The first LNG Market Maker

Late in 2008, the foundational agreements for the GATE terminal were in final negotiation. For the first time, a multiuser regasification terminal strictly separated the owner/operator from the capacity customers. We often met in small teams haggling until the early morning hours to iron out the wrinkles in the contracts.

There sure were many as there always are. Or at least we perceived them as such as we faced an unprecedented situation. More than a year after the signing ceremony I was told that at the time we had rewritten the book of regasification with those foundational contracts. 

I was flattered. But I also knew that whatever we had put into those agreements would be exposed to the ultimate acid test. An LNG market like we never saw it before.

OK, time for a reality check. In 2008, the LNG world was very different from what we know today. Shale was not yet the blockbuster it turned out to be later. North America was still perceived to be the grand LNG El Dorado.

We were in a cut-throat Sellers Market. This means that as a prospective Buyer of LNG you had to literally kiss a Sellers behind. That said, even if you did that you still had to pay premium prices for the LNG. There was even talk of long-term sales agreements with a price formula above Crude Parity.

Crude Parity means that one MMBtu of LNG fetches the same price as one MMBtu of Crude Oil. 

It was a bad time for Buyers and Sellers felt like they were on top of the world. It also felt impossible to get reasonably priced LNG for many years to come. Going for new regasification capacity did not look like the best idea at this time.

But there also was another talk in town. The question if LNG was about to become a commodity. I delved into the Commodity issue many years ago. My basic rationale has not changed an awful lot since then. If you cannot determine the value of an LNG cargo you are given at some point on Earth and off the cuff, you don’t have a commodity.

In other words – if you had oil cargo, you could sell it for a determinable price. Even today you can’t do that in LNG. 

LNG is still subject to a pretty unforgiving supply line. You need a lot of stuff lined up to be able to execute a deal at will. You need spare shipping capacity lined up. You need regasification capacity at a terminal that you can readily use lined up. And you need market access lined up. Plus you need to be reasonably sure that those elements all dance well together. LNG tankers need to drop their cargo somewhere to empty up for the next cargo that’s already waiting. 

Obviously, as there is a lot more LNG in the market today than it was 12 years ago and there is also a lot more shipping capacity, this has loosened up somewhat. But still not to the point that deals can be cobbled together and executed at the bat of an eyelid. As you would be able to do that in crude oil.

The current oversupply situation puts a lot of pressure on the market. North-Western Europe has started to fulfill its best innate quality. It is the overflow drain for the world market. If a cargo cannot find a place to be sold into, it is dumped into North-Western Europe. It has the terminal capacity. It has deep and big markets. It has great interconnection and deep underground storage. It finally has liquid gas hubs with transparent pricing.

What it lacks is an LNG Market Maker.

OK, what is a Market Maker? This term comes from the financial world. Investopedia defines Market Maker as follows:

“A Market Maker is an individual market participant or member firm of an exchange that also buys and sells securities for its own account, at prices, it displays in its exchange’s trading system, with the primary goal of profiting on the bid-ask spread, which is the amount by which the asking price exceeds the bid price a market asset. The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in an effort to keep financial markets liquid.”

In the strictest sense of the word, even Natural Gas exchanges in the most liquid Natural Gas markets in North America and North-Western Europe don’t have Market Makers. The Market Maker makes sure that there will always be a commodity for sale (for a price he displays). He also makes sure that commodities can always be sold (for a price that he displays). So, in the truest sense of the definition, any Natural Gas exchange fails this test.

But what if we adopt a much softer definition for the LNG Market Maker? For example as a company that will under most scenarios buy and sell LNG for a fee or a price. Not as an absolute certainty but predictably so if certain factors are fulfilled. 

Pre-positioned for such a role are those with plenty of available regasification capacity in North-Western Europe. They would provide an important hedge to the market. Right now Japanese and Chinese utilities are building up trading capacity in North-Western Europe for that purpose. They do that not to make money from trading but rather to help with getting rid of excess LNG. They all have over-contracted LNG in the past and their portfolios are bulging. 

The Market Maker would be better placed to perform in this role and to provide this service. Anyone trying to manage the portfolio won’t necessarily put his best elements and efforts into this. The Market Maker would use his A-Team. And he would derive value from situations a less professional player could not hope to fetch. 

When we negotiated the GATE agreements we knew that sweating the details too much would just make the agreement brittle. We built something that had to endure the test of time and the twists and turns of the market. We could not possibly have foreseen all that would and could happen. So we gave it room to breathe and sure enough, the terminal would evolve far past the regular regasification terminal into a service center for LNG. And it still does. 

We are all proudly looking at our creation and how it grew wings.

Just as we will look at the first LNG Market Maker to emerge in North-Western Europe and carry the market to new horizons. 

The energy revolution is not over, it just goes into a higher gear.