Making the FLNG numbers work

Industry experts gathered in Houston late last year to discuss the future of floating LNG. Jennifer Pallanich joined them.

A supply glut stemming from a wave of project sanctions between 2003 and 2005 followed by the North American shale revolution means there is a potential for supply surplus through 2013 at a minimum. That was the verdict of Howard Rogers, a senior research fellow at the Oxford Institute for Energy Studies, addressing December's Floating LNG 2010 conference in Houston.

'In short, new LNG projects are not likely to be viable at current UK and US prices, but the long term isn't necessarily going to be like this.' There is a possibility, Rogers added, that shale gas will keep North America functioning as an 'island' that doesn't need to import LNG.

There are ways to overcome oversupply, as Michelle Michot Foss, chief energy economist and head of the center for energy economics at University of Texas at Austin's bureau of economic geology, pointed out. 'The best cure for cheap gas is cheap gas. You work off the surplus eventually.'

Fred Venner, EOR Ruhrgas VP of LNG marine operations, asked: 'Is the world ready for a floating LNG project? Right now the world is awash with LNG. Floating LNG will only come to fruition when you can make the numbers work against gas.' He noted differences between offshore LNG and offshore oil. 'There are very few people who understand LNG in the marine environment,' Venner said. 'Can we really marinize a liquefaction plant that will work properly for a long period of time?'

The fundamentals of FLNG's future come down to supply and demand, of course. 'How should we think about [the FLNG] market in a world where other unconventional resources are going to come online?' wondered Douglas Westwood MD Steven Kopits. He balanced that against the observation that 'the demand coming out of China isn't just large. It's enormous.'

While China is sensitive to securing access to energy, 'if oil is affordable, demand is to all intents and purposes, unlimited', Kopits added.

During nine months of the global oil recession, oil consumption in the US dropped by 2 million b/d. Historically, Kopits observed, 'We get oil shocks then we get recessions. We have two choices going forward: we either have high prices that impede economic growth or we have recessions.' With the recent oil shocks, Kopits noted, natural gas emerged victorious. 'When any commodity is expensive, we will switch to the next closest alternative. When oil is expensive, that alternative is natural gas.'

Another oil shock is expected in 2014, he said, adding: 'Floating LNG becomes more interesting when we think about it as an oil substitute rather than something that's going to have to compete against coal in China.' Peak oil and economic growth would drive demand for natural gas, he predicted.

Douglas Westwood's World FLNG Market Report 2011-2017 anticipates $23 billion being spent on FLNG terminals over that period – $5.3 billion in Australia, $5.2 billion in Africa, $4.7 billion in Asia, and the remaining $7.8 billion in the rest of the world. Gas is 'not going to be a side show, it's going to be the central show', Kopits declared. 'It's not the bridge to somewhere, it's the next thing.'

FLNG's appeal, he said, includes the ability to monetize small and stranded gas fields, reduces gas flaring, and avoidance of the 'not in my back yard' issues. However, some technology challenges had still to be overcome, for example slosh-resistant containment systems, cryogenic offloading, and marinization of liquefaction process equipment, and there is also a question of scale, Kopits added.

However, Phillip Cox, offshore LNG business development manager for Technip, countered that the necessary technologies are either being finalized or refined. 'The building blocks are all there,' he said. 'It's all coming together.'

According to Øivin Iversen, Hoegh LNG's VP for the LNG FPSO business area: 'Floating LNG is not about putting an onshore plant on a floater. It would be nice, but it's not.' FLNG must cater to variable inlet conditions and ship motions, changes in composition, safety in layout and minimum hydrocarbon inventory, maintenance without long shutdown periods and logistic challenges, he said.

'There is nothing in the LNG industry that has been a standard LNG project,' said Philip Fjeld, CEO of Flex LNG. 'Whether it floats or is onshore, it needs to be managed accordingly.' FLNGs had at least one advantage over onshore plants, he argued: they are redeployable. 'You cannot redeploy concrete that you've poured into the ground,' Fjeld said. New land-based LNG plants are considerably more expensive than new FLNG plants, according to numbers released by Worley Parsons, he added.

Flex LNG and Samsung Heavy Industries have been working together to develop an LNG FPSO. An Asian national oil company had been in talks with the pair to join a floating liquefaction project, but those discussions ceased in early November (OE December 2010).

FLNG 'is going to come', said Rudolf Huber, head of business development at Econgas, 'but I don't think it's going to be the bonanza everybody thinks it will be'. He wondered whether unconventional gas would prevent FLNG from flourishing. He also had reservations from a financial standpoint: some FLNG projects are 'working like space shuttles', he said. 'They are self-contained. Engineers will find a solution. The problem is cost.'

SBM Offshore business development manager Harke Meek thought 2tcf proven reserves was about the minimum reserves necessary for an FLNG project. 'I think if you get below 1.5tcf proven in the ground, it will be very, very challenging,' Meek said.

The FLNG trick, Meek explained, is to 'marry two completely different industries into one' – combining offshore oil and onshore LNG to get an LNG FPSO. SBM is focusing on medium-sized LNG FPSOs, which are within the proven range of oil FPSOs but are expected to be economic, he said. An extra-large LNG FPSO is beyond the proven oil FPSO size and a smaller LNG FPSO may not be economically feasible, he added.

Wood Mackenzie's senior analyst for global LNG research, Asish Mohanty, described as 'do-able' FLNG projects that involve 0.5tcf to 3tcf of reserves that are far from land, clean gas with limited or no non-hydrocarbon gases, and have a simple ownership structure, host government backing, and significant liquids for revenue support (or no liquids to avoid liquids processing facility cost).

'I don't think there's any project that satisfies all of these completely,' Mohanty said. However, there are about 400 stranded gas field discoveries that could have the potential to be developed with FLNG on a range from small scale to large scale, he noted.

Western Australian FLNG projects already under consideration include Shell's Prelude (3.3tcf), Woodside's Greater Sunrise (5.1tcf), and Inpex's Abadi field (5tcf-14tcf). Prelude, with an anticipated life of at least 20 years, 'is on poll position', Mohanty said, pointing out that environmental approval came through in November and completion of the project's 18-month FEED was imminent.

Another possible FLNG project, this time offshore Brazil, is being considered by a Petrobras-led consortium which includes BG Group, Galp Energia and Repsol. FLNG is among the development options they have under review for some 18.4tcf of pre-salt gas reserves in several Santos Basin fields. An investment decision was expected last month.

But in addition to the twin technological challenges of deepwater and pre-salt development, this project could also pose an economic challenge, Mohanty noted, as Atlantic Basin LNG prices have been low compared with the Asian markets. OE

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