EPISODE 227

Gordon Bennett and Tim Mendelssohn Spark Debate on LNG Freight Pricing and Risk

45 minutes · March 22, 2021

“Carbonomics” -- the term ICE’s Gordon Bennett introduced our listeners to last year -- is already shaping our future. With the “merit order” of energy supply shifting, we’re witnessing the rise of natural gas and other cleaner fuels. On his return to the ICE House, the visionary Mr. Bennett is joined by Spark Commodities’ Tim Mendelssohn to raise the curtain on ICE’s two new LNG Futures Contracts, Spark30S Atlantic and Spark25S Pacific, both of which help lower volatility and manage risk of global supply lines.

Speaker 1:

From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House, our podcast from IntercontinentalExchange on markets, leadership and vision and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism, right here right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now welcome inside the ICE House. Here's your host, Josh King of IntercontinentalExchange.

Josh King:

Some people get excited about baseball spring training, which is happening now in Florida and Arizona, and others about Black Friday Christmas shopping in November, but a much anticipated annual event is the selection of the Word of the Year by Oxford Languages. To borrow a baseball metaphor, the last 12 months have been full of curveballs and the Word of the Year for 2020 was yet another baffler. Rather than selecting a single notable word, our friends of the Oxford Languages offered up a report that focused on a selection of words on, I'm going to quote here, language change and development over the year with the chosen words addressing topics including political and economic volatility, social activism, the environment. If there was a Word of the Year for financial markets in 2020, then volatility would be it, the result of the global pandemic and countries plunging in and out of nationwide lockdowns. It seems that no aspect of capital markets was unscathed by the volatile winds of a public health crisis mixed with political upheaval. Most talked about may have been the drastic price swings experienced in the energy markets.

Josh King:

We did several episodes of this show honing in on how the short term impact of COVID could reshape this market and be associated geopolitics for generations. As of this recording, the price of ICE Brent Crude rebounded to around $69 a barrel similar to what we saw in mid 2019. Ending a roller coaster that saw WTI Crude go negative for the first time in history last April. But let's remember, the capital market is no stranger to volatility. In the LNG freight market, for example, shipping rates rode the waves of volatility in the last few months. To respond, the LNG freight market reacted with an increased demand for risk management tools. ICE saw this opportunity but took its time speaking with customers, deciding what contracts to launch and crucially on which price assessment to base them.

Josh King:

Fast forward to mid February 2021. ICE has announced the launch of LNG freight futures contracts based on Spark Commodities price assessments. Here to talk about the LNG freight futures contracts are Gordon Bennett, Managing Director Utility Markets at ICE and Tim Mendelssohn, Managing Director at Spark Commodities, we'll talk with them both right after this.

Speaker 5:

Whether it's markets, exchanges, or networks, connection makes everything possible. The connection between data and technology, innovation and expertise, and most of all, between people and opportunity. For over 20 years, ICE has transformed markets, products and processes to make things work better, faster, smarter from modernizing energy and commodity trading, to revolutionizing the bond markets. Whether it's the world's largest stock exchange or the dream of home ownership, we do more than see the big picture. We create it. You may not know our name, but we bet you know our network. ICE, make the connection.

Josh King:

Today we're fortunate enough to have not one but two guests, Tim Mendelssohn is managing director of Spark Commodities and prior to joining Spark, Tim worked at Koch Supply & Trading for three and a half years. Before joining Koch, Tim worked at BP for three years where he first entered the LNG world. Tim is on the line with us from Singapore. Gordon Bennett, Managing Director of Utility Markets for ICE Futures Europe is a returning guest to our podcast having given us all a much needed tutorial on what he calls carbonomics back in 2020.

Josh King:

Gordon is responsible for sales and business development for ICE's long established European natural gas and power franchise. Together with its international emissions, and coal portfolios. Prior to joining ICE, Gordon spent over 12 years at the energy broker Spectron working in London and New York and before that, he was senior manager in the energy infrastructure and utilities division of Arthur Andersen. Welcome Tim and Gordon, inside the ICE House.

