Global LNG Navigating Risks in a Dynamic Market by CTRM Center

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GLOBAL LNG NAVIGATING RISKS IN A DYNAMIC MARKET

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Global LNG - Navigating Risks in a Dynamic Market

INTRODUCTION Liquified natural gas (LNG) has been a traded commodity for more than a century. But only in the last couple of decades has the market expanded to meet the ever-increasing demand for energy, through low carbon emissions energy sources. With the development of the massive Qatar LNG facilities in the mid-1990s and the increasing demand for imported gas, global LNG trading has grown from about 50 MTPA in 1990 to more than 350 MTPA in 2020. Most energy commodities struggled with lower trade and consumption volumes under the pandemicinduced industrial shutdowns in 2020. LNG trade was, however, up slightly at 0.4% during the year, continuing its uninterrupted streak of year-over-year growth since 1996. However, that growth was far below rates in the preceding years which averaged 7% since 2004. While consistently growing, the global LNG market appears to be at a crossroad, with new and expanded sources of supply coming online over the next decade. This is during an uncertain demand curve influenced by environmental regulations, renewable energy resources, and price volatility. Most forecasts predict

annual global LNG demand will be around 700 MT by 2040, doubling the demand of 356 MT at year end 2020. These forecast increases will be largely driven by growing demand in the Asia Pacific markets. However, costs for competing renewable energy sources (solar and wind) are falling quickly. And, with an accelerating global movement to carbon neutrality, there is growing uncertainty in that forecast in the mid and long-term. Many of the challenges facing the post-covid LNG market in the near-term are focused on environmental developments, operational constraints (including a volatile/constrained shipping market), and financial exposures.

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Global LNG - Navigating Risks in a Dynamic Market

RECENT MARKET DEVELOPMENTS Despite lower demand for almost all energies during the pandemic, the LNG market proved resilient, with volumes up slightly from 2019 at 0.4%. The collapse of oil prices made cargos based on oil-indexed long-term agreements more attractive than short-term and spot supplies. Buyers returned opportunistically to the market in the second and third quarters of 2020, purchasing cheap cargos for storage in anticipation of a recovery in oil prices. The pandemic did impact LNG demand particularly compared to pre-pandemic forecasts expecting a 5%+ increase from 2019 to 2020. However, with the reopening of many of the Asia Pacific markets that began in the latter half of 2020, demand is increasing. Through the first quarter of 2021, LNG trade in the region appeared on pace with pre-covid forecasts, bolstered by colder weather in January of 2021 across many Asian markets. Despite a resurgence of the pandemic in the 3rd quarter of 2021, the pace of growth from pre-pandemic forecasts looks to resume in 2021, particularly in the fast-growing Chinese market.

Natural gas demand is highly seasonal and relies on a complex infrastructure of pipelines to transport from source to market or to LNG liquification facilities. Once liquified at these multi-billion-dollar facilities, LNG storage and transport require costly insulated containers, specialized loading/offloading facilities, and a limited network of transport vessels. As such, LNG development costs are high and operational complexities across the supply chain often lead to delivery constraints. This is particularly evident when demand in markets

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Global LNG - Navigating Risks in a Dynamic Market

with limited gas storage capacity exceeds planning forecasts. LNG voyage times range from a week to over a month depending on the length and route of the voyage. With limited offloading and regasification capacity at the destination points, a sudden cold snap or heat wave can lead to gas shortages and increased price volatility. Countries in the Asian markets without significant domestic production, and with limited storage capacity are particularly at risk. LNG market volatility was pronounced in 2020 and early 2021. In the face of industrial and commercial shutdowns across Asia, Japan Korea Marker (JKM) spot prices hit a low of $1.825/ MMBTU in April, resulting in numerous canceled cargos (including 177 from the US). Prices did rebound with the onset of the winter heating season when a strong cold snap in January 2021 in Japan and surrounding countries dramatically increased gas demand. Heating driven demand pushed the JKM index to an all-time high of $32.50/ MMBTU. Though the spike was short lived, it clearly demonstrated the sensitivity of the LNG markets to weather. This event was compounded by lack of storage and apparent poor supply planning as many operators in the region entered the winter season with below average storage levels even in

the face of forecasts of a colder than average winter season. Supply chains were also impacted by the increased demand. With many of the large Asian industrials and utilities frantically buying cargoes to address the shortfall in the region, a shortage of LNG vessels emerged. This temporarily drove up charter rates from around $50k/day to a record high of $300k/day. Increased vessel traffic in turn delayed deliveries due to congestion at canal crossings and ports, increasing costs throughout the logistics chain. However, with the passing of the cold weather in Asia and high levels of gas in storage, charter rates fell to an all-time low of $25k for Atlantic Basin vessels in March of this year. The record high gas demand in January 2021 across the Asian markets exposed the risks of limited storage and lack of domestic supply sources in the region. Limited supply options during a period of high demand created prices shocks and exposed bottlenecks across the global supply chain. Such severe weather events, logistical interruptions (such as the Suez Canal blockage and Panama Canal congestion), and limited vessel availability/high freight costs have become paramount concerns for many market players.

