Could liquefied natural gas be the latest player in the retail energy sector? Xavier Veillard, senior manager, Accenture Strategy discusses the opportunities, challenges—and risks.
What are some of the major challenges facing LNG producers today?
The LNG market is oversupplied and expected to remain so for the next three to five years. The capital investment needed for large-scale liquefaction projects ranges from roughly $5 billion to $20 billion, putting enormous pressure on producers while prices remain low. They risk not covering their marginal cost of production. Needing to manage cash flow carefully, LNG producers may postpone projects and delay further expansion.
They also can rationalize costs to the maximum extent possible, and trade actively to enhance the mark-up extracted from LNG sales. Fortunately, the market structure has been shifting to allow new counterparties to source, trade and market LNG with greater flexibility.
LNG retail is at an embryonic stage. What kinds of opportunities are emerging?
LNG retail applications are burgeoning throughout the world, particularly in the area of LNG retail services. Some opportunities include launching new terminal logistics services, such as LNG bunkering, truck filling, ISO tank filling and cooling services that leverage LNG’s cryogenic energy. Services such as these can provide incremental income and also support expansion of LNG demand. Along with value-added services, customers want automated back-office functionalities in logistics, invoicing and settlements.
What are some of the key reasons you expect adoption of LNG to grow?
There are many reasons. Regasification equipment manufacturing is enabling LNG to be used in trucks, for off-grid power generators and for industrial cooling systems. Vehicles powered by natural gas emit much less carbon dioxide than those powered by diesel, and the percentage reduction is even higher in comparisons between LNG and gasoline.
We have analyzed a number of demand forecasts, and noted that the share of LNG fueling heavy-duty vehicles in China is expected to reach approximately 7 percent by 2025, which would be up from 1 percent last year. In Northwest Europe, the forecast is for the number of LNG-fueled vessels to grow by eight times from last year’s level by 2020. 2
Does LNG have any cost advantages over other fuels?
Based on arbitrage with diesel and fuel oil, LNG can be economically more competitive at times. This is based on a detailed analysis we conducted for Northwest Europe.
What are the risks involved in delivering LNG through retail channels?
New risks may arise from having a larger pool of B2B customers. Credit risk management, for example, will need to be developed for small-scale B2B customers to assess credit worthiness, and to structure prepayment and settlement terms. Additional optionality and liquidity risk management.
What are some other ways to stimulate LNG demand?
Going into partnership with small-scale LNG users or wholesalers is one option to help stimulate demand. Ultimately, success on the retail path is likely to require such partnerships, along with capital investment and a range of internal capabilities to grab profitable market share.
Footnotes:1 “Long-Term LNG Market Outlook,” IHS © July 2015, and “Small-scale LNG Map Dataset,” Gas Infrastructure Europe, © May 2015
Senior manager, Accenture Strategy
Xavier Veillard leads Accenture’s Investments, Trading & Optimization Group in France & Benelux. He has worked with natural resources ministries and senior executives from global oil & gas corporations in EMEA and Asia Pacific countries, advising on market liberalization, portfolio strategy, investments execution and asset-backed trading. Xavier’s core expertise has been focused on the LNG industry with engagements around financial valuation, corporate restructuring and portfolio optimization models.