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LNG is dead, long live (F)LNG?

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LNG Industry,

Tom Haylock, Aragon, asks whether floating LNG is seeing an opportunity to challenge traditional onshore LNG solutions thanks to the current market situation.

Like the rest of the oil and gas industry, the LNG market has undergone significant upheaval in the last few years. LNG prices are low and the demand growth for LNG is not what it once was. Traditional markets in Asia are saturated and the shale gas revolution has effectively removed the US as a buyer of internationally produced LNG. As of now, there has not been a new country or geographic area which has come forwards to drive future LNG demand as there once was with China and Japan. To make things worse, a significant amount of dormant excess production capacity that is under completion is soon to start up, most noticeably in Australia. Unsurprisingly, the result has been that the number of new final investment decisions (FIDs) for LNG projects has been severely restricted, with the most notable being a brownfield expansion with the additional third train approved for the Tangguh LNG plant in July 2016.

Old Moss carriers present opportunities for fast and cost-effective LNG storage (image courtesy of NYK Line).

Many industry watchers are expecting a dormant period for new liquefaction projects due to the near perfect storm of current low prices, imminent large scale excess capacity and reduced demand growth in traditional markets. It is highly likely that this is true in part, especially for traditional onshore LNG projects. The appetite to approve an FID for new large scale LNG plants is simply not there for the coming short to medium-term. This reluctance is further compounded by the historical challenges of such mega-projects in achieving budgets and schedule targets and the significant ballooning of cost per tonne of LNG produced.

So, should people consider LNG liquefaction projects to be dead for the coming decade?

The simple answer is no, of course not. However, the ability for liquefaction projects to be competitive to enable a successful FID will be a significant challenge for years to come. For any new liquefaction project, the most challenging factors that will dictate successful FID are the same as they always are, but now the margin of error is much smaller:

  • Price and market – Unsurprisingly, project economics are king. The current LNG spot pricing is low and long-term offtake contracts are way below the historical highs of pre-2014 levels. With prices currently at best in the range of US$9/million Btu delivered, a target of as far below US$7/million Btu FOB as possible is required to be profitable in the current market, and even then this level may need to be reduced further to achieve an offtake contract in competition with the excess LNG expected to come onto the market. In addition, finding suitable offtakers for large volumes may be challenging due to the appetites of traditional buyers in Asia being suppressed.
  • Cost-effective solutions – To be able to achieve less than US$7/million Btu, it is necessary to approach liquefaction projects in a new manner. The days of sprawling onshore plants where every system has multiple add on systems for minor efficiency improvements is simply not suitable. What can often be lost in projects is that performance optimisations can often be unjustifiable when considering the CAPEX impact compared to the improvement in production. In terms of what can be justifiable regarding CAPEX expenditure on a project for current market prices, the ceiling is in the range of US$1200/t of LNG produced or less, which is approximately one-third of the rumoured costs for some of the most recent onshore LNG plants. So finding a balance between performance and cost efficiency is now tipped much more towards the cost efficiency side of the scales.
  • Achievable solutions – Even though a solution can appear to be cost-effective on paper, the reality of what is achievable must be taken into account and it will be a focus area for anyone seeking project finance. Mega-projects are difficult to bring in on time and on budget, and even the most proven of organisations find it challenging in traditional onshore liquefaction projects as the boundary conditions, such as available skilled workforce, tax, customs, logistics, infrastructure, weather, timezone, build schedule and constructability, change each time due to project location. The appeal of keeping the project scope manageable and within proven models and capabilities is important. Rather than one single mega-project to produce 6 million tpy or 9 million tpy, why not split it into a two or three-phase project each producing 3 million tpy? This way, execution risk is reduced, first LNG can be achieved earlier and required budget and financing is more achievable. The simple fact is that being able to produce LNG sooner has a larger benefit on project economics compared to having a facility that is a few percent more efficient.

Considering these challenges, what are the likely outcomes? US onshore liquefaction projects are unique in that they may be able to hit these challenges thanks to cheap available gas and developed local skills and infrastructure on their doorstep. However, the distance to market for the East Coast US projects is a challenge as the highest landed LNG price of US$9/million Btu will most likely be in Asia. So even in the US, the traditional model of project may struggle due to shipping costs, as well as longer time to market due to regulatory factors.

Tangguh aerial photo (image courtesy of BP).

Aragon believes, and is seeing in the market, that new and existing projects being considered both from the traditional onshore LNG sector and the newer floating LNG (FLNG) sector for the short to medium-term are consolidating towards applying at shore and nearshore FLNG solutions to make a project economic. As even offshore FLNG is suffering currently due to the additional costs related to subsea and mooring (turrets) making it challenging to hit a competitive price per tonne of LNG.

Applying an at shore or nearshore FLNG solution holds many benefits:

  • The FLNG unit can be fabricated in a controlled environment in existing specialist facilities designed for such work, using proven construction and execution models faster and at a lower risk and cost.
  • There are little or no challenges associated with large scale construction activities at the final location.
  • At and nearshore FLNG solutions have simplified mooring arrangements and do not require subsea systems as they can normally tie into a jetty or pipeline providing gas from onshore.
  • Where suitable, FLNG facilities can be powered from shore, either by existing infrastructure or through a newbuild power plant as a separate integrated power project. This allows improved emissions and use of electric motor drives. It even offsets the use of liquefaction technologies, which are much simpler and cost-effective to apply but may be less efficient.
  • Offloading reliability is much higher when conducting side-by-side transfers and at shore/nearshore allows for offloading via dedicated jetties, reducing the contractual risk for delivering LNG.
  • Both floating and fixed/gravity based solutions can be considered. Gravity based systems such as GravifloatTM can present more cost-effective solutions in many cases, especially compared to onshore LNG.
  • Vessel motions are typically much less severe, or non-existent if using gravity based structures, resulting in lower topsides weight than offshore FLNG.
  • Facility design can be kept within manageable sizes and financeable limits, and simply repeated multiple times to meet the total target production for the location in question.
  • The use of older LNG carriers as FSO/FSUs enables faster and cheaper projects, while suitable LNG carriers are available. Local content requirements can be satisfied through more manageable onshore scopes, from logistics, warehousing and camps through to complete pretreatment facilities as may best fit the project in question.
  • At shore developments allow for less stringent POB requirements as workers and operators are able to live onshore. In addition, evacuation in event of emergency can be simpler.

However, success is not guaranteed by simply applying an at/nearshore FLNG solution, it needs to be the right kind of at/nearshore solution. Too many believe that FLNG is simply putting an onshore plant on a barge or gravity based structure. Aragon’s focus and experience for over a decade as an engineering partner for FLNG value chain projects has shown that this is a fundamentally wrong approach. The wrong approach results in significant cost impacts. A seemingly simple choice between technologies can result in large CAPEX increases for exactly the same production levels. This has been shown by the various projects which have not even made it to FEED level as well as others that have stumbled at or struggle to make FID. What makes it even more challenging is that traditional LNG thinking can often be at odds with the best approach for FLNG. It is only through working with partners who know from experience where the pitfalls are that a cost-effective and pragmatic at/nearshore solution can be developed allowing a project to be realised.

GravifloatTM during installation, well suited for at/nearshore FLNG (image courtesy of Sembcorp Marine).

When done correctly, the cost per tonne of LNG produced by at/nearshore FLNG solutions can achieve the range of US$500/t – US$1000/t LNG produced, something that is almost impossible for most onshore LNG projects. So the current market turmoil really is a strong opportunity for FLNG to show that at/nearshore applications are a real and competitive solution, enabling cost-effective liquefaction and FID to be taken when other approaches cannot.

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