Analysis: Floating LNG is for bigger players, not game changer

PERTH Fri Jun 24, 2011 6:32am EDT

PERTH (Reuters) - The gas industry has its hopes pinned on floating LNG production to unlock stranded resources as demand for the fuel soars, but the technology is far from revolutionizing output methods and set to remain in the realm of the bigger players for now.

Royal Dutch Shell's Prelude project off the coast of Australia -- part of a rush to help feed a doubling in Asia's demand for the chilled fuel by the end of the decade -- may have advantages over land-based projects, but the scale and risks of such a project are big hurdles for smaller companies.

"With the attendant technological issues, the commercial risk, it was always going to have to come from a supermajor that had extensive in-house technological experience as well as the wherewithal to underwrite the project itself," said Nelly Mikhaiel, a consultant with Facts Global Energy in Honolulu.

The main purpose of developing floating liquefied natural gas production plants is to bypass piping gas to an onshore liquefaction plant, an endeavor that can be expensive for remote deepwater gas fields.

Shell aims to bring the 3.6 million tonnes per annum (mtpa) Prelude, the largest ship in the world which will be longer than four soccer fields laid end to end, online by 2017.

Brazil's Petrobras also plans to bring a floating LNG project online by 2015, but industry experts say Petrobras is likely second in line with its plans to liquefy gas from its pre-salt offshore oil and gas reservoirs in the Santos Basin.

Petrobras' field is also an ideal candidate for floating LNG due to its remote deepwater location, which would be extremely expensive to develop.

Although Petrobras has all the requisites to bring floating LNG online including ample financial resources and a partner, BG Group, with experience marketing LNG, experts say their ambitious plans to develop oil resources could leave them overstretched.

"They would have to be following in Shell's footsteps very, very closely and have already formed alliances with shipyards... in order to make that happen. I dare say they will follow Shell, but I'm not sure at this stage if anyone will beat them to it," Mikhaiel said.

HIGH UPFRONT COSTS

Floating LNG's uncharted territory makes it particularly well-suited for large companies like Shell and Petrobras with plentiful resources. Plowing money into this will eventually pay off, but it will take some time.

"When they have one or two under their belt, you will see capex synergies from that ... Shell very much indicated that the capex will be high for the first one or two vessels, but as they understand how these things work, you can get synergies from that," said John Hirjee, an analyst with Deutsche Bank in Melbourne.

Shell has not revealed the cost of Prelude, but has said it would be would be similar to recently approved land-based LNG projects at around $3 billion to $3.5 billion per million tonnes of LNG per year, indicating a cost of $10.8 billion to $12.6 billion for the 3.6 mtpa project.

In addition to having the financial resources to execute the project, both Shell and Petrobras are planning to tap gas fields with higher liquids content whose sale will bring down the overall costs of the projects.

Despite high costs at the front end, floating LNG may offer extra advantages for LNG developers in Australia -- which currently has the largest list of proposed LNG projects -- in terms of dealing with labor shortages.

Australia, already one of the world's largest LNG exporters, has around A$200 billion worth of LNG projects on the drawing board and aims to triple current production to 60 million tonnes a year by 2020 -- targets which experts say will stretch the nation's labor force.

"Every engineer, every geologist, every electrician, every plumber is going to be in huge demand and as a result I wouldn't be surprised if we start seeing schedule slippages -- we've already started seeing them with some projects," Facts Global Energy's Mikhaiel said.

Building the vessel in another country, as Shell is doing with Prelude's construction in South Korea, will limit the impact of the labor shortage on costs.

"It's obviously a massive boon because you can avoid some of the manpower and resource struggles that I think are only going to intensify as time progresses."

SMALLER PLAYERS, BIGGER OBSTACLES

Companies without Shell's financial resources, its track record as an LNG supplier, and a gas resource that would be relatively lower cost to develop, may struggle to make floating LNG work, analysts said.

"The barriers to competition are high. Without having all the ingredients in place, you're just going to make it much, much harder to get a project off the ground," Mikhaiel said.

Smaller would-be floating LNG developers without a track record as an LNG supplier face challenges in all aspects of the project from securing funding to convincing buyers to sign up.

"Because FLNG(floating LNG) has not been proven, buyers have been reluctant to sign up for offtake from an FLNG facility because of uncertainty about when that project will come onstream and if it will ever be delivered," Giles Farrer, an analyst with Wood Mackenzie in London, said.

"Shell has a global traded LNG portfolio, so it is able to provide backup to its potential LNG customers, which offsets the risk of severe delays in delivery."

Smaller projects also forfeit the economies of scale that some say are necessary for floating LNG at this stage.

"One of the things we've certainly known is that LNG is all about scale and getting capacity expansions on incremental capex so that does put a question mark on some of the smaller FLNG proposals," Deutsche Bank's Hirjee said.

(Additional reporting by Brian Ellsworth in Sao Paulo; Editing by Himani Sarkar)

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Comments (1)
rwlight wrote:
Very poorly researched article. Misleading and inaccurate regarding who will use FLNG and who will likely be the first. Article sounds like an advertisement for Shell.

Jun 24, 2011 9:58am EDT  --  Report as abuse
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