TY - JOUR
T1 - Strategic and flexible LNG production under uncertain future demand and natural gas prices
AU - Yusuf, Noor
AU - Govindan, Rajesh
AU - Al-Fagih, Luluwah
AU - Al-Ansari, Tareq
N1 - Publisher Copyright:
© 2023 The Authors
PY - 2023/6
Y1 - 2023/6
N2 - The expectation in global demand for liquified natural gas (LNG) remains bullish in the coming years. Despite the unprecedented impact of the COVID-19 pandemic, and the oil price wars between OPEC and Russia in 2020, causing oversupply and falling prices, the LNG markets continue to demonstrate flexibility and resilience in delivering the needs of different sectors, whilst helping achieve the emissions targets. This is attributed to the high competitiveness amongst LNG producers and suppliers, providing greater confidence for medium-to-long term demand. However, the uncertainties in the current outlook for the return of demand and price growth in the post-COVID period pose difficulty for new liquefaction project investment decisions in the pre-Investment Decision Phase (pre-FID). Accordingly, the consideration of new production and selling strategies is needed in the early design stages of projects to cope with the shift in buyers' sentiments favouring increased reliance on spot and short-term uncontracted volumes, as well as incorporating additional flexibility into long-term contracts. In this study, the economic valuation of the flexible Air Product's AP-X liquefaction technology was investigated considering the modelling of price volatilities, using the mean-reverting jump-diffusion pricing model and Monte Carlo simulation, assuming different demand level scenarios in the high-income Asia Pacific markets based on historical trends. The results clearly demonstrate that embedding flexibility within an LNG production system allows producers and suppliers to diversify selling strategies, and take advantage of the lucrative market conditions when demand and prices increase, and hedge against market risks when demand and prices are low.
AB - The expectation in global demand for liquified natural gas (LNG) remains bullish in the coming years. Despite the unprecedented impact of the COVID-19 pandemic, and the oil price wars between OPEC and Russia in 2020, causing oversupply and falling prices, the LNG markets continue to demonstrate flexibility and resilience in delivering the needs of different sectors, whilst helping achieve the emissions targets. This is attributed to the high competitiveness amongst LNG producers and suppliers, providing greater confidence for medium-to-long term demand. However, the uncertainties in the current outlook for the return of demand and price growth in the post-COVID period pose difficulty for new liquefaction project investment decisions in the pre-Investment Decision Phase (pre-FID). Accordingly, the consideration of new production and selling strategies is needed in the early design stages of projects to cope with the shift in buyers' sentiments favouring increased reliance on spot and short-term uncontracted volumes, as well as incorporating additional flexibility into long-term contracts. In this study, the economic valuation of the flexible Air Product's AP-X liquefaction technology was investigated considering the modelling of price volatilities, using the mean-reverting jump-diffusion pricing model and Monte Carlo simulation, assuming different demand level scenarios in the high-income Asia Pacific markets based on historical trends. The results clearly demonstrate that embedding flexibility within an LNG production system allows producers and suppliers to diversify selling strategies, and take advantage of the lucrative market conditions when demand and prices increase, and hedge against market risks when demand and prices are low.
KW - Flexibility
KW - Long term contracts
KW - Monte Carlo simulation
KW - Spot selling
KW - Stochastic modelling
UR - http://www.scopus.com/inward/record.url?scp=85159832463&partnerID=8YFLogxK
U2 - 10.1016/j.heliyon.2023.e16358
DO - 10.1016/j.heliyon.2023.e16358
M3 - Article
AN - SCOPUS:85159832463
SN - 2405-8440
VL - 9
JO - Heliyon
JF - Heliyon
IS - 6
M1 - e16358
ER -