How Floating Technology Will Revolutionize LNG

Floating liquefied natural gas (FLNG) technology took center stage this week with the arrival of a major new FLNG ship in Lithuania. The Independence FLNG ship was greeted by onlookers and well-wishers, but the event was also billed as a concrete step towards breaking Europe's dependence on Russia for natural gas.

The Independence will have the capacity to regasify 4 billion cubic meters of natural gas each year, more than enough to meet Lithuania's entire gas demand with enough left over for other Baltic states.

Onshore LNG liquefaction and regasification terminals have been around for years, but FLNG ships are relatively new and are only now beginning to break into the market, highlighted by the arrival of the Independence to the Baltic region.

While there are a variety of factors that ultimately determine the economic viability of FLNG ships over LNG import terminals, the Lithuanian Energy Ministry says it expects to procure LNG at prices of about $345-$383 per thousand cubic meters (or $9.39-$10.43 per million Btu). That competes favorably against natural gas from Russia, for which Lithuania paid $488 per thousand cubic meters earlier this year.

There are a series of exciting benefits that FLNG ships offer, which will be discussed further below.

Floating Storage and Regasification

FLNG ships come in two main varieties. The first is floating storage and regasification units (FSRU), which are vessels that can be moved and anchored at a port. They accept LNG from a separate carrier, bring the LNG onboard, regasify it, and pipe it onshore. The Independence that just arrived in Lithuania is of the FSRU sort.

They serve the same function as an onshore LNG import facility, but can potentially be constructed at a fraction of the cost. Perhaps more importantly, they can be moved to another port if need be, rather than leave behind stranded capital if trade patterns change and ports no longer need to import LNG.

These so-called FSRUs are beginning to crop up in disparate parts of the world. There are an estimated seven FSRUs in operation as of September 2014, with Lithuania becoming the fifth country to do so. There are at least five more projects either planned or under construction.

China announced on October 28 that its first FLNG ship completed its first phase of construction in Tianjin. The $537 million ship will be capable of regasifying 3 billion cubic meters of natural gas annually, and will serve Tianjin and Beijing.

The Independence was constructed by Hyundai Heavy Industries (KRX: 009540), a Korean firm that controls 15 percent of the world's ship building market. Hyundai says that its floating storage regasification units (FSRUs) offer enormous advantages for regasification over conventional onshore LNG import terminals. For example, construction time can be cut down by a full year, and they can potentially cost about half as much as a regasification terminal. Hyundai Heavy will be a major player in the FSRU market in the years to come.

Golar LNG (GLNG) is more of a pure play on floating LNG, however. Golar won the contract to build the world's first converted FSRU ship, and it was delivered into operation in 2009. Known as the Golar Spirit, the ship allows its purchaser, Petrobras, to import LNG into northeastern Brazil. It has an annual capacity of 2.5 billion cubic meters.

Golar added another FSRU in Brazil the same year - named the Golar Winter - which had the capability to regasify 5.1 bcm/year, or double the capacity of the first ship. The ship initially served Rio de Janeiro, but in a perfect example of the versatility and flexibility of the nascent FSRU sector, it was later moved to the northeastern state of Bahia to satisfy market demand there.

Golar also has operating FSRUs in Dubai (4.9 bcm/year), Indonesia (5 bcm/year), and Kuwait (7.5 bcm/year). It has plans to deliver two more - one to Jordan (7.5 bcm/year) and one to Ghana (7.5 bcm/year) in 2015.

Floating Production Storage and Offloading

FSRUs are already in operation, regasifying LNG at the port of entry, and sending it ashore. But there is an even more exciting technology that is nearing commercialization.

It is called Floating Production Storage and Offloading (FPSO). FPSO ships are under construction, but none have entered operation yet. The beauty of these vessels is that they can actually float above an offshore natural gas field, tie into the well at the seabed through special risers, and take natural gas on board. Then, FPSOs can liquefy the natural gas and offload it onto a conventional LNG carrier. This completely cuts out the need to pipe natural gas to an onshore storage unit, and subsequently go through the liquefaction phase.

Exmar NV (EBR: EXM) is expected to bring the world's first FPSO ship online in the first quarter of 2015. It will have a relatively small capacity of just 0.5 million tonnes of LNG per year (or 0.68 bcm/year).

But there are a few more projects on a bigger scale. First, Petronas, the state-owned oil company in Malaysia is building a larger FPSO ship, which will have a capacity of 1 to 2 million tonnes of LNG per year (mtpa). Its first FPSO ship, which it is calling PFLNG 1, will be completed by the end of 2015 and will produce and liquefy natural gas 180 kilometers off of Malaysia's coast. Petronas is also moving forward with a second FPSO, dubbed PFLNG 2, which is slated for completion in 2018.

Perhaps the most spectacular on the list is the Prelude, which is under construction by Royal Dutch Shell (NYSE: RDS.A). The ship is expected to be truly massive, and Shell claims it will be the largest structure ever sent to sea. It "contains enough steel to build the equivalent of 35 Eiffel Towers," according to a flashy promo video on Shell's web site. It will be near a half kilometer in length, weigh over 600,000 tonnes, and displace six times as much water as the largest aircraft carrier in the world. It will be able to produce and liquefy 3 mpta per year.

Shell notes that although the ship will be huge, it is still only about one-quarter the size of an onshore liquefaction and export facility. This, the company promises, will allow it to cut the cost of LNG development. The ship will be moored 475 kilometers off the coast of Western Australia.

In a sign that FPSO technology may be disrupting LNG markets, BHP Billiton (NYSE: BHP) and ExxonMobil (NYSE: XOM) said that they have decided to forge ahead with floating technology rather than use existing onshore LNG infrastructure for a natural gas project.

Although a final decision has yet to be made, the two companies confirmed that they prefer to use floating LNG technology in their 50-50 joint venture to develop the Scarborough discovery off the west coast of Australia. The field is expected to hold 8 to 10 trillion cubic feet, but since it is over 200 kilometers from the coast, there has been little progress on developing the field since its initial discovery in 1979.

No doubt with a keen eye on Shell's progress with its Prelude, BHP and ExxonMobil have been convinced that FPSO technology will be the key to finally developing the Scarborough field.

Conclusion

The LNG industry is rapidly expanding. Global liquefaction capacity is expected to expand by one-third over the next several years, jumping from 