Innovation of the year: Lacima

Energy Risk Asia Awards 2021

ERAA21-Winner-web

A new solution developed with a major liquefied natural gas (LNG) market player during the past year to address the analytical, profit and cargo optimisation challenges associated with shipping such a resource saw Lacima win 2021’s Innovation of the year award. The company is a specialist provider of energy and commodity analytics software covering trading, valuation, optimisation and market and credit risk management.

The global LNG market has undergone a significant transformation in the past 20 years – quadrupling in size and doubling its share of the global natural gas trade, thus emerging as one of the fastest growing segments in the energy industry. Historically, LNG industry operations consisted largely of ‘milk runs’: a ship was loaded, for example, with an LNG cargo in Nigeria. It then travelled to Japan, unloaded and returned to Nigeria to reload.

However, new market entrants have identified the gains to be made from connecting low-value to high-value gas markets with vessels used to move gas between different regions of the world. How these market participants construct LNG portfolios, and subsequently optimise the shipping of the gas, can create millions of dollars of value.

Participants are increasingly building large portfolios with overlapping optionality, which can be used to significantly enhance returns due to the growing complexity of the portfolios.

Chris Strickland
Chris Strickland, Lacima

“In the past 12 months, Lacima has developed a new solution for LNG that addresses the analytical challenges facing this new market structure: an exciting advancement that is already identifying opportunities in trading and shipping of the LNG portfolio and which is delivering millions of dollars in additional trading profit,” says Chris Strickland, Lacima’s chief executive and co-founder.

The primary analytical problem the industry is trying to solve is how to find the optimal value, and feasible associated shipping schedule, that meets all of the constraints and contractual obligations of an LNG portfolio.

Most LNG players organise their operations, portfolios and shipping schedules around an annual delivery programme (ADP). The ADP is a crucial component in LNG supply chain planning, representing the forward shipping schedule for a calendar year for a LNG business. The ADP consists of a large portfolio of contracts, constraints and optionality.

The high potential value of the ADP, underpinned by the large number of constraints and option components, creates opportunities to modify planned cargo movements and therefore deliver increased value. Each improvement to the portfolio can potentially deliver millions of dollars in increased value.

Determining what modifications to make is not a simple task and, with a lack of suitable vendor products, most LNG players have built in-house solutions. These solutions, however – as with most other energy and commodity modelling and optimisation challenges – do not effectively address the complexities of LNG optionality. Rather they ‘dumb down’ the problem to simple representations of models, contracts, vessels and shipping characterisations, and as a result ignore what drives the value – the optionality.

Often only a single feasible solution is produced, one that is not optimised to fully model the contract and shipping problem, and thus significant value is left on the table.

“The ADP is central to most LNG trading desks – it affects a wide range of functional areas in a LNG operation including portfolio management, contract management, short-term trading, structuring and origination, shipping, asset management, finance and risk,” says Strickland. “Lacima has developed a generalised framework specifically to address the formulation of the ADP and to perform deep portfolio analysis.”

The framework handles the key components of the contract portfolio elements (including markets, indexation, S-curves, volumes and destination flex), the vessel types (including ports, speed of vessels – laden and unladen, fuel type and burn, boil off, quality, delivery window, costs, etc), and canals (speed, fees, size of ships allowed, etc).

Typical problems in this area of supply chain planning for medium to large users can involve five to 20 vessels, with up to 200 lifts and deliveries in a single year, many of which require backstops. It is not unusual for optimisation problems of this type to require run times of many hours.

“Lacima’s new shipping optimisation solution implements a new proprietary iterative approach that, depending on the portfolio set up to be addressed, can result in run times of eight hours being reduced to under five minutes,” Strickland says.

He adds that from a portfolio analysis perspective, the resulting time savings are extremely important as additional analysis can now be run that involves what-if analysis, such as adding and subtracting trades and vessels from the portfolio, stress test analysis, as well as stochastic simulation for risk purposes.

“At today’s gas prices a typical ship can transport $70 million worth of gas and so strips of cargoes going out multiple years can have values well into the billions of dollars. Getting the analytics right around both valuation and shipping optimisation can make a difference of millions of dollars in trading profits.”

Given that most LNG players have a broad range of needs including the trading of gas storage, swing, and transportation as well as managing the risk of the portfolio; an effective LNG solution must co-exist alongside these wider needs. Lacima is the only player with commercial solutions that solve such shipping optimisation problems, while also providing a detailed risk management framework. 

Ultimately, the backbone of Lacima’s analytics offering is the unified analytics engines powering all its solutions so the same models and methodologies are employed to provide consistent results for the values used to trade a deal, through to those used to manage the risk of the positions. This LNG addition to Lacima’s suite addresses a specific pain point which is applicable across the whole LNG industry, the calculation speed of which opens up the areas of portfolio analysis, scenarios and calculation of risk that were not available before.

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