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Interview: SOCAR Trading pursues 'pioneering' LNG business model

London — * Malta LNG-to-power project just the start: CEO
* Opportunities to be had in 'long' global LNG market
* Competitive advantage over traditional LNG players

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Azerbaijan's SOCAR Trading -- which this year commissioned the ambitious integrated LNG-to-power project in Malta -- expects to agree deals for similar projects elsewhere in the world in the coming years as it looks to benefit from the expected global glut of LNG, CEO Arzu Azimov said in an interview last week.

In a shift from traditional LNG supply and trading models, SOCAR Trading can focus on working with partners in mostly developing countries to help satisfy their power generation needs through LNG and linked power stations.

"Our strategy was based on the idea that the market was getting long on LNG sooner than expected," Azimov said. "So one opportunity was to create a consuming project for LNG. We see ourselves as pioneering in this field."



The integrated LNG-to-power project in Malta -- an island state that is looking to move away from oil-fired power generation -- could be a model for the future, Azimov said, especially in growing economies in Africa and Asia.

In November last year, SOCAR Trading also signed up to be part of a consortium to supply LNG to Cote d'Ivoire for power generation.

"We are prepared to look at any location -- we do all the necessary due diligence and look for partners looking to build or modernize a power plant. The Malta project was very complex with a lot of technological innovation. We learned a lot in that process."

Different projects in different countries will need different solutions, he added.

"It's never exactly the same -- it may be just sections of a larger project, or it could be just a pure floating LNG storage project," he said.

"Some are willing to agree to a fully integrated project, with power station and LNG offtake contract and guaranteed supply. In some areas there are existing power plants, but not enough gas. We can source LNG for them."


MALTA PROJECT


The Delimara Gas and Power Energy Project in Malta is the first SOCAR Trading became involved in.

It is operated by Electrogas Malta -- a consortium of SOCAR Trading, Germany's Siemens Project Ventures and Malta's GEM Holdings -- and comprises a floating LNG storage facility, onshore regasification plant and a new CCGT power station.

SOCAR Trading is the supplier of LNG to the import facility, and is expected to deliver 8-10 cargoes of LNG each year.

The first was delivered in January this year.

"We are competitive and we are flexible," Azimov said. "We are not hostage to our own production -- we can always take the cheapest LNG available on the market at any given time."

Azimov pointed to the start of US LNG exports as a key turning point for the industry -- the ability to source flexible, cheap gas quickly.

With an "attractive" market set to stay in place for the foreseeable future, Azimov said there could be more project announcements in 2017.

"We hope so -- in several locations. It depends how focused our partners are to complete their projects," he said.

Azimov said SOCAR Trading was essentially open to offers when it comes to future LNG-to-power projects.

"We would look at LNG and gas-fired power generation projects in places isolated from any existing grid or pipeline supply -- islands, or places with very regionalized consumption," he said.

"Greener power supply is becoming a priority in developing countries so countries that are short on power are falling under our strategy," he said.


COMPETITIVE ADVANTAGE


Azimov said most LNG suppliers have their own production that is mostly tied up in long-term contracts.

"They have to balance their own LNG production with their own term supply deals and find homes for any excess LNG. But we are flexible and as such we will always be competitive," he said.

In Cote d'Ivoire, SOCAR Trading is part of a consortium that won a tender to operate an LNG-to-power project to boost the emerging West African country's economy.

Total is operator with a 34% stake in the facility alongside national companies PetroCI (11%) and CI Energies (5%) as well as SOCAR Trading (26%), Shell (13%), Golar (6%) and Endeavor Energy (5%).

An FSRU with a capacity of up to 3 million mt/year will connect via pipeline to existing and planned power plants in Abidjan, as well as to regional markets connected to the network.

It is due to start up in late 2018.

"SOCAR Trading will be responsible for its share of LNG supply to the terminal relative to our stake," Azimov said, adding that the more projects the company becomes involved in, the bigger its LNG portfolio becomes.

Other projects are currently at different stages of development -- either with an MOU being prepared, due diligence being carried out or bilateral talks ongoing.

Being 100%-state owned can also be an advantage, Azimov said.

"Part of our strength too is that we are fully state-owned, that can work in our favor in certain situations," he said.

For some countries, the aim to diversify gas import sources or power generation options is political.

"They use it as political leverage rather than as a pure commercial project. Some face political issues, and they might be looking for an alternative solution."

In other countries, dealings are "purely commercial."


NO PURE LNG TRADING


While the LNG spot market remains relatively illiquid -- certainly compared with crude oil and oil products -- SOCAR Trading has no ambition to be a pure LNG trader.

"We don't see the benefit in pure LNG trading -- we don't have our own supply and we don't have customers we have to supply. Without those two shoulders we are more flexible," he said.

"SOCAR is neither a producer nor a consumer of LNG, so trading LNG was not our priority," Azimov said.

"Though as we grow our portfolio -- projects like Electrogas -- we'll have more flexibility. We are looking at the future development of an LNG trading desk when we have a portfolio of different projects," he said.

Azimov said LNG spot trading was on the increase, a trend that is likely to continue.

"More and more term contracts are expiring and customers are not extending them, so the share of spot trading has grown and will continue to grow. Consumers are waiting for their term contracts to expire and they won't make new ones. So the focus on spot trading is increasing. This is driven by the increased availability of LNG, especially with the US volumes coming to market," he said.

He added that technology was advancing quickly, allowing more LNG buyers to source import facilities.

"There are more carriers, more market participants, so more liquidity. There are new buyers -- the likes of Pakistan, Egypt, Kuwait and Jordan -- building up their consumption of LNG," he said.

--Stuart Elliott, stuart.elliott@spglobal.com
--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com

Read Stuart's related blog post: Full steam ahead for SOCAR Trading’s LNG-to-power strategy