Tim Mendelssohn:

Good to be here. Thank you.

Gordon Bennett:

Thanks, Josh. It's good to be back. I'm excited to be here actually, because I got the invite back first of all. We're going to get to talk about the introduction of a major milestone in the globalization of natural gas. But most importantly, we're going to be talking about ships. And as we talked about in my first appearance on the podcast, my father was in the merchant navy, so it doesn't get much cooler than that.

Josh King:

And you know Gordon, how much you and I geeked out on ships the first time. But let's start with Tim. I'm curious, how goes it in Singapore, it's been sort of a role model for dealing with COVID. No community infections on most days, and really only about 60,000 confirmed cases and 29 deaths since the outbreak began. What can the world learn Tim do you think about how to deal with a pandemic, from your sovereign island city state of 281 square miles located in maritime Southeast Asia?

Tim Mendelssohn:

As it's a good question, I think they can learn that if you put in very, very, very strict controls, you can control the pandemic. But I think one thing I would say Singapore, it's an amazing place to be, it's also a very small place to be. So when you're trying to control a population of six million, that's a lot easier than if I'm from the UK originally. And I was speaking to you from the US. Very, very different places, but they have done an amazing job in controlling the pandemic. If you came here now you wouldn't really see too much of a change, which is pretty amazing.

Josh King:

Gordon, in Britain, if we can just get the royals to stop sniping at one another. Your Prime Minister, Mr. Johnson, is well on his way to ending England's restrictions, I think by about June 21. I believe this was the week that all schools were scheduled to reopen. And after school sports allowed, will you be meeting friends in Regent's Park for a picnic anytime soon?

Gordon Bennett:

No, but you have mentioned a significant milestone which is the schools have gone back and so my house is quiet today, all three kids are back in school and that you can overestimate how important that is for just general mental well being, if it's so unnatural to be living 24/7 together for two months. So there's a huge sigh of relief that the kids are back at school they're seeing their friends and it gives a good sort of, get some space for the family.

Josh King:

So guys, before diving into a discussion about LNG freight, as a source of power generation and energy, LNG has grown in demand on a global scale. LNG from one corner of the globe is going to provide energy to a nation or region 1000s of miles away leading to what's been referred to as the globalization of natural gas. Why is this source of energy in particular become so popular recently?

Gordon Bennett:

Well, I think that natural gas has always been popular, or has been popular for a long time, certainly in my lifetime. The interesting thing about LNG liquefied natural gases is the ability to transport it, we often talk about virtual pipelines, so being able to liquefy the gas and compress it allows it to be transported and the liberalization of the LNG value chain has created this different market structure in natural gas. So we've gone from sort of regional pipeline, natural gas markets, sort of regional supply and demand dynamics. And with the liberalization of the LNG value chain, all of a sudden, you're able to connect different supply and demand centers around the globe and flow the gas to places that perhaps it wasn't being flowed for, certainly under a market based mechanisms.

Gordon Bennett:

So LNG is not new. It's been around for a long time. But the structure of the LNG market has changed over the course of the last sort of five or six years. So that is the structure of the market, I find sort of interesting and exciting, as opposed to necessarily the commodity itself.

Tim Mendelssohn:

As Gordon says, you've got the pipelines that typically don't offer the same flexibility, but as your demands of producing a liquefaction site, so where the gas becomes LNG, as well as greater opportunities and availability of places where you can re gas that LNG materialize around the world. With a growing fleet in the middle, LNG gives you a lot more flexibility and optionality than conventional pipeline gas. And so by having those very supply sources, as well as demand centers, you have a lot of optionality, especially when you're looking in the power generation business to switch. And there's a huge amount within the LNG business that's evolving. But for me that the key takeaway for LNG is this principle of optionality that it gives you?

Gordon Bennett:

Yeah, I think that's a great point in terms of if you're living in the US or Europe, you're used to this extensive sort of pipeline, gas infrastructure where you can get the gas everywhere and anywhere. Whereas in Asia and less developed parts of the world, LNG as Tim says, it gives you extra optionality to get gas to places that don't have the pipeline infrastructure to support it.

