Natural Gas and LNG Options -1
This title is also the name of a book/manual that is based upon work supported by the US Department of Energy and Power Africa. This manual contains fundamentals about the LNG industry. I intended to read the whole book and took some notes to myself rather than shared in such a platform. However, the notes instantly became too big so I continued to take my notes to create a series of pieces. I hope to add some further readings recommendations, videos, charts, and images to make all topics more clear.
This series mainly covers the topics below:
Global Gas Market, LNG & Domestic Gas Value Chains, Domestic Market, Structuring an LNG Project, Government Role, Capacity Building, LNG Development, Environment, Social Impact & Safety, Pricing, LNG & Gas Contracts, Financing an LNG Export Project, Risk Management, Local Content, LNG Import Projects, New and Emerging LNG/CNG Markets, Conversion Tables are the titles of the sections in the book.
Global Gas Markets:
— In 1959, the world’s first LNG carrier, the Methane Pioneer, set sail from Lake Charles, Louisiana with a cargo of LNG destined for Canvey Island, UK. This first-ever US-UK shipment of LNG demonstrated that large quantities of LNG could be transported safely across the ocean, opening the door for what would become the global LNG industry.
— There are three main global gas markets: the Asia-Pacific region, the European region, and the North American/Atlantic Basin region which includes North America, South America, and Latin America
— Pacific region has historically been the largest market for LNG. Japan is the world’s largest LNG importer, followed by South Korea and Taiwan. China will be expected to become a top exporter in the near future.
— The growth of LNG in Europe has been more gradual than that in the Asia- Pacific, primarily because LNG has had to compete with pipeline gas, both domestically produced and imported from Russia. EU tries on projects that will diversify its gas resources to provide energy security in the region
— In North America, the United States, Canada, and Mexico have strong pipeline connections and abundant supplies of natural gas. Historically, this region had been able to supply all of its natural gas requirements from indigenous suppliers. However, by the shale revolution in the US, the gas production in the US has increased drastically and this has influenced the LNG sector in the region. In February 2016, Cheniere Energy’s Train 1 came online, thus heralding in a new wave of LNG supply.
Supply & Demand Balance:
The key predictors of LNG supply balance for several years have been:
- The emergence of the US as a major LNG exporter,
- The completion of a number of major LNG export facilities in Australia
- Slower than expected demand increase from Asian markets,
- New gas discoveries, particularly large discoveries in frontier regions
— The confluence of these four factors, which continue to evolve, has created a short-to-medium term situation of material LNG oversupply. Oversupply depresses spot and medium-term prices for gas that has not already been contracted. In addition, a major portion of the LNG market has long-term contracts indexed to oil prices which have also dropped significantly.
— Oversupply creates a difficult environment for the new LNG facilities due to a reduction in prices.
LNG Shipping:
— Capacities: The largest LNG ships (newest generation of Qatari ships being 216,000 to 266,000 cubic meters) can carry around 6 billion cubic feet of gas, equivalent to one day’s average consumption for the entire UK, or around 10% of US daily gas production.
— LNG Ship Cost: A new build LNG carrier might be expected to cost around $200 million to $250 million (CAPEX), which would typically require a charter rate of about $80,000- $100,000 per day to support capital and operating costs (OPEX).
— Spot charter rates in the industry are currently only at around a third or a quarter of these levels, so ships without long-term charter arrangements are struggling to find economically viable short-term charters.
LNG and Domestic Gas Value Chains:
— The LNG value chain starts upstream with exploration and production operations. It then proceeds through the midstream stage of processing and transportation, and then the downstream phases of liquefaction to shipping and distribution to the consumer.
— LNG is not currently a commodity business and continues to be dominated by long-term contracts. A spot market and shorter-term contracts are emerging due to commercial and geopolitical factors.
— Because LNG projects are capital intensive, it is necessary to support all the divisions in the LNG value chain. (IMPORTANT)
— The gas supply that comes from the production field is called “feed” gas and this feed gas must be sent to a processing facility for treatment prior to liquefaction.
