LNG commerce is composed of two primary models. One is the traditional point-to-point model, on which the industry was founded and still accounts for more than 60% of LNG trade. More recently, the portfolio model has emerged, pursued by upstream oil and gas majors, that would allow them to monetize their gas reserves by converting them to LNG and shipping the product worldwide in vessels under their control — an attractive strategy that also would allow them to increase their exposure in the LNG market to take advantage of international arbitrage opportunities. As such, they are always long in LNG and in the ships required to move it. However, the portfolio model is being infiltrated by a buyer community looking to become short-side portfolio players and increasingly committing to long-term offtake agreements or FOB sales, then shipping LNG not only to meet their domestic market needs but to take advantage of regional pricing differentials. In today’s RBN blog, we look at the rise of the short-side portfolio player model and ask who might prevail in a potential clash of titans over market share and dominance.
The long-side portfolio players — Shell, BP, TotalEnergies — were major offtakers from the first wave of U.S. LNG plants and sought to place their volumes under long-term contracts, mainly with Asian buyers. This model was wildly successful for those in the market, leading to more entrants, ever-increasing contract volumes, and evolving deal structures. For example, some players are increasing their exposure to LNG beyond simple contract volumes; TotalEnergies’ equity stake in NextDecade’s Rio Grande project is a good example of this. (For more on the upstream, or long, portfolio players, see Two Of Us.)
Although some companies may describe themselves as long-side portfolio players, as a general rule, companies in this category have:
- Access to multiple sources of destination-flexible LNG
- Sufficient LNG carriers (LNGCs) to move the volumes to any market
- Import terminal capacity capable of absorbing cargoes during weak market periods
- Excellent credit standing
- Teams of staff working to optimize the portfolio, especially with regard to shipping costs and logistics
In basic terms, the objective of the upstream portfolio player is to deliver any cargo in any ship to any customer for the highest margin, and there are a variety of mechanisms and strategies they use to achieve that. The primary driver for these companies has been to convert upstream gas supplies into higher-value LNG independent of the traditional point-to-point model, which is based on joint-venture structures in which national oil companies typically hold majority shares and determine commercial strategy. Since its inception, the portfolio model has proved highly profitable: BG Group reported margins in excess of $4/MMBtu prior to its absorption into Shell. Much of this profit arose from price differentials between different LNG markets, which gave rise to lucrative arbitrage possibilities.
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