Josh King:

So Gordon and Tim, as we talked about in the introduction, we're happy to geek out on the process of gas here. And I'm curious and one thing Tim just said, this process of re gassing LNG, something that most consumers like me have no appreciation of, what's actually involved in that?

Tim Mendelssohn:

You can regas LNG either with a conventional regasification terminal, which is a huge processing facility. Normally close to urbanized areas, well, close enough so there's a pipeline but not too close to that becomes a risk. But what's becoming interesting and building on a Gordon's point is there's also vessels that are retrofitted and with the ability to do that. So you can take this gas into really remote areas, where pipelines and other more kind of solid infrastructure just isn't economically viable. And so you have lots of different options within that regas space, conventionally big facilities. And when the commodity was on more defined routes, as the commodity is developed and there's more liquidity in terms of where that gas is going, you've also got a lot more flexibility in the solutions that can regas the LNG and provide a lot more niche solutions.

Tim Mendelssohn:

So as an example, in Lithuania, they've got the piped gas from Russia, but the LNG offers flexibility. So they have a regasification unit, so that they can supplement this pipeline gas with LNG, depending on price moves and other considerations, to have lots of flexibility in that space alone.

Josh King:

So, gentlemen, the ICE LNG contracts have been described as a milestone in the evolution of the LNG market, can you lay out for us the aspect of the LNG freight futures contracts and how they'll be used?

Tim Mendelssohn:

Okay, so in terms of how those contracts are going to be used, I guess there's two leading use cases in terms of the importance of these futures. As the LNG market is typically traded around regional gas hubs, if you do not understand the freight component between, as an example the US Gulf Coast and Europe or the US Gulf Coast and Asia, which are typically where this LNG is flowing, and you do not understand your freight component, it becomes incredibly difficult to make an economic decision, especially when we've seen such volatility in the freight market.

Tim Mendelssohn:

To give you a sense of that volatility, last summer, we were reporting rates at around 18,000. In January, they were over 300. And last week, they were back in the high teens and now about 20. So understanding that freight component both in the spot, and in the future along the forward curve is critical for traders, both those who are operating the vessels and moving gas physically, but also the gas and power traders in the respective regional hubs who need to understand why is TTF versus JKM, why is that spread how it is? And how is LNG going to impact those prices? So that the freight indices in my opinion, I realize I'm biased, but they're a really important part a global offering, especially with the ICE has on the strength on TTF and JKM and other gas products. And it really forms a much more global offering than if you just rely on the gas hubs. It connects all of them together via this, as Gordon mentioned earlier, this virtual pipeline.

Josh King:

You mentioned TTF and JKM. ICE already has these existing LNG futures contracts known as the Japan Korea Market that's JKM. Also TTF and the UK natural gas futures known as NBP, and more recently the what's known as the West Indian Market, the WAM. What will these contracts do differently than those existing LNG futures contracts?

Gordon Bennett:

As Tim says, we've developed the natural gas portfolio over the course of the last few years. TTF and NBP have been existence for a long time. We've spent the last three to five years really pushing JKM as a benchmark and that has firmly established itself as the Asian natural gas benchmark and really the first Asian natural gas benchmark. So is the first time we saw a gas benchmark East of Suez. And now we're kind of into I call sort of LNG 2.0 or globalization 2.0, where we've added a new East of Suez marker, the West India Marker, the fact that we launched West India Marker earlier this year is an artifact that the market is evolving.

Gordon Bennett:

And the LNG freight contract I think it's a major milestone because as Tim says, it's connecting those hubs and it's allowing participants to manage their freight risk. And we saw something very recently in terms of what happens when you get supply and demand imbalances and we saw prices shoot through the roof and freight I think Tim mentioned that was $300,000. And people were talking about shutting in natural gas in the Gulf Coast of America, which on the face of it seemed a bit strange because the ARB between the commodity itself LNG on the water was in the US and an LNG delivered into Asia, the ARB was like over $100 million.

