Issue Fall 14
LNG Merchants started its journey with the intent to become an infrastructure development company focused on small-scale LNG liquefaction projects. But as the company evaluated opportunities, it found that the market lacked proven demand.
“There was a need to prove that this model works and people will convert to LNG,” according to CEO Mike McCall.
Power of Creation
Although the company remains focused on LNG infrastructure development in the long-term, it decided to create a merchant arm that is looking to target customers and provide them with turnkey LNG supply solutions. By so doing, the company is participating in the demand-creation sector of the market. “We are working to build demand and support that can lead to the development of future infrastructure,” McCall says.
Having now been in business for about two years, LNG Merchants is a small company with fewer than five people. Its expertise is on the business development side of the business, and it is looking to drive demand for LNG in the Eagleford Shale play, as well as in north Texas and Nevada. “We are at the early stages of developing the merchant business, and it will take several years to develop the market,” McCall says. “Our participation in this stage is critical.”
The approach is to look for potential customers with the prospective need for high-volume, high-load LNG solutions. LNG Merchants understands that there is a cost to convert the customer to LNG, so it is looking for those companies that require a great deal of fuel usage with their capital equipment. “We look at industrial applications like asphalt and mining, as well as the oilfields in the development, fracking and drill rig markets,” McCall says.
One area where LNG Merchants is focused is customer education. Customers need to know that investing in LNG conversions and equipment is a financially viable option. By looking for customers with sufficient fuel demand and putting together detailed information on supply chain, equipment and conversion costs, LNG Merchants can point out where savings can be found.
“As a merchant, we provide access to LNG supply through transactions with customers, showing them how to get access and how to convert,” McCall says. “Demand has to be created, and most customers won’t convert 100 percent of their fleet at the outset. The may do a pilot test, and once we prove that LNG works in their equipment and for their specific need, that can build demand and help support growth of the regional LNG supply.”
LNG Merchants understand that the more efficient it can be in the provision and finance of equipment, the more savings it can provide to customers and the more opportunities that will arise for conversion. That is why its staff is built up of individuals with a strong merchant background in natural gas.
“That background is mostly in selling natural gas by pipeline to utilities and power plants,” McCall says. “Our business opportunities here are similar. We don’t see or touch the product. We put the turnkey transaction together and work with our partners to provide the pieces.”
Therefore, selecting the right partners is as critical as selecting the right staff and the right customers. LNG Merchants is actively courting and developing partners. In the Eagleford Shale, it identified a fuel distribution solutions company that is a large seller of diesel and active in 16 states.
“We met with them and explained that LNG is an up-and-coming fuel option,” McCall says. “We showed them how to get into the market and helped them capture and service customers. The idea is to work with them to originate transactions, and then they provide logistics and service capabilities. Other relationships are more commercial and price-based, such as with transportation partners.”
As the company continues to have a hand in building the LNG market, its operations will require capital for two purposes. As volume increases, it will need capital to provide credit support and working capital. In addition, it will need to invest in equipment to service and convert customers, such as transportation, storage and vaporization.
“Those are big investments that need to made in the market to create demand,” McCall says. “When we started, we saw that investment at the customer level was more vital at this point.”
Currently, LNG Merchants is looking to take advantage of opportunities in the market, working on several potentially substantial transactions. The regional availability of LNG remains limited at this time, and the market has a long sales cycle of up to a year from introduction to decision. But by opportunistically finding the right transactions, LNG Merchants can develop the market and increase demand.
“Then we can work with infrastructure developers and target our own LNG liquefaction development opportunities,” McCall says. “Right now, this is a market that is still in the early stage of development.”