Newcomer of the year, Asia: Pavilion Energy

Energy Risk Asia Awards 2019: Singapore LNG trader rolls out much-needed risk management expertise

Frédéric Barnaud, Pavilion Energy

The traded liquefied natural gas (LNG) market is blossoming, with a growing spot market and increasing numbers of buyers and sellers, especially in Asia. However, the withdrawal of many international banks from the market, coupled with the entry of many new players, has opened up a gap between the provision of risk management expertise and the need for it.

Recognising this, Singapore-based LNG specialist Pavilion Energy launched a financial solutions desk in 2018 to offer hedging and risk management services to organisations trading LNG in Asia and beyond. The firm hopes its third-party hedging service – which benefits from Pavilion’s own internal risk management expertise and its experience across the entire LNG supply chain – will support growing financial trading activity in the Asian LNG market.

The hedging desk occupies a niche in the market, according to Pavilion Energy, thanks to the company’s in-depth LNG expertise and its ability to operate across the supply chain. Backed by its parent company, the state-backed Singapore investment firm Temasek, Pavilion Energy supplies one-third of Singapore’s industrial gas demand, despite only trading LNG since 2014.

Pavilion Energy’s financial solutions division also sits apart from other organisations that have stayed in the market, such as large integrated oil majors that do not necessarily have the same detailed knowledge of LNG markets and energy players that do not operate across the entire supply chain. “Our business model is quite unique,” says Frédéric Barnaud, group chief executive officer at Pavilion Energy. As an integrated energy company, Pavilion Energy has active downstream and marine businesses and provides LNG trading, shipping and optimisation services, as well as energy hedging via its financial solutions unit. The latter executes Pavilion’s internal risk management activities and supports its partners and customers in managing exposure to price volatility across Asia, according to Barnaud.

A financial transaction in early 2019 involving a large European energy company, for example, saw Pavilion Energy execute a price conversion for an ongoing LNG trade deal in less than 48 hours. The financial solutions team accessed expertise from across the business to complete the deal, including structured trading, LNG portfolio optimisation and energy risk management.

While the transaction seems fairly straightforward, its structure relies on knowledge and expertise developed in the oil markets. As Asian gas markets move away from the use of long-term contracts priced against oil towards a more active spot market, Pavilion hopes deals such as this will become more common. “We see great potential for more of such deals in the market, which will bring flexibility and advance the development of a vibrant and liquid market,” says Barnaud.

Activity in Asia’s primary natural gas benchmark, the Platts LNG Japan Korea Marker, has hit record highs in recent months. According to the Intercontinental Exchange, its JKM LNG volume was up 323% and open interest in futures and options up 228% from September 2018.

We see great potential for more of such deals in the market, which will bring flexibility and advance the development of a vibrant and liquid market

Frédéric Barnaud, Pavilion Energy

In addition to more established energy trading hubs in Europe, Barnaud says Pavilion Energy wants to support the build-up of financial trading activity in Asian LNG markets. He adds that, as a Singapore-headquartered organisation, Pavilion Energy believes the city-state has “what it takes” to be a strong hub for both the financial markets via the JKM and the physical markets through the Japanese Crude Cocktail, the traditional reference for Asian LNG prices.

The LNG market is undergoing revolutionary change, and organisations such as Pavilion Energy are both reacting to that change and also influencing and shaping future trends in the market. And Pavilion is particularly well-placed to succeed under such changing market conditions, according to Barnaud. “We are a lean, agile company with a strong collaborative culture at our core,” he says. “Our businesses and operations are structured with this in mind.”

The energy risk management systems for the financial solutions desk were formalised in less than a year. As the gas market continues to evolve, this kind of flexibility will be key to its success, says Barnaud.

One of the biggest unknown influences on the market going forward will be government policy on climate. The transition towards the low carbon economy will almost certainly increase demand for cleaner gas instead of coal and oil. One sector where demand for LNG could grow quickly is shipping, where regulation from the International Maritime Organisation, such as IMO 2020, is increasing environmental fuel standards.

Faced with such change, but also huge levels of uncertainty, it is going to be more important than ever for firms in the LNG market to asses and manage their risks, making Pavilion Energy’s offering ever more relevant, Barnaud says.