Gordon Bennett:

But you're reading these articles where the gas wasn't flowing and the gas wasn't flowing because didn't have access to the shipping. And so access to a hedging tool, hopefully, is going to promote more spot tonnage and access to a hedging tool, where you can smooth the impact of increases in prices in the spot should allow the gas to flow and to take advantage of the arbitrage.

Josh King:

Talking about the arbitrage, Tim Spark Commodities is a relatively new company, it was established just about two years ago, 2019. But it's not the first startup that you've been involved in having established a successful startup, even when you're back at university. Tell us a bit about your background. Can you give us the story of Spark Commodities? What inspired you to set it up?

Tim Mendelssohn:

Yeah, so I started Spark, I guess, to take a step back. So I'd had a bit of an entrepreneurial experience when I was younger, that it was very, very different, I was selling upcycled cement bags to two people in the UK. But it was an amazing experience. And I got to the point where I sat down with my dad and I said, look, I've got to choose between going to BP and doing something serious or setting an upcycled cement bag. And you say, look, you're mad to go to BP learn as much as you can and then the upcycled cement bag will come at a later stage of your life.

Josh King:

Some people mow lawns, some people shovel driveways full of snow, some people sell T shirts outside of concerts, what is selling an upcycled cement bag?

Tim Mendelssohn:

Okay, so essentially what we did is we had 20 women in Cambodia, who were upcycling these cement bags, turning them into gym bags, school bags, loads of different things. They look great. I know that doesn't sound very realistic, because there's a cement bag, but they look fantastic. And if every cement bag we sold, we donated a school kit to kids in Africa or in Asia. So it was a kind of social enterprise, the cement bag gave us that kind of products that we could upcycle and do our bit and install that onto consumers in the UK. And it was great. So I started doing that, joined BP a great company, loved it, started in Aberdeen, two years up there. And I moved down to the trading team in London. And BP really was great. They were super supportive, full of super talented people.

Tim Mendelssohn:

But my challenge was, how do I do something more impactful slightly outside of my role. So I joined Koch, which for me was a collection of startups, Charles Koch had built his business, in loads of different, everything from Weber barbecues through to the glass that you're seeing in Dubai, on the skyscrapers through to a trading business. And I was in a very lucky position that as the team got restructured, I was the young chief guy on the desk. So I got to do a lot more, started in operations, then move through to trading freight and then cargo. And just before joining Spark was moved to Singapore which is why I'm here to set up the LNG desk.

Tim Mendelssohn:

My wife had quit her dream job. And as the container was sailing, I had a call from one of my shareholders saying, we've got an idea. We need you to focus on price. We don't really know what that is. But what do you think? And I looked at my wife and said, if I can't take a risk at this stage of my career, then when can I take a risk? So I quit Koch. Not because of ... Koch was a great place. And Three months later started Spark.

Josh King:

Spark then has grown very quickly reaching a customer base of about 170 companies using its platform. This is certainly quite a big achievement for you Tim, what do you think makes Spark sparkle as it were, what's the USP?

Tim Mendelssohn:

To be honest, I think what we're doing is not hugely complicated, but we just relentlessly focus on what our customers are telling us. And I think as a trader, all I wanted to look for was optionality. And the irony in doing that was when I looked at, who was defining my price at the end of the day, the normally wasn't a choice. And so we find that by addressing the headaches or concerns that our customers have, I think a lot of people talk about technology, and that is going to disrupt everything, and we don't try and disrupt. But what we do recognize is that technology has a massive capacity to improve processes and understanding and in our case, transparency, but we also have, I hope, strong people on the commercial side who understand how the commodity world works. I guess our USP is a blend of really strong technology and a platform that delivers far superior price discovery to the next best alternative, but also an understanding of what our customers need.

Josh King:

What do you think, is the new cooperation with ICE such an exciting moment for Spark?

