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Commercial Operations explained

 

 

When you have spend most of your working life working in so-called “commercial operations” roles, you forget there was a time when this didn’t mean anything to you. The following post discusses what I have found Commercial Operations to mean in the LNG industry.

Commercial Operations is sometimes referred to as Contract Management. This is a useful practical description, since it suggests to include the activities that follow from the execution of a contract - i.e. an LNG Sales and Purchase Agreement (SPA), or Domestic Gas Sales Agreement (GSA).

Below, I’ll cover commercial operations as it relates to the Buying, Selling and Allocation of LNG.



Commercial Operations Activities

Since such agreements are executed by a Buyer and a Seller, it follows that managing the contract (commercial operations) is an activity undertaken by Buyers and Sellers.

Buyers

Buyers of LNG must manage storage tank levels at the receiving terminals to match domestic demand for gas. The short term scheduler at the receiving terminal must manage the arrival of ships to avoid tank levels from becoming too low - an event called a “stock out”. Whilst a ship can be requested to travel faster (e.g. using forced vaporisation), the best way to advance the unloading of LNG is to also advance the loading date of the LNG at the production facility. The Buyer makes the request to the Seller, who in turn makes the request to the project operator (The Lifting Coordinator - discussed below).

(For Buyers of Domestic Gas, the analog for tank storage is pipeline imbalance which must be managed on a daily basis. If higher or lower demand can be forecast, the Buyer may nominate a lower volume to the Seller.)

Sellers

Sellers (or “Lifters”) of LNG hold the right to the gas volume, but also the obligation to offtake LNG. Thus they must manage an offtake interface with the Operator (Lifting Coordinator) and a delivery interface with the Buyer. Shipping is the bridge between offtake and delivery, so a sound knowledge of the constraints of a fleet is essential.

A short term scheduler will typically receive near term and medium requests for changes to delivery date. If a ship is unable to deliver to the discharge terminal on time, the Seller will request an early loading date to give the ship additional voyage time. This change will need to be successfully negotiated within a few hours. The control the Seller has over the ship will depend on whether the gas is sold on a DES (Delivered Ex Ship) or FOB (Free on Board) basis.

Lifting Coordinator

Equity projects involve a third party, the Lifting Coordinator. The Seller of the gas, typically is an owner of part of the LNG Project (they own project ‘equity’). It may be a single digit percentage, or a double digit percentage. Their percentage share of the project, determines their entitlement to offtake gas that is produced by the field and the LNG or Domgas plant (Gas production and LNG offtake % are not necessarily the same). This entitlement must be taken, or in industry language, “Lifted” by ship in the case of LNG, or gas pipeline in the case of domestic gas.

A contract between the project Operator and each Seller, (a Lifting Agreement), defines how much volume the Operator allocates to each equity owner (known as a “Lifter”). It covers resolution of scheduling issues, management of purging and cooling, scheduling excess cargo etc. This executed Lifting Agreement must be fairly administered during the operating phase of the project.

The team that administers the Lifting Agreement is called the Office of Lifting Coordinator, or Lifting Coordinator and may comprise secondees from the project owners, in addition to the project operator’s own staff. These teams typically comprise an ADP manager, SDS manager, Marine Operations Coordinator, and Lifting Coordination Manager overseeing the team. This team sets the Annual Delivery Program (ADP) each year and adjusts the Specific Delivery Schedule (SDS) each week in consultation with the Lifters. A key function of this team is to avoid berth conflicts and tank tops. Tank Tops are a topic for a future article.



How Commercial Operations relates to Marketing

It is important to note that Commercial Operations is not Marketing/Origination. Marketing/Origination involves identifying suitable Buyers/Sellers and negotiating towards development and (hopefully) execution of some form agreement committing the Seller to supply an amount of gas and obligating the Buyer to offtake and pay for that amount.

Where Commercial Operations is fast paced, requiring decisions to be made in a short period of time, Marketing is a slow process, often taking years. 

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