The most common way to make money in LNG trading is by moving cargoes from supplier regions into growing gas markets that lack pipeline connectivity, while taking advantage of the regional price arbitrage. LNG traders also optimize their portfolio through spot trade as buyers prefer shorter and more flexible contracts amid surplus supply and low LNG prices.
More recently, in the absence of regional arbitrage opportunities, traders are using innovative options, such as destination and time swaps and trading oil-linked cargoes against spot cargoes, to make profits and provide buyers with flexibility. For example, an investment bank has offered its LNG customers the option to choose alternative ports to deliver LNG cargoes for an up-front premium, which allows them to manage arbitrage risk.2
Innovation is also happening around pricing, although to varying extents in different regions. For instance, US LNG deals are being indexed to the Japan Korea Marker, an Asian benchmark, and an oil major has agreed to sell LNG to a Japanese utility, with the price indexed to coal. As LNG markets globalize and competition among various fuels affects their pricing, demand for cross-commodity, structured products and risk management will rise.
Lack of infrastructure is one of the key challenges in Asia, one of the fastest-growing LNG markets. Liberalization in many emerging markets is bringing small, private and often inexperienced and risk-averse LNG buyers to the market. Commodity traders are helping to develop LNG import and regasification infrastructure in new import markets, such as Pakistan and Bangladesh, and extending credit lines to buyers with low credit ratings.
Innovative financing models are also being developed. Increasing spot market share is changing the financing model of liquefaction facility projects, previously backed by long-term contractual commitments. LNG players are switching from traditional project finance toward balance sheet financing, using retained earnings as well as raising debt or equity. This model is only feasible for IOCs and NOCs with significant financial resources. Some projects in the US are experimenting with new risk allocation approaches by offering equity stakes in liquefaction terminals to potential industrial or financial partners.
Apart from deal structures driven by broader industry trends, innovative and bespoke deals that solve customers’ unique problems can also help to differentiate gas and LNG traders. For instance, an investment bank has designed innovative deal structures combining the physical supply of natural gas with tailored payment terms allowing buyers to defer payments and manage their working capital.3