Tim Mendelssohn:

For us, it's huge. I mean, I think I see this in phases. Phase one was achieving the listing, which we are super excited about. And I think for us, we recognize we will have different competitive advantages, ours I think is delivering price transparency, we do not have a comparative advantage in delivering liquidity to the market. ICE and LNG undisputed in that space. But from a Spark perspective, it's a huge opportunity to validate to our customers, and ability to have a technological and customer centric focus, to build liquidity in a product that they desperately need.

Tim Mendelssohn:

And phase two, to be clear, you know that's phase one. All of this doesn't matter unless we execute. So now the focus is on making sure these products trade, and giving the customers the liquidity they need.

Josh King:

Execution is one thing Tim, technology is another and we can also geek out on this, technology is at the heart of Spark. Can you tell us a bit about the interplay and intersection between technology and the energy markets, give us a little tutorial and how do you leverage that to become so successful so quickly?

Tim Mendelssohn:

So for me, I kind of see us as a glorified dimmer switch, I think transparency, people kind of flip between a pasty and transparency. For me, they're not binary. So what where I think our role in the technological space becomes quite impactful is we take an illiquid market and relatively opaque market in the form of LNG and LNG freight. And by using technology and helping people understand that data, those prices and that information in a much more powerful way, we turn on that dimmer switch, which in turn means people have more trust, and then they're much more likely to trade. So for me that the analogy I would use is, if you're buying a house, in the US, you wouldn't dream of buying a house unless you went on Zillow. In the UK Zoopla, over here in Singapore is PropertyGuru.

Tim Mendelssohn:

That doesn't change the fundamentals about you buying a house at an economic price. But you're much more likely to buy that house if you've got data fed by technology to help you make an informed decision. If I just said to you that the value of your house is half a million dollars, very difficult for you to make that purchase or sell decision. If you've got much more data and a system and an ecosystem that supports that decision, you're much more likely to make a decision and it's very similar principle that we're following.

Josh King:

I'm curious, this dimmer switch that you have at Spark, how does it differ from others who provide price assessments?

Tim Mendelssohn:

I mean, I think it's tricky for me to speak about my competitors. But I think that essentially, we just provide a lot more data, our ability to funnel data and get data from our customers, I think is quite strong. And in terms of the offering, I think it's important to understand in LNG freight and in that space, specifically, the offering in terms of the next best alternative is quite limited from a technology perspective. So if we've got to take on PDFs, and other more antiquated ways of disseminating price information by showing a lot more and helping people understand evolution ranges, different profiles of different submissions, we can do a lot more in that space.

Gordon Bennett:

Especially in nascent markets, right, some of the stuff that you're doing, where you're trying to give people a bit more of a peer inside of what value is by some things that you were talking about in terms of ranges and who was submitting what rather than just publishing a number. So I think that it's important in new markets to get people comfortable with value. And it's very complementary business to ICE both in terms of sort of ethos and objectives, because the ICE brand is about data expertise and technology, which everything that you just said about Spark because they're extremely aligned. And we both have the objective of bringing transparency to market and you providing the transparency on the assessment itself. And that's a great complementary businesses and you roll on top of that ICE's network of being able to, that one to many model, were you saying you won agreement with your clearing member, you've got access to hundreds of participants, it's a combination of transparency and access model is how you build commodity benchmarks and the thing that's critical to give people access to liquid markets, to manage risk and allocate capital.

Josh King:

What distinguishes ICE's LNG freight contracts that are based on Spark? How do the contracts reflect this changing market demand? And how do they adapt to any movements in it?

Gordon Bennett:

There's a good argument that there isn't a freight future available at the moment. This has been nearly a two year exercise. Before we met Tim, people were coming to us and asking us about freight and the freight market, freight derivative market didn't exist. So you're kind of trying to figure out what does it need to look like? I remember sitting on a panel, the end of 2019 in Rome, and the CME had just launched their freight contract with the Baltic. And I was asked a question on the panel, as we know, where when's the ICE one coming. And I sort of made the analogy of, we were still figuring out what the ingredients were for our cake and that CME had taken their cake out of the oven already.

