In a shifting LNG market, agility winsMay 3, 2023
Hamed Al Naamany, CEO of Oman LNG, talks to The Energy Year about the ongoing reshaping of the global LNG market and the company’s strategy for navigating it. Oman LNG is the country’s sole exporter of LNG, operating a three-train plant with a capacity of 11.5 million tonnes per year (tpy) in Qalhat, Sur.
What were the key achievements of Oman LNG in 2022?
Our key achievements in 2022 were agility, foresight and the capacity to read between the lines through the market dynamics. We started last year in a completely different scenario from how we ended 2021, particularly in terms of energy geopolitics, and we managed to make the most out of the positive momentum LNG has experienced recently.
We already had a surge in LNG prices in 2021 due to the challenges in supply and logistics. Our aim was to further penetrate new markets, and we were able to continue being among the earliest players to ride the LNG upsurge, placing our volume where it was most needed.
How do you view the ongoing reshaping of the global LNG market?
We shifted from a large, unipolar LNG market focused on Asia to a bipolar one, where Europe is going to pull LNG under different terms and dynamics. The way Europe trades will be heavily gas indexed, most likely with an important influence from the US’ Henry Hub, while the Asian approach will be on different market fundamentals.
Having multiple indexes creates a competitive business environment in which to manage those baskets to your advantage, and being able to either switch or turn to the most favourable one when you need to. In this context, we have diversified and expanded our client portfolio, which allows us to talk to them on both a short- and a long-term basis since the markets where your customers are based might entail opportunities for other deals too.
What is your strategy to navigate this competitive environment?
We want to have a basket that is mixed and this applies not only to the clients, but also to the nature of the contracts we have. Following the skyrocketing LNG prices in 2022, we assessed that the market is leaning towards mid-term agreements, with the 5- to 10-year contracts being most popular. Our ratio at the moment sees 10-15% of the contracts in spot sales, while the biggest share will be split between 5- and 10-year agreements. We won’t go beyond 10 years because we think the market will change again and we want to remain flexible, simply following the numbers and deciding whom to supply according to the market’s evolution.
We have recently signed multiple agreements with several companies from different countries to supply them with our LNG in a range that goes from 800,000 to 1 million tpy, most of them over a period of 10 years starting from 2025. These include France’s TotalEnergies, Thailand’s PTTEP, China’s Unipec, Turkey’s Botaş and Shell International Trading Middle East.
We were also pleased to sign with four key Japanese partners: JERA, Mitsui, Itochu and Kansai Electric. Our production capacity would allow us to go with higher than 1 million tpy in terms of supply volumes to each client, but we don’t plan to increase it because our strategy is to capture the best of all markets, and not only within a region but within each country. In Japan, for example, we supply to four different companies from different regions of the country because the demand varies significantly according to the weather.
In other words, our aim is to avoid putting all of our eggs in one basket because dynamics and demand can change fast for a wide array of reasons, from natural disasters, to conflicts, to political issues. We are also adapting regarding the creation of a common gas market in Europe, and we want to be geo-strategically balanced in our operations to face them properly. That is why instead of selling to five or six buyers, we are selling to 11 different buyers, both in Europe and Asia.
What are your expectations regarding the key markets you can supply and the demand coming from Europe and Asia?
The main Asian markets continue to be China, Japan and South Korea. We have a contract up to 2024 with KOGAS for the supply of 4.1 million tpy. India is also a growing market and we have expanded our foothold into Europe, a very interesting structure because of its multiple entry points – through Italy, Turkey or the Netherlands.
We want to be able to enter all these hubs and if you sign a big contract with one, you deny yourself the possibility of having access to the others. We will assess how the price varies in all these markets and then direct our flexible cargoes accordingly.
Again, it’s a matter of numbers. If Europe pulls more than Asia, we will go there, and vice versa. The demand will come from both, but with different purposes in mind: Asia is looking at LNG for longer-term energy security; as for Europe, the approach is to secure short- or medium-term solutions to buffer the emergency situation and then come up with a broader strategy that fits very well with our aims too.
What’s important to understand is how market dynamics will readjust, and then adapt to them. We need to be pragmatic, and be ready to face a rebalancing of the market.
Can you provide us with some updates on Oman LNG’s production capacity and targets for future output?
The total production of LNG from our Qalhat facility grew from 8.6 million tpy in 2017 to 11.5 million tpy in 2022. Recently we completed a debottlenecking project: the target was to increase production by 10% and we have exceeded this target below the budget initially allocated for this growth project, and we were timely in the market. It was a success considering that it came at the right moment given the global energy crisis and we basically had an “extra” 1 million tonnes to leverage.
Now, we are working to reach 12 million tpy of production in a year or two. Currently we are working to present to the government and the shareholders a second phase of growth with viable options to continue our success story, and ensure we continue to be a major player in this industry.
