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Such market fundamentals, in addition to recent price increases, create a favorable environment for increased imports of LNG – which, during 2004, amounted to 652 Bcf, roughly half the expected future demand. However, greater reliance on LNG is stymied by the lack of sufficient capacity at US regasification terminals. Only five such terminals are currently in operation in the US and regulatory hurdles and opposition from both public and private bodies has hindered the construction of additional regasification infrastructure.
The US LNG market has undergone a fundamental change recently. In August 2005, President George W. Bush signed the Energy Policy Act. This Act clarified the Federal government’s role in the siting and operation of onshore and near shore LNG import terminals and gives the FERC the ultimate authority over states on LNG issues.
To facilitate the importation and regasification of LNG there has been a rapid expansion in the range of alternative offshore LNG importation methods. These new methods are expected to compete with conventional onshore regasification terminals.
LNG economics
The decision to invest in or construct new LNG facilities in based upon two key factors, namely economic rates of return and regulatory restrictions. Before organizations begin dealing with the considerable legal “red tape” involved with building new facilities, projects must be justified by examining the demand and supply of natural gas in North America in the future.
With natural gas prices expected to remain high for the foreseeable future, energy companies are looking to increase their investment in LNG facilities. Proposed LNG terminals are subject to an assortment of Federal, state, and local regulations and with the push for more import terminals, the specifics of government jurisdiction over LNG facilities has become a major concern.
Growth in the global LNG trade is being fueled by declining costs in all phases of the supply chain. Greater economies of scale have driven LNG production costs 30-40% lower than a decade ago. These lower costs have allowed LNG to become competitive with natural gas prices. With new suppliers entering the market, competition has forced cost-cutting measures and further price reductions. For example:
- Liquefaction costs between 1996 and 2000 averaged $230 per ton, compared with $560 per ton between 1986 and 1990.
- Between 1996 and 2000 the cost of a new tanker dropped by approximately 30%. In the 1990’s an LNG vessel would cost $250 million to build, but today’s vessels average $165 million.
- In addition, ship size has grown from 125,000 cubic meters (60,000 metric tons) to 140,000 cubic meter capacity.
- The construction costs of regasification terminals have also fallen.
Historically, the cost of producing, shipping, and re-gasifying LNG has been prohibitive and uncompetitive with United States gas market prices. Costs of this total process: gathering, liquefaction, transportation and re-gasification, ranged well above $3.00/MMBtu range (excluding the netback price to the owner and operator of the stranded gas reserves from which the gas was purged prior for liquefaction). Assuming a $0.50-1.00/MMBtu netback to the producer and/or sovereign entity that owns the gas, a total deliverable gas price of over $4.00/MMBtu could be attained on a cost basis. This $4.00 plus number is well below the cost of natural gas in the US. The new millennium, however, has brought lower LNG costs and, coupled with raising US natural gas prices, LNG is now an economically viable proposition.
Import terminal cost considerations
The costs of an LNG import terminal depend on several variables. Those that have a major impact on costs are:
- Installed storage capacity;
- Geology of the area (soil stability and seismic activity);
- Labor and construction costs for the area: and
- The marine environment (proximity to deep water, need for dredging and/or breakwater).
Other factors include public opposition and permitting. The major costs in operating a facility are personnel and power. Personnel, the largest expenditure, is a fixed cost; and power is a variable cost relative to production.
A vertically integrated company, for example, will spend $1 billion on a liquefying plant, $175 million each for the tankers and $300-$500 million for an import terminal where it will be stored and later regasified.
LNG Project Economics
Although worldwide natural gas supplies for LNG facilities are abundant and can be tapped inexpensively, processing and transportation equipment is capital intensive and highly specialized, requiring hundreds of millions of dollars in investment for each new facility. For each cubic foot of natural gas delivered to end users, less than 30% of the cost is for the commodity itself, while more than 70% reflects the cost of processing and transportation. It should also be noted that LNG project costs can vary significantly because of site-specific construction costs.
