Managing risk is important for each organization involved in an LNG project to understand. The host government, local community, project developer, EPC contractor, upstream developer, LNG buyer and financier(s) all have risks they need to understand, manage and mitigate. Risks are generally not eliminated by the decisions that are made, but rather are shared between these institutions.
Each entity has certain roles and responsibilities and these come with risks for that party and the other parties. If risk allocation is clear and each entity is responsible for mitigating their own risks, then all parties can confidently proceed with project development. The choice of commercial model, for example, can determine if the LNG project developer bears the upstream cost risk or if that is borne by the upstream entities and whether the allocation of market risks is to the project developer or to a different entity who owns the LNG and takes that market risk.
For an import LNG facility, there is the risk that the local demand and completion of the infrastructure (local distribution, power generation, etc.) may not be ready to absorb the imported LNG.
Risk Management and LNG Business
LNG Investment and Risk
Key risk models recognize the intricacies of LNG investment and will also consider risks. In order to encourage LNG investment, a robust and effective risk profiling approach is a prerequisite. Price dynamics (price risk) will continue to change the fundamentals for key LNG investment decisions. In today’s changing price environment, hedging and managing long-term price risk has become a more complex and challenging part of project implementation.
Unforeseen in-country upstream drilling and completion, facility, pipeline and transportation cost escalation or schedule delays may impact the initial volumes of natural gas available to the LNG facility. This may also be coupled with price dynamics if the transfer price is a factor (for a non-integrated commercial model) that could determine whether an LNG facility bears the risk for upstream capital investment. The costs and completion risks for the LNG plant itself can be shared between the project developer and the EPC contractor.
For the marketing of LNG from an export facility, demand from “traditional” LNG customers is predicated on supply and demand forecasts which are by their nature uncertain, as evidenced by today’s LNG supply glut in the marketplace. The four biggest LNG importers, China, India, Japan and South Korea, account for almost two-thirds of global demand but Japan and South Korea are not likely to see significant demand growth in the future.
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Demand is expected to grow in China and India, but the timing of this growth is uncertain. An alternative for potential LNG exporters to mitigate market risk may be to pursue a strategy based around smaller LNG export projects. It is worth noting that smaller import market players (< 3 MTPA, Egypt, Pakistan, Eastern Europe, etc.) have grown their market share by over 50 % over the last two years and now account for more than 10 % of global market share. An equal number of smaller markets are actively trying to establish LNG import facilities such as ECOWAS countries, South Africa, Myanmar, and so on.
LNG Risk Structure
When considering LNG investment, it is important to consider the drivers for a successful investment decision through specific risk management methodologies. The primary goals for corporations investing in LNG are to cost effectively build, or expand, LNG trains, improve export or import capacity, provide least cost environmentally and technically sound LNG facilities that generate an economically viable products stream (LNG, LPG, condensate) for maximum investor return.
LNG Risk Management Methodologies
Methods and tools for portfolio and risk management are locally defined to deliver increased capital efficiency and greater resistance against strategic, operational and market risks. This stage avoids disputes through a proactive and comprehensive framework for managing risks and claims. Risk review supports the project stakeholders’ need to understand their tolerance of risk in terms of safety, environmental, financial, reputation, and performance risk in order that risk limits can be appropriately defined and decision-making processes informed.
