Lower prices, weak demand and competition from vast onshore shale plays helped put a damper on offshore liquefied natural gas terminal projects in the Gulf of Mexico. Russell McCulley talks to companies that are bucking the trend and pushing through with plans for deepwater LNG ports.
Not so long ago, when the world economy was humming and growing energy demand seemed assured, there was considerable interest in the US for the installation of liquefied natural gas (LNG) terminals off the nation's coast. Yet to date, only two have been built – Excelerate Energy's Northeast Gateway, offshore Boston, and its Gulf Gateway Energy Bridge (OE April 2005), a submerged turret loading buoy system offshore Louisiana, which is operational but not in use – while Suez LNG's Neptune project ten miles off the coast of Massachusetts is nearing completion. In all, the US Maritime Administration, also known as MARAD, has approved eight of 16 applications for deepwater LNG offshore port licenses. Prospects appear to have dimmed, however, as a number of operators have withdrawn plans for LNG terminals or put them on indefinite hold.
Shell subsidiary Gulf Landing last year surrendered a deepwater port license for a proposed gravity-based structure offshore Louisiana; Freeport McMoRan's application for the Main Pass Energy Hub has been held up because of financing issues; Chevron pulled out of the planned Port Pelican deepwater port in 2005, opting instead to increase its capacity at Cheniere Energy's onshore Sabine Pass LNG terminal from 700mmcf/d to 1bcf/d.
Also in 2005, ExxonMobil withdrew its application for the proposed Pearl Crossing facility offshore Louisiana; the following year, ConocoPhillips formally bowed out of the Beacon Port project offshore Louisiana and the Compass Port proposal off the coast of Mississippi and Alabama.
Not coincidentally, enthusiasm for expanded LNG importing capacity cooled about the same time that US shale gas plays, and the technology necessary to exploit them, began to heat up, raising the prospect of large domestic reserves. A tanking world economy further complicated the financial case to be made for offshore LNG ports. Gulf Gateway, completed in 2005 with a peak capacity of 690mmcf/d, has been dormant since Hurricane Ike damaged the offshore pipeline infrastructure in 2008. Excelerate senior VP operations Capt Mark Lane says 'better market access into the domestic natural gas distribution system' through the Northeast Gateway terminal was also a factor in the company's decision to let the Gulf of Mexico installation remain inactive for now.
But two operators are proceeding with plans to establish LNG terminals in the Gulf of Mexico. Port Dolphin Energy, a subsidiary of Heogh LNG of Norway, received final permission late last year to establish an import facility 28 miles offshore Tampa, Florida. And an application is pending for the Bienville Offshore Energy Terminal, a regasification facility off the coast of Alabama. Bienville is a project of Torp Terminal, a subsidiary of privately held Norwegian company Torp LNG, which is also developing a receiving terminal offshore Italy.
Torp's proposal includes a floating regasification unit using a closed-loop ambient air vaporization system located 63 miles offshore Alabama in about 450ft of water. For offloading, the terminal will use the HiLoad terminal, an unmanned floating 'forklift' with three thrusters that can attach to the bottom and side of an LNG carrier. The technology was originally developed by Remora, which like Torp is part of the Norwegian Hitec Industries group.
Torp had initially proposed an 'open loop' regasification system for the Bienville project, but withdrew the license application in October 2008 after Alabama governor Bob Riley and activists voiced concerns about the technology's possible adverse environmental effects. The company resubmitted the application last year with blueprints for a completely floating system featuring closed loop vaporization technology. Torp Terminal CEO Joe Berno says the final hearing for the permit process should take place early this year; the company hopes to have a record of decision in hand by mid-summer and will then spend a year or more lining up financing and contracts before construction begins in 2012. According to Berno, the facility could be operational as early as 2014.
Engineers spent more than six months on the new design, Berno says, and came up with an ambient air system that includes 'an array of forced-draft ambient air vaporizers on a floating offshore vessel' to be moored at Bienville. The new design let Torp avoid 'the conventionally submerged combustion vaporizers, where you're just burning gas to provide heat,' he says. The floating regasification unit (FRU) will be anchored to the seabed via a detachable turret mooring system, and will serve as a metering station as well as provide electrical power, utilities, safety equipment and crew quarters. Torp expects Bienville to have the capacity to process 1.4bcf/d.
