Natural gas/LNG house of the year, Asia: Engie

Energy Risk Asia Awards 2019: Focus on a low-capex model pays off for French energy giant

Gordon Waters, Engie
Gordon Waters, Engie

In 2018, Engie closed a $1.5 billion sale of its mid- and upstream liquefied natural gas (LNG) business to oil major Total, while retaining some supply contracts and regasification terminals. But if anyone thought that marked the departure of the France-based utility from the LNG market, they were much mistaken.

The plan was part of a “strategic repositioning” towards a leaner LNG business, focused on midstream and downstream activities. At the time, the company said the decision was part of a broader move away from upstream oil and gas activities, which had seen the firm sell its oil and gas exploration and production business in 2017. 

“Ultimately, Engie wanted to reduce its exposure to commodity risk,” says Gordon Waters, Engie’s global head of LNG. He notes, for example, that the upstream business was buying gas from Yemen and Egypt on Brent indexation, rather than LNG linked to gas indexes such as TTF/NBP and Platts Japan-Korea marker (JKM). It also had a major contract to buy gas referenced to the Henry Hub Index in the US, with a Brent-referenced sale on the other side of the trade.

“The idea was to simplify our involvement in that space, but we’re still a 55% gas-powered utility, with 760 gas-fired power plants globally,” he adds.   

Following its strategic repositioning, Engie is building its LNG portfolio with a fully risk-managed and low-capital expenditure approach, Waters says. This move reflects the change of the LNG market away from the traditional oil-indexed, long-term contracts and towards greater spot market trading of LNG, and to trading referenced to gas indexes.

The sale to Total involved transferring all Engie’s LNG business unit staff to the oil company, necessitating a rapid restaffing. Twelve months on, and the LNG business has come roaring back, following a shift of Engie’s LNG activities to Singapore. “Last year, it was all about rebuilding the business and rebuilding our capabilities to be able to service the Engie group … Now, that’s very much up and running, and we’re expanding the hedging we offer to clients,” Waters says.

With more than 60 employees, Engie’s Singapore trading operation has become a major hub for its global energy management activities from where the company trades risk management products across the full energy spectrum, including oil, gas, power, petrochemicals and environmental products, as well as physical and derivatives LNG products.

On the paper side, we’re doing a lot more in the Asian time zone, converting clients’ Henry Hub exposure into Brent and JKM

Gordon Waters, Engie

The region is already the largest source of demand for LNG and is expected to remain the market’s largest driver for growth. Engie forecasts that the size of the global LNG market is set to almost double between now and 2040, growing from 400 billion cubic metres (bcm) in 2018 to 790 bcm. Meanwhile, LNG’s share of the global natural gas market is forecasted to grow from 10% to 15%. China will drive that increased demand, with the US and Australia providing much of the increased supply.

“On the paper side, we’re doing a lot more in the Asian time zone, converting clients’ Henry Hub exposure into Brent and JKM,” says Waters. “We’ve moved a gas and JKM paper trader out from Europe since February, and we’re having a discussion about bringing a second JKM trader out to Asia to ensure we can offer more competitive hedging solutions during the Asian trading hours.”

Waters says the firm is committed to continuing the expansion of its activities in JKM, trading it down the curve and offering it as a service to customers. 

Engie is responding to the globalisation of the LNG business and plans to develop financial freight agreements (FFAs) for LNG. These new instruments would allow market participants to better risk manage the LNG chain. Waters notes that, at present, the shipping market for LNG is purely physical. However, given the growth of spot-to-mid-term trading and chartering activity, some major freight brokers are looking at developing FFAs for the LNG market.

“These FFAs will help LNG players to hedge forward exposures and create more liquidity – as well as more opportunities for risk-managed arbitrage of, for example, US volumes into Asia,” Waters says.

He adds that these kind of instruments are “relatively complex for LNG and rather illiquid”, but says they have significant potential: “It’s a bit like JKM when we first got involved 10 years ago; you have to invest initially to get it up and running. I’m excited by the growing risk management solutions for LNG.”

With the launch in October of the US LNG Export Futures – a physical contract for delivery at Cheniere Energy’s Sabine Pass facility – traders can buy LNG in the US and sell the gas into JKM or TTF (the Dutch gas hub), using the financial freight contract to entirely lock in their profit.

“It’s the latest piece of the jigsaw in terms of being able to truly trade the LNG global market financially,” Waters says.

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