LNG regasification has been a no-business for pretty much all of its history. The terminal owners/operators are pretty happy with this state of affairs as their life was really simple so far. Don’t move and take in guaranteed returns – that was the mantra. All this will have to change if the LNG industry is serious about going normally.
I have been away for a long time. Please accept my apologies – energy Austria 2020 quickly becomes a reality and that keeps me really busy. We bring LNG to the Danube river region and that in itself is asleep robber. Still a damn filthy excuse for not tending to my favorite garden – this blog.
Back to more skittish things now – take a cursory and you will be forgiven to think that European Regasification is troubled. As a matter of fact, most terminals go empty for most of the year and regasification capacity is an impossible sell for the capacity takers.
This is hardly surprising if you consider the odds. The world LNG market is tilted against European would be LNG importers. Those with no long-term legacy supply in place go empty as Asia still sucks the market dry (at least sort of) and those with supply in place will do their utmost to get it diverted to those dollar wagging Asians in order to milk the market for what it’s worth.
This situation is certainly serious and not of the buyers making but in all frankness, the European players could do a hell of a lot more to make themselves more attractive to the LNG haves. The days of the boundless Asian miracle must end (one day) but even before that goes down in flames some volumes of LNG will need to find a relief valve in a sink market.
Since the demise of North America as the world’s LNG “swallow it all” (in fact the gulf coast would still perform but prices are toxic) there is a need for a replacement. Why is that important? With Asia cleaning the plate, does anyone still need to sink cargos?
The Japanese situation currently barely masks the ills besetting LNG today. If we really care about making LNG’s movements a little more flexible, we will need a performing sink of last resort in case a deal bombs and one finds himself with a distressed cargo. LNG is still no liquid commodity so as soon as you are distressed with a cargo, you are toast. Once the gamble backfires one needs a destination of last resort that will be able to swallow the surplus LNG with no further ado. Oh, and there still are cargos into the US. That means that someone has no other choice than going there.
What do we need for the sink to work?
First, the sink needs to show a lot of available regasification capacity. Vessels need to find a slot plus the tank-space attached. You cannot do this through regulation or smart logistics. Only the market can provide this service effectively. And there is no market without some players at each other’s throats – meaning competition. Overcapacity creates competition. When players are booked solid they don’t care about getting rid of some capacity.
The gas market behind the terminal needs to be big (or big enough) in order to swallow the landing volumes without perceivable effect on the market which means that there needs to be sufficient liquidity. If a terminal is built for the physical needs of a town or an industrial customer there never is a guarantee that the volumes can be evacuated quickly into the pipeline system. And hangin out by market dictate in the tank is an expensive option.
Plus there should be a sufficiently liquid hub for transparent price markers. This gives the trader a yardstick against which he permanently re-calculates the residual value of a cargo as compared to the premium deal he seeks.
A commercial terminal operations regime that allows for easy transfer of capacities on any notice in order to make those operations quick, smooth, painless and most of all transparent to the parties will help a lot.
How can terminals be made that flexible? If you have ever dabbled in programming, you sure have stumbled upon open source programming. Some of those open source projects have become hugely complex and have a very large and dedicated developer community underpinning it. This blog, for example, runs on WordPress, and open source Content Management System (CMS) written in PHP.
The core of such a program provides good services and everything necessary to run a simple website. If you want to keep it simple and stupid you never need to go beyond the core. When it becomes more bespoke or complex, specialized programs or extensions (in WordPress they are called Plugins) are being provided by myriads of programmers. In order to protect the core of the system, the CMS programmers have provided special interfaces which they call hooks or API’s.
Those hooks allow plugins to communicate with the core without need to modify the core. It provides room for extension, evolution and in many cases allows even to override certain CMS core functions. It also allows for easy core maintenance without worrying about the plugins.
Back to LNG regasification.
When in late 2007 we worked on the GATE agreements, we faced multiple challenges. One of them was our own management which at the time did not understand the evolutionary process LNG was going through. They wanted LNG and so we were running against a very tight, self-imposed deadline.
On the other side, we had a terminal project that also mentally still lived in an old world of “terminals under the cheese cover” which as we knew did not exist anymore. Things take a really long time to materialize in Natural Gas – some foolishly interpret this general sluggishness of the industry as a reversal of some trend. Many of the proposed contractual mechanisms and so-called solutions failed even basic tests of functionality for a modern LNG regasification terminal as we saw it. We knew that we would not be able to resolve this dilemma by orthodox means due to the time constraints.
So we had to resort to much more drastic action in order to square the circle. Knowing fully well that we would not be able to create a perfect contract, we strived to create a contractual framework that would allow for contractual evolution to unfold even after signature.
We knew that we had to write the book of Regasification anew as all the existing examples of Regasification contracts failed our tests and especially the test of modern times. So we dropped for an open framework that would be able to bend with the winds of opportunity. But applying language to that effect would possibly have killed the deal so we dropped for a solution that resembles the CMS used for managing websites.
A fully fledged LNG regasification agreement that was able to stand alone (that’s important for lenders) but with a couple of hooks and interfaces that allowed for evolution (the only evolution I usually see in LNG agreements are the price revisions which hardly pulls anyone off the chair).
Let’s pull an example. The umbrella principle – it gives the foundational capacity taker in the terminal lots of leeway on how to make best use of his capacity. The foundational capacity taker assumes a lot of risk as he commits himself to consume or pay if not consumed a hefty chunk of capacity for a multi-decade long stretch of time. No matter how the market turns and if he is able to economically make good use of it. All that without the warm embrace of a monopoly.
This deserves some goodies in his lap. In the past, the capacity taker was the only customer at the terminal. He was able to do pretty much however he pleases as long as he did not jeopardize the safety of the terminal. In a multi-user terminal, this could not be, as the shippers coexist on the basis of equality.
The umbrella gives every foundational shipper some sort of cloak which makes what happens under it invisible to the terminal and the other shippers. Invisibility in this sense is meant to be for the commercial significance of the deal. Commercially (and from a liability point of view) the deal the foundational shipper has with the sub-shipper remains hidden to the outside world. The shipper may pass on his liabilities to the sub shipper or not. He may increase them, or reduce them. He may exact a bigger price for his slot, or a lower one.
Again, the only thing piercing the umbrella (or the cloak) are rules such as “use it or lose it”, safety rules and anything else that is intended to make the terminal safe to operate or to uphold the principles of fair competition.
There are other rules designed to make terminals more nimble. I don’t want to make an exhaustive list of them as this would not be possible. The book on regasification contracts (and indeed almost any other contract as this movement will permeate the whole LNG world) is wide open. Those, not infected by Frankenstein disease (see an earlier post for that) will invent lots of new shiny tools to give terminals ballet shoes instead of the heavy stompers they usually don.
Don’t expect terminal operators to accept those rules gracefully. They still live in their old world and are more than happy to be held unaccountable for even their own wrongdoing (as is the case when the terminal is owned and operated by the capacity taker himself) and still take a maximum commercial position.
Regasification terminals will become beacons of flexibility and nimbleness. As every so often this will probably happen on the ashes of those saddled with the foundational capacity and going bankrupt for it. As I said frequently, most people (and companies) prefer to die rather than to change.
Many will. But those in the aftermath create a whole new world out of it.