Gordon Bennett:

So what's different about the LNG freight contract that ICE is the spec. Because Tim's spec has been different from the beginning, the fuel being used in the actual ships in his spec has been LNG from the beginning, whereas the contract that was launched on the CME actually had fuel all as the shipping fuel. So this will be the first contract that has the LNG as the fuel and Tim can explain why that's important and what that means in terms of difference in value.

Tim Mendelssohn:

Yeah, and this is a kind of geeky comment, but it's a really important one, is LNG vessels run on that energy. So get that LNG on board is desperately trying to become a gas all of the time, that gas then boils off, creates pressure, and then that's used to propel the vessel. So for us, it was always, this isn't me deciding. This is due to extensive market consultation with our customers and those that are most active in those markets.

Tim Mendelssohn:

We decided from the outset that LNG fuel is critical, simply because that's how the vessels trade. And that's what represents fair value for a vessel on a defined contract. So we've been consistent about that from the beginning. And as well is the consistency that also links into the historical data so our customers can make much more informed decisions based on historic volatilities, and based on what represents fair value.

Tim Mendelssohn:

To Gordon's point around what that means, from a price perspective. With the top of the podcast you mentioned, Brent strength, if you are indexing something and a component of that is linked to fuel and therefore highly correlated with Brent and there's a disconnect between Brent and LNG which we've seen increasingly I think in the old days, there was a much higher correlation now it's much weaker, then you're either overstating or understating depending on the difference between Brent and LNG, your fuel on the shipping leg on a rate that's $20,000 a day. There's a difference in $10,000. So that's a huge difference on percentage terms to your underlying assessment, just by making the simple decision between do you choose LNG or do you choose fuel oil.

Josh King:

After the break. Gordon Bennett, Managing Director of ICE Futures Europe's Utility Markets and Tim Mendelssohn, the managing director at Spark Commodities will drill into the natural gas markets and its role in the energy transition. And that's coming up right after this.

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Josh King:

Welcome back, before the break Gordon Bennett, the managing director of ICE Futures Europe's Utility Markets and Tim Mendelsohn, the managing director at Spark Commodities were discussing ICE's recently launched LNG freight futures that use Spark Commodities assessments as a key milestone for the natural gas markets. Gordon, you often talk about the liberalization of natural gas, how do these new freight contracts fit into that narrative that you've developed?

Gordon Bennett:

I think it provides this sort of turbo boost whereby customers are able to sort of optimize the flow of that virtual plight. Because at the moment they have no tool to do that. And we also talked earlier about the difference in that commodity arbitrage but not being able to take advantage of it, because not having the shipping tons available. So I think that this is an extra turbo boost in terms of the liberalization of the LNG value chain, and see more gas flowing more freely across the globe.

Josh King:

Let's talk a little bit about benchmarks. Gordon, Tim, ICE has a lot of experience and foothold in creating global benchmarks. They ensure both price transparency and also help manage risk. With this mind, what are both ICE and Spark doing to help establish ICE LNG freight futures as a global benchmark?

Tim Mendelssohn:

I mean, I think to begin with, I would say the partnership nature of what we've done is critical. So my job at Spark is to ensure that the index is robust. And it reflects fair value for LNG freight. So we've worked continuously with the market to make sure that we've got a product that does that, and my hope and hopefully, Gordon would say, that's been reflected in the customers feeding back to the exchange to ask for the Spark assessment. So from my side, it's about ensuring that integrity of the assessment, and hopefully on exchange side, and this is where the partnership becomes very powerful. If we can create an index that's trusted with transparency that builds that adoption, and combine that with a rocket fuel the ICE have in terms of the global gas offering, then we can provide a much more robust and liquid assessment for the customers who bought it immediately, they can then manage freight risk more effectively.

Josh King:

A recent report by McKinsey noted that I'm going to quote from it here, wider use of carbon pricing could improve LNG is competitive position compared with coal and oil. Guys, what are your thoughts on this? What role will energy transition play in these contracts their use, and also its evolution?