LNG projects comprise several distinct elements, each of which is necessary to implement a successful, cost effective project:
- Abundant low-cost natural gas reserves: A successful LNG project must have enough proven reserves of natural gas available to support liquefaction capacity for the life of the plant (20+ years). In addition, production costs (including applicable production taxes levied by the host government) need to be low (typically, less than $1 per thousand cubic feet, and preferably around $0.50 per thousand cubic feet).
- A liquefaction facility, including a jetty and loading facilities for LNG tankers: The liquefaction plant is typically the most expensive element of an LNG project. The cost depends on a host of site-specific factors, including the project’s scale, with larger projects having lower unit costs. Operating costs are relatively minor. Liquefaction is a very energy-intensive process, typically using about 8-9% of the plant’s input as plant fuel.
- LNG tankers: Each project requires several dedicated LNG tankers. These are complex and expensive merchant ships because of their double hulls and special cryogenic lining. Each new 135,000 cubic meter (3 billion cubic foot) capacity tanker costs approximately $175 million.
- Regasification plant: LNG can be unloaded only at specialized terminals, which typically include a jetty and unloading facilities, LNG storage equal to at least a single tanker cargo, regasification facilities, and connections to pipelines. The cost of the regasification terminal varies with capacity, local construction costs, and the amount and type of site preparation. Regasification plant costs are typically considerably lower than liquefaction plant costs.
The large capital costs associated with each component of an LNG project imply that projects can be undertaken only by organizations with sufficient financial resources. Under the traditional LNG project structure, successful LNG projects required the cooperation of the host government (where the natural gas resources are located), the entity that owns the natural gas rights (private or state), the government of the consuming country, consuming organizations (national or private electric utilities, gas companies, etc.), and a host of specialized organizations, including shipyards, financiers, tanker operators, construction companies, and process technology licensors. In the past, protracted negotiations were often needed to reach agreement regarding the distribution of these costs, the benefits, and the considerable risks associated with the project. This project structure may be evolving, however, as a result of the proliferation of spot market trading of LNG in recent years.
No LNG project is likely to proceed unless the developers receive some assurance that they will be able to earn an acceptable return on their investment. A successful LNG project requires a price that is low enough to motivate consumers to use large volumes of natural gas, yet still high enough to persuade developers and borrowers to actually build the project. Although spot sales are on the rise, LNG developers will seek long-term contracts for their product at a price that is sufficient to cover their capital costs and service debts even in a lower-than-anticipated energy price environment. It is also common for large end users to be offered or take an equity stake in LNG projects, so as to encourage a common interest among the buyers and sellers.
US natural gas demand
US demand for natural gas is about 23 Tcf and is projected to increase up to 12 Tcf during the next 10 years as utilities lean more heavily on gas for electricity generation. In other words, gas currently accounts for roughly 24% of US energy use, but by 2020 it is expected to rise to 36.5%.
Strong US natural gas fundamentals have created substantial interest in LNG import terminals. In addition to power generation applications, industrial, commercial and residential demand for natural gas continues to increase. This has placed considerable pressure on US natural gas reserves, causing natural gas field reserves to deplete faster than anticipated. It now takes approximately 2.5 times more active rig capacity to produce the same amount of gas as it did eight years ago. Falling production is illustrated by the fact that for the last eight years, US natural gas production averaged approximately 52 Bcf/day, off from its 2001 high of over 53 Bcf/day.
California in particular, where roughly 40% of all electricity generation is derived from natural gas, is one market sector that would benefit significantly from additional LNG development. Demand for gas in California, the second largest US market for the fuel, has outstripped the rate of local infrastructure expansion and the resulting shortfall of gas supplies is one reason why the state continues to teeter on the verge of a serious energy crisis.
US natural gas prices
For most of the 1990s, annual US natural gas prices at Henry Hub, Louisiana traded in the range of $1.50-$2.50 per MMBtu, but in the year 2000 a new annual high of $4.23 was reached. The figure below shows that in 2004 average wellhead prices reached $5.50 per MMBtu.
Wellhead prices surged even higher in 2005, due to supply constraints caused by Hurricanes Katrina and Rita which shut-in US Gulf of Mexico and onshore natural gas production for varying periods of time.
