Our Initiative to Support the Advancement of LNG Markets and Company Practices

Today’s Rapidly changing LNG Markets are the Impetus for this Project:

Global LNG fundamentals are undergoing dramatic shifts that have created both challenges and opportunities. For example:

There is a steady increase in both the number and regional diversity of liquefaction (supply) points as well as in the number and regional diversity of regasification (demand) points, which is driving increases in trading volumes

Regional diversity also drives more frequent and larger magnitudes in swings between oversupply and undersupply with, in some cases, both occurring simultaneously across different regions as well as through time

A faster market cycle has translated into increased volatilities and broken correlations across LNG and related energy markets
Increased price risk has elevated margin risk all across the LNG value chain

In connection with the market dynamic, we have also seen growth in the demand for companies to utilize financial trading and hedging while striving to effectively manage the heightened risks they face today. Some are transitioning toward structures and strategies allowing them to employ organizational hedges, strategic hedges, and financial hedges. This transition drives the establishment of trading functions to support these objectives. The CCRO was created in response to the need in all industries for trading functions to understand and exercise best practices in risk management, and for the appropriate market characteristics to support them in doing so.

These conditions have created a situation where a marketplace with great potential for growth is being hindered by unfavorable or lagging practices. Particularly practices related to risk management. CCRO members know that a problem situation such as this is where the CCRO can create real value for industry. We seek to provide the neutral platform where companies can work together to reveal unseen facts regarding industry practices, identify lagging practices in risk management, and publish appropriate practices for industry adoption.
This CCRO initiative’s mission is to both deliver the benefits of best practices for risk management within our member companies and to advance industry practices that support more robust markets for all. Together, these create the desired conditions where the LNG industry may develop and prosper, while avoiding the dramatic failures that other industries have seen in the past.
CCRO experience with similar groups in other industries have shown that there are a number of deliverables available for this new initiative to consider:
- Provide a platform for LNG risk professionals to come together, either virtually or in-person, to share challenges
- Find consensus solutions among risk professionals and publish them as industry recommendations
- Establish a baseline by surveying current internal practices in risk management across the industry
- Benchmark LNG industry practices vs. other industries, as recorded in published CCRO surveys
- Publish characteristics of much-needed transaction systems for effective risk management
- Support development of new vehicles for market data transparency

Topics to Explore in Upcoming Discussions:

…is there attention that we could bring to methodologies or even specific mitigation instruments that would reduce the collateral burden?
…however, it's not entirely clear which transaction types and just what transaction details are required for reporting compliance.
…most of us know how valuable that straightforward stress test can be when things get complicated. Could we establish best practices when creating and reporting the results of stress tests?
…it helps regulators to understand why industry standards can be a very beneficial, yielding large scale benefits for their area of oversight.
…best practices for valuation of these challenging transactions lacking a robust forward curve or other critical data parameters.
…asking participant members to first agree on what the needed KRI metrics are and then what information would they like to share to create them.

Some additional examples of current industry practice gaps we’ve identified as in-scope:

Limited transparency for critical information: spot and forward cargo pricing, especially for non-Northeast Asian markets. Data may include tanker day-rates, gas consumption, esp. in Asia, etc.
Large asymmetries across market participants with respect to: trading and hedging capabilities and expertise, market intelligence, etc.
Pressing needs for more and better LNG risk management tools, technologies and products
- Additional LNG trading hubs to better manage basis risk
- Standardizing the Master Purchase and Sale Agreement (“MSPA”)
- Streamlining the Letter of Credit process
- Additional financial products to mirror physical side of business
- Trade execution platforms to facilitate and fortify trading processes
- etc.