Types of Risk in LNG
Below is an example of an LNG Risk Register:
| Liquefied Natural Gas Risk Register | ||
|---|---|---|
| Type of Risks | Risk Description | Risk Mitigation |
| Market Risk | LNG Market balance and competition | Economic analysis |
| Political & Regulatory Risk | Policy change, government stability, energy regulatory framework | Engage government as partner to financial and development negotiations |
| Development Risk | Land rights ownership, FEED study completion, site and land access | Follow known and rigid development processes, leases, contracts, and documentation stages |
| Financial Risk | Sovereign Guarantees, World Bank guarantees, credit worthiness of LNG off-taker, LNG offtaker financial commitment to upstream, LNG Facility and other auxiliary investment (Power Plant) | Manage financial actions through known, transparent international monetary vehicles. Engage investors willing to support long-term sustainable programs |
| Environmental Risk | Natural disaster potential, endangered species, air and water quality emissions to populated areas | Follow international environmental standards from World Bank, ISO, and main treaties to mitigate future environmental or regulatory issues |
| Engineering, Procurement & Construction Risk | EPC guarantees and warranties, EPC ability to leverage local content with adequate service delivery, training, and schedule assurance | Engage proven EPCs with track record to include full “sign-off” of EPC terms and Local Content and Social Responsibility mandates |
| Community Impact Risk | Competition for road access, air, light, dust, and noise impacts, social and cultural impacts, waste disposal, price increase for food, health and sanitation on community | Engage local government, commercial and industry early in development to include full communications planning. Invest early in community-focused programs |
| Personnel Safety | Worker safety, control of criminal activity, trafficking control | Invest early in community security and safety training programs |
| Health Impact | Limit community and worker exposure to disease, minimizing strain on healthcare facility availability. Road safety | Invest sufficiently early in community health and education/information programs |
| Compliance Penalties | Creating a culture of compliance, timely payment of penalties, enforcement of international treaties for compliance (e. g., Child Labor), reporting and monitoring | Develop project management office for full communications, change control, and compliance program requirements |
| Corporate Reputation | Outreach and reputation to community through low to high tech communications, local content training, community training, primary and secondary school level training, healthcare provisions, revenue investment back to impacted community | Investment in country, community, and communications programs for local and global communications of joint government, corporate, and project successes |
| Country Reputational Risk | Political reputation federal, state and local, community positive impacts, transparency and visible local investment into society food, water, energy, and human security | Support governmental public policy, marketing, communications and highlight international investment to promote country level success |
Below is a sample of a Risk Matrix:
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- The international group of liquefied natural gas importers (GIIGNL). LNG custody transfer handbook / 6th Edition: 2020-2021.
- American Gas Association, Gas Supply Review, 5 (February 1977).
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- American Gas Association, Gas Supply Review, 5 (February 1977).
- The Society of International Gas Tanker and Terminal Operators (SIGTTO). Ship/Shore Interface / 1st Edition, 2018.
- Department of Transportation, US Coast Guard, Liquefied Natural Gas, Views and Practices Policy and Safety, p. IV-3.
- Department of Transportation, US Coast Guard, Liquefied Natural Gas, Views and Practices Policy and Safety, p. IV-4.
- Federal Power commission, Trunkline LNG Company et al., Opinion No. 796-A, Docket No s. CP74-138-140 (Washington, D. C.: Federal Power Commission, June 30, 1977).
- Federal Power Commission, Final Environmental Impact Statement Calcasieu LNG Project Trunkline LNG Company Docket No. CP74-138 et al., (Washington, D. C.: Federal Power Commission, September 1976).
- Federal Power Commission, «FPC Judge Approves Importation of Indonesia LNG».
- OCIMF, ICS, SIGTTO & CDI. Ship to Ship Transfer Guide for Petroleum, Chemicals and Liquefied Gases / 1st Edition, 2013.
- Federal Power Commission, «Table of LNG imports and exports for 1976», News Release, June 3, 1977, and Federal Energy Administration, Monthly Energy Review, March 1977.
- Office of Technology Assessment LNG panel meeting, Washington, D. C., June 23, 1977.
- Socio-Economic Systems, Inc., Environmental Impact Report for the Proposed Oxnard LNG Facilities, Safety, Appendix B (Los Angeles, Ca.: Socio-Economic Systems, 1976).
- «LNG Scorecard», Pipeline and Gas Journal 203 (June 1976): 20.
- Dean Hale, «Cold Winter Spurs LNG Activity»: 30.
