Supporting the LNG Supply Chain with ETRM Software

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

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.

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. (Learn more in “Using ETRM Software to Deal with the Fading Promise of 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 for LNG production are looking to make a return on that investment. The key to maximizing profitability for these companies is the accurate tracking of 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.

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 cost efficient to transport over long distances, there are operational challenges involved in the production of LNG which includes liquefaction, transportation, and regasification.

Providers of LNG require energy trading and risk management (ETRM) software to manage the entire LNG lifecycle from capturing physical transactions to scheduling and tracking best available positions. Everyone within the organization (including traders, schedulers, and accountants) should have the real-time data needed to deliver the efficient, profitable scheduling of LNG.

Any multi-faceted software platform used to manage LNG must support both the dry and the wet, nat gas and liquids. A side product that can result from getting nat gas out of the ground is natural gas liquids (NGL) so the software platform should also support NGLs (for example, butane and propane). It is not unusual for contracts to specify the inclusion of NGLs with LNG.

Any software platform used to manage LNG 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

The management of LNG is more complex than many other commodities and requires customized software to support the process. What makes the process of producing LNG unique is that it changes form (gas to liquid), 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 buys a specified quantity of a commodity (perhaps with a certain quality level) and the source of the commodity is not much of a factor. But with LNG, a buyer owns those specific molecules from the start of the supply chain to the end. Imagine the scenario with the process starting in North America where the natural gas is taken from the ground, and then the final regasification takes place in the Far East. For effective operations, it is critical that producers of LNG track the product at each stage in the supply chain.

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 during liquefaction, transportation, and regasification due to spillage and 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.

There are multiple parties involved in the process. LNG producers generally take the natural gas out of the ground and get it to the terminal for liquefaction. LNG operators typically take responsibility at that point and perform the liquefaction and then ship it out. There may be an additional party involved who is marketing (selling) the LNG. And at the other end of the supply chain (for example, Japan), there may be multiple players again.

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 multiple currencies.

An (over) simplification of the LNG process is to say it is a process of managing supply contracts and transportation. True, but it’s a very complicated process, with many line items and lots of documentation that must be tracked.

To support the investment of infrastructure to convert natural gas to LNG, companies require a comprehensive software solution to manage the operational storage and transportation contracts so they can effectively oversee their price risk and position management.

A single, integrated system of record ensures a company can 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. A single system of record ensures a company knows its costs throughout the supply chain.

Contracts specify the value of the cargo – the price of the molecules going in. Once the product gets regasified at the other end, the price is typically stipulated by the cost of oil, gas hub prices, or spot market trades. As described earlier, certain losses during transport can be assumed. Companies involved in LNG 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 the natural gas to the terminal, getting it on the ship, getting it across the ocean, and getting it to the other terminal to be regasified at the other end. There are many decisions to be made throughout the process and companies need to make the best decisions 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.

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.

Use Eka’s ETRM software, InSight CM – Natural Gas, to manage the entire LNG lifecycle from capturing physical transactions to scheduling and tracking best available positions. The next-generation ETRM software provides a seamless process for efficient scheduling of natural gas positions that are to be liquefied and regasified. With Eka’s platform, traders, schedulers, and accountants have the real-time data needed to deliver the efficient, profitable scheduling of LNG.