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Global LNG - Navigating Risks in a Dynamic Market

SUPPLY-SIDE DYNAMICS Australia, Qatar, and the US comprise the current “Big 3” in LNG production. Their combined exports account for about 56% or 200 MT of the global supply of 356 MT. The next largest exporter, Russia, provided about 8.5% or 30 MT of the global supply in 2020. Other producers in the Pacific basin, including Indonesia and Malaysia (excluding Russia production in the region), produce about 16% or 57 MT of the global supply1. Australia briefly assumed the mantle of the largest supplier of LNG in November 2018, with 6.5 million tons (or about 312 BCF) of LNG delivered to the Asian markets. Qatar, which shipped 6.2 million tons (or 298 BCF) that same month, quickly regained the title as several plants returned to production after completing maintenance projects. However, with several new facilities commissioned in 2019, Australia reclaimed the title again in 2020 by exporting 77.8 MT that year compared to Qatar’s 77.1 MT. Though Australia has several additional projects nearing final investment decision (FID), long term capacity growth is questionable given proposed environmental regulations that could halt expansion of gas exploration and production in the country.

These advantages provide a breakeven cost as low as $4/ MMBTU delivered to the Asia markets2 (compared to greater than $5 for Russian and as much as $8 for US supplied LNG). In early 2021, Russia approved a massive new longterm development program to increase their LNG production capacity to 140 MT per year (20% of the global supply) by 2035 across their Atlantic Basin and Pacific Rim assets. These projects have had difficulty finding customers willing to commit to the long-term oil-indexed supply agreements. Given low interest to date, the Russian operators’ ambitions may have to be scaled back or delayed.

Qatar recently launched a $29B USD expansion program for their North Field facilities. With production expected to grow to 110 MT by 2026, Qatar will certainly regain the title of the largest exporter by 2024 when production starts ramping up. The nation enjoys both a significant price advantage versus other suppliers and a geographic position that gives it ready access to both the Asian and European markets. 1 2

GIIGNL 2021 Annual Report https://www.reuters.com/article/us-qatar-lng-exports-analysis/analysis-qatar-tightens-global-gas-market-grip-with-bold-expansion-moves-idUSKBN2B80EZ

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Global LNG - Navigating Risks in a Dynamic Market

Australia and the US have been the leaders in growing incremental LNG supplies since 2019 (with the US adding 11 MT in 2020 alone). Looking forward, the Qatari North Field expansion, and Russia’s Yamal and Gydan Peninsulas projects could lead the headlines in the LNG market over the next decade. If those projects move ahead as planned, Russia and Qatar will vie for the title of the world’s largest supplier over the next several years. The two countries do enjoy locational advantages, and relatively low-cost gas supplies. Their investment in new LNG production could derail other nations’ projects currently in the planning stages. However, as both continue to pursue long-term, oil-linked agreements to finance their development efforts, existing producers in the US are less threatened than other regions. US LNG producers can provide more flexible delivery terms, prices indexed to abundant domestic natural gas, and a perception of a more reliable political and commercial environment. These advantages make US producers attractive swing suppliers for LNG end-users, portfolio buyers, and traders looking to diversify their portfolios. That said, several proposed US projects are on hold or have been canceled in the

wake of market uncertainty. Extreme price volatility (record low oil-indexed prices in 2020 and record high spot prices in early 2021) has temporarily made the longer-term supply agreements more attractive to large Asian LNG buyers. Supply shortfalls are forecast to emerge after 2030, and some US-based projects that had been delayed are expected to resume development. Several should reach FID in 2021 and 2022. Should demand for LNG continue to grow as currently forecast, the US will remain well positioned to grow traders for several decades. Despite some delays, many projects continue development and construction along the Gulf Coast. The EIA expects that some 55 MT of LNG capacity will be added before 2030. With these additions, total US export capacity is expected to be 104 MT. There remains some uncertainty around the timing of new additions and several of the dozen plus approved new projects may not materialize. For example, the Exelon-backed Annova project recently halted development in Texas, with the company citing “changes in the global LNG market” as the reason for its failure.3

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/lng-project-tracker-commercial-talks-pick-up-as-field-of-developersshrinks-63454465 3

