NOCs find allure in LNG trading
Traditionally conservative players are embracing more flexible approaches
Optimisation is the new name of the game for many NOC LNG exporters, from Southeast Asia to the Middle East. They have finally embraced trading in order to keep up with a rapidly changing landscape almost unrecognisable from the market they first entered.
NOCs have been selling LNG since the 1970s, but only in the last decade or so have they made headway in terms of trading. Building a liquefaction plant was about monetising natural resources; optimisation is about value creation from every molecule of LNG produced.
Gone are the days of single point-to-point LNG contracts, while US liquefaction played a key role in ushering in a new level of commercial flexibility. NOC producers must now re-evaluate their business models and ask themselves how they can remain competitive with so many new players coming in and shaking up old norms.
Industry consensus appears to be that everyone—both traditional buyers and sellers—must become portfolio players. Japan’s Tokyo Gas is the most recent to jump on the bandwagon, announcing a new LNG trading arm at the start of September.
Not all NOCs are willing or able to take on the additional risk of ‘pure’ trading. But an ‘asset-backed’ approach, where you maximise value from cargoes along a chain of assets available to you (ships, storage and contracts), is more palatable.
Industry consensus appears to be that everyone—both traditional buyers and sellers—must become portfolio players
It is a gradual move, not one done overnight. Education, knowledge-sharing and training is required, which is precisely why NOCs have either hired seasoned traders in the industry to start up desks in Singapore or London, or formed joint ventures with existing, often European, actors when they have decided to enter the LNG trading realm. Even LNG newbie Empresa Nacional de Hidrocarbonetos from Mozambique has teamed up with trading house Vitol to sell future supply from the country’s Rovuma project.
Middle East LNG supply currently makes up the smallest portion of short-term and spot LNG trade—but that is set to change. Qatar Petroleum will make a direct foray into LNG trading with the formation of a new team in Doha. The unit will manage not only Qatari cargoes but also third-party volumes. Third-party trading, not optimisation of the giant Qatargas portfolio, is a significant new step.
Before the shale revolution flipped the US from being the world’s most anticipated importer to its most vibrant export market, a large portion of Qatari LNG had been destined for North America. When US requirements disappeared, Qatargas (or Rasgas as it was then) was quick to turn around and find alternative destinations. The firm always had people to optimise existing supply in case of market disruption and participate in short-term buy tenders.
But the move into trading is long awaited, and long prepared for. Forming the new trading team is likely an acceptance that a significant portion of future Qatari supply will find its way into the spot market as major buyers drop the baggage of legacy contracts in favour of fresher supply deals.
Abu Dhabi’s Adnoc has already faced up to this challenge. Once its legacy contract with Japan’s Jera expired in early 2019, short-term deals with numerous traders were lined up. Contracts with BP and Total are due to commence in 2021. Adnoc embraced the transition from single-buyer model to diversified, multi-buyer contracting strategies.
And Oman LNG is headed down the same path. With new volumes from its plant and a major contract expiry with South Korea’s Kogas on the horizon, Oman too is bracing the potential that it will see a lot of its supply going to portfolio players. And both Mid-East Gulf NOCs are also expected to dedicate more resources to enhancing their spot market presence.
Saudi Aramco decided to get in on the action even before having any LNG volumes of its own. The firm started trading physical cargoes out of Singapore to learn the ropes and establish a market presence reputation despite having no equity supply. Bloomberg News reported it sold its first cargoes to longstanding oil customers, South Korea’s S-Oil and Indian Oil Corporation.
NOCs with existing LNG trading involvement are also further innovating. Malaysia’s Petronas—with supply from Egypt, Australia and soon Canada—has always considered itself a portfolio player. But it has taken its trading skillset up a notch by further investing in tools, digitalisation and infrastructure.
Petronas has added reload capability to its 3.5mn t/yr Pengerang import terminal and embarked on LNG bunkering, break-bulk and transport via Iso tanks. These small-scale solutions are used to actively create demand, especially in Southeast Asia, with new deliveries to Myanmar.
Everyone must now offer flexibility in contracts and competitive prices. But existing relationships…can nudge deals over the line
Indonesia’s Perusahaan Gas Negara (PGN) is also beginning to spread its wings. The firm took over the gas unit of state oil firm and PGN parent Pertamina in a rationalisation of Indonesia’s gas industry structure, giving it access to Indonesian cargoes.
But the firm went on to sign a deal with China’s Sinopec to deliver a handful of cargoes—either from Indonesia or from the spot market. The deal was supposed to commence in 2020 but may be delayed into next year due to the impact of Covid-19.
An edge for these more established NOCs over new entrants—which is perhaps understated—is their longstanding relationships with existing LNG buyers. Everyone must now offer flexibility in contracts and competitive prices. But existing relationships—with friends and partners that know you as a reliable supplier—can nudge deals over the line.
Fauziah Marzuki is head of BloombergNEF's LNG research team