Do you have any plans for using the LNG you produce?
Currently, all of our production is exported. However, although at an early stage, we are considering bunkering as an opportunity, with a small portion of our output going there. At the moment we are trying to figure out who would be the right partner.
We certainly recognise the value of LNG as a big bunkering option coming up as other products – methanol and ammonia – are far behind and we don’t expect to have LNG ships running on ammonia in the medium term. So, we are continuously evaluating and assessing bunkering opportunities, but first you need to have enough ships converted and in your traffic lane to justify such a business. It is definitely a way to diversify our operations and I think in the next five years, it might materialise.
What elements make Oman LNG a reliable partner in an already very competitive regional market?
First of all, we are very attentive to our customers, with whom we have strong, deep-rooted relationships, providing them with the flexibility they require and in turn being rewarded with their loyalty. The second element is our staff’s capability. Our clients know that they will not have any surprises because we are a trustworthy organisation.
The GCC market is a very competitive one for LNG, but that is great for us because it’s not about the size of the volume, but instead which kind of approach you present. For Oman LNG, we are selective, targeting our customers and serving niche players.
What are the company’s key initiatives and achievements in becoming more sustainable and environmentally friendly?
In 2021, we successfully delivered the Middle East’s first carbon-neutral cargo, highlighting our commitment to position LNG as a key transition energy with a drive towards net-zero emissions.
Since 2017, we have undertaken several initiatives to cut our emissions, retiring our former power plant and investing in a new one, achieving a 20% efficiency increase. The old plant could have run for another 10-15 years, but we made this decision pushed by the desire to be not only an LNG producer, but one with a lower carbon footprint.
We have seen a significant gradual reduction, keeping us in the top quartile as the best-performing LNG player and the relationship between LNG produced and greenhouse gases emitted plays a big role in this. We started using as a baseline the 0.27 tonnes of CO2 per tonne of LNG produced in 2017. Now we are targeting 0.24 and we want to take it down to 0.22 in the coming five years to be in line with the government’s objectives in its net-zero emissions programme.
In terms of investments, we have also carried out the electrification of our trains in certain equipment and we are developing a series of initiatives which include renewables integration, flare capture and some further equipment replacement, working with major technology companies that can provide us with the latest solutions. Lastly, we have already set up a committee supported by our board to define how Oman LNG will continue to be a pace setter as far as sustainability and decarbonisation practices are concerned.
What is your assessment of the country’s future energy mix and its hydrogen-related opportunities?
I think that the national target of 30% of electricity generation coming from renewables by 2030 is realistically achievable. Additionally, the liberalisation of the power sector with the creation of a spot market represents a great opportunity not only for the country, but for Oman LNG as an LNG producer too.
It will be interesting to see how renewable power will prove to the country that it is a reliable source as well as how and for what the excess gas will be used because there will be an important chunk of it that could go to other sectors, such as petrochemicals or LNG. Renewables are expected to offset gas in the energy mix; however, gas will not be lost – only moved elsewhere. The main element to consider is how to optimise its use, considering also that it is a key resource to drive the transition towards renewables.
Then, hydrogen is a great opportunity for Oman. It will become available to a number of industries that today are using gas, allowing us to produce more LNG. Hydrogen is a fuel that, as an LNG producer, we can consume too. For example, we are contributing to the development of the Sur hydrogen cluster, which is envisaged to include renewable energy power plants and to potentially produce 480 tonnes of hydrogen per day. This would allow us to reduce our own gas consumption to power our plants, and dedicate the excess gas for LNG. We will shift from gas turbines to gas engines that can be enabled to run on green hydrogen.
In short, hydrogen will help us decarbonise our own production and enable a much richer energy mix. That is why Oman LNG has been pioneering the Sur hub concept – because we should not look at hydrogen in isolation, but should see it in combination with the other energy means to capitalise on it the most.
What role does Oman LNG want to play within the national economy?
Our aim is to monetise gas resources, but our vision goes beyond that. We want to be a platform that attracts investors to come to Oman, driven by our model. We want to position ourselves as a great ambassador of the sultanate in the world given the nature of our business, dealing with many different companies and countries, where we have both the business opportunity and the human capital. And finally, we aim to be seen as a point of reference not only for our LNG activities but also for our commitment to the energy transition and to increasing potential partners’ appetites to work with us and our government.
Since inception, Oman LNG has made strong social investments that serve its community, and the nation. As such, we continue touching lives across the Sultanate of Oman through our numerous initiatives and projects that address technology, innovation and knowledge, employment and entrepreneurship, and environmental stewardship, as well as health and wellbeing. Through this, we ensure we are enriching our community through our continuous success.