An Executive Summary of LNG and its Potential Impact on the US Gas Market.
What is Liquefied Natural Gas (LNG)?
LNG is natural gas that has been converted to a liquid state. LNG is typically liquefied at –161.5 degrees Celsius reducing the volume by 1/600th. During the liquefaction process the oxygen, carbon dioxide, sulfur compounds and water are extracted and sold. The process is designed to purify the LNG to almost 100% methane.
The LNG Process
Developing a proven LNG reserve is an extremely capital intensive. A proven reserve must support the designed capacity for at least 20 years in order to be economically feasible. For example a 1 Bcf/d project would require a 7-10Tcf reserve to be justifiable. The quality of the LNG is critical in developing reserves, high concentrates of LPG and condensate can improve the economics of the project by 10%. After liquefaction the LNG is then loaded on specially designed refrigerated tankers that deliver the LNG to ports with receiving facilities. Usually at the terminalling facilities, the LNG is regasified (or vaporized) for delivery into a natural gas pipeline for consumption, or loaded on trucks for delivery to regasification facilities.
A Global Perspective of LNG
Asia, Africa and the Middle East produce the majority of the LNG consumed worldwide. In 1994 Indonesia and Algeria accounted for 40% and 21% of the world LNG exports respectively. Australia, Brunei and Malaysia together account for 31%. Algeria exports the majority of its LNG to Europe and the US and a small amount to Japan. LNG from Asia is exported mainly to Asian markets in Japan, South Korea and Taiwan.
Table 1 A Global Perspective of LNG
LNG holds considerable potential for future natural gas trade, which will continue to be unlocked in several ways. Countries such as Thailand, Brazil, the Philippines, China and India may elect to build facilities in the future.
LNG Capital cost may continue to decline with improving technology. The minimum efficient scale for LNG projects may decline, creating opportunities for smaller export projects.
The continued development of an active spot market with more exporters and importers may improve utilization rates on expensive fixed liquefaction and transport capacity, as well as reducing project risk.
Markets for premium priced “clean” fuels will expand in current and potential consuming countries with increasing wealth and increasing public concern about air quality or greenhouse gas emissions.
LNG use to cover peak consumption periods and enhance gas system reliability may grow.
The Competition to LNG
LNG projects have not been created in a vacuum. They must compete with other fuels and even with other gas export technologies. LNG projects compete against coal and petroleum products in power generation markets and potentially against middle distillates and liquefied petroleum gas in premium residential markets.
International Pipelines – Probably the least expensive and most effective means of moving large quantities of natural gas over long distances. However worldwide political uncertainty results in a shortage of pipeline development from areas of plentiful supply to areas with no natural gas supply. Deepwater pipelines face the same challenges as international pipelines. In general the distance were the economics are at a crossover between LNG projects and pipelines occurs around 1,250 miles for offshore pipelines and around 2,300 miles for mainline pipelines.
Other factors that will affect the choice of LNG Vs pipeline are; the cost of purchasing pipeline rights of way, the maximum flow required to meet peak day (utilization rate), the depth of water and nature of seabed and the economic benefits of the importing/exporting country.
Ammonia/urea manufacture – the principal building block in nitrogen fertilizers, uses natural gas as a feedstock. Ammonia plants are very capital intensive.
Methanol – is a common industrial chemical feedstock, usually manufactured from natural gas. Methanol plants tend to be much higher capital cost per Btu than do LNG liquefaction plants, but have lower transport cost. However the two factors approach balance only at very great transportation distances.
The LNG Fleet
In the conventional gas or oil tanker market, vessels may be constructed for speculation or on a short-term basis. Although this has not been done in the LNG industry since the 1970’s. The price of a new LNG tanker at the end of 1999 was $160-180 million range. Historically the shipping of LNG has operated under a high degree of efficiency and safety. In the 40 years of fleet growth, there has bee never been a single incident involving a breach of the containment system resulting in cargo spillage from collision, grounding fire, explosion or hull failure.
LNG shipping is a specialized business with a limited number of players. Ships are currently attracting a price of $45,000 per day for long term contracts, but for short term spot cargoes the rate has been as low at $27,000 per day.
To improve efficiency shipyards have been concentrating on building larger ships. Although there are size limitations on new vessels due to the specifications of existing receiving terminals that were designed to handle a maximum size vessel of usually 125,000 cum cargo.
At the end of 1999 the world fleet of LNG carriers consisted of 113 tankers. The total capacity of all the tankers is 11,752,549 cubic meters, compromising of:
In 1998 five large vessels were delivered adding 690,000 cubic meters of transport capacity to the fleet.
A notional 4 million metric ton (534 million cubic feet per day) project would require delivery of 65 cargoes of 3 billion cubic feet each year. LNG tankers are designed to travel at 20 knots; if the LNG plant is 3,000 nautical miles from the customer (say Australia to Japan), a round trip by tanker would take (including time in the port) about 17 days. Thus a single tanker could deliver 21 cargoes in a year, and three or more tankers would be required for the project. The example demonstrates the problem of maintaining delivery schedules when tankers need periodic overhaul or due to weather related delays.
Discharge a full Cargo of 119,000cum (approximately 3 Bcf of natural gas equivalent) to the receiving regasification facilities will take anywhere between 16-36 hours including docking and pumping time. Typically a tanker will deliver 10 to 12 cargoes each year depending on the distance traveled.
LNG in the US
During the past decade (1988-1999), natural gas demand increased by about 67 percent. LNG imports grew dramatically between 1995 and 1999—moving from 10.5 Bcf to 89.6 Bcf.
As the Table 2 below shows the US was a net importer of LNG in 1999, although it did export a small quantity to Japan. LNG imports are forecast to increase from 620mmcf/d currently to 4.3Bcf/d by 2010, a rate of 7% annually.
Table 2 1999 LNG Imports and Exports to and from the US: