The typical LNG marketing and trading portfolio will contain some of the simplest and some of the most complex derivative structures encountered in energy finance. Some of the more commonly found structures are physical forwards, basis spread options and best-of spread options, but longer-term transactions like SPAs will often contain an even wider array of embedded exotic features. In this post, we provide an example of one of the simpler derivative structures, and demonstrate how it is valued.
We are very proud and honored to have launched a regular monthly feature covering the LNG forward markets for Energy Metro Desk (EMD), the energy trading and risk management industry's leading bi-weekly magazine. With permission, we are posting a reprint of the first edition of our commentary here, along with EMD's interview with our editors.
Please click here to access Capra Energy LNG Forward Market Wire Commentary and Interview on Energy Metro Desk.
November 3, 2014, Berkeley, CA
Capra Energy has announced the start of the benchmarking program for its LNG Forward Market Wire.
LNG Forward Market Wire provides long-term LNG forward price assessments from an objective and independent third party source, Capra Energy Group. The forward price curves are generated through a systematic, auditable process that is based on transaction activity in the global LNG markets, supplemented with robust econometric analysis. Also, the methodology and the price curves are continually enhanced to reflect the latest LNG market developments.
Please click here to open the complete LNG Forward Market Wire - Benchmarking Programme Press Release.
Please click here to access LNG Forward Market Wire Monthly Reports during the benchmarking programme, review product information or enroll in the benchmarking programme.
The BP-TEPCO LNG Deal
Tokyo Electric Power Co's (TEPCO) recently announced sale and purchase agreement (SPA) with BP Singapore for 1.2 million tons per annum (mtpa) of lean LNG over 17 years is just the latest in a string of long-term deals that Asian LNG consumers have signed for supplies originating from the US Gulf Coast. The BP-TEPCO deal is technically a 'portfolio contract' that gives BP the flexibility to source the LNG from anywhere. But given BP's large purchase position in the Freeport project, the TEPCO deal's linkage to Henry Hub spot prices, and the specification of low heating value (lean) LNG, it is a safe bet that much of the supply will originate from the US Gulf Coast.
The Japan OTC Exchange's (JOE) new LNG contract was officially launched today. It is technically being described as a "non-deliverable forward contract," and is starting off as a non-cleared, cash-settled, bilateral contract, but JOE expects that CME will be providing clearing in the near future. The launch of this contract is a positive development for global LNG trading and risk management, and once CME clearing kicks in, we expect a wider and larger group of participants to make use of it. The full details of the contract are presented below:
A Win-Win Deal: Supply Diversification and Risk Management
Statoil's recently announced sale of approximately 0.4 million tons (6-7 cargos) per year for five years (2015-2019) to Lithuanian gas supplier LITGAS makes a whole lot of sense - to both sides. Statoil secures a foothold in the Baltics, an important and growing market that is logistically and strategically compatible with Statoil's asset portfolio. And LITGAS, for the first time, diversifies its gas supply away from Russia, which has historically provided 100% of its needs, increasing both its supply security and its leverage in price negotiations with Gazprom. This has reportedly already paid off, with LITGAS securing a significant discount in its most recent pipeline gas purchases.
According to Reuters, Chevron has been "struggling to lock-in 20-year sales contracts for its Gorgon liquefied natural gas (LNG) export plant in Australia." In spite of its targeted commercial operation date of mid-2015, only 65% of capacity has been contracted. We wanted to share a few of our reactions to this.
Woodside Petroleum reported its financial results a few days ago, and it appears to have had quite a good first half of 2014. This was also an early chance to see the operating results of Woodside's new trading and shipping business, which it established last year to focus on opportunities in the spot and short-term markets.
Source: Woodside Energy Ltd.
A robust suite of LNG forward curves is a key prerequisite for the proper valuation and risk measurement of LNG portfolios. Tamir Druz of Capra Energy and Carlos Blanco of Black Swan Risk Advisors provide an overview of effective methods for constructing long-term LNG forward price curves, along with in-depth guidance and illustrative results for a proxy-based approach.
The University of Calgary's recent report, Risky Business: The Issue of Timing, Entry and Performance in the Asia-Pacific LNG Market, warns that an uncoordinated fiscal and regulatory policy for Canadian LNG exports risks derailing project development in British Columbia, and that the B.C. LNG tax is, in essence, a revenue grab that may make these projects non-viable. While the report is very comprehensive and well-researched, and does raise some legitimate points and risks, the report's conclusions are premised on some fundamental assumptions that should be questioned: