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Floating LNG market rises as technology develops

As technology develops, floating liquefaction and regasification spending is set soar, say Steve Robertson and Lucy Miller of Douglas-Westwood

For many decades the prospect of floating liquefaction and regasification has been touted as a solution to developing offshore gas discoveries where onshore options are not available or feasible.

And the floating liquefied natural gas (FLNG) industry has taken major strides in recent years. Technical concepts have been put into development and some major milestones have been passed, including the installation of the floating regasification terminals and sanctioning of multi-billion dollar floating liquefaction projects.

In this article, Douglas Westward presents an overview of the current state-of-play in the industry, including some of the commercial challenges that developers face in the successful deployment of FLNG vessels.

It is important to note that at present there is no industry standard definition of FLNG. Many sources that refer to FLNG simply mean LNG floating production, storage and offloading (FPSO) vessels.

We include both floating liquefaction and regasification in our consideration of the industry, defined as followed:

Floating liquefaction – a specialised FPSO vessel with LNG liquefaction topsides (LNG FPSO). Other hull types such as semi-submersibles and spars have also been suggested.

Floating regasification – this takes place on a vessel either moored offshore or in port. There are two main types of floating regasification vessels – floating storage and regasification units (FSRUs) which remain stationary on location or regasification vessels (RVs) which can also act as LNG carriers.

Developers active in the FLNG business range from integrated majors such as Shell to smaller independent technology-focused and lease contracting companies such as Norway’s Höegh LNG and Dutch firm, SBM Offshore.

The key drivers of the floating liquefaction sector are the desire to monetise stranded offshore gas fields and the relative costs of an onshore liquefaction terminal. A modular design allows the FLNG vessel to be built in lower cost environments then towed to location.

Positioning the liquefaction facility offshore at the field location reduces the requirements for costly port infrastructure and long pipelines to shore which would be required for an onshore development.

While principally aimed at offshore gas reserves, floating liquefaction has also been considered for onshore fields, with projects in Papua New Guinea and Western Canada in development.

Many systems on a floating liquefaction vessel will be the same or similar to those used on conventional oil producing FPSOs. Specialised equipment, though, has to be designed or adapted specifically for these vessels including:

a) The insulated storage tanks, which need to utilise a specialised LNG containment system that is sloshing resistant.

b) Topsides modules that include gas pre-treatment and liquefaction processing equipment.

c) Offloading systems that can operate safely and efficiently in difficult sea conditions.

Operator-owned developments

Shell is currently developing two floating liquefaction design concepts, a large-scale generic facility which is expected to be able to produce around 3.6 million tonnes a year (t/y) of LNG and a smaller facility with a capacity of around 2m t/y.

In July 2009 it was announced that South Korea’s Samsung Heavy and France’s Technip had won the contract to design and construct up to ten of Shell’s 3.6m t/y units, the first of which will be used off Australia from 2017 on the Prelude development. Other possible locations for both sized vessels include Egypt, West or East Africa, Indonesia, Iraq and Venezuela.

Malaysia’s Petronas has also progressed to the final investment decision (FID) stage on the Kanowit Kumong project. This will see a small unit of 1.2m t/y capacity installed offshore Malaysia in 2016.

Under Prelude’s business model the feedstock owner, Shell, will operate the floating liquefaction vessel and be responsible for any contractual arrangements with offtakers. While this is likely to form the business model for large integrated companies such as Shell, other operators are looking to leasing in order to reduce their risk.

Under the leasing model, the owner of the LNG FPSO does not own any rights to the feed gas or the LNG as it is processed, liquefied and stored. Instead, the leasing contractor receives a fee for providing the vessel and services.

Leasing is extremely common in the conventional oil FPSO sector and there is considerable scope for crossover within the FPSO and floating liquefaction leasing sectors. Companies involved in both sectors include Höegh, SBM Offshore and US company Teekay. Leasing offers a number of benefits and provides access to FPSO LNG solutions for smaller national oil companies (NOCs) and independent operators.

