Why do energy players need to leverage current LNG market trends?

Global demand for liquified natural gas is growing. Yet, failing to implement the right digital tools will prevent energy enterprises from harnessing this opportunity. In this series we outline the right tools and where to implement them. In Part 1, we start by presenting the four trends leading to LNG’s increasing popularity.

Seen as a “bridge fuel” to a low-carbon future, liquified natural gas (LNG) is fast becoming a major player in the world’s energy mix.

To put this into perspective, overall natural gas currently meets around 24% of global energy demand. In Europe, LNG demand increased by 60% in 2022 due to disruptions in Russian gas imports via pipelines. Moreover, global LNG trade increased to 397 MTA compared to 2021 with a steady 4-5% growth rate, and its market share is only expected to grow further.

But what factors are contributing to this growth, and what can the industry do to best leverage this opportunity?

4 key trends are contributing to LNG’s market increase

LNG is seen as a “green” alternative to other fossil fuels, giving it both a competitive advantage and a future in the energy sector. However, its current and growing popularity can be attributed to four trends: energy security, environmental benefits, collaboration and flexibility, and digital innovation.

Energy players will need to understand each of these trends to successfully leverage this opportunity.

1.       Energy security

Energy security has become top of mind for many countries, especially given today’s turbulent geopolitical climate. As such, governments are looking for long-term strategies to improve energy security and diversify their energy mix. Europe, for example, planned to build 17 new LNG terminals to increase the existing importing capacity by more than 40% in next few years.

Such investments in LNG terminals and related gas pipeline infrastructure are creating more opportunities for the natural gas market, globally. It’s an opportunity that energy firms must harness now to be ahead of the curve.

2.      Environmental benefits

Due to its status as a “bridge fuel” the more governments commit to the energy transition, the more demand for LNG will grow. It’s predicted that by 2040, LNG will meet 75% of Asia’s increasing gas demand.

It’s been proven that switching to natural gas can substantially cut harmful emissions – such as nitrogen oxides (NOx). For example, a power plant can cut its NOx emissions by half if it replaces coal with natural gas. Similarly, LNG can be used as a fuel for marine and road transportation, providing a cost-effective and environmentally friendly alternative to diesel. As such, the transportation sector can reduce NOx emissions by as much as 80%. In both examples, carbon emissions are substantially reduced.

Due to this favorable environmental reputation, LNG isn’t heavily taxed by climate regulations – a cost that can significantly impact both public and private sector operations. Not to mention that both sectors are increasingly looking for the best sustainability measures to meet net-zero targets and customer demand.

By decarbonizing LNG cargo, producers can meet buyers’ environmental demands, while achieving a competitive advantage over heavily taxed alternatives (e.g., oil and coal).

3.      Collaboration and flexibility

The LNG market is becoming more international as deals closed at gas trading hubs are replacing over-the-counter bilateral agreements.

At the same time, collaboration is increasing between major players for shared ownership of the value chain. For example, Rovuma LNG in Mozambique coast, in Africa, where ExxonMobil and Eni are joint operators.  Shell and Qatar Energy are also partnering on the North Field East Expansion – the single largest project in the history of LNG.

LNG’s flexible storage and regasification systems can cater to a wider range of gas demand and supply. These differentiating capabilities include floating LNG (FLNG) and floating storage regasification units(FSRU). These only take two years to build and implement, allowing coastal regions faster access to fuel than would be possible through laying long distance transit pipeline infrastructure. Such capabilities also enable natural gas providers to fuel niche sectors and far-to-reach areas, thereby further growing LNG demand. These include:

• Marine fuel bunkering
• Off-grid power plants
• Heavy transportation vehicles

The flexibility doesn’t end there. LNG contracts also have flexible clauses, which give companies the ability to resell and optimize trade portfolios whenever there are better trading opportunities.

But it’s not only long-term charters that energy players should set their sights on. The increasing number of LNG cargo vessels gives players a unique opportunity for short and spot charter deals.

4.      Digital innovation

Intelligent automation and other digital innovations are providing the LNG market with an exciting platform from which to improve and grow. These technological advancements can be leveraged to automate and optimize various LNG business processes and increase operational efficiency in the following ways:

• Ui/UX technologies support deal capturing, nominating activities, and cargo operations
• Machine learning allows companies to schedule LNG cargos and manage LNG logistics
• Data analytics supports contract and trade risk management, as well as technical operations
• Augmented and virtual reality tools help with crew trainings, as well as “smart” maintenance and repair
• Robotic process automation can be used for contract management
• Blockchain technologies are crucial in energy trading and “smart” contracting, as well as LNG scheduling and emissions tracking activities

Clearly, such tools enable market players to excel in LNG trading, dispatching, and technical operation activities. Firms will need to undergo tailored digital transformation to ensure they meet their business goals and stay ahead of market peers.

 

LNG future outlook

Evidently, the overall demand for LNG in the energy market will continue to grow. Only through a deep understanding of the trends contributing to this growth, can energy players fill the white spaces in their business and truly harness LNG’s value.

Energy companies have an opportunity to:

• Optimize LNG end-to-end supply chain
• Develop new LNG markets and related downstream market infrastructure
• Perform efficient capital management in building LNG infrastructure
• Utilize LNG benefits in decarbonization drives across energy markets

At the same time, nowadays, it’s impossible to progress without successfully leveraging digital tools and innovations. Depending on the role of the enterprise and its area of activities in the entire LNG value chain – whether it’s fuel production, trade, transmission, distribution, or utilization – leaders must find out which technologies to utilize in order to automate and optimize the relevant processes for their more efficient growth. If all of this can be implemented, then LNG can play a pivotal role towards driving value and meeting net-zero targets.

Keep an eye out for Part 2 of our series to find out which digital technologies are best suited to improve LNG trading processes.

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LNG Trading: Trends and Challenges