Oil majors eye $5 billion ships to cut LNG cost

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) is leading the charge but U.S. rivals Exxon Mobil (XOM.N) and Chevron (CVX.N) and Australia's Woodside (WPL.AX) 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.