Business Risks in LNG Companies

This article discusses the risks involved in venturing into the LNG business, criteria for setting up an LNG company, and types of conflict in designing. It also provides references for further reading.

BUSINESS RISKS IN LNG COMPANIES
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Introduction
The market for liquefied natural gas (LNG) is drastically growing and now the commodity
occupies a large portion of the world’s energy needs. The trading of LNG is estimated to be
more than pipeline gas and the figure is expected to reach 50 % of the globally traded gas by
2035.
The lifecycle in trading of LNG is made possible by natural gas suppliers, liquefaction plants,
terminal operators, transport operators, regasification plants, storage facilities, pipeline
operators, and the utilities needed for production of natural gas.
Design of LPN
Diagram showing the block-flow design of a LNG plant
At the plant, the natural gas is channelled into the liquefied natural gas plant. The gas is then
treated to remove hydrogen sulphide, water, carbon IV oxide as well as the components such
as benzene that will freeze when the gas is subjected to low temperatures. The remaining gas

is then stored in the liquefaction facility having a composition of methane which is 90 %, and
butane, propane, nitrogen and ethane.
Risks of venturing into the LNG business
Global LNG exports will lead to creation of more chances thereby increasing the complexity
of the business. In the event that the Mediterranean ramps up its LNG exports, there will be
shift in the global demand and supply1. This will bring about more complexity to the portfolio
management of ECU Energy especially if the company is to sell on a global scale. In the
event the company becomes a domestic supplier, it might lose its ability to manage each
variables that may include price fluctuations, foreign exchange rates, and the credit risk
available on foreign entities.
The increase in market competition due to oversupply will amplify the risk of doing business
coupled with the possibility of shrinking of trade margins. The venture of ECU Energy will
increase the supply of natural gas in the domestic market hence lowering the prices. This will
mean that the company will have to export more to the global market where there will be
better prices. The risk here will increase as doing business on a global scale need very
complex logistic chains as well as much longer payment cycles. This will in turn result in the
company increase its capabilities on risk analysis and hedging.
The regulatory aspect is main way in which politics usually affects the oil industry. This is
coupled with other laws and regulations that affect the exploration and extraction of oil and
1 Borg, J., 2016. Oil & Gas Law : Contractual Risk Management. London: Pearson.
Clews, R., 2015. Project Finance for the International Petroleum Industry. Massachussetts:
Academic Press.

gas which tend to differ from one country to another. Normally the political risks will be
higher when the company is exploring and extracting oil and gas deposits abroad.
These risks usually evaluate the environmental impacts of any project. The main factor that is
evaluated here is the carbon foot print of the oil and gas projects. This usually analyses the
amount of carbon the project will emit to the atmosphere which will be used in analysing the
likelihood of the project to promote climate change2. Pollution, lack of attention to safety of
personnel, as well as disaster and fire equipment available are other environmental risks that
must be quantified and considered as they usually have an effect on the project economics.
The price of the natural gas plays an important role in determining whether a reserve will be
economically feasible or not. Basically, more geological barriers usually tend to tag along
higher price risk that the project might face3. ECU Energy should try and predict the overall
costs of the project and thereby make a decision on whether it should start exploration or not.
The price risk usually accompanies oil and gas projects once exploration and development
begins.
In addition, the host governments have introduced the “zero flare tolerance” policy that is
applied in combating the environmental impacts of oil and gas projects. This policy has
2 Inkpen, A., 2011. The Global Oil & Gas Industry. New York: PennWell Corp.
Jacoby, D., 2012. Optimal Supply Chain Management in Oil, Gas and Power Generation.
New York: PennWell Corp.
3 Simkins, B., 2013. Energy, Finance and Economics: Analysis and Valuation, Risks
Management and the Future of Energy. New York: Wiley.

developed into a significant expense and capital item that is applied in the development of
new production prospects.
Geological risks can be used in describing the difficulty in extraction process as well as the
possibility that the deposits that are in accessible reserves will be smaller than what is
expected4. Geological risks bring with them higher levels of uncertainty as it is impossible to
see the gas reservoirs and what is available are estimates from seismic data and maps.
Geological risks usually come into play when money has been spent in drilling of exploratory
as well as development wells which usually amount to millions of dollars.
Criteria for setting up this company
The location for the design selected was in Cleveleys near Blackpool. Cleveleys area was
selected since it is a pain land and this location is near a water source which provides water
for cooling. This area was selected on the following criteria;
Local geography of this land. Because this land will be used in refining oil it will hence need
extra land depending on the area´s local conditions like drainage, topography and also the
regulation of the government. Therefore this location contains all these requirements as it has
good drainage, the land is fairly plain and the regulation of the government is fair and very
supportive to make the company operates effectively.
Utility and the cost of water. The area where the company needs to be situated should have a
proper water supply as well as a good wastewater system. Good water supply highly help in
the cooling of the company heating system which is employed in refining the oil in the
company. In this location, there is an Irish sea which provides enough water. The water will
4 Dalvi, S., 2015. Fundamentals of Oil & Gas Industry for Beginners. Chicago: Notion Press.
Downey, M., 2011. Oil 101. New York: Wooden Table Press.

