LNG Financial Models
Executive Summary
Key Takeaways
- ✓ LNG financial models combine an upstream-style depleting gas reserve base for feed gas with midstream-style long-term offtake contracts and capital-intensive liquefaction infrastructure.
- ✓ Liquefaction train capacity, measured in million tonnes per annum, is the physical bottleneck on revenue, and utilization against nameplate capacity should be modelled with realistic availability assumptions rather than continuous full-capacity operation.
- ✓ Offtake sale and purchase agreements are typically long-term and take-or-pay, priced against an indexation formula, historically oil-linked, increasingly Henry Hub or hybrid-linked, that must be modelled against the actual contract formula rather than a flat assumed price.
- ✓ Boil-off gas, the natural evaporation loss of LNG during storage and shipping, is a physical loss that should be modelled explicitly rather than ignored or folded into a generic operating cost line.
- ✓ Offtake counterparty concentration is a material risk in LNG project financing, since a small number of long-term buyers typically underpin the bankability of the entire liquefaction project.
Objective¶
This guide sets out how LNG financial models are structured, within Oil & Gas Financial Modelling.
Bridging Upstream and Midstream¶
LNG projects depend on a depleting natural gas reserve base to supply feed gas, requiring the same reserve-depletion discipline addressed in Upstream Financial Models, while simultaneously requiring the capital-intensive liquefaction infrastructure and long-term contract financing structures addressed in Midstream Financial Models. An LNG model that only tests one half of this structure, feed gas reserve adequacy without offtake contract analysis, or vice versa, is incomplete.
Liquefaction Capacity as the Physical Bottleneck¶
Liquefaction train capacity, measured in million tonnes per annum (mtpa), is the physical ceiling on production regardless of how much feed gas reserve is available. The model should reflect realistic train availability and utilization, accounting for planned maintenance and unplanned outages, rather than assuming continuous operation at nameplate capacity.
Offtake Pricing Mechanics¶
LNG offtake is typically structured through long-term, frequently take-or-pay, sale and purchase agreements, priced against a specific indexation formula. Historically this has meant oil-linked pricing (indexed to a crude marker such as Japan Crude Cocktail), with an increasing share of contracts linked instead to Henry Hub gas prices or a hybrid formula. The model must replicate the actual indexation formula in each offtake agreement rather than applying a single flat assumed price across all contracted volumes, since the mix of pricing mechanisms across a project's offtake portfolio materially affects revenue sensitivity to different commodity price movements.
Physical and Contractual Risk Factors¶
Boil-off gas. The natural evaporation loss of LNG during storage and shipping, a physical volume loss that should be modelled explicitly against the relevant storage and transit duration rather than ignored.
Offtake counterparty concentration. A small number of long-term buyers typically underpin an LNG project's bankability, making counterparty creditworthiness and contractual performance a material, explicitly tested risk rather than a background assumption.
Netback pricing exposure. Where LNG is sold on a delivered basis, the seller bears shipping cost and price risk between the liquefaction point and the delivery point, addressed in full in Netback Price.
Common Structuring Pitfalls¶
- Modelling feed gas reserve adequacy without a corresponding offtake contract and liquefaction capacity analysis, or vice versa.
- Assuming continuous nameplate liquefaction utilization without realistic planned and unplanned downtime.
- Applying a single flat offtake price rather than replicating each contract's actual indexation formula.
- Omitting boil-off gas losses from the physical volume balance across storage and shipping.
Continue Reading¶
Related Pillars¶
Related Technical Guides¶
Related Glossary¶
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Frequently Asked Questions
How does an LNG financial model differ from a pure upstream or pure midstream model?
It combines both. LNG depends on a depleting natural gas reserve base for feed gas, an upstream characteristic, while also requiring capital-intensive liquefaction infrastructure financed against long-term offtake contracts, a midstream and project finance characteristic.
What determines revenue capacity in an LNG financial model?
Liquefaction train nameplate capacity, measured in million tonnes per annum, sets the physical ceiling on production, and actual revenue depends on utilization against that capacity combined with the offtake pricing mechanism applicable to contracted volumes.
How are LNG offtake agreements typically priced?
Under a long-term, frequently take-or-pay sale and purchase agreement, priced against an indexation formula, historically linked to a crude oil price marker, increasingly linked to Henry Hub gas prices or a hybrid formula, which the model must replicate rather than assume a flat price.
What is boil-off gas, and why does it matter for LNG modelling?
The natural evaporation loss of LNG that occurs during storage and shipping due to its cryogenic temperature. It is a physical volume loss that should be modelled explicitly against the relevant storage and transit duration, rather than ignored or folded into a generic operating cost line.
Why is offtake counterparty concentration a material risk in LNG project financing?
Because a small number of long-term buyers typically underpin the bankability of an entire liquefaction project, so the creditworthiness and contractual performance of each counterparty has an outsized effect on the project's financeability relative to a more diversified revenue base.
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