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Global LNG - Navigating Risks in a Dynamic Market

DEMAND OUTLOOK HAS UNCERTAINTY The continuing construction of regasification terminals around the globe points to ongoing confidence in the long-term viability of LNG. According to the International Group of Liquefied Natural Gas Importers (GIIGNL), global regasification capacity reached 947 MTPA at the end of 2020. This reflects an addition of almost 26 MTPA over 2019, with 8 new regasification terminals coming online. With regasification terminals now located in 43 countries, an increasingly diversified demand base should support long-term growth. As much as 40% of LNG is now traded under spot or short-term contacts, mainly without destination limitations. The growth in the spot markets will help ensure LNG cargos can be redirected to address market imbalances. More traders are entering the market and portfolio buyers are taking larger positions in newly developed LNG production facilities. So, spot and short-term trading will likely continue to grow and provide the flexibility of supply that could encourage additional regasification terminal development. This could open additional markets and stimulate natural gas demand, particularly in developing countries. Virtually all forecasts indicate the Asia markets (particularly China and India) will be drivers of global LNG growth. Demand in the region is expected to more than double by 2040. China recently announced their commitment to become carbon neutral by 2060. To achieve this goal, natural gas (both domestically produced and imported via pipeline) and LNG will be relied on heavily to replace their coal fired generation fleet. This is in addition to their current massive investments in renewables required to fuel the country’s fast-growing economy.

Europe, with 19 LNG terminals, has emerged as a swing consumer for global LNG traders. The continent has a large gas storage capacity and can access additional supplies via pipeline from Russia. The ability to opportunistically switch between suppliers was well demonstrated in 2020 as European buyers purchased excess LNG cargos that were redirected from the Asian markets at the height of the pandemic. These opportunistic purchases allowed them to fill the regions’ natural gas storage quickly (from 56% full in April to 96% full in September) at a lower cost than competing Russian pipeline gas. Despite forecasts of low demand growth through 2040, Europe’s ability to switch between gas suppliers will ensure it plays a significant role in helping to stabilize global LNG prices. Industrial and commercial uses for LNG continue to develop and expand. Growing demand in the mid-term could come from developing countries and small-scale retail LNG. Nations in Africa, South America, and the Pacific Rim have relied on bottled LPG, biomass, or coal for fuel, and retail LNG would undoubtedly offer a cleaner alternative.

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Global LNG - Navigating Risks in a Dynamic Market

LNG is also gaining new market share as a marine fuel in recent years. Spurred in large part by IMO 2020 regulations, conversions of existing vessels from bunker fuel to LNG is picking up pace. Construction of new LNG fired vessels, including container ships, ferries, and dredges is increasing. With approximately 190 LNG fired ships in operation at the end of 2020, the fleet of LNG fueled ships is expected to double to more than 400 by year end 2023, doubling consumption to 3.5 MT. LNG is increasingly finding utility as a motor fuel for trucks and buses, particularly in China and Europe. It’s estimated that China’s fleet of trucks and buses fueled by LNG has more than doubled in the last 5 years, growing from about 220 K in 2016 to almost 590 K in 2020.4 And, with China’s net-zero carbon by 2060 commitment, conversions of their large motor fleets to LNG as a motor fuel will accelerate. Despite these developments, the picture for future market growth isn’t certain. There is a growing chorus of calls to decarbonize energy supplies by most industrialized countries. Even with relatively low carbon emissions compared to other hydrocarbon fuels, future demand growth for natural gas and LNG is facing headwinds brought by the ongoing energy transition. Though clearly a good alternative to coal for power generation in developing countries, many

environmental groups continue to push for total decarbonization of energy supplies. Green hydrogen, produced through electrolysis of water using electricity produced from renewable power sources, is increasingly viewed as a cleaner alternative to natural gas. Hydrogen can be used as a primary fuel (burned) for power generation or industrial consumption, or for use in zero-emission fuel cells for small scale, distributed power generation and transportation. Green hydrogen is more expensive to develop and produce than hydrogen derived from natural gas. Still, it is receiving significant investment such as the recently announced NortH2 consortium (comprised of Equinor, RWE, Gasunie, Groningen Seaports, and Shell Nederland). This group intends to transport hydrogen via repurposed natural gas pipelines in the Netherlands to surrounding countries for industrial use. This project, powered by an underdevelopment North Sea windfarm, will only displace natural gas derived hydrogen currently being consumed in the region. The project, if successful, could help spur additional investments in repurposing existing gas infrastructure and accelerate the transition from fossil fuels. Transportation (via fuel cells) and industrial hydrogen consumers such as iron and steel producers will likely be the first and largest users of green hydrogen.