Gordon Bennett:

When we're talking about energy transition and Paris Agreement and net zero, it is net zero. So I don't think anyone is forecasting gross zero where there are no emissions. It's net zero. So that implies that we will have carbon, it will come from hydrocarbon. And so irrespective of our view of good fuels, bad fuels, hydrocarbons will have to stay in the mix. To get to net zero, you need to you need to remove the impact of it. So that could come in the terms of either nature based offsets, where you're sequestering the carbon or carbon capture technology. We've seen in Europe, there's been a proliferation of coal to natural gas switching. And that's resulted in big reductions in emissions, particularly in the UK where I think sort of we're 40% down on 1990 levels, and that's a lot of that's driven by the decarbonisation of the electricity generation sector. So there's this huge opportunity in Asia to play that again. And so LNG will play a major role, and hopefully decarbonizing the electricity generation sector in Asia with widespread coal to natural gas switching.

Gordon Bennett:

Natural gas does have a challenge because it is a hydrocarbon at the end of the day. And it also has a challenge in terms of methane emissions. But I think the industry is well aware of those challenges. It'll be operationally unacceptable to leak methane or certain levels of methane. And a lot of the majors are already actively dealing with that. You've seen recently there's a lot of announcements in delivering carbon neutral LNG. And it's a relatively new phenomenon, I think that will be increasingly being used to allow people to get to net zero.

Tim Mendelssohn:

The only comment I'd add to that is, and I agree with Gordon's so far is carbon neutral LNG, there's a really growing interest and getting commitment to that. We've launched back in November or early December, what we call Spark neutral, which is targeting specifically the freight component of the carbon, and its index to Spark as well as a UAS as the reference price for carbon. The reason we focused on freight only is, as Gordon says, this is clearly an imperative to do that. And that's probably not going, there's no suggestion that's going anywhere. For us, the challenge was number one from a measurement perspective. And number two, from an economic perspective, the entire value chain within LNG is very difficult to quantify, and economically justify. So in a similar way, that when you fly in, I guess, in the old days, but when used to fly between places, if someone was to ask you to offset, where the fuselage for the plane was created, where the fabric for the seats have come from, and the taxi for the cabin crew to get to the airplane is going to be economically, probably more expensive than the ticket. And it's very, very difficult to quantify.

Tim Mendelssohn:

So what we focused on in the same way as when you fly, you can offset you're essentially the fuel and the transportation cost. We've adopted a similar model, where we help people understand and quantify the carbon for their fleet. We reference new ways as that carbon reference price, because that's the most liquid reference for carbon. And we feel that's got a huge amount of interest in terms of being part of that early stage transition, before we get to the full carbon neutral LNG, which economically seems to be still pretty difficult to justify and from a measurement perspective, difficult to quantify.

Josh King:

Energy Transition is often discussed in the context of alternative sources of energy, meaning ones that have fewer carbon emissions. Tim and Gordon, what are your thoughts on the growth of LNG as a source of power? What role is it going to play in relation to some of the other things that are headline generating such as hydrogen, electricity and batteries?

Gordon Bennett:

People are creating electricity from natural gas today. And it's proven that natural gas emits half the emissions of coal. So that's where LNG and natural gas has a bit of a head start as far as alternative energy usage, whether it's hydrogen, or industrial level battery storage, or carbon capture and storage. These are all sort of largely unproven, they're expensive. It's a little bit unknown in terms of what the future entails. And I suppose a bit like in terms of sort of vaccination rollouts and COVID, you don't just bet on one provider or one technology, you spread it across a Pfizer and Oxford AstraZeneca, a Johnson and Johnson.

Gordon Bennett:

So I think that people, organizations, corporates are going to have to sort of spread their investment across a number of potential solutions to energy transition. But people need to be transitioning now. We can take the risk that these things, they're definitely going to come because they don't really exist today. So we should be taking some of the easier wins and reducing our emissions now through using less carbon intensive fuels and we should take those and put them in the bank whilst building our expertise and reducing the cost of newer technologies, which will compliment us getting to net zero.

