Socar Takes Power Route to LNG as No Profit Yet in Trading

  • LNG now lacks ‘flexibility and mobility’ of other commodities
  • Socar eyes LNG-to-power projects before entering trading

The State Oil Co. of the Azerbaijan Republic is supplying liquefied natural gas to new buyers as it waits for global volumes to reach the “critical mass” needed to trade the fuel.

Socar will possibly start “pure trading” in the next five years, said Arzu Azimov, chief executive officer of Geneva-based Socar Trading. Until then it will focus on projects that involve using LNG to generate power in nations from Africa to southeast Asia, he said.

Socar is hoping to benefit from emerging nations’ rising power demand, which the International Energy Agency expects to more than double by 2040. A 46 percent drop in benchmark Asian spot LNG since 2015 and an anticipated jump of 45 percent in supply by 2021 has made the fuel attractive to users that lack pipelines to import gas to produce electricity.

“When supply rises, people see lower prices, see this resource as more attractive and invest in infrastructure to consume it,” Azimov said in a telephone interview. “The preferred way for them is construction of a package in one place, which is our specialization.”

Socar, which only trades crude and oil products, is participating in tenders for projects to build a power plant together with a regasification and storage facility, both as an equity holder and an LNG supplier, Azimov said, declining to give more details due to the competition involved. The company, which doesn’t produce its own LNG, is a shareholder in and sole supplier to a project nearing completion in Malta. It already contracted the fuel, he said, declining to disclose the origin.

‘Critical Mass’

LNG hasn’t reached the same level of liquidity as crude or coal, he said. Liquidity is set to rise with more companies trading the fuel and as the industry expands, according to the IEA. 

Spot and short-term deals, where traders typically operate, still account for less than a third of total trade dominated by long-term contracts. Gas markets, unlike those for crude, remain largely regionalized without a single pricing mechanism and many LNG contracts lack destination flexibility.

“When we accumulate a critical mass of consumption and participation in projects linked to consumption of LNG, then we will naturally start trading,” Azimov said. To organize trading isn’t a problem “if you already have a trading system and if you can assess and manage risks. If all the infrastructure is in place, to start trading you will just require traders who need relevant network and experience, but it’s a matter of five to six months.”

“Pure trading” at the moment doesn’t offer profit without access to production, consumption or transport infrastructure, he said.

“Buyers and sellers are still mainly either consumers or producers,” Azimov said. “Every cargo has a certain linkage to the port of origin and departure. There is no mobility and flexibility that other trading commodities have, therefore we don’t treat it as a trading commodity yet.”

Developing Hubs

There is the risk of insolvent buyers and difficulties disposing of an unneeded cargo when liquidity hasn’t fully developed, he said. Hubs, such as the one being considered in Singapore, are needed to make it “interesting” to trade considering that storage and ships are expensive.

Global LNG export capacity will increase by 188 billion cubic meters (6.6 trillion cubic feet) from 2015 to 2021, of which 90 percent will originate in Australia and the U.S., according to the IEA. As fuel costs fell, more than 50 nations are considering switching to LNG from oil, according to Wood Mackenzie Ltd.

“Every next terminal, every next vessel, every next producer or consumer is adding to this package, contributing to the growth of liquidity,” Azimov said. “It is still far from that stage when it becomes a commodity. There are attempts but a critical mass is needed.”

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