FLNG tanker

As natural gas’s importance to the global energy mix continues to grow due to the shale gas surge and gradual policy shifts away from coal and nuclear options, the market for liquefied natural gas (LNG) is looking set for sustained growth. Companies involved in the LNG supply chain are ramping up in preparation for a bright and profitable future meeting surging demand in Asia and elsewhere.

Energy analyst Douglas-Westwood ‘s World LNG Market Forecast estimates that global capital expenditure on LNG facilities will reach nearly $288bn between 2013 and 2017, more than doubling the amount spent during the previous five years. Construction of LNG carriers is booming, with 125 vessels on order and a further 100 expected to be added to the worldwide LNG fleet by the end of 2020.

With LNG’s stock on the rise, there is more scrutiny than ever on new techniques to simplify and streamline the offshore LNG industry’s value chain. The floating LNG (FLNG) concept has held promise for decades as a means of liquefying gas at, or near the offshore site of production using a specialised vessel or floating platform, thereby eliminating the need to lay expensive subsea pipelines to shore or build onshore liquefaction plants.

This makes FLNG potentially revolutionary as an economically viable means of exploiting gas that has thus far been stranded in remote deepwater locations. However, while the technology has been studied since the 1970s, for a long time the prospect of its application was a speck on the offshore horizon; an enticing possibility that seemed to be perpetually just out of reach.

FLNG: progress to date

Today, it appears the long-elusive dawn of FLNG is almost upon us. Although there are no FLNG projects currently operating, a healthy number are in development, with around $60bn expected to be spent by the industry on FLNG facilities by 2020. Furthermore, three major projects have reached the final investment decision (FID) and are actively being built.

What can be gained from taming the chaotic nature of weather?

These include Royal Dutch Shell ‘s ambitious Prelude FLNG project to produce gas from the Prelude and Concerto fields off the coast of north-west Australia, which when completed around 2017 will become the largest floating structure ever built, weighing five times more than the US Navy’s largest aircraft carrier.

Also under construction is Petronas FLNG 1 (PFLNG 1), which will process gas from the Kanowit field offshore Malaysian Borneo on completion in late 2015, as well as Pacific Rubiales Energy’s near-shore floating liquefaction, regasification and storage unit (FLSRU) offshore Colombia, which has a chance of becoming the world’s first operational FLNG project if it can stick to its estimated completion date of early 2015.

Uncertainty around the unproven nature of FLNG is, broadly speaking, the main obstacle to wider adoption of the technology, so the performance of these pioneer projects will be a vital indicator for the industry – there are plenty of FLNG projects in development that are waiting in the wings, possibly looking for a real-world success story before gambling on a new technology.

Promising signs

Having committed around $13bn to the construction of Prelude (although the company refuses to confirm an exact figure), Shell has expressed confidence that the FLNG concept is proving more financially flexible than its initially recommended application as a stranded gas liberator, stating that using multiple FLNG plants to create a hub on a large offshore gas field could compete financially with the traditional pipeline-based configuration.

"Economic feasibility studies since Prelude FID hint…at a much wider application area," said Shell in a study presented at the LNG 17 conference in April 2013. "Besides applications that are similar to Prelude or a development where multiple smaller fields are exploited by means of sub-sea tie-backs, internal economic analyses show that multiple FLNG facilities operating on a large field may be a competitive proposition versus an onshore LNG plant."

It’s also a strong sign that the FLNG option is beginning to win the argument, even with companies that have previously shown reluctance. In late September, BHP Billiton announced that it had been convinced by its joint venture partner Exxon Mobil that FLNG is the best choice to develop the Scarborough gas project off Australia’s western coast; BHP had previously believed it would be preferable to transport gas via pipeline to the North West Shelf or onshore Pilbara. "I’m happy to say we have progressed it far enough now where we are confident in the technology and the commerciality so we know it will go forward," said BHP’s petroleum and potash president Tim Cutt, as quoted by the Sydney Morning Herald. "It’s a good commercial project."

"The FLNG option is beginning to win the argument, even with companies that have shown reluctance."

Something to prove

Nevertheless, there is still too much uncertainty around FLNG’s technical and financial intricacies to make the technology’s success a foregone conclusion.

While building an FLNG plant in drydock reduces the risk of construction delays and vessels can eventually move on to new fields with relative ease, cost is still a factor for newcomers to the technology, especially as external investment could be hard to secure while FLNG is still an unknown quantity. "The challenge for FLNG is definitely cost," said Poten & Partners’ LNG & gas consulting manager at an FLNG conference in London earlier this year.

Another significant financial aspect of FLNG operation is the higher cost of insurance due to the risks involved in processing and transferring LNG at sea while dealing with all the unpredictable conditions that come with the marine environment. For an operation like Pacific Rubiales’s FLNG project in Colombia, which will be located relatively close to the shore, the risks will be reduced, but for endeavours like Prelude and PFLNG 1, located 200km or more from the coast, it is understandable that only deep-pocketed oil and gas giants like Shell and Petronas are taking the plunge for now.

And those high insurance costs aren’t without justification. The inherent risks to FLNG operation have been extensively studied. They include the safety implications of having all the equipment of an onshore LNG processing plant on a vessel that offers around a quarter of the space – separation distances will inevitably be reduced. The vessels’ motion in the water creates untold complications for the storage and offloading of LNG; while the ‘sloshing’ effect is a well-known issue on LNG carriers, the transfer of LNG from the FLNG unit to an LNG carrier, potentially during rough sea states, will need to be addressed with innovation to avoid danger and loss of availability in the supply chain.

Political resistance to FLNG

There is also an element of political resistance that has held back the development of FLNG in some regions. For all the benefits the technology offers to offshore operators looking to unlock tricky gas resources, those benefits don’t particularly extend to the country hosting the operation. While the traditional onshore LNG processing option offers a large number of jobs and construction contracts for local people and firms, FLNG plants are built by specialised dockyards, primarily in Korea and China, and manned by specialists; thus they provide far fewer direct economic benefits.

Tandem offloading technology using cryogenic hoses could help push floating LNG operations into more challenging offshore locations.

Australian oil and gas company Woodside, which is working to develop several early-stage FLNG projects, has had significant experience of this kind of political reluctance. The company’s Sunrise FLNG project off the coast of East Timor has stalled due to a disagreement with the government on the ‘floating’ element of the project, with the tiny nation understandably adamant that a shore-based LNG plant would be far preferable for its small population. And even in its home country the company has been at loggerheads with the Western Australia state government for the same reason in relation to the Browse Basin project, despite getting the go-ahead from the federal government.

In an October 2013 article for Macrobusiness, Susan Gourvenec, professor of offshore geomechanics at the University of Western Australia, the global balance has now tipped in favour of FLNG and by sticking to its guns, the state risks being left behind. "Attempting to block an FLNG-based Browse development is now most likely to push the oil and gas majors elsewhere worldwide, rather than bringing them back to a Browse onshore option," Gourvenec wrote. "The inevitable global growth of FLNG means WA would be wiser to embrace this new technology, capitalise on our first mover advantage and invest in education and training so that the state can provide the type of jobs that this opportunity presents."

If Gourvenec is right and the wider adoption of FLNG is no longer a question of ‘if’, then the relevant questions are ‘when’ and ‘where’. In that case, states like Western Australia could indeed miss out as the technology becomes an increasingly lucrative global concern. Then again, with some key questions still unanswered and the flagship FLNG projects yet to prove their economic case under real-world operating conditions, perhaps the caution of investors and countries alike is justified.

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