(485d) Impact of Split Delivery in Minimizing LNG Procurement Cost

Historically, LNG has been traded via long term contracts between a producer and a customer. These long term contracts or LTCs, spanned over 15-25 years and provided both, the producer and customer with a stable supply of LNG. With the advent and growth of the LNG spot market in the last decade, many countries have been looking into methods to create a cost effective import portfolio considering both long term contracts and spot market. It is common practice in the LNG industry to load a single cargo for delivery to a single location supplied by a single seller. Since 2017^[1], split delivery has also been introduced, which offers a new level of operational flexibility to LNG suppliers and importers. But with a split delivery, importers face a trade-off between increased operational costs and reduced cargo costs. Hence it is important for a buyer to create a procurement plan that takes this into account and optimizes overall procurement costs. In this study, we focus on the optimal procurement of LNG at the import terminal and study the benefits by including split delivery as an option.

In literature, LNG procurement for the customer has been studied primarily as a long term strategic decision with energy security as the priority while minimizing procurement cost. Shaikh et al. (2017)^[2] modelled a natural gas import scheme for China, where they developed a mathematical model aimed at minimizing the import cost, transport distance, domestic and political instability associated with each supplier. Later, with a surge of spot market share in LNG trade, it was studied as the portfolio optimization problem that is determining the ratio of LTC and spot market in total imports. Kim and Kim (2018) ^[3] developed an optimal portfolio for Korea. In this study, they developed a two-step portfolio model mean-variance optimization model which determines the ratio of LTC and spot in imports followed by a linear programming model which chooses the optimal set of contract for LTC procurement. The benefits of split delivery in LNG supply chains have been discussed mainly from the producer’s end. Mutlu et al. (2015) ^[4] considers the problem of developing an annual delivery program with least cost for a supplier. They included penalties for deviating from contractual terms, excess production and maintenance of ships and also a spot market revenue by selling excess LNG. Costs were compared with and without split delivery and they established the cost benefits of split delivery for a producer. Sheiktajian et al. (2020) ^[5] compared the costs of split and non-split delivery for an LNG manufacturer selling LNG via LTC and spot markets by considering deterministic and uncertain scenarios. Shahrukh et al. (2019) ^[6] were the first to develop an import strategy for an LNG importer under the terms of an ongoing long-term contract and a spot market available to minimize overall procurement costs for the short term (1-12 months) by proposing a mathematical formulation LNGPM. However they did not allow split delivery in their model. No model in existing literature can establish the benefits of split delivery at the customers end in the short term. In this paper, we seek to fill this gap by considering a scenario with split delivery and compare the costs to the scenario where no split delivery is allowed (LNGPM) to understand the various cost benefits due to splitting of delivery.

We have formulated the above problem as a mixed integer linear programming problem (MILP). In our formulation, we model the LNG available to the importer as a set of LTC and spot cargoes from which the optimal set having least overall cost has to be procured for satisfying the requirements of the importer. We consider multiple terminals at the importer’s end, with each terminal having separate demand which must be collectively satisfied by the procured cargoes. We also consider limited berths/jetties and capacities of storage tanks at each terminal. For the cargos, we allow each cargo having its own volume, price, availability window and charter costs. In our model, we consider the option of splitting the delivery between the terminals available only to the LTC cargos and restrict the splitting of delivery between two terminals as seen in the real world. To prevent impractical solutions, the ratio of volume unloaded at each of the terminals is taken to be in reasonable limits . The objective function is to minimize the sum of cargo costs and transport costs under contractual stipulations and constraints based on the mentioned resources and obtain an optimal set of cargos to be procured.

To understand the benefits of split delivery, we present an illustrative example. The example involves an LNG importer having three regionally distributed terminals, having two LNG berths at each import terminal. The planning horizon is taken as 30 days. During the planning horizon, there are sixty spot cargoes available at different time windows. There are also 4 LTC cargos, each corresponding to a particular contract. Each contract has a minimum and maximum amount of LNG that can be procured from that supplier. Each LTC and spot cargo has a cargo volume, LNG price, travel times, and travel costs associated with each cargo. At each import terminal, capacity of storage tanks and a reorder level is specified. Travel time between all combinations of terminals is also defined in case of a split delivery. The illustrative example is solved for both scenarios and their results are compared. We see that there is an additional saving of 1.6 million USD by utilizing the split delivery option. We observe that using split delivery, we procure same number of LTC cargos, but slightly lesser volume of LNG. The other reason for savings is improved flexibility and better scheduling while ordering spot cargos. The additional travel cost incurred due to travel between terminals during a split delivery is offset by the savings in procurement cost. To reduce the effect of additional inventory at the end of the month, we solve the same scenario for 12 months on a rolling horizon basis to give a better comparison of the models. We see that by allowing split delivery, we are able to save 10.67 million USD (0.93%) when compared to the scenario without utilizing split delivery.

In the above example, we have considered benefits of only one customer who avails split delivery. There is a potential to reduce costs further by cooperating with other nearby customers and allowing split deliveries between import terminals of different customers to benefit both customers. In this regard, we have considered three levels of co-operation and compared the benefits among each level. We see that by co-operating and allowing split delivery there is always a reduction in cost seen for the customers. We will also report the observations from various scenarios discussed above.

References:

1. Dhul Qidah (2017, August 21). Qatargas, RasGas complete LNG co-loading for split delivery, LNG global. https://www.lngglobal.com/qatargas-rasgas-complete-lng-co-loading-for-split-delivery

2. Shaikh, F., Ji, Q., Fan, Y., Shaikh, P. H. & Uqaili, M. A. ‘Modelling an optimal foreign natural gas import scheme for China’. J. Nat. Gas Sci. Eng. 40, 267–276 (2017).

3. Kim, J. & Kim, J. ‘Optimal Portfolio for LNG Importation in Korea Using a Two-Step Portfolio Model and a Fuzzy Analytic Hierarchy Process’. Energies 11, 3049 (2018).

4. Fatih Mutlu, Mohamed K. Msakni, Hakan Yildiz, Erkut Sonmez, Shaligram Pokharel, ‘A Comprehensive Annual Delivery Program for Upstream Liquefied Natural Gas Supply Chain’. European Journal of Operational Research (2015), doi: 10.1016/j.ejor.2015.10.031

5. Sheikhtajian S, Nazemi A and Feshari M. Marine Inventory-Routing Problem for Liquefied Natural Gas under Travel Time Uncertainty. International Journal of Supply and Operations Management,7, no.1, pp 93-111 (2020)

6. Shahrukh, Mohd and Srinivasan, R. (2019). Evaluating the Benefits of LNG Procurement through Spot Market Purchase. Computer Aided Chemical Engineering, 46:1723–1728. doi: 10.1016/B978-0-12-818634-3.50288-5