Selection of Liquefied Natural Gas (LNG) Contracts for Minimizing Procurement Cost

Recent increases in energy prices, the rise in natural gas demand due to the concerns over CO(2) emissions and a possible carbon tax, the development of a low-cost and high-capacity liquefied natural gas (LNG) value chain, the emergence of new suppliers with large gas reserves, the flow of uncommitted LNG capacity to the market, and the disappearance of conventional clauses such as destination are stimulating global LNG trade. Moreover, natural gas liberalization is resulting in the emergence of new buyers with variable demands, which is increasing the competitiveness and dynamicity of the LNG market. The LNG contracts are thus diversifying in price formulations, flexibility, duration, quality, quantity, commitment, discount, and other terms and conditions. Finding a combination of contracts and suppliers, which trades off various cost factors in an optimal manner, is becoming more and more challenging, where systematic optimization-based approaches can be very useful. In this study, we address contract selection from the perspective of an LNG buyer company. We develop a mixed-integer linear programming formalism that helps the buyer select the best combination of suppliers and contracts in an integrated manner that addresses various aspects, such as contract timings and lengths, demands, rice formulations, volume discounts, delivery terms, shipment costs, purchase commitments, etc. We minimize the sum of purchase and transport costs, and we illustrate our approach using three examples with diverse and realistic features.