Berno points out the company is also proposing an alternative method of regasification that would bypass the need to circulate intermediate fluid between the FRU and the HiLoad. 'When there's an available flexible cryogenic hose, we would simply move the LNG straight from the LNG carrier over to the ambient air vaporizers, and rather than circulate an intermediate fluid through those we'd circulate the LNG and re-gas it at those vaporizers,' he explains. 'It would be a more efficient operation, and more simple because you'd eliminate one set of hoses and reduce the size of the vaporizers required, because it would be a direct vaporization instead of an indirect one.'
An offshore terminal allows a number of advantages, he says, including easy access for large LNG carriers and less regulatory hurdles than bringing a carrier into port. There's also the permitting issue: getting new permits for onshore terminals is increasingly difficult on the Gulf Coast, particularly in places like Alabama that have limited shoreline, much of which is off-limits to development. Environmentalists have also raised concerns about the safety of LNG operations. 'Any time you do something onshore you run into that Nimby issue: not in my back yard,' Berno says. 'It's comforting to say I'm 63 miles offshore and not along the coastline, five or ten miles from your community.'
Torp is targeting Alabama and neighboring Gulf Coast states as its primary market, he says. But the Mobile Bay location gives the project access to an extensive network of pipelines that can get gas to markets throughout the US, including Florida, where gas-fueled electricity demands are expected to rise over the coming years.
That demand growth is behind the Port Dolphin project, which cleared a key federal regulatory hurdle last October with the signing of a record of decision on its deepwater port license application, paving the way for the installation of a deepwater LNG port offshore Tampa Bay. The project, which has the backing of Florida governor Charlie Crist, will have a peak capacity of 1.2bcf/d: enough gas, the developers say, to meet 15% of the state's energy demand. Hoegh has scheduled construction to begin in 2012 and hopes to have the port operational the following year; at the start, Port Dolphin officials say daily throughput will be 400mmcf/d and ramp up to a daily average of double that figure.
The port will be set up to temporarily moor two shuttle and regasification vessels (SRVs) using a submerged turret loading system with buoys located about three miles apart. Last November Hoegh took delivery of the SRV GDF Suez Neptune from Samsung Heavy industries and the company has another SRV, the Suez Cape Ann, scheduled for delivery in 2Q 2010 from the same shipyard; both were built specifically for work at the Neptune LNG port in Massachusetts Bay, and Port Dolphin has indicated that two or more newbuild SRVs could be added to the fleet to serve the Florida site.
Port Dolphin Energy's project development manager German Castro says Hoegh's LNG vessels, originally designed to meet Massachusetts' stringent environmental rules, can connect to the buoys in wave heights of up to 12ft and, once connected, can send out product in wave heights of up to 38ft, 'which in the Gulf of Mexico, you're not going to see'. In the event of severe tropical weather – a persistent concern in the region – the buoys can be submerged and the vessels removed to safe harbor.
One of the project's biggest challenges, Castro says, was finding the right spot for the project in the gently sloping Gulf. 'The buoy technology needs to be placed in at least 100ft water depth,' he says. 'Finding that perfect spot required some intensive research and investigation on our side. We ended up choosing a location that is 28 miles south-southwest off the mouth of Tampa Bay. It's perfect for our purposes, and at the same time works very well for minimizing risk concerns related to this type of project.'
Port Dolphin ran into a few snags getting permission to run a 36in gas transmission line from a Y connecting the two buoys to onshore pipelines that would tie in to the Gulfstream Natural Gas System and Tampa Electric Company. The company submitted two separate proposals to modify the pipeline route before clearing the environmental impact phase: the first to ensure that the project avoided an aquatic preserve, and the second in response to concerns over the possible loss of beach-quality sand resources.
A bigger hurdle, perhaps, is finding a market for LNG in the midst of economic turmoil. Castro says Hoegh 'investigated many places on the east coast of the US' and chose Florida because the state has no indigenous gas production to speak of, is in the process of converting from coal to cleaner power generation and is expecting significant population growth in coming years. 'A solution like this adds plenty of reliability and flexibility to power generators in this area,' he says.
With the record of decision in hand, Port Dolphin recently released a marketing prospectus seeking contracts with upstream gas companies. But the company has 'no ambition to participate in the gas transaction,' says Castro. 'That is not our business. Having said that, we are a company with a very industrious outlook, and we have a mandate from our upper management and our board to bring the two or three projects we have on the table to fruition before we move on to other initiatives.'
