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Samsung Bets on Shell Floating LNG as Orders Fall

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Samsung Bets on Shell Floating LNG as Orders Fall (Update1) 

By Dinakar Sethuraman and Angela Macdonald-Smith

Dec. 19 (Bloomberg) — Samsung Heavy Industries Co. and Hyundai Heavy Industries Co. are betting that Royal Dutch Shell Plc’s plan for untried floating gas-export terminals will spur billions of dollars in orders as the shipping market collapses.

A floating liquefied natural gas project may cost 50 percent as much as a typical onshore terminal and boost supplies of the cleaner-burning fuel. Orders for ships including tankers, dry bulk carriers and LNG vessels in the first 10 months of this year dropped 38 percent, said Clarkson Plc, the world’s largest shipbroker.

LNG projects may rescue shipbuilders buffeted by canceled orders from the global financial crisis at a time when onshore ventures are being stalled by rising costs and environmental objections. Shipyards will record the lowest orders in a decade for vessels transporting LNG, freeing space for floating plants, according to London-based Drewry Maritime Services Ltd.

“Everything has come together to give a very favorable atmosphere and conditions to develop these” ships, said Jos Leo, director of floating LNG at The Hague-based engineering company CB&I Lummus, part of Chicago Bridge & Iron Co. “There is momentum now.”

The challenge is that no one has managed to take a plant, the size of 170 soccer fields, that requires 50,000 cubic meters of concrete and 6,400 metric tons of structural steel, then shrink it to 4 percent of its size and send it 250 miles (402 kilometers) offshore. Shell and other backers of floating- platform technology say they can do just that.

Ship Orders

The market for floating liquefaction and regasification vessels, where chilled gas is converted into vapor state, may be about $8.5 billion by 2015, Canterbury, U.K.-based Douglas- Westwood Ltd. said in a report e-mailed today.

Samsung Heavy, based in Seoul, has contracts to build four such vessels by 2012, each costing about $1.2 billion, for Flex LNG Ltd., which wants to operate the world’s first floating LNG plant.

Daewoo Shipbuilding & Marine Engineering Co., Hyundai Heavy and Samsung Heavy, all in South Korea, made bids for Shell’s vessel, which may cost as much as $5 billion and be the world’s biggest. Shares of the three largest shipbuilders declined as much as 69 percent so far in 2008, compared with a 42 percent drop in Korea’s Kospi index.

Gas Demand

Crude oil in New York tumbled 73 percent from a record $147.27 a barrel in July to a four-year low of $39.19 a barrel, and gas declined 59 percent from a 30-month high of $13.69 per million British thermal units in July on the New York Mercantile Exchange. Prices of LNG in Asia, which are linked to crude, declined 40 percent from a record $20 per million Btu. Global oil demand this year will fall for the first time since 1983, according to a U.S. Energy Department report.

Demand for liquefied gas, spurred by rising use of gas- fired generators and the shutdown of nuclear power plants in Japan, grew three times that of oil last year, according to BP Plc’s Statistical Review of World Energy.

“We are having space in our shipyards now to build these big vessels,” said J.S. Kim, a project manager at Ulsan-based Hyundai Heavy, the world’s largest shipbuilder. The financial crisis slowed orders for vessels, enabling shipbuilders to focus on technically advanced LNG platforms and drill ships, he said.

The advanced offshore products contributed 67 percent of Samsung Heavy’s $15.3 billion of contracts this year, surpassing orders for tankers for the first time in the company’s 34-year history, the company said.

Reduced Contracts

“There’s more optimistic view for offshore products because demand is very strong,” Lee Jae Won, an analyst at Tong Yang Securities Inc. in Seoul. “Oil majors have plans to explore more oil and gas.”

Samsung Heavy won contracts for two LNG carriers this year, down from 11 in 2007, according to company spokesman Hwang In Chan. Orders for large container vessels fell to nine this year from 34 in 2007, he said.

The world’s biggest financial companies incurred more than $1 trillion in writedowns and credit losses since the start of last year, prompting banks to slow lending.

“The liquidity crunch raises an issue,” said Richard Nelson, a Singapore-based partner of global energy group at U.K. law firm Herbert Smith. “The industry may move toward balance- sheet funding.”

That switch means AAA-rated companies such as Exxon Mobil Corp. with about $37 billion in cash and Shell with $9.7 billion will have better ability to finance projects, while smaller ventures seek help.

Plant Costs

“The credit markets are tough but for LNG projects the window is still open if projects are structured correctly,” said Philip Fjeld, Flex’s chief executive officer, who plans to focus on energy companies instead of banks to raise as much as $400 million next year. Each of Flex’s ships at 1.7 million tons of capacity is less than half of Shell’s vessels.

Floating LNG plants may cost $550 to $700 per ton of capacity, compared with $1,500 for onshore projects, Fjeld said. Such ventures may boost supplies by 12 million tons annually by 2015, a little more than growth in global demand last year.

Floating LNG projects may find it easier to raise money compared with traditional LNG developments because of lower costs, shorter development time and less environmental effect, Erik Wojcik, director of energy and infrastructure finance at Societe Generale SA, said at a conference in Sydney.

Offshore versions may take less than half the time to build compared with onshore units, Citigroup Inc. said in April.

Exploration Units

The floating carriers will initially operate in calmer waters because turbulent seas may cause the liquid fuel to swirl and slosh at tank walls, damaging the equipment. Operating in the hurricane-prone Gulf of Mexico is tougher, said Steven Chan, global head for LNG at U.K.-based Lloyd’s Register Asia, which inspects and certifies ships for safety.

Floating LNG will remain a “niche play” because of the small size of the plants, saidFrank Harris, head of global LNG at Wood Mackenzie Consultants Ltd., a U.K. energy research firm.

Shell, the world’s biggest non-government LNG producer, invited three groups to bid for the contract to build the world’s biggest floating LNG facility in June, saidSaskia Kapinga, a Shell spokeswoman. The ship may be about 480 meters long and 80 meters wide with 270 people living onboard.

Reduced Financing

Petroleo Brasileiro, Brazil’s state oil company, may order at least one floating LNG plant from Schiedam, Netherlands-based SBM Offshore NV, a marine equipment supplier and installer, to develop the Western Hemisphere’s biggest oil find in three decades. For each barrel of oil at the deposit, called Tupi, there’s 700 to 1,000 cubic feet of gas that can be liquefied on a floating platform for shipment.

As vessel orders plunge, Samsung Heavy, Hyundai Heavy and Seoul-based Daewoo Shipbuilding will be counting on floating LNG to hold up earnings. Orders for vessels may tumble by half this year because of declining freight rates and a lack of financing, said London-based Drewry, a shipping consultant.

“Shipyards had the most phenomenal party from 2005 to 2008,” said George Horsington, general manager of Swire Production Solutions Ltd. in Singapore, which operates floating oil platforms. “Floating LNG, a perpetual hope of the industry, looks better than ever.”

To contact the reporter on this story: Dinakar Sethuraman in Singapore at o[email protected].

Last Updated: December 18, 2008 22:58 EST

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