DMCC to base LNG futures contract on physical storage hub
The Dubai Multi Commodities Centre (DMCC) is to launch an LNG futures contract only after its planned physical storage hub is up and running.
“We want the ability to have a physical delivery point, in order for the contract to be launched,” Dr Tilak Doshi, executive director for energy at DMCC, told Heren Energy.
With a three-year construction window for DMCC’s planned hub in the Gulf, the futures contract could get started sometime around 2011.
Doshi explained that plans for a futures contract were only under discussion as part of the storage proposal: “A futures contract will include physical delivery. It won’t be a paper contract. The storage facility is a business in its own right.”
Interest in the storage hub proposal – announced last year, as a joint project between DMCC and LNG Impel – has come from many quarters, Doshi said, and “critical progress” would be announced in the first or second quarter of 2008.
A location for the hub has still not been decided, although a variety is being considered, including Fujairah. “We have talked to producers and consumers, as well as traders, across the whole spectrum of the LNG industry, so that this kind of storage facility would meet their needs,” said Doshi.
He added that particular segments of the industry looked at the proposal in a more aggressive way than others: “Among those – as you would expect – are traders, and some of the trading companies and banks that trade commodities.”
DMCC envisages organic growth of a futures contract, and other financial instruments, once the storage hub is in place and being used. A lot will be based on the seasonality of the sector, Doshi explained, and the fact that the facility will be operated independently of any of the major producers:
He told Heren Energy: “Once we get a delivery point, and once you’ve got a range of players using the storage facility – including producers, consumers and third parties – you will have a range of players who will naturally start a process of swaps, forward contracts, borrowing and loans around that. We don’t foresee an auction, as such.”
If one consumer was storing gas and waiting for winter, it could lend gas for a particular price, for replacement with gas of a similar quality at a later date, Doshi explained: “Once that sort of activity takes place, it creates the environment to support a futures contract. In that context, we will talk to the industry, and design a futures contract that will flexibly serve everyone’s interests. It requires an active spot market and a delivery centre.”
In the past, some players have questioned why producers would want to use a storage hub, with all its associated costs, when they could just export gas directly elsewhere. But, according to DMCC, the seasonal nature of LNG demand makes storage important. In a perfect world, of course, suppliers would seamlessly send LNG to a reliable offtaker, but such a scenario will never exist.
He said: “LNG supply can be very inflexible. Winter-summer differentials and price spikes can be massive. The whole purpose of a storage facility is to exploit the arbitrage between summer and winter, to handle the price spike, and to be able to arbitrage between east and west in as efficient a way as possible. If the producers could have their supply schedule worked out far in advance, then, of course, they wouldn’t want a double-handling. To use the facility, they have to bring a cargo to the facility, transfer the cargo by pipeline, and then reload again.”
The fact that between ten and 15 LNG vessels were being used for floating storage last winter demonstrates a clear need for DMCC’s storage hub, Doshi claims. With spot vessel rates of around $65,000 (EUR 43,947)/day, floating storage is not a cheap option, and might not offer the same flexibility as an onshore hub: “If I had an LNG vessel with a spot cargo stored offshore North East Asia, and it was a mild winter, with no problems in power generation elsewhere, the best price I would get for that cargo would be a US West Coast netback price. If that cargo was stored in the UAE, the best price would be one of two major markets. It would be the UK NBP price or the Far East price, or even the US Henry Hub price.”
He reckoned LNG has been stored on vessels in the past because there has been no alternative. DMCC’s alternative will be “far cheaper” then floating storage, and result in far less boil-off. Doshi declined to outline what the costs would be, but insisted the onshore hub would be “a fraction of what it would cost to store on a ship”.
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