US LNG demand
US LNG markets have yielded mixed results for investors in the past. Rising natural gas prices in the 1970s acted as a catalyst for LNG investment and four receiving terminals were constructed. Dreams of high profits, however, never materialized since natural gas prices fell sharply after their 1983 peak. Eventually, all but one of the four LNG facilities was mothballed.
For close to 20 years, LNG was not considered to be a cost effective source of natural gas. As a result of the high US natural gas prices in 2000-2001 and growing domestic demand for gas, interest in LNG has been renewed to the point were numerous new facilities are now being proposed. Although LNG was, in the past, used mainly for “peaking” purposes, the expanding use of natural gas for electricity generation makes it a less ‘seasonal’ commodity. Thus, as the economics of LNG become more favorable in the United States, higher utilization rates of LNG facilities have followed. Demand for regasified LNG will not be limited to the utility sector. Forecasters expect more than 60% of this new demand to arise from the industrial, commercial and residential sectors in the year 2015.
US LNG imports are expected to rise by almost 1.5 billion cubic feet per day over the course of the next three years. As demand for natural gas and LNG grows, additional infrastructure will be needed to handle new imports. Taking into account the previously mentioned North American natural gas supply constraints, US demand for LNG has the potential to increase well over 10% per year for the foreseeable future. To meet this demand, the EIA is forecasting that long term US LNG imports will grow to 4.8 Tcf in 2025, representing 15% of America’s natural gas demand by that time. Even given the relatively optimistic EIA estimates for growth, LNG imports will meet only about 3.5% of total US energy in 2025, much less than the 27% that oil imports are expected to account for.
Growing spot market activity
The US received LNG imports from eight countries in 2004, while it exported natural gas to three (Canada, Mexico and Japan). The figure above shows the respective quantities of LNG exports and imports. Net US gas imports equaled approximately 15% of all domestic demand, a figure that has remained relatively constant since 1999.
In 2004, net imports to the United States were 3.4 Tcf, which was an increase of 140 Bcf, or 4.3%, over the previous year. LNG imports grew 29%, to 652 Bcf. Net LNG imports grew to about 17% of overall net imports, up from 13% in 2003.
There were ten spot LNG cargo sales into the US during 2005, amounting to roughly 28 Bcf. These cargoes were not tied to any contract or swap arrangement. In 2005, spot sales were concluded with Cove Point, Elba Island and Energy Bridge.
The majority of spot purchases by US capacity holders are the result of supply interruptions or extended maintenance schedules on the regasification side of the chain. High natural gas prices in the US were not responsible for attracting these spot cargoes.
LNG diversions from the US in 2005 totaled approximately 64 Bcf. Most of these cargoes were diverted from their Lake Charles destination and sent to Spain which suffered from low hydro levels. Other Lake Charles cargoes were diverted to Elba Island.
Growing demand for natural gas in the US will be met by LNG produced from Asia Pacific, Africa, the Middle East the Caribbean and South America. From 1995 to 2000, LNG imports have shifted heavily to producers located closer to the US, such as Trinidad, to take advantage of savings associated with freight costs. However, in 2004, the majority of US LNG imports were sourced from Trinidad due to its proximity with US markets and compatible gas Btu content.
LNG pricing
The price of LNG imports is rising. For the last 2-3 years it remained sufficiently below that of domestically produced natural gas, permitting LNG imports to be competitive with domestic gas supplies. The figure below shows that during the 1990’s the average price of LNG imports into the US was under $3 per Mcf, however, by 2004 this price almost doubled.
Benefits of offshore terminals
One of the most appealing features of offshore LNG import terminals is their lack of environmental impact on shorelines and population centers. An offshore LNG import terminal is a relatively small and isolated installation and in the unlikely event of an accident, few would be affected.
The enhanced security and safety of offshore LNG infrastructure is the result of their remoteness. Access to offshore LNG facilities can be monitored and restricted to a much greater extent than onshore installations.
