’s this same receiving terminal capacity that just a few years ago was impossible to sell that will attract premium prices. It’s an opportunity for those holding the capacity to make the money they lost over the years back and make a handy windfall on top.

Because as Europe itself starts to look oversupplied, it won’t be the LNG slots alone. It will take gas storage or use cases as well which will depress Natural Gas prices in Europe across the board. This means even lower prices to fetch for pipeline gas exporters and this is where it starts to get nasty.

Because to LNG, this is beyond an insurance policy. Its a survival tactic to get rid of some product now hoping that the market will come back later. LNG can go wherever it wants as long as receiving capacity exists. There is a potential upside to their game – maybe. 

And like locusts, they will leave a ravaged Europen gas market behind. It’s the pipeline sellers that pay the bill.

How can pipeline gas sellers to Europe soften the blow? By making LNG rare again.

And for that to work, LNG as a fuel needs to take off. So, who has an interest in making LNG as a fuel work now?