— While gas used by consumers is almost entirely methane (CH4), natural gas is associated with a variety of other compounds and gases and also produced in association with oil and sometimes liquids are produced in association with gas. Most of these compounds must be removed prior to the liquefaction process.
—Liquefaction Process: At the liquefaction plant, the natural gas is chilled into a liquid at atmospheric pressure by cooling it to -162ºC (-260ºF). In its liquefied form, LNG takes up about 1/600th of the space of the gaseous form, which makes it more efficient to transport.
— Liquefaction plants are typically set up as a number of parallel processing units, called trains. Each train is a complete stand-alone processing unit but typically there are multiple trains built side by side. Liquefaction is the most expensive part of the value chain.
— Shipping: Ships are typically owned by a shipping company and chartered to seller or buyer. In some fully integrated projects, the ships are built and owned by the project consortium, like Qatar’s LNG projects.
— Regasification and Storage: LNG is returned to its original gaseous form by increasing its temperature.
— Distribution and Transport to Final Market/Sales: Key aspects of this stage include the ability to factor in volume, price, and supply/demand to best position parties to negotiate and satisfy agreements for transportation, distribution, and sales.
Domestic Market:
— Major usage of domestic natural gas is power generation. Natural gas can also be used as fuel in transportation, industries, commercial buildings or residences.
— Additionally, natural gas can be used as a feedstock for various other industrial plants, such as fertilizer plants, methanol plants, petrochemical plants, and gas-to-liquids plants.
— The price of natural gas must be balanced between the cost of supply and what is affordable for consumers; otherwise, consumers will not switch to gas, assuming other alternatives are in place and/or available.
— The fuel-switching economics must be favorable in the long term, which means, first and foremost, the price difference between the delivered cost of natural gas and the incumbent fuel must be strong over the life of investments by consumers and suppliers
— Perhaps the greatest challenge to switching to natural gas fuels has been the recent collapse in crude oil prices and the attendant decline in refined product prices (e.g. of distillates and heavy fuel).
Gas-To-Power:
— The purpose of a gas-to-power strategy is to encourage the use of domestically produced natural gas and increase power supply to meet domestic needs for power
— A successful gas-to-power project typically has each party having the technical, financial and operational capability to undertake its respective investment. The parties must coordinate their plans, including development, construction, and financing plans, in a way to enable a timely FID (final investment decision) and start-up of the entire value chain.
— To attract IPP investment, host governments will need to provide the necessary legal and regulatory framework in the gas and electricity sector to underpin the PPA (power purchase agreement) which typically has a duration of 20 or more years.
Market Structure:
— The ability of local or regional gas and power markets to partially or wholly underpin a major gas resource development depends largely on the way in which the wholesale and retail gas and power markets are structured.
— The market segments for natural gas are supply, wholesale, and retail. Each market segment can be structured as exclusive, mixed, or competitive, with prices either regulated or market-based.
— In the supply segment, the producer sells to an aggregator or directly to an end-user.
— In the wholesale segment, an entity, such as an aggregator, purchases gas from another entity for resale to other customers. (Indirect)
— In the retail segment, an end-user purchases gas from an entity for its own use.
Gas Master Plan:
— A starting point for many countries, especially countries that wish to develop gas resources and/or domestic markets for natural gas, is the creation of a Gas Master Plan (GMP).
— A GMP is a holistic framework to identify and evaluate options for natural gas use for domestic supply and/or export.
— Although each country has a unique GMP. There are some broad elements to consider:
- Objective of the Gas Master Plan, Gas resource evaluation, Gas utilization strategy and options consistent with country’s energy policy, Domestic supply vs demand analysis (power and non-power sector), Identification of other domestic “priority” projects, Infrastructure development plan/formulation, Institutional, regulatory and fiscal framework, Identification of possible mega or “anchor” projects, Formulation of a roadmap for implementation of projects, Gas sector regulatory reforms, Socioeconomic and environmental issues associated with development, Gas pricing policy.
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