Offshore terminal jurisdiction and permitting
US offshore LNG facilities are under the jurisdiction of the US Coast Guard not the FERC. The US Coast Guard is less bureaucratic and more efficient than the FERC generally, approving LNG project applications in one year, while it usually takes the FERC 18 months or more to approve an onshore facility.
Offshore LNG receiving technologies
Offshore receiving technologies can be defined by the following categories:
- Offshore gravity based structures (GBS) - A GBS LNG import terminal consists of concrete or steel caissons located on the seabed. This type of installation is totally self-supporting with respect to its operation, utilities and power generation;
- Platform based import terminals – The utilization of existing oil and gas platform structures, converting them to accommodate LNG deliveries;
- Floating storage regas units (FSRU) – An LNG import terminal concept consists of a purpose built, permanently moored steel structure with LNG carriers shuttling between an export facility and the import site; and
- Regasification vessels - A standard LNG carrier modified in order to enable the vessel to discharge regasified LNG to a subsea pipeline, through an internal turret arrangement connected to an offshore mooring buoy.
Each of these offshore regasification technologies have their own specific merits and disadvantages and their use will be highly dependent on various environmental factors, such as water depth and other logistics.
Currently, there are no international standards, such as British Standard codes, specific to fixed offshore LNG terminals, since none have as yet been constructed and facility engineering requirements are being examined on a case-by-case basis.
Although these offshore import alternatives are not currently operating, save regasification vessels, they are in various stages of development. Each technology has its own strengths and weaknesses. Developers have found that an offshore technology that works well in one application may not work as well if certain environmental conditions change.
The feasibility of each LNG import alternative is highly dependent on the conditions encountered at each site. One the most important factors to consider is the depth of water in which the regasification facility will be operating. The figure below illustrates that GBS are designed and best suited for shallow water operations, fixed platforms generally work best at intermediate depths and various floating systems are best in depths greater than 100 meters.
Economics of offshore terminals
Proposals for offshore LNG regasification facilities are growing in number with some $6 billion in construction projects proposed at ten different terminals.
Examples in the table below show that while offshore LNG projects are generally more expensive than their onshore counterparts, any incremental expansion of offshore projects is expected to be less expensive than onshore expansion since larger vessels, up to 250,000 cubic meters, can be accommodated offshore and there is access to plentiful, no cost, seawater for the vaporization process.
Conclusions
Siting an LNG import terminal offshore, offers several practical advantages. Such facilities can be positioned away from the congestion of main shipping lanes, LNG carriers will not have to come into port to dock (saving time and chartering fees) and there is no need for dredging of rivers, estuaries or ports to accommodate such vessels.
Although any development of on or offshore LNG regasification facilities will be subject to strict environmental and regulatory approval, an offshore location will help appease those groups and individuals who oppose the building of onshore storage tanks and regasification facilities in their communities.
While the concept of offshore LNG regasification terminals is attractive to many, opposition remains from those who, wrongly fearing the escape of vapor clouds, still do not want such infrastructure close to population centers, even if they are located miles offshore.
Each of the four offshore LNG import and regasification technologies outlines in this article has its own strengths and weaknesses. These are summarized in the table below.
The driving forces behind the development of offshore LNG receiving terminals and technologies in North America are concerns over long term US gas supply availability combined with safety concerns over the increased handling of LNG. By bringing LNG terminals offshore, it is possible to import and regasify this fuel:
- Without impacting environmentally sensitive areas;
- Without potentially jeopardizing population centers.
The information presented in this article supports Utilis Energy’s assertion that LNG will become an increasingly important fuel for the US market.
Additional regasification capacity is being added, both on and offshore, to accommodate greater LNG imports. The global LNG market and supply economics have evolved sufficiently, permitting greater volumes of LNG to be sold into US market. In addition, offshore regasification operations have made strides to circumvent and alleviate existing land-based LNG opposition, creating opportunities for greater LNG penetration in the US market. These developments set the stage for LNG to contribute ever more significantly as a fuel to meet 21st century North American energy demand.
This article has been based on information from a recent Utilis Energy study – ‘North American LNG 2006: Market & Regasification Technology Analysis’ – available at www.utilisenergy.com