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China pumps cash into African FLNG projects

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LNG Industry,

Reuters are reporting that China is planning to pump almost US$7 billion into FLNG projects in Africa, betting on a largely untested technology in the hope that energy markets will recover by the time they start production in the early 2020s.

Western banks are wary due to the depressed state of the shipping and gas markets, as well as the technical difficulties of pumping gas extracted from below the ocean floor, chilling it into liquid form on a floating platform and transferring it into tankers for export.

China, however, is making a strategic push into FLNG, aiming to become the lowest cost seller of the complex floating plants and lead the global rollout of a technique that remains in its infancy, with only one project in commercial production so far.

The country needs gas as a cleaner alternative to coal under a drive to improve air quality in its cities, and has already lent US$12 billion to Russia's conventional Yamal LNG project in the Arctic as US sanctions scared away Western banks.

It has also lent or committed almost US$4 billion to three FLNG schemes off the African coast. In two more African projects costing a total of US$3 billion, it plans not only to provide the funding, but also build the production platforms.

FLNG is attractive to resource-rich but debt-burdened African countries. Projects can sail into place, drop anchor, and begin exporting for much less than the cost of onshore plants, the price of which quadrupled in the decade to 2013.

That, at least, is the theory. The reality is that the technology remains complex. Royal Dutch Shell's mammoth Prelude FLNG plant, for example will be aboard the world's biggest floating structure, but must squeeze the equipment into a quarter of the space occupied by an LNG plant on dry land.

The US$12.6 billion Prelude project, which is due to start operating off Australia in 2018, is typical of those conceived during the era of high energy prices. However, spot LNG prices have fallen 70% since early 2014 and are expected to remain under pressure or drop further due to extra supply from new conventional plants in Australia and the US.

Despite this, some producers and buyers are banking on the glut ending early in the next decade, although they don't want to lock themselves into big projects, preferring smaller, more flexible ones like in Africa.

The only operational FLNG project launched in Malaysia last year, with construction of the floating platform costing around US$1.6 – 1.7 billion. Bankers say this is still too expensive and if the Chinese can build one for US$1 billion, they would corner the market.

With new investments in costly conventional LNG plants on hold, the only two production projects to advance this year are floating types, in Mozambique and Equatorial Guinea. Both are largely backed by Chinese loans although the platforms are being built by more established Asian shipyards.

Dutch offshore engineer SBM and JGC of Japan will partner with the Chinese players, including China Offshore Oil Engineering & Construction Ltd.

Last year, China's Wison Offshore & Marine completed the first-ever FLNG ship but it remains unused following the cancellation of a project in Colombia it was intended for.

As typical Western sources of funding have slowed due to the weak state of the shipping business, highly-capitalised Chinese players believe the market has reached the bottom and are keen to step up lending before the cycle turns and pushes up costs.

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