https://www.shell.com/promos/energy-and-innovation/download-the-shell-lng-outlook-2021/_jcr_content. stream/1614823770264/2b5b3fdaa9feba85dadc9b3408c200f26eadf85f/lng-outlook-2021-final-pack-updated.pdf 4

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Global LNG - Navigating Risks in a Dynamic Market

A MULTITUDE OF RISKS REQUIRES A CLEAR VIEW OF THE MARKET Given the complexities and inherent risks of the global LNG market, all market participants need to maintain a vigilant eye on the short-term to optimize profitability and have constant awareness of mid and long-term market developments to protect value. This requires the appropriate software to capture, value, and analyze their commercial and operational activities and risks. Those that also operate in the upstream or downstream natural gas markets, either buying natural gas feedstock for LNG production or selling into the grid/pipelines at regasification facilities, face additional layers of risk. Local gas prices can introduce additional cost exposures related to the acquisition and transmission of natural gas to/from LNG facilities. Managing these exposures requires a full view of LNG market conditions, including natural gas supply/sales contracts and any embedded optionality they may provide, such as accessing gas from storage or alternative delivery points. This can help reduce costs for plant operators/tollers or maximize gas sales opportunities for gas distribution companies and traders operating downstream from regasification facilities. LNG market participants that manage or charter LNG carriers (tollers, portfolio buyers, and utilities), have additional tracking and analytic requirements. These include voyage planning and estimation, cost management, and vessel scheduling. Depending on the underlying supply agreements, they may also have destination optionality that can allow a vessel to be

redirected mid-voyage should arbitrage opportunities arise. Identifying and quantifying such opportunities will require the ability to capture near-term supply requirements, alternative supply sources, projected costs, and prices to analyze each potential scenario. As demonstrated in 2020, lack of storage remains a critical chokepoint for LNG and natural gas in the Asian markets. Given limited domestic production, countries in the region rely heavily on a constant stream of cargo to arrive within a tight window of time. Upsets within the LNG logistics chain or weather-driven changes to supply and demand can send large price swings rippling through the global markets. Managing this constant stream of LNG vessels requires a vigilant eye on demand forecasts and market conditions across crucial supply points and competing market areas, particularly Europe. In the midterm, annual delivery plans (ADP) must be developed and negotiated between buyers and sellers based on the best available forecasts of price and demand. Managing the ADP process requires a broad view of the global market and the ability to integrate with, and analyze, vast streams of data necessary for decision making.

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Global LNG - Navigating Risks in a Dynamic Market

ION Commodities offers a comprehensive portfolio of solutions for LNG covering upstream supply, storage operations, terminal operations, cargo movements, trading, regasification and downstream demand. With solutions that can address the breadth of the LNG value chain, ION is positioned to provide the ideal solution to meet the needs of LNG market participants across the value chain. And for any of the LNG proven products offered by ION, clients can add vessel management and asset optimization capabilities that are easily integrated. With ION’s LNG solutions, traders, liquefaction plant owners, and LNG capacity owners are better able to aggregate, manage and analyze the crucial data and information needed to

make commercial and operational decisions. ION provides users the ability to manage their contracts, trades, and positions and quantify risks from gas supply acquisition through LNG production, transportation, storage, regasification, and gas sales. All without relying on spreadsheets or multiple and poorly integrated thirdparty applications. With this full view of their operations, users can run what-if scenarios to optimize their supply, markets, and transportation routes. By having this full view of their activities in real-time, opportunities, constraints, and risks can be quickly identified, allowing users to operate profitably while protecting value and addressing commercial obligations.

ABOUT ION COMMODITIES We’re transforming the world of commodities through innovation. Our mission is to understand the diverse and changing needs of your energy and commodities business and meet those needs with advanced technology. Wherever you are, and whatever industry you’re in, ION Commodities solutions put you in complete control. With decades of knowledge and experience, we can provide proven solutions to the challenges you’re facing. That’s why over 30,000 users worldwide have partnered with ION to sharpen their decision-making and boost their productivity. Want to know more? Contact us at: commodities@iongroup.com commodities.iongroup.com

ABOUT Commodity Technology Advisory LLC Commodity Technology Advisory is the leading analyst organization covering the ETRM and CTRM markets. We provide the invaluable insights into the issues and trends affecting the users and providers of the technologies that are crucial for success in the constantly evolving global commodities markets. Patrick Reames and Gary Vasey head our team, whose combined 60-plus years in the energy and commodities markets, provides depth of understanding of the market and its issues that is unmatched and unrivaled by any analyst group. For more information, please visit:

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