Regulated LNG regas plants have come under pressure not only from open access regulation and overcapacity, but primarily from a shift to a role as a separate business entity responsible for its own performance, especially in Europe–prompting plant owners to diversify into less regulated areas. Although Europe is ahead of the game and is already offering a wide range of services, other markets like Japan, China, and India are also expected to further develop downstream services as a core part of terminal operations and design.
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McKinsey Energy Insights LNGFlow tracks the activity of the global LNG fleet and the performance of individual LNG plants and terminals in real time, with country- and regional-level aggregates. It shows that LNG trade flows increased by ~38bcm from 2016 to 2017, mainly driven by additional Asian demand. Looking ahead, McKinsey Energy Insights Gas Intelligence Model projects that the share of LNG in the global gas trade will grow from ~10 percent in 2017 to ~13 percent by 2030, gaining share vs pipeline and gas-consumed-where-produced due to the growing distances between supply and demand centers. Regasification infrastructure, mainly in Asia, is expected to grow accordingly.
Using insights from McKinsey Energy Insights market models, proprietary industry data, and a global network of energy experts, we observe three main forces that are driving terminal operators to diversify and invest in unregulated business.
First, regulation of tariffs and third-party access (TPA) rules has put downward pressure on unit revenue, leaving terminals dependent on volume growth. According to Saudi research group, KAPSARC1, 54 percent of global regasification capacity already offers TPA of some sort, with the most comprehensive rules in Europe, the US, and Singapore. The trend toward TPA implementation is gaining momentum across different markets, like Japan, and will likely challenge profitability in the coming years. Note however that while regulated tariffs have put downward pressure on terminal profitability, long-term ship or pay contracts have provided a shield against worsening market conditions for unregulated terminals.
Second, in Europe, the rapid increase in terminal capacity relative to LNG demand over recent years has led to a lower average throughput and utilization rate down from ~45 percent in 2010 to ~28 percent in 2017. This is partly due to some plants being built to diversify supply (e.g., in Lithuania and Poland), rather than on purely commercial grounds, as well as stronger than expected competition from pipeline imports. Plants that have been affected include Belgium’s Fluxys2 which recently said its Zeebrugge terminal unloaded just 17 cargoes in 2017, compared to 30 in 2016. Going forward, regas capacity in Europe could grow beyond the current capacity of 225 bcm/year in 2018 through expansions and new projects proposed in, for example, Germany and Croatia possibly leading to an additional ~12bcm/year by 2021.
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Japan has maintained a steady utilization rate around 40 percent in recent years but could face similar challenges to Europe as a high level of available capacity is offset by a projected decrease in demand.
The third force affecting regasification plants is a shift in their role in owners’ portfolios from being fully integrated in the value chain of LNG to the end customer to a role as a separate business entity with its own responsibility and accountability for operational and financial performance. In this new role, there is an increasing need for terminals to compete for volume as short-term and spot FOB LNG sales become more prevalent, particularly in interconnected markets in North-West Europe. This means terminals must offer lower prices or provide better services – such as faster loading and unloading times - to capture the supply flow. Japan terminals will also face the same issues as TPA to regas terminals is introduced.
Possible responses to increasing pressure
To maintain or regain profitability, regas terminal operators can take four different approaches.
- Cost-saving measures Although it is uncommon for terminals to reconfigure once they have been set up, additional measures can complement and improve the system, e.g., improved boil-off gas handling, recovering waste cold from the regasification process and utilizing it for cryogenic power and district cooling. This is already being done in Japan but only 25 percent3 of the potential is being tapped. These measures will also reduce fuel consumption in the regasification process.
- Regulatory measures Terminals can also try to be exempted from open access regulation or compensated for reduced income. For example, in the Netherlands, Italy, and UK, new investments were granted exemption from TPA4 and in Italy terminal operators will be compensated via end users for the financial effects of a new “capacity payment” system in which shippers will have to bid in an ascending clock auction5.