be channelled into the company after using the wastewater will be treated before it is
disposed of back to the sea again. Electricity supply will as well be required to help in
running the company especially in refining the oil. Electricity will as well be used in treating
the wastewater.
Distance. The location should be selected in such a way that the raw material (crude oil) and
the finished good ( refined oil) can be accessed for transportation. And this is true for the
presence of the roads which are there in this area. The good access road helps a lot to make
the sales better in this area.
Environmental issues. This is a very crucial consideration for the refining industry, the
wastes from the refining oil need to be treated before they are disposed to the environment.
In case the waste is not treatable then they need to be disposed of in a place where they
cannot affect humans living around, for example, dipping them into the sea. The map
illustrating the location where the refining company is proposed to be situated is illustrated
below;
The above criteria will hence be adopted to enhance setting up this refining company.

Figure 1: Showing the map of Cleveleys where the refining company is located
Types of conflict in designing
There are some conflicts which may interfere with the selection of this refining company
such are the culture conflict and the government conflict. Culture conflict basically occurs
when there is a different clash in cultural beliefs and value and cultural violence is used to
explain the reason for the crime and violence in a given area. But for this location there is a
less cultural conflict since the culture in this area is almost the same thus there is no culture
clash. The belief in religion can as well results to this cultural conflict but this area has the
same religion and this makes it so stable for this company to work. And when there is less or
no cultural conflict it will be very conducive for the company to perfectly operate.
Another conflict whose presence can hinder the normal operation of the refining
company is the government conflict. Government conflict can positively or negatively affect
the location of the refining company. When there is political stability like the one in
Cleveleys can make it favourable for setting up the refining company. Some of these
government conflicts can be due to some parameters like government regulations for setting

up the company, increased or reduced tax imposed for starting such a company. The
government of Cleveleys is very stable and this makes it very conducive for the setting of this
company in this place. The government may introduce some incentive to enable the
establishment of this company. Since the region has a very political stable environment it is
very easy for the government to provide some incentives for starting this company. Another
parameter which can result in government conflict is the law controlling environmental
pollution. If the company has a very proper environmental pollution control it will perform
better in that region where it is situated.
Other factors which can affect the situating this company is the economic risk, setting
up this company is faced with a huge amount of money which the individuals who want to
starts the organisation need to have enough funds to help to construct this designed company.
So this is a real risk since the amount of money is huge and it can seriously hinder the setting
up of the company. This hence means that the company will need to acquire enough money
before they proceed in setting up the company for refining the oil.
Another risk is design risk, for the refining company there are some performance
standards which must be adhered to these standards are universal hence need to be followed
during the design of this company. It becomes a risk in case such standards are not followed
the way they should.
Conclusion
The investment in the oil and gas exploration is not going to stop anytime soon. The overall
profits usually outweigh the risks of investing in such businesses. There is a constant demand
for energy that is filled by natural gas. ECU Energy will still get profits in oil and gas despite
the risks that stand along the way.
References

Borg, J., 2016. Oil & Gas Law : Contractual Risk Management. London: Pearson.
Clews, R., 2015. Project Finance for the International Petroleum Industry. Massachussetts:
Academic Press.
Dalvi, S., 2015. Fundamentals of Oil & Gas Industry for Beginners. Chicago: Notion Press.
Downey, M., 2011. Oil 101. New York: Wooden Table Press.
Inkpen, A., 2011. The Global Oil & Gas Industry. New York: PennWell Corp.
Jacoby, D., 2012. Optimal Supply Chain Management in Oil, Gas and Power Generation.
New York: PennWell Corp.
Rose, P., 2012. Risk Analysis and Management of Petroleum Exploration Ventures. New
York: AAPG Press.
Simkins, B., 2013. Energy, Finance and Economics: Analysis and Valuation, Risks
Management and the Future of Energy. New York: Wiley.
Wright, C., 2016. Fundamentals of Oil & Gas Accounting. New York: Wiley.