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Flexibility in the LNG market: Unlocking value in an oversupplied industry

With depressed prices, a virtual halt in investment, and plummeting value of contracts, the next five years will see the LNG market hit the bottom of a boom-bust cycle. Over that period, a wave of new supply, predominantly in the US and Australia, will increase the total liquefaction capacity by up to a third, only accounting for committed projects. Any upward supply-side pressure will only begin to emerge beyond 2021.

Even at that point, weak demand is likely to impede a swift recovery. Although buyers are far more diverse than ever before, fundamental reasons will stall a full rebalancing until at least the mid-2020s. Gas demand growth is currently squeezed out by renewables deployment, energy efficiency gains and depressed GDP growth expectations. New windows of opportunities in the transport sector and petrochemicals, while boosting the long-term prospects, are unlikely to bring a significant uplift in the short term.

Largely in response to these conditions, and with growing numbers of increasingly sophisticated participants, the LNG business model is transitioning towards flexibility to unlock value. Buyers are increasingly trading to benefit from price volatility by redirecting cargoes, and shipping providers are also capturing a significant share of the value of flexibility through freight rates. Opportunities for structural changes in the market with shorter contracts, emerging supply hubs, and new pricing formulas are starting to shape new rules for the industry.

In Europe, these emerging market dynamics boost buyers’ negotiating position against historic suppliers, as LNG is increasingly eroding Russia’s market power.

In this study, we model and analyse both the intrinsic and flexibility value of contracts, in the context of these profound market changes. This report discusses the evolution of the LNG industry, with a particular emphasis on the next few years, covering:

  • Timeframe for the rebalancing of the LNG market and challenges from oversupply
  • Implications for European buyers
  • Major disruptions that will fundamentally transform the market: new pricing models, new players, new market structure, technological progress
  • The value of contracts’ flexibility and optionality
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