Josh King:

Do you think this demand for LNG is going to spread to much broader geographies? How will LNG freight help satisfy that demand if so?

Tim Mendelssohn:

You can see in Southeast Asia, there's more demand centers appearing where you don't have to invest in huge, huge facilities. The LNG provides that optionality, so Myanmar as an example is a recent importer of LNG. That's just a good example of the role that LNG can play. And the connection it has to freight is that you don't have to build a big pipeline, as Gordon says, you've got the virtual pipeline, the LNG freight offers. And that's what means the LNG gives you we come back to the beginning of the conversation, that optionality. So I think as long as, as Gordon said on the previous piece, I think it's going to be a combination of lots of different approaches, it's not going to be one commodity, or one piece of technology that rules.

Josh King:

As we wrap up. One of the other big trends and key issues you can highlight from your different locations. Tim, both in Singapore and Gordon in the UK.

Gordon Bennett:

Well, we've spent the last few minutes covering it. I think carbon pricing is critical. Every ICE Futures Europe board meeting I started with, I always start off with carbon as the world's most important commodity. There's not that many people have really been subject to carbon pricing carbonomics. I thought that was weird in the beginning. But then if I think about a bit of slow thinking, it's quite smoke constituency based of being subject to carbonomics is really the electricity generation sector in Europe that has been dealing with this for 10, 15 years. The European ETS has been a great success story in decarbonisation, so one of our challenges is to make more people aware of the importance of carbon pricing and make people aware of cap and trade as a policy tool. You hear people talking about, oh, we need that carbon pricing in the US. And I actually go, oh, there's two. There's EGGI and the CCA. So there's a big educational and advocacy role to play for us to basically let people learn from our experience operating a carbon market and putting a price on the externality of emissions.

Josh King:

Tim, Spark is only two years old now, how is the firm given that going to continue to evolve? Do have any upcoming projects that you can share with us?

Tim Mendelssohn:

We've got some really interesting things in the pipeline, I think, what I'd say is the first thing we have to do for those to become very interesting is execute on our futures contracts with haste. So the focus now is on delivering LNG freight and giving our customers liquidity. We have different avenues we're pursuing and related commodities and in the LNG space.

Josh King:

And Gordon, now this brings us to the conclusion of your second appearance on our podcast and the first, we talked extensively about carbonomics. And today, we've dive deep into LNG freight futures. For appearance number three, whenever that comes, what do you have in the pipeline for us?

Gordon Bennett:

So rolling on from the educational component, I think. Another story I'd like to get into is really talking about the power of financial markets for stock, not just carbon markets, but how financial markets and being able to value stuff is integral to the real economy. Transferring risk, and allocating capital comes from value and whether it's our derivative markets, or our stock exchanges, that we're giving people, we're telling people where value is and allowing them to sort of manage their risks, move their earnings, raise capital and grow their businesses. So I'd love to talk about that in the future.

Josh King:

The unending search for value, Gordon, it sounds like a fascinating topic. We will put it into the production pipeline for now. It was a pleasure gentlemen, both to have you inside the ICE House. Thanks so much for joining us for this hour to talk about LNG freight futures. Thanks very much.

Gordon Bennett:

Thanks, Josh. Thanks, Tim.

Tim Mendelssohn:

Thanks, Josh. Thanks Gordon.

Josh King:

And that's our conversation for this week. Our guests were Tim Mendelsohn, Managing Director at Spark Commodities and Gordon Bennett, Managing Director of utility markets at ICE. If you liked what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a question, or comment you'd like one of our experts to tackle in a future show, email us at [email protected] or tweet at us @ICEHousePodcast. Our show this week was produced by Veronica Slomka and Leah Holmes, with production assistants from Pete Asch and Ian Wolff. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening, and we will talk to you next week.

Speaker 1:

Information contained in this podcast was obtained in part from publicly available sources and not independently verified, neither ICE nor his affiliates make any representations or warranties, expressed or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security or recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.

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Information contained in this podcast was obtained in part from publicly available sources, and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice.