In our previous blog, we discussed that LNG is one of the major drivers behind the growth of natural gas in the global energy mix and how it is shaping the overall strategies and investments of leading energy players for the years to come. The global LNG volume traded is expected to grow up to 700 MTA by 2040, with major growth concentrated in the Asian and European regions as demand centers. We will witness major disruptions specifically in the energy trading area, in the way to do business, government and international regulations and the changing use of technology.
LNG trading trends
The currently undergoing changes in the LNG trading business can be attributed to the below key trends:
- Changing regulations & compliance mandates in different geographies. One of the main LNG demand regions – Europe, is known for its overly complex set of power and natural gas regulatory frameworks. The EU REMIT, EMIR and MiFID regulations are today strengthened with the Revenue Cap, LNG Market Data Benchmark and other similar mechanisms to increase transparency and cope with power and gas price spikes caused by Russia’s war in Ukraine. These result in reporting and often financial obligations posed to the market participants.
- Changing trade types and contract evolvement. As the regulatory framework develops, increased amounts of data are required to be stored and reported to respective regulators. Along with this the increased number of LNG markets participants, the need to balance long-term agreements with intense spot trading activities, as well as the introduction of complex Sales and Purchase Agreements (SPA’s) further increase the LNG trading business complexity.
- Evolutions in nomination and cargo operations processes. As the global LNG trade increases with the emergence of new market participants, the intensity of nomination and LNG shipping activities rises proportionally. Managing the nomination or renomination processes, as well as tracking and optimizing the LNG carriers’ movement, remain an important part of the end-to-end trading process.
- Higher market volatility and continuous price changes. Since the TTF natural gas prices changed from a whopping 306 EUR/MWh to as little as 29 EUR/MWh (representing a tenfold change) in just over a year of time between August 2022 and May 2023, the European gas market conditions reversed completely.
- Managing commodity risk, market risk, credit risk, and operational risks. As global markets remain volatile, and supply chains are very vulnerable due to crises such as the COVID-19 pandemic, or the Russian war in Ukraine, risk management has become a crucial affair. Risks related to the commodity availability, potential market changes, the financial state of the engaged counterparts, operational issues and resulting hedging activities require multiple calculations and thorough data management procedures to be fulfilled.
- Managing the finance and accounting aspects of the trading business. Finance reporting (based on local regulation frameworks other than International Finance Reporting Standards), as well as accounting procedures, vary between different geographies.
- Potential “green” fuels sector development and a need to incorporate appropriate mechanisms and procedures to further decarbonize the Natural Gas/LNG sector – for instance, the ones related to the Proof of Sustainability – PoS certificates management and trading. As the new hydrogen and biofuels business segments are set to develop at a growing pace amid the leading world countries’ Net Zero goals fulfillment, utilization of hydrogen and biomethane with Natural Gas is often seen as a feasible solution to decarbonize the world’s energy, industry, and transportation sectors. The appropriate trading, sustainability management and reporting mechanisms must be implemented as the market evolves.
- Shortcomings of traditional trading system landscapes for evolving LNG trading processes complexity. Simple out-of-the-box ETRM (Energy Trade and Risk Management) products are not adequate to cover the entire scope of the above-mentioned business activities. Most of the time, such solutions are not capable of supporting change in business landscapes as per continuously evolving trading business. Moreover, having its own shortfalls in managing large amounts of trade data, as well as performance challenges, it hence fails to support business processes efficiently.
The key role of technology
Energy companies are focusing seriously on the LNG business expansion and are assigning larger capital expenditures to related activities. However, apart from the infrastructural expense, investments in the IT landscape which helps in data acquisition and decision making keep those companies ahead of their peers. To function optimally, the engaged parties require undisrupted and often real-time access to the relevant market and customer data, along with access to advanced analytical tools supporting their business processes.
With a changing paradigm of the overall LNG trading business, due to continuous evolutions in overall global energy markets, the opportunities are growing, along with the respective challenges and threats. Though, an apt and smart use of technology can help to envisage and mitigate these business challenges to a larger extent.
