Wildfire in Indonesia. Floods in East Africa. Active hurricanes in the eastern Pacific. A subdued monsoon season in India. All these events, and more, are being attributed to the 2015- 2016 edition of El Niño, likely to be one of the three strongest ever recorded.

When El Niño produces such extreme and varied effects worldwide, it inevitably grabs the headlines. But for industries with global supply chains, tight margins, complex logistics and a heavy reliance on international shipping, El Niño is just one extreme exam- ple of the day-to-day challenges that the weather presents.

This is certainly true of the worldwide LNG industry, whose global trade passed 241 million tonnes in 2014 (an increase of 4.3 million tonnes over 2013 levels). New LNG frontiers have emerged on the Gulf Coast and in Canada, the deepwater basins of East Africa and in the brownfield projects of Asia Pacific, among others. In this growing, dynamic and interconnected value chain, the weather is a key external factor, affecting output and squeezing margins.

Even a small storm or particularly thick fog can have a debilitating effect on profits and partnerships. Adverse weather conditions can strongly affect trade routes and common shipping lanes. Journeys that are hastened or slowed by intense winds, high waves or restricted visibility can cause bottlenecks at ports, leading to extra costs for delays and penalties for unscheduled delivery.

Further effects can be felt in broken lending and borrowing arrangements, shortage or excess of supply, breached contracts, unplanned boil-off and inefficient operation of vessels and use of bunker fuel.

And because LNG operations are akin to a finely tuned machine, any disruption to one part of the operation will have a knock-oneffect somewhere else—often further exaggerating the problem.

Routes Under Pressure

What makes this year’s El Niño even more interesting for the global LNG industry is that it coincides with the certification of the Panama Canal for LNG carriers, and the rapid development of LNG facilities as the U.S. boom in shale continues.

LNG has now joined the extensive list of commodities that traverse one of the world’s busiest shipping routes, cutting journey times between the Pacific and Atlantic oceans significantly, and creating a much safer option than traditional courses around Cape Horn. Its role in creating a competitive market for U.S. operators is not to be underestimated.

But the opening up of the Panama Canal itself demonstrates exactly why weather can pose such a challenge to optimal LNG operations. The risks associated with having a ship carrying gas stored under pressure pass through the canal mean there are strictly enforced rules relating to the order, spacing and timing of traffic, in both directions.

Operators themselves have to ensure they have the right type of vessel—the canal’s dimensions and depth place limits on tonnage—which affects fleet composition. Insurance also has to be adjusted to take these new risks into account.

Missing A Slot

For example, a ship delayed by unexpectedly heavy fog in the Gulf of Mexico misses its scheduled slot to transit the canal. Instead it finds itself holed up for days before another appropriate time can be found, thereby missing its scheduled delivery and loading times at its eventual destination in the northeast of Asia, with all the operational costs and loss of business that this delay entails.

The Panama Canal, for all the advan- tages it opens up, also emphasizes the need to understand and account for weather variability.

Naturally, LNG operators make allowances for the normal uncertainty of seasonal variations: winter demand and typical winter weather can be “baked in” to delivery schedules. Even the arrival of an El Niño itself is fairly predictable—it takes place every two to seven years and is indicated by warming of Pacific waters. Vessel operators know to make adjustments to trans-Pacific journeys as a result.

What is much harder to forecast is the duration and intensity of the event, and the effect it will have on normal seasonal variations. As little as 18 months ago, there was some doubt among meteorologists about how severe this most recent El Niño would be. Like any other weather conditions, predicting the outcome of El Niño is very much a question of probabilities rather than certainties.

Models And Simulations

This is where advanced modeling and simulation comes into play. The sheer number of variables created by even normal weather conditions is huge: far too large for anything but the most advanced computational techniques to make sense of. What simulation can do is make clear the most likely outcomes in any number of given scenarios, enabling evidence-based decision- making and giving LNG operators the confidence of knowing what the outcome of their journey scheduling is most likely to be.

By using advanced modeling techniques—and visualizations to give clar- ity to the results—operators can plan routes more effectively, choose the size and capacity of ships, schedule berthing and docking more efficiently and ensure that supply matches demand.

Evidence-based decision-making can give LNG operators the confidence to know the most likely outcome of their journey schedule to a port. Source: Lanner

Protecting Investments

However, the value of simulation can be seen far earlier in the LNG value chain. El Niño year or not, the weather will always be a major external factor on commodity businesses in general and LNG in particular. Understanding its impact before investing in major infrastructure and equipment is critical, particularly as the industry grows and becomes more competitive.

This is exactly what is happening in the U.S., where new LNG players are looking at their plans for liquefaction and storage facilities on the Gulf Coast. The decision on how much equipment is needed is not just a factor of how much gas is available: it is also a factor of how much gas can be transported out of the site, the navigability of the local waterways and the location of potential customers.

The weather affects all of these. Consider again that fog in the Gulf of Mexico. Not only does it affect journeys from existing operations, it is also a con- sideration for any organization attempt- ing to work out planning liquefaction, storage or transport facilities in Texas and southern Louisiana.

For example, a producer may decide to commit to shipping more than 12 million tonnes per annum (mtpa) based on theoretical transport capacity and estimated demand. It invests in the necessary liquefaction and storage infrastructure and enters into consor- tiums with various shipping partners to ensure that 12 million tonnes are distributed each year.

But if it turns out that it can only deliver 11.5 mtpa, then it has invested too much and is over-paying its ship- ping partners. Similarly, if it turns out that it could have delivered 14 mtpa, it is seriously out of the money. Either way, the producer gains a sub-optimal return on its investment.

On the other side of the contract, the shippers need to be confident that they are able to supply the right ships at the right time, with the right tonnage and capacity to deliver the agreed volumes—all while allowing for boil-off and bunker fuel. They therefore need to be confident that, allowing for weather, their ships can arrive, load, depart and deliver in a consistent fashion.

Will typical wind speeds knock their vessels off their moorings? How often and how far does that infamous fog affect visibility and maneuverability? Will unusual delays at pilot boarding stations compound channel traffic bottlenecks? Failure in any one of these areas opens the consortium up to bloated contingencies and costly mitigations.

Certainty In Complexity

In this case, advanced simulation provides the evidence necessary to make sound investment decisions, and creates the foundation for successful consortiums to plan and deliver annual delivery programs. By exploring and stress-testing thousands of different scenarios, and using probabilistic techniques to understand the consequences of different variables, all parties can proceed with much greater confidence that the outcome of their partnership will be as expected.

The value of simulation here is not just that it can provide insight into what will happen within normal weather parameters, but also the effect of the extreme weather conditions that period- ically prove so disruptive.

Of course, what the U.S. producers are facing is an entirely familiar prob- lem. Their counterparts in Asia and Australia have long had to navigate their way around typhoons in the South China Sea and ensure delivery through the Strait of Malacca.

But in light of volatile market prices and fluctuating demand patterns, the industry as a whole is demonstrating greater reluctance to fix its costs. Newer players are looking for a more flexible approach, and the use of simulation and modeling to continually re-evaluate ini- tial positions is set to increase. As competition in the LNG market heats up, the room for guesswork, hunches and uncertainties gets ever smaller.

Steve Helmsley is solutions director for Lanner.