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Dawn of a Global Commodity – LNG Trading Transformed

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox Energy demand impacts to linger in wake of Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Fast-moving Michael destroys gas demand across US Southeast


Dawn of a Global Commodity – LNG Trading Transformed

The LNG industry is well into its third and most significant expansionary phase, one in which supply is racing ahead of demand. But to turn an old adage on its head: there is nothing like low prices to cure low prices.

The industry’s expansion is part and parcel of two overarching trends: the gradual spread of gas-on-gas competition that has emanated from both the US and North West Europe for more than a decade, and the global transition to lower emission energy sources, which is making LNG a key fuel of choice for many countries seeking to address chronic energy deficits.

LNG is well but ambiguously placed. It can bring the cleanest of fossil fuels to global markets and expansion has de-risked the supply chain. But when it arrives it must compete with local gas, other domestic sources of energy and alternative imported fuels.

Moreover, the supply of LNG is only as good as the weakest link in the chain. It requires heavy investment from both seller and buyer alike.

It needs gas production, liquefaction, transport, import facilities, storage and then distribution infrastructure before a single, chilly molecule can reach the end user. And it needs efficient markets at each and every point along the line. A market distortion in one element can have huge ramifications all the way back up to the supplier.

The high risk this entails has historically promoted in inflexible supply agreements, necessary to provide investment certainty, but LNG is increasingly landing not in regulated but liberalized, competitive markets.

The juxtaposition of external in inflexible supply and internal competition cannot help but create stresses and strains that are ultimately unsustainable.

It is not just a “buyers’ market” in temporary supply and demand terms; it is a market that is structurally changing at both the point of production and the point of consumption.

This poses major challenges for the traditional LNG supply model, but within it also provides the seeds of resolution.

The industry’s expansion is making LNG a global commodity in its own right, but to consolidate that trend new markets must be opened, and that means extending LNG supply chains into less credit-worthy, higher-risk markets and into industries relatively new to LNG, such as maritime and land transport.

It is a simple equation: in both these markets, and in existing, liberalizing markets, LNG must be at least as flexible as its competitors to succeed.

This inevitably shifts the focus of risk from buyers to sellers. The question then becomes how to mitigate this new risk, and the answer lies, as in other markets, in the development of improved financial architecture, greater market liquidity, and transparency, which allow risk to be shared by third parties, whether financial institutions, pension funds, traders or otherwise.

That transformation is taking place, and innovation and adaptation are required to transition from the in inflexible, supply agreements of the past into a more versatile and nimble industry capable of opening the doors to new markets.

The growing pains are sometimes acute, but the LNG industry is finally coming of age.

Key takeaways

Interconnectivity

The emergence of US LNG and Australian coal seam gas-based LNG production have created significantly larger direct connections between the domestic gas markets and exports of LNG producing countries. At the same time, the expansion of LNG trade has formed bi-directional price transmission mechanisms between previously fragmented regional markets. Some countries are now both LNG exporters and importers.

Liberalization

On the demand side, legacy LNG markets are liberalizing, creating a much more diverse and competitive environment, in which LNG is just one competing energy source. More actors on the buy side sensitive to internal domestic market competition means sellers must build new relationships and change their value propositions to address the requirements of the new conditions emerging in these markets.

Risk allocation

The allocation of risk is shifting to different parts of the supply chain; buyers face new risks in their home markets, and are pushing that risk back up the supply chain to LNG suppliers, making the traditional LNG supply model – long-term, oil-indexed, take-or-pay contracts with destination restrictions – no longer t for purpose.

Aggregation

Traders and portfolio LNG suppliers are grasping the opportunities these new conditions offer by finding innovative ways of mitigating the changing allocation of risk. Aggregating both demand and supply allows trading entities to break the direct link between a single LNG source and buyer, and at the same time enhance security of supply. Of equal, if not greater, importance, it allows them the flexibility to take maximum advantage of temporary periods of scarcity pricing in any of the growing number of LNG markets.

Flexibility

When taken together, the changes on the supply side and in these different import markets create a new and fast-evolving environment in which the point-to-point, bilateral trade model of the past no longer meets requirements. As a result, suppliers need to develop flexible business models that can meet the needs of all market types in a non-discriminatory manner. This means shorter, less-restrictive contracts with new pricing mechanisms.

Financial architecture

In this more fluid, flexible and interconnected environment, both buyers and suppliers alike require more sophisticated financial instruments to mitigate the changing allocation of risk. Price transparency and liquidity are essential and it is incumbent upon Price Reporting Agencies, such as S&P Global Platts, trading platforms and exchanges, and market participants to engage in the construction of the financial architecture that can mitigate the challenges presented by the new world of LNG trade.

Market evolution

With these changes, LNG markets are evolving, albeit in different directions. Some are ‘ flux’ markets subject to rapid change — for example in the Middle East, with the development of East Mediterranean gas, and in Latin America, with the development of Argentinean shale and Brazil’s sub-salt oil and its associated gas. In these markets, LNG appears destined for an uncertain, and potentially temporary, often seasonal, balancing role.

Other markets are more clearly ‘option’ markets, where LNG provides a more significant balancing role and meets a variable proportion of baseload gas demand subject to price, for example in Europe and China. Pipeline gas supply and alternative energy sources provide a price ceiling, but these markets are also likely to deliver periods of scarcity pricing that require large supply volumes.

The third type of market – baseload — is the most dependable, although not without uncertainties. Here, LNG already occupies or promises to build a long-term position in baseload gas provision, for example in the populous nations of South Asia or in the legacy markets of North Asia. The expansion of gas use in key sectors, such as power, fertilizer production, petrochemicals, city gas or transport, is a major and well-articulated component of the country’s energy policy, which promises long-term demand growth. In these markets, there are few alternatives: those that do exist carry significantly higher risk in terms of safety, cost, local air pollution or achieving national commitments to global climate change mitigation.

 



Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.



Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.