- Complex integrated ETRM solutions can play a very seminal role in overall trade capture, STPs (Straight Through Processes) of LNG Deal lifecycle, as well as invoicing and settlement processes after the deal closure.
- An ETRM system can be bolstered with a simplified UI/UX interface with the support of microservices to simplify deal capturing and optimize the trade booking processes in a front office. This can further extend to managing complex pricing formulas, as well as external interfaces to capture other required trade attributes to help aggregating all required trade booking information to record all LNG transactions holistically.
- Data analytics can play a key role to make informed decisions faster for LNG traders in risk management, daily Profit and Loss (PnL), Value at Risk (VaR) calculations, identifying hedging exposure, etc.
- LNG dispatching and operations teams need solutions to manage complex planning and minimize loss in time, as well as optimize other resources. Artificial Intelligence and Machine Learning technologies can provide some unique heuristic solutions in nominations and cargo operations processes to plan LNG shipment efficiently.
- Modern ETRM solutions can get integrated with other peripheral IT applications, such as ERP systems, to send and receive inbound and outbound data instantaneously. This can help pulling market data from external systems, as well as accomplish deal confirmation along with settlement process flawlessly and swiftly.
- Technologies like big data and cloud storage further enhance capabilities of ETRM solutions to store and manage enormous amounts of trade data, while business intelligence tools help build custom reports that help in business decision makings, managing risks as well as in regulatory reporting.
- Blockchain technologies can support numerous areas such as smart contracts, to convey title of physical commodities with market players Blockchain technologies can also support tracking the origin of “green” fuels in the mixed stream with Natural Gas/LNG, as well as manage the respective PoS certificates for them.
- In the future, Generative AI may help leverage data to create new LNG trading strategies and assist LNG business players in their decision-making. For example, in the case of multiple long-term and spot delivery options, Generative AI may help decide, if under the existing market conditions going for an additional spot deal might bring benefits despite the associated financial penalties for being late with long term contract delivery.
- Based upon the inclination and depending on the level of their IT maturity, LNG trading and shipping enterprises might not be willing to only utilize basic ETRM tools, but to go for deep integration of these with complementary software add-ons instead. The latter ultimately might lead towards creating advanced IT landscapes, helping to overcome business challenges associated with the end-to-end LNG trading and operations cycle in its individual segments:
The evolving LNG trading landscape requires processing copious amounts of data and supporting various business-specific procedures. To allow better performance and higher agility in the face of continuous process changes, successful organizations need to implement state-of-the-art IT solutions covering the end-to-end trading activities cycle. Advanced IT systems not only help energy companies in their process optimization, but also in identifying and mitigating various associated business risks. As the ordered LNG gets shipped to the respective importing terminals, the next crucial step is made with the LNG delivery in either liquefied or re-gasified form to the end client. In part 3 of our blog series, you will find out how LNG logistics can benefit from utilization of advanced digital technologies. Watch this space!
Vikram Chandrashekar is a Senior Principal in Infosys Consulting working with energy clients as a trusted adviser delivering transformational business value to energy and utility customers. Vikram is experienced in mobility and convenience, energy transition, downstream B2B, trading and shipping, and LNG scheduling and shipping.
Severyn Dranchuk is an experienced business consultant, and graduate of Petroleum Engineering. Severyn has over six years’ experience executing end-to-end digital transformation and IT implementation projects along with leading business development activities in the European energy & utilities sector. Severyn is passionate about energy transition and finding ways to support major industry players in transforming their businesses to meet net-zero goals.
Omkar Vinayak Tambe
Omkar Vinayak Tambe is an Energy Trading Risk Management consultant having more than eight years of IT consulting experience especially into end-to-end implementation of ETRM\CTRM systems. He has completed MBA, specializing in Oil & Gas Management. His focus areas are energy and utility markets, risk management, derivatives market, commodity trade life cycle and regulatory reporting. Possessing diversified experience in Endur and other bespoke ETRM\CTRM systems for various energy commodities. He is passionate to collaborate and assist our clients to steer their journey of Energy Transition towards the net zero goals.