A rude awakening for NWE regasification terminal customers and operators

In the dying days of 2008, a bunch of renegade gas players congregated in Rotterdam to make history. Well, it was certainly not their foremost intention to make history – that was more of some sort of unintended consequence and most of them might not even have dared to dream how things would unfold to this day. Whatever, they just did what needed to be done at the time and that’s all that matters for us right now. They just wanted to get into the LNG game but as a very important sidekick, their project should bring the LNG sparkle back to the old continent.

GATE was born.

I remember those days like yesterday as I found myself in the middle of the storm inventing an entirely new mechanism to keep potentially sloppy terminal developers nice and friendly over the long term by inflicting pain on them in measured bits and pieces when they need it. More on that in another post.

The penalty calculator found its first application in a live LNG capacity agreement.

GATE has been everything already. It started as a new type of terminal that promised professional Regasification and Terminalling services to capacity takers that would otherwise not engage in the rest of the LNG value chain but were still desirous to get into the business itself. It promised modern multi-user principles to run the terminal and even access to LNG for faraway Central European markets. It was a reloading station to harvest the arbitrage potential that Asia held until last year. It would be a diversification measure away from Russian Gas and there is the specter of LNG bunkering in the air.

Right after FID, LNG supply grew so tight that almost every hope to source long-term lock-in LNG for the terminal evaporated into thin air making the capacity takers hostages of an agreement that became very expensive to manage and the terminal itself a dead duck.

However, in 2015, LNG prices came down so much that the terminal is going to be very busy for quite a while. It has become one of the beacons for LNG bunkering and LNG is being loaded onto trucks bringing the cool liquid to places as far away as Austria and even beyond.

Enough of the banter.

It’s hard to know how the original capacity takers see their GATE investment today. Most of them have suffered more than bloody noses for many years and they might be forgiven not to see the impending reversal in fortunes. As there is too much LNG in the world and to prevent a still very illiquid market from completely faltering, this surplus LNG will search for a safety valve which can only be Europe as America has gone away as the world sink for LNG.

Up to now, there was no LNG to flush through its pipes and an LNG terminal with no LNG is a stranded investment. Now, though, the terminal is going to see some of the contractual mechanisms that have been designed for a busier time test. As they never have been exposed to the harsh breath of reality, most – if not all – of its users might think that they know the contract they have signed and how it works. However, likely, they don’t.

How comes? They have been living with the contract for many years now and all of them can read. True, however, it’s also a fact that people don’t care about rules for things that have not even come close to happening even if they lie in full sunlight before them. Those in charge of the contract were busy with other stuff and as this was seen as a stranded investment, it would not have attracted the most enterprising minds of any of the capacity takers workforces. Those not quick enough to run away from the responsibility for the capacity will likely also not be quick enough to see its intrinsic value and risks.

They will simply administrate the dilemma and hope for no worse to come while they ducked to deflect blame. Probing the contract for what it’s worth might be seen as a risky activity by them which heightens the possibility that the contract has been left dormant so far.

The original negotiators are gone in most cases so there is nobody who can remind us of what the original mechanisms were meant to do. A truly interesting situation indeed as we see a bunch of inexperienced operators with a bunch of equally inexperienced capacity takers facing one of the biggest reversals of fortune the LNG industry has ever faced and the impending exposure to the spotlight of international attention and fame.

Everyone will watch how North Western Europe is going to fare in this bloody battle on the LNG front as it also produces a standoff between Russia as the old continent is still the number one supplier of pipeline gas and desperate LNG vendors and portfolio players. More on this battle in another blog post.

And those who take an interest in LNG market developments and terminal management are in for some truly interesting times as the coming months will produce plenty of friction that will test the inner workings of GATE.

Originally, GATE had set out to revolutionize the way those terminals were to be built and operated the world over. It was conceived to be the first true multi-user terminal with an operator that was not allowed a volume position in the terminal. It was hailed to be a break from the old and inflexible past when a regasification terminal was nothing but an infrastructure piece of equipment on the chain, shielded from failure. GATE was an evolutionary step in the timeline of LNG regasification terminals.

Looking back at those promising years from today’s point of view could make anyone involved with it at the time feel like a fool. But despite the apparent failure, GATE was a step in the right direction as it attacked some old ills of the LNG chain head-on and reset the standards.

Blake Larkin, then Managing Counsel of the Chevron Shipping Company, said that we had written the book on how those terminals shall be run henceforth right after the agreement was struck. Despite years of operation, those very mechanisms have never been put to the test so that’s some rude awakening for the doozy folks running this particular show.

And we all know that no matter how innovative stuff is – it needs to survive exposure to reality. This reality stares GATE and its parties right in the face now. There will be blood. That’s safe to say. Let’s see whose blood it shall be.

However, the patterns this blood will produce will keep contract specialists and analysts busy for years. Plus, it will be the fertilizer for a new LNG world.