The Complex LNG Supply Chain

Posted on April 13, 2016
Posted By: Michael Schwartz
 

Natural gas and liquefied natural gas (LNG) have very important roles in the world's energy supply. There are several stages throughout the supply chain of LNG and it must be effectively tracked from the initial stage as natural gas, to transportation to a liquefaction plant, to shipment in liquid form to be regasified. Supporting the changing forms of natural gas and its global nature are unique challenges in the supply chain.

The LNG process starts when natural gas is taken out of the ground and then transported via pipeline to a liquefaction plant, typically located on a coastline. After liquefaction, it is shipped in liquid form in a tanker to a terminal (frequently located on another continent) where it is regasified to become natural gas. Although LNG is much denser than natural gas, making it more cost efficient to transport over long distances, there are operational challenges involved in its production.

Delivering LNG requires sophisticated software to manage the entire LNG lifecycle from capturing physical transactions to scheduling and tracking the movement of LNG. LNG companies need a seamless process for efficient scheduling of natural gas that is to be liquefied and regasified.

Time for ROI

Over the last 15 years, companies have invested heavily in the infrastructure required to convert natural gas to liquid form for storage and transport to deliver LNG. Billions of dollars have been spent to build terminals and ships. The production of LNG is a complex process spanning continents and taking several weeks from start to finish. Companies that have made the investment in equipment are looking to start making a return. The key to maximizing profitability is the ability to accurately track the movement of product and forward prices to manage the complicated process of LNG. Once a company has committed to supplying LNG per a contract, the company needs to optimize operations or suffer potential losses.

Energy trading and risk management (ETRM) software allows LNG providers to better manage the LNG lifecycle. Everyone within an organization (including traders, schedulers, and accountants) should have real-time data to deliver efficient, profitable scheduling of LNG.

ETRM Software Features for LNG

Any multi-faceted software platform used to manage LNG must support both the dry and the wet, natural gas and liquids. It should also support natural gas liquids (NGL), a side product that can result from extracting natural gas from the ground (for example, butane and propane).

These software platforms should be able to:

  • Handle both natural gas and liquids, as well as NGLs
  • Support NGLs and the mid-stream of NGL deals, including processing and fractionation
  • Control the entire LNG lifecycle from liquefaction to regasification
  • Model the input, output, costs, and losses of both liquefaction and regasification
  • Manage all components of the storage and transportation contracts
  • Analyze positions and exposures including mark-to-market valuation, value at risk (VaR), backtesting, stress testing, and P&L
  • Track all transaction data to manage FX exposures
  • Support spread trades such as calendar spreads or time spreads

Managing the Complexities of LNG

The process of producing LNG is unique from other commodities. It changes form, frequently spans continents with multiple parties involved (both private and government), and takes much longer than the supply chain of other commodities. With other commodities, a buyer purchases a specified quantity (perhaps with a certain quality level) and the source of the commodity is not much of a factor. However, with LNG, a buyer owns those specific molecules from the start of the supply chain to the end. Imagine a scenario with the process starting in North America where the natural gas is taken from the ground, and the final regasification takes place in the Far East. For effective operations, it is critical that producers of LNG can track the product from start to finish.

Multiple contracts are used to manage the production of LNG: one for getting the original natural gas from the ground to the terminal for liquefaction and another for the regasification process. These contracts specify which party pays for losses that can occur during the various stages of the process. Will it be the shipper or the receiver? Losses can occur throughout the supply chain due to spillage or evaporation (‘boil off’). Each of these must be tracked so there are no surprises at the end of the process over who pays what fees or what the agreed upon price was.

Losses can result from temperature variance during shipment and can be as much as 5%. In addition to losses, the fuel being shipped may also be used to run the ship. This shipping cost is considered part of the loss that occurs within the supply chain. So, the amount of cubic feet of LNG at the start of shipment is always more than the resulting quantity when the shipment arrives.

The LNG Cast of Characters

There are multiple parties involved in LNG supply chain. LNG producers generally take the natural gas out of the ground and get it to the terminal for liquefaction. Then LNG operators will perform the liquefaction and ship it out. There may be an additional party involved in marketing (selling) the LNG.

In addition to the details of the contracts, there are other obligations that must be managed. For example, when shipping through international waters there are title transfers that must be tracked along with any taxes and fees. Since this is a global supply chain, the rules of other governments must be accounted for. How a ship can conduct itself in a port, how it conducts itself as it crosses international waters, what rights it has as it approaches a port, what rules it must follow while waiting to dock, considerations during high tide versus low tide, plus many other factors come into play when managing a shipping operation. Other factors include political concerns and compliance. Therefore, any software used to manage the process of LNG must support multiple countries and currencies.

The LNG process is more than simply managing supply contracts and transportation. It can be very complex with many line items and documentation that must be efficiently tracked.

A Single System of Record

To support the investment of infrastructure for converting natural gas to LNG, companies require a comprehensive software solution to manage operational storage, transportation contracts, price risk, and positions.

LNG companies must stay on top of their physical and financial positions to protect themselves from market price volatility. Companies need to know their position when getting natural gas to the terminal, on the ship, across the ocean, and to the recieving terminal to be regasified at the other end. There are many decisions to be made throughout the process regarding when to move or sell. For each of these steps, companies must know what fees and losses can occur and the resulting prices. A few pennies of discrepancy in large volume LNG deals can result in massive losses.

A single, integrated system of record ensures a company can seamlessly manage its entire supply chain. Without this, there is a risk that poor decisions may be made when one part of the business doesn’t know what the other part of the business is doing. 

Conclusion

Next-generation ETRM software that supports the entire supply chain of multiple commodities including natural gas, LNG, and NGLs will enable LNG companies to protect profit margins. A single, integrated system that efficiently manages the physical movement of product and all the details required to track LNG in real-time provides the critical business intelligence and analysis information to make optimal decisions around trade execution, position management, and scheduling.

Many changes are occurring in the LNG market. Global LNG buyers are shying away from oil indexed, long term agreements. A growing fleet of non-dedicated tankers is emerging. The sources of supply are changing. In this environment of constantly changing market conditions, software that provides the best decision support will enable companies to thrive.

Learn more in the original blog post: Supporting the LNG Supply Chain with ETRM Software

 
 
Authored By:
Michael Schwartz is Executive Vice President & Chief Marketing Officer at Eka Software Solutions, the global leader in providing Smart Commodity Management software solutions. Michael leads all global marketing functions at Eka, including marketing strategy, product positioning, press/analyst relations, communications, and events. He brings more than 20 years of experience to Eka, leading marketing departments and helping software technology companies grow. Michael is a frequent contributor to leading energy, risk
 

Other Posts by: Michael Schwartz

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