Prelude to a floating future

This year, we witnessed a landmark for the LNG industry in May when Shell sanctioned the Prelude project, which is set to become the world’s first floating liquefaction, storage and offloading (FSPO) or FLNG vessel.

The facility will be located in the Browse Basin, off Western Australia, and will have a capacity of 3.6 million tpy of LNG, 1.3 million tpy of condensate and 0.4 million tpy of liquid petroleum gas (LPG). Feed gas will be sourced from a number of Shell operated fields in the area.

Project risks

Prelude is the industry’s first venture in FLNG, and risks and uncertainties remain due to the unproven nature of the technology. Shell has been working on an FLNG concept for many years and will have addressed these concerns.

The untested technology means the risk of cost and schedule overruns is high. In any groundbreaking project of this nature, there are likely to be unforeseen costs. While Shell has taken the necessary steps to lock in known component costs at fixed prices, it is likely to have set aside a large contingency budget.

Project economics could be affected by the introduction of carbon tax legislation, which has been long-considered by Australian legislators. Shell is due to submit its CO₂ management plan to government a year before first production, but the authorities are aware of Shell’s plans and its approval is anticipated.

Why is Prelude the first FLNG project?

Shell sponsorship

Shell has an appetite for groundbreaking technology development. Since 2009, Shell has commissioned the Sakhalin-2 LNG project in Eastern Russia and the Pearl gas-to-liquid (GTL) project in Qatar. Sakhalin-2 was an unparalleled offshore upstream development in Arctic conditions, whilst Pearl GTL is by far the largest GTL project ever developed. Prelude is another opportunity for Shell to pioneer new technology. 

Shell has used its global traded LNG portfolio to back up marketing of Prelude; Shell Eastern Trading has signed two marketing agreements. Shell’s portfolio allows it to utilise LNG from other sources should the project be impacted by delivery delays. This provides reassurance to customers who would otherwise be concerned with project setbacks, and allows Shell to command a market price for LNG from the project.

Shell is able to provide finance and insurance for the project internally. It does not rely on international markets where the risk premiums for an FLNG development are considerable.

Field characteristics and location

Prelude is an ideal candidate for FLNG. The field is too small and too far offshore to be developed as a standalone development, and has substantial associated liquids reserves.

One of the key challenges of FLNG is developing a safe and reliable offshore loading system. Marine conditions complicate offloading due to safety concerns in having two vessels in close proximity. The good metocean conditions in the Timor Sea limit facility downtime, and offloading should be possible and safe for most of the year.

Project risks are mitigated by the attractive investment climate, and government support for the industry in Australia. Australia’s location in the Pacific Basin is a further advantage, providing access to the premium North Asian LNG market.

Implications of Prelude FID

Benefits for Shell

Shell has several strategic motivations for pursuing Prelude FLNG and underwriting the project’s considerable risk. From a corporate perspective, it fits with its strategy of firming up a new wave of greenfield investment opportunities to build on strong near term growth.

It will also provide it with a first mover advantage for future FLNG development opportunities and accelerate development of its own, smaller, stranded gas fields. Shell has designed its FLNG concept to be easily replicated and has an agreement with shipbuilder Samsung, which provides for up to 10 units over the next 15 years.

A successful development will also help Shell’s business development activities, making it an attractive partner for any company considering FLNG. Indeed, in July this year Inpex announced it was transferring a 30% stake in the Abadi project, in Indonesia, to Shell.

Impact on other FLNG proposals

FLNG production has long been talked about, but it has struggled to move to implementation. With the first project sanctioned, will other projects now move ahead? We are still at least five years away from Prelude proving the FLNG concept. But the fact that FID has been taken by a company with Shell’s reputation and track record provides a boost for other FLNG proposals.

Brazil’s pre-salt Santos Basin is another front runner for FLNG. Petrobras, and partners BG, Repsol and GALP may yet be the first to put FLNG into production, with their FID provisionally scheduled this year.

Smaller scale FLNG prospects may have to wait longer to obtain backing from LNG offtakers and financiers. Small-scale FLNG has been proposed for a range of projects in Australia, Indonesia, Malaysia, Papua New Guinea and West Africa. However, none have yet been sanctioned.

Wider implications for the LNG industry

The history of LNG has been characterised by ever larger scale projects. FLNG will allow the industry to develop prospects previously thought too small or too remote for LNG.

While FLNG does open new opportunities, it is likely to remain a niche play in the global LNG market over the medium term. Wood Mackenzie’s long term forecast for LNG demand sees FLNG supply accounting for just 2.5% in 2020 and 3.7% in 2025. Under a more optimistic scenario, with the sanction of many of the world’s proposed projects, FLNG supply could account for 5.5% of overall demand in 2020 and 10.2% by 2025.

FLNG offers new opportunities, but is likely to remain a niche play in the global LNG market over the medium term. Ultimately, it could revolutionise the offshore gas industry; transforming exploration and development of gas resources in a similar way to FPSOs in the offshore oil industry. One thing is certain, it will make LNG a still more flexible and responsive business, with an increasingly global reach.

Authors: Andrew Buckland and Giles Farrer, Wood Mackenzie, UK.

www.woodmac.com/floatinglnganalysis

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