- Additional unregulated services using existing infrastructure, including technical services (e.g., the gassing-up and cooling-down of the LNG carrier offered at most European terminals), peak shaving at Italian terminals, and virtual liquefaction offered at the Sines Terminal in Portugal6.
- Expansion of infrastructure to offer new services including infrastructure to allow reloading, small-scale LNG offerings like bunkering and truck-loading facilities, and infrastructure to utilize waste heat and cold from LNG storage and regasification. Specifically, for reloading, McKinsey Energy Insights LNGFlow shows an increase in re-exports from 13 shipments in Q1 2017 to 36 in Q1 2018 globally, driven mainly by Europe increasing re-exports from 9 to 26 shipments in the same period.
The next section focuses on how regasification terminals can diversify into additional unregulated and new services (as described in bullets 3 and 4), illustrating the momentum these services are currently gaining with examples from across the world.
Alternative revenue streams through additional services
To maintain or regain profitability, regas terminal operators can decide to increase their focus on offering a wide range of less or unregulated services (see Exhibit 1). For example, terminal operators in countries including Spain, China, and India are already taking an active role in local small-scale LNG marketing via LNG trucks, instead of just putting the infrastructure in place and leaving marketing activities to others. European terminals have also been providing truck-loading services, bunkering services (with Belgium and the Netherlands at the forefront), peak shaving services, and, over the last two autumn/winter seasons, trans-shipment, with cargoes delivered in the autumn months being reloaded and shipped to NE Asia mid-winter to take advantage of prices there of up to $11.70/mmbtu this year. LNG truck loading in Europe is already becoming a numbers game with over 34 thousand truck loads per year in Spain7, ~3.5 thousand in France8, and 1.5 thousand in Belgium (Zeebrugge)9.
Spain has been particularly active in its downstream LNG regas diversification. The company is adapting its terminals to provide small-scale and bunkering services, including LNG multimodal transport via ISO containers. It is involved in innovative projects in the maritime, railroad, and airport sectors, as well as the “LNG as Hive”10 project–a five-year initiative co-financed by the EU to develop an integrated logistics supply chain for LNG.
In India, according to Reuters11, Royal Dutch Shell is planning to build a truck-loading facility by 2019 at its Hazira LNG terminal. This truck-loading facility appears to be part of a strategic choice to enter the LNG downstream business to meet demand from disconnected mainly industrial users (e.g., power plants, petrochemical companies, and fertilizer producers). In addition, Petronet12 states that “for effective utilization of its Kochi terminal, ancillary services such as storage and reloading, cool–down, and bunkering services” are being explored.”
LNG hub model to replace classic regas plant
Looking ahead, we see an increasing need for regas terminal owners to diversify their business into unregulated areas to protect or improve their profits. Regas operators outside of Europe (e.g., in Japan) are expected to come under heightened pressure as TPA and other rules aimed at liberalizing the market are imposed.
In Japan and Korea, we see a possible case for asset-backed trading by terminal operators. For example, a case for seasonal storage arbitrage by terminal operators could exist, assuming seasonal price spreads, continued access to excess storage capacity, and the availability of spot cargoes in shoulder months. In 2017, McKinsey Energy Insights LNGFlow observed 4 reloads in Gwangyang (Korea) and 2 reloads in Sodeshi (Japan) mostly destined to serve high LNG demand in China. This indicates that it is already practicably possible to reload to take advantage of price differentials in the region.
Outside Europe, India, and Japan, Singapore’s regas hub has also been diversifying, including into bunkering services13, reloading services, and trans-shipment – for example, throughout Indonesia’s western islands. Even in China, terminals are actively seeking alternative revenue streams or integration closer to the end customer, notably in truck-loading services. The days of LNG terminals as classic LNG regasification facilities that only optimize availability and operational reliability could soon be over, with an LNG hub model focused on additional value-adding services, particularly in small-scale downstream, beginning to emerge. Therefore, regas terminal operators should be thinking strategically about how to set up or adjust their terminals to be able to tap into the potential of offering services beyond the standard operational package.