Added Value for Energy Projects

LNG Arbitrage Fundamentals and Value Chain

Our GLOBAL ENERGY DIVISION promotes sales and purchase opportunities for selected clients. Our experts have long-term experience as LNG supply and trading managers in various countries. Our external LNG desk has experience of structuring and completing large complex commercial deals in the gas and LNG business. That involves foreign governments and joint venture partners as well as gas majors. We have direct access to all LNG suppliers and the relevant traders and shipping companies. Moreover, we are able to establish tailor-made portfolios of LNG supply contracts for all purchase regions and provide future trend reports.

Our individual arbitrage audit covers the following price drivers: benchmarks, (oil price) indexation, geographical spreading, spot market availability/prices, reserves, extraction, production, consumption, terminal location, liquefication and regasification infrastructure, storage, (floating) pipeline, transportation, freight calculation, weather, seasonality, new markets, new trade routes, geo-politics and (our) industry relations.

LNG is shipped around the world in specially constructed seagoing vessels. The trade of LNG is completed by signing a sale and purchase agreement (SPA) between a supplier and receiving terminal, and by signing a gas sale agreement (GSA) between a receiving terminal and end-users. Most of the contract terms used to be DES or ex ship, holding the seller responsible for the transport of the gas. With low shipbuilding costs, and the buyers preferring to ensure reliable and stable supply, however, contract with the term of FOB increased. Under such term, the buyer, who often owns a vessel or signs a long-term charter agreement with independent carriers, is responsible for the transport.

LNG purchasing agreements used to be for a long term with relatively little flexibility both in price and volume. If the annual contract quantity is confirmed, the buyer is obliged to take and pay for the product, or pay for it even if not taken, in what is referred to as the obligation of take-or-pay contract (TOP). In the mid 1990s, LNG was a buyer's market. At the request of buyers, the SPAs began to adopt some flexibilities on volume and price. The buyers had more upward and downward flexibilities in TOP, and short-term SPAs less than 15 years came into effect. At the same time, alternative destinations for cargo and arbitrage were also allowed. By the turn of the 21st century, the market was again in favor of sellers.

Until 2003, LNG prices have closely followed oil prices. Since then, LNG prices in Europe and Japan have been lower than oil prices, although the link between LNG and oil is still strong. In contrast, prices in the US and the UK have recently skyrocketed, then fallen as a result of changes in supply and storage. In late 1990s and in early 2000s, the market shifted for buyers, but since 2003 and 2004, it has been a strong seller's market, with net-back as the best estimation for prices. Receiving terminals exist in about 18 countries, including India, Japan, Korea, Taiwan, China, Belgium, Spain, Italy, France, the UK, the US, Chile, and the Dominican Republic, among others. Plans exist for Argentina, Brazil, Uruguay, Canada, Greece, and others to also construct new receiving or gasification terminals.

In 2004, LNG accounted for 7% of the world's natural gas demand. The global trade in LNG, which has increased at a rate of 7.4 percent per year over the decade from 1995 to 2005, is expected to continue to grow substantially during the coming years. The projected growth in LNG in the base case is expected to increase at 6.7 percent per year from 2005 to 2020.