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Oil majors eye $5 billion ships to cut LNG cost

Reuters

Tue Nov 25, 2008 1:13pm EST
By Tom Bergin

 

LONDON (Reuters) – Oil and gas companies are racing to develop a new type of vessel they hope will revolutionize offshore gas production but even if the untested technology works, its deployment could be blocked by resource holders who fear it will undermine development goals.

The industry hopes to build a fleet of ships or barges that can sail or be towed to offshore gas discoveries, extract gas, freeze it to liquefied natural gas (LNG) and offload the LNG to tankers for shipping to lucrative Western and Asian markets.

Anglo-Dutch oil major Royal Dutch Shell Plc (RDSa.L: QuoteProfile,ResearchStock Buzz) is leading the charge but U.S. rivals Exxon Mobil (XOM.N: QuoteProfileResearchStock Buzz) and Chevron (CVX.N:QuoteProfileResearchStock Buzz) and Australia’s Woodside (WPL.AX: QuoteProfileResearchStock Buzz) are also eyeing Floating LNG or FLNG.

Companies hope FLNG will be cheaper than building onshore liquefaction facilties, speed up the time it takes to bring fields onstream, reduce projects’ environmental footprints and make it economic to exploit small and remote offshore deposits.

Such deposits represent over a sixth of global gas reserves, builder Costain, which offers FLNG design services, says on its website.

Producing gas without touching the host nation’s soil would also reduce security risks, which is why Shell wants to use the technology in Iraq — even though the reserves are onshore — and why several players want to use FLNG in Nigeria.

“FLNG has the potential to be a real revolution in the LNG industry,” Stephen Craen, an energy banker at Societe Generale told a conference last month.

FLNG could also be a boon for shipyards and equipment makers because the vessels may be the most expensive ocean-going craft ever built — even costlier than the U.S.’s latest, Nimitz-class aircraft carriers, which cost around $4.5 billion each, according to the U.S. navy’s website.

“There’s a lot of excitement about FLNG at the moment,” Frank Harris head of global LNG at industry consultants Wood Mackenzie, said.

IDEA WHOSE TIME HAS COME?

Plans for FLNG vessels vary from a ship-like design proposed by UK-based startup FlexLNG, that would produce 1.5 million tonnes per annum (tpa), to barge-like structures being pursued by Shell and others, that could produce up to 5 million tpa.

The larger vessels will likely cost about $1,000 per tpa to build, Harris said, suggesting costs of around $5 billion each.

This is in line with onshore costs but will avoid the need for separate offshore production platforms and up to hundreds of kilometers of piping – potentially saving billions.

FLNG vessels are also forecast to be quicker to build than onshore plants — 3.5 years compared to 8-10 years, analysts at Citigroup said in a research note earlier this year.

This is partly because offshore facilities can avoid the lengthy permitting processes associated with building onshore. FLNG has less impact on animal habitats and avoids the need to move communities, proponents say.

The permitting advantage has also led to plans to develop floating facilities for importing LNG. Exxon Mobil wants to use a floating regasification terminal offshore New Jersey, U.S.A, but its experience is a note of caution to those who expect floating LNG production to offer big cost savings.

“It’s more expensive but it may be the only way to do it environmentally or to get permitting,” Neil Duffin, head of Exxon’s project development unit said, of the New Jersey project.

Floating LNG production also faces some technical hurdles.

No one has ever tried to freeze large quantities of natural gas to minus 160 degrees Celsius (minus 260 degress Fahrenheit) at sea before. While it should work in principle, analysts say bad weather could cause regular outages.

Choppy seas are considered an even bigger threat to vessel to vessel transfer of LNG, potentially causing expensive shipping delays.

HOST NATION OPPOSITION

Even if FLNG is proven to work and be cost effective, its deployment may be limited by resource holders’ fears that the technology means gas discoveries do not spur economic growth.

As FLNG vessels will likely be built in developed countries such as Korea, no construction jobs will be created locally.

Some less developed African and Asian countries also fear the use of floating LNG may discourage companies from piping gas ashore to provide energy for domestic industries.

“They don’t like these type of projects. What they want is domestic power solutions,” one oil executive said.

Samuel Ciszuk, energy analyst at IHS Global Insight, said Shell’s plan to use FLNG at its planned joint venture with Iraq’s Southern Oil Company (SOC) had raised fears in Iraq that domestic gas needs could be ignored.

“Shell and SOC could prioritise exports at the earliest possible opportunity in order to raise revenue, rather than first fulfilling Iraq’s gas and power-starved domestic demand,” Ciszuk said in a research note.

However, analysts caution that even after over a decade of research and the recent flurry of industry conferences and consultants’ reports on floating LNG, it may still be years off anyone actually building a floating liquefaction vessel.

“We’ve yet to see anybody pull the trigger on an FLNG project yet,” Harris said.

 

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