FLNG’s Future Just Comes Down to Economics
Liquefied Natural Gas’ growth potential is unquestionable. Being the only form of gas that can potentially connect markets in a moment of stark price differentials between North America and Asia, its future is not in doubt. Despite a possible competition from methane hydrates, LNG does indeed remain the most relevant instrument to fulfil the need for greater flexibility and integration of gas markets; it is an inescapable reality. It comes as no surprise that the number of countries importing LNG has doubled from 14 to 28 since 2004.
A different picture holds true for Floating Liquefied Natural Gas (FLNG). It could be shelved like Gas to Liquids (GTL) or increase its presence in the near future, depending on the results of the main on-going projects. Floating LNG is for sure at a turning point, but nobody has a clear understanding of the direction it is taking.
“The future success is not yet assured,” Graham Hartnell, Manager, LNG & Gas Consulting at Poten & Partners, said during the Floating LNG Conference in London.
WHY FLNG?
The FLNG projects can bring new energy resources within reach. One facility can produce, process and store the gas before it is shipped overseas. In this sense, it makes it possible to unlock new natural gas resources including smaller, remote fields.
These projects have also several design advantages.
“Built in dry dock, FLNG is less susceptible to construction delays,” said Richard Tylor, Partner at Hogan Lovells, adding that a second advantage is related to the long design life of the project – 50 years on average. This means that much time will pass before dry dock inspections and overhaul.
But the advantages are far more extensive. According to the experts gathered in London, the projects are more manageable in the controlled environment of a shipyard. This translates into cost and schedule certainty – something that investors deeply appreciate.
This kind of time efficiency is also due to the fact that the nature of the project helps to streamline permitting procedures. For instance, in the United States projects over 2 miles off the coast fall under the United States Maritime Administration (MARAD), which has a defined timeline. The onshore projects, which are under the Federal Energy Regulatory Commission (FERC), don’t benefit from this. Their timeline is indefinite.
Additionally, FLNG was said to have a theoretical lower environmental footprint, including lower CO2 emissions. On the other hand, some FLNG could run higher risks related to the marine environment. In this sense, the environmental aspect is clearly project-sensitive, as the conditions would dramatically differ from project to project.
“Each project is different,” Hartnell pointed out during his presentation.
That is why some advantages of Floating Liquefied Natural Gas depend on the location, on the design and on several factors.
All in all, the undeniable advantage of FLNG is the adaptability. That is something common across all the projects. The speakers of the conference did clearly agree that the main strength of FLNG does rest on its flexibility.
FLNG can indeed accommodate a wide variety of gas specification (rich or lean) and, more importantly, it is a movable midstream asset that can be used in several locations and does not require pipelines to shore.
Given its potential, it comes as no surprise that companies started exploring this opportunity. All these strengths explain the significant investments by Shell, which holds 67.5% of the Prelude project, 26.56% of the Greater Sunrise and 35% of the Masela/Abadi. The Anglo-Dutch oil and gas company is at the forefront of this potential revolution in the gas markets.
UNCERTAINTIES: FINANCING AND TECHNOLOGY
The hurdle for FLNG is the uncertainty that surrounds it. And that is pretty intuitive: how to be certain of something that has never been built before?
Given that uncertainty is something that many investors frown at, the main initial hurdle logically comes from financing. Despite some saying that FLNG would have lower CAPEX and OPEX with respect to conventional LNG projects, the fact that there are no existing FLNGs in operation speaks for itself. The contractual and finance structures are not fully tested. They could be better, but only the few FLNG projects in construction will answer this riddle.
“FLNGs are relatively unproven,” said Constantyn Gieskes, Project Manager at Braemar Engineering.
This uncertainty is of great importance, as FLNGs cannot be low cost projects. They have high construction costs and parallel high insurance fees due to potentially adverse meteorological conditions.
“The challenge for FLNG is definitely cost,” Hartnell confirmed, explaining another substantial difference with conventional LNG projects.
While LNG projects can benefit from economies of scale, FLNG don’t. In this sense, each project has to be cost competitive. It has to be economically attractive as a precondition for the realization.
Alongside the financing hurdle, the second major uncertainty is related to the technical side. For instance, a few speakers hinted at the pre-treatment phase being more difficult as it is more sensitive to motion.
The technical issue is set to be the main challenge in the long term. If the first projects will overcome the economic hurdle, technicalities are going to be central. These difficulties could turn out to be significant enough to affect the structure of the project. For instance, some speakers mentioned the possibility that some companies would be forced to set up consortia to better address the technical issue.
Moreover, there are also some operations that could pose safety risks. Unloading operations for example could be complicated, while efficient flammable refrigerants could present greater risks. If for some parts of society technicalities rhyme with red tape, this is not the case for the FLNG industry.
SO WHAT? ARE THERE ANY WAYS OUT?
As explained by Tyler, there are some golden rules for FLNG. Firstly, aligning interests along the value chain could help to developing a robust operating strategy. Secondly, allocating risks to those stakeholders best able to manage or mitigate them could pave the way to safer and faster processes. And the use of proven technology by experienced participants remains a major warranty for a flourishing industry.
If these golden rules are nothing new, what is becoming increasingly clear is that extreme and more complicated projects require technologically advanced solutions. The frontrunners of these technologies will have the responsibility to prove that their projects are viable. The opportunities are offshore, the risks are afloat as well. The next couple of years will tell if FLNG will promote a democratization of LNG or will simply fill a niche for stranded gas.
Sergio Matalucci