Any new LNG terminal project in the Gulf of Mexico faces economic hurdles in the current climate, says Rafael McDonald, associate director, global gas for IHS Cambridge Energy Research Associates (IHS Cera). 'A lot of these projects look pretty good on paper, but you have to compare that with land-based [terminals], which are already existing,' he says. 'Obviously the first question that comes to mind is, is it going to be needed?' Developers can provide the cost of constructing such a project, he says. 'But in calculating things like rate of return, you have to make assumptions about the throughput. And that's where it gets really tricky. Most of our calculations, we do it assuming 100% throughput just so we can keep it constant throughout. But if you're making money on a dollarsper- mmbtu basis, and you're not sending many mmbtu's through, it's not going to be an economic project.'
Offshore installations, because they usually have lower up-front capex costs than land-based terminals and are not as dependent on high throughput rates, can make sense in places where demand is 'extremely seasonal,' McDonald says. That could play well in warm Florida, where energy demand peaks in summer, unlike colder states that see demand rise in winter.
But 'events of the last two years, specifically shale gas developments, have certainly dampened our forecasts for regas utilization in the United States as a whole,' he says. 'Our outlook is slightly darker than it was a couple of years ago.' Excess gas capacity in the Gulf of Mexico region has scuttled many LNG projects that seemed assured a few years ago, he says. 'When some of these were proposed, even three, four, five, six years ago, we were up in arms – the US is going to need LNG! The US is going to need LNG! And I think it's safe to say that now the US does not necessarily need it. It might still get it, but it doesn't need it. That's with our assumptions, again, that shale gas doesn't get majorly derailed. Even if shale gas slows down, you're still not going to need LNG in the sense that the market was thinking five years ago.
'So I think for future projects, what they have to look at is, there's already a substantial amount of existing capacity that somebody could use,' McDonald notes. 'So if they're going to start construction and put a bunch of money into an offshore regas facility, they have to have a good idea of where they're taking that business away from.'
Florida has become a focus for gas producers in recent years, with many operators in the shale plays looking for ways to get product to the Mobile Bay area, where it can easily be transported via existing pipelines to utilities in Florida, says Ken Medlock, a fellow in energy and resource economics at Rice University's James A Baker III Institute for Public Policy. 'There have been several proposals in the Mobile Bay-Pascagoula area,' he says. 'A lot of that stuff that's targeting Alabama and Mississippi has the Florida market in mind. And one of the nice things that can be said about Florida – if you need to deliver gas in summer, you need to find a market that rises in summer.'
Energy-gobbling industries along the Gulf Coast have traditionally relied on offshore Gulf of Mexico production, which has been in decline, Medlock says. 'That makes that area hungry for imported sources,' he says. 'Now that could be imported from a neighboring state, or it could be imported from an international location via LNG. But the bottom line is if those industries are going to continue to thrive there, they are going to have to find sources of supply that are not native to that area.'
Nevertheless, he says, 'over the next ten to 15 years, I don't see a whole lot of opportunity in terms of strong load factors on [LNG terminals]. I say that because, if you do start to see a need to grow LNG imports, there's a ton of unused capacity on the Gulf Coast already. It is a very physically liquid market' – if you can get gas to the pipeline infrastructure, no matter what type it is or where it came from, it can be transported to just about anywhere in the region. Beyond the next decade or so, he says, 'a lot depends on what happens on the regulatory side. If we see really strong carbon abatement policies adopted, then you could see natural gas demand take a really strong move up. That could actually open the door for some new developments.'
LNG importers' 'best hope', according to Medlock, 'is that the coal lobby is successful only to the point that they don't see their industry shrink, and kind of hold their breath that no carbon sequestration technology is proved to be viable and competitive. Because if it is, then coal will grow, and that's at the expense of everything else.'
Market conditions, as the past couple of years have shown, can change quickly, and in unexpected ways; offshore LNG could be in for a long slog, or the companies pushing ahead with plans in the Gulf of Mexico could be rewarded for their persistence.
Torp Terminal's Berno says the focus on greenhouse gas reduction 'bodes well for LNG': the technological challenges are not as great as wind, solar or nuclear power, and the resource is abundant. And it's crucial for producers to have a range of markets, including the Gulf Coast, he says.
'LNG is one of these things that's produced on a regular basis; you always have to find a home for it, it's not turned off, so [operators] look around the world and see where's the best place to go. The US because of its infrastructure and storage opportunities, is always a market that's open.' OE