In terms of technical specification, leased LNG FPSO designs typically differ from owned units in the following ways:

• Smaller physical size and lower capital cost;

• Smaller liquefaction capacity – most of the designs range between 2m and 3m t/y. This compares to Prelude’s 3.6m t/y of LNG, plus condensate and liquefied petroleum gas (LPG); and

• Simpler liquefaction technology – nitrogen expander or single mixed refrigerant compared to Shell’s double mixed refrigerant.

Höegh, SBM & Excelerate have completed conceptual and pre-front end engineering and design (FEED) for a variety of different scenarios and are now progressing with specific projects. Other companies such as Flex LNG, Japan’s MODEC and Teekay have yet to begin specific project-related engineering studies or have seen previous projects stall and are looking for alternative deployments.

Floating regasification vessels are the most developed form of floating LNG system and there are currently nine such facilities in operation worldwide. These are located in Argentina, Brazil, Dubai, Kuwait, the UK and the US.

Floating regasification is proving popular with LNG developers for the following reasons:

• Shorter lead times – The construction times for floating regasification vessels are considerably shorter than for onshore terminals;

• Temporary fixtures – Floating regasification vessels can be used as temporary terminals, either as an initial phase before the start-up of an onshore terminal or for periods of peak demand. These vessels can be easily moved from one location to another; and

• Cost – For small to medium sized volumes, floating terminals are often cheaper than the equivalent onshore development.

The floating regasification market is set to increase rapidly over the next decade as more countries utilise the technology. The cost and construction time advantages are proving alluring even in countries such as India and China, which have traditionally favoured onshore development solutions.

Indonesia, with its stranded gas fields and rapidly growing cities, is a focus for both floating liquefaction and regasification terminals.

The FLNG industry has demonstrated technical solutions to the challenges of taking liquefaction offshore. However, some hurdles remain for FLNG developers.

Capital cost of LNG developments in general (onshore and offshore) are such that financing requires long-term sales and purchase agreements for the LNG to be in place over a period of typically 15-20 years.

The complexity of arranging the supply chain of upstream field owner, facilities owner, shipping, regasification and end user is significant and eased considerably for those operators that are vertically integrated and can exert control over each of these elements to see a project through to the FID stage.

However, the smaller developments featuring a mix of independent oil and gas companies, FLNG leasing contractors, shipping companies, and utilities are typically more complex given the larger group of companies involved.

Furthermore, project financing becomes a challenge for lease contractors. While some oil FPSOs may cost over a billion dollars, most will typically require financing of several hundred million dollars. In contrast, FLNG vessels may cost $2bn to $3bn, which presents a major financing challenge even for the largest lease contractors.

At present, of 12 key visible projects on the immediate horizon for development, five are expected to feature leased units.

Market forecast

The global FLNG market currently only consists of import terminals.This is expected to change over the next seven years. As capital expenditure (capex) associated with a floating liquefaction vessel is more than triple that of a typical floating import terminal, liquefaction vessels are expected to dominate global spending of $29bn forecast over the 2012 to 2018 period.

Asia, which is a focus area for both floating liquefaction and regasification, is expected to account for a third of the forecast capex. There are two key floating liquefaction projects in Asia – Petronas FLNG and Inpex Abadi development located offshore Indonesia.

Many Asian countries are considering floating regasification vessels in order to import gas to rapidly growing cities. Even China, which has traditionally advocated onshore terminals, is considering positioning a series of vessels along its coastline. Future floating regasification capex from this region is likely to come from countries such as Bangladesh, China, India, Indonesia, Pakistan and Vietnam.

Australasia became the first region in the world with an approved FLNG liquefaction project after Shell sanctioned the Prelude FLNG project. Offshore gas fields and deep subsea trenches such as the Timor Sea Trench make this region a key focus area for floating liquefaction project developers.

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