- BySteve Hemsley
- In Blog
- Posted 20/04/2016
Wildfires in Indonesia. Floods in East Africa. Hurricanes in the eastern Pacific. A subdued monsoon season in India. All these events are being attributed to the 2015/2016 edition of El Niño, likely to be one of the strongest recorded.
When El Niño produces extreme and varied effects worldwide, it grabs headlines. But for industries with global supply chains, tight margins, complex logistics and a heavy reliance on international shipping, El Niño is just one example of day-to-day weather challenges.
This is certainly true for the LNG industry. New LNG frontiers have emerged in the US Gulf Coast and Canada, the deep-water basins of East Africa, and in the brownfield projects of Asia Pacific. In this growing, dynamic and interconnected value chain, the weather is a key factor, affecting output and squeezing margins.
Even small storms or thick fog can have a debilitating effect on profits and partnerships. Adverse weather conditions can strongly affect common shipping lanes. And because LNG operations are a finely-tuned machine, any disruption to the operation will have a knock-on effect elsewhere.
Shipping routes under pressure
What makes this year’s El Niño more interesting for the global LNG industry is that it coincides with the certification of the Panama Canal for LNG carriers, and the rapid development of US production facilities.
LNG has now joined the list of commodities that traverse one of the world’s busiest shipping routes, cutting journey times and costs between the Pacific and Atlantic significantly – creating a safer option than traditional courses. Its role in creating a competitive market for US operators is not to be underestimated. Especially as US tolling agreements have destination flexibility, where purchases are more opportunistic and rely on spot-market pricing.
But the expansion of the Panama Canal demonstrates exactly why weather can pose such a challenge for US exporters and portfolio marketers. The Panama Canal, for all its advantages, highlights the need to understand and account for weather variability.
Seasonal variations and extreme events
Long-term supply commitments make allowances for the natural uncertainty of seasonal variations: typical winter demand and weather can be ‘baked in’ to delivery schedules. Even the arrival of an El Niño is fairly predictable: it occurs every two to seven years and is indicated by warming Pacific waters. As a result, LNG shippers and portfolio players know to make adjustments to trans-Pacific sales and purchase agreements.
What is harder to predict is the duration and intensity of the event, and its effect on seasonal variations. With many US cargoes expected to be marginally priced – what percentage of US LNG volumes will be threatened by the inability to predict delivery and costs?
This is where advanced simulation comes into play. The sheer number of variables created by even normal weather conditions is huge: too large for anything but advanced computational techniques to interpret. What simulation can do is clarify the most likely outcomes in any scenario, enabling evidence-based decision-making and giving producers, traders and portfolio players the ability to stress-test portfolio and risk-management strategies.
By using advanced modelling and visualisation techniques operators can plan routes more effectively, choose the size and capacity of ships, schedule berthing and docking slots more efficiently – and ensure that supply matches demand.
Protecting investments and supporting consortia
However, the value of simulation can be seen earlier in the LNG value chain. El Niño or not, the weather will always be a major external factor on the LNG business. Understanding its impact before investing in major infrastructure and equipment is critical, particularly as the industry becomes more competitive.
But in light of volatile market prices and complex demand patterns, the industry is demonstrating greater reluctance to set long-term plays. Newer players are looking for a more flexible approach, and the use of simulation to continually re-evaluate positions is set to increase. As competition in the LNG market heats up, the room for guesswork, hunches and uncertainties gets ever smaller.
Have weather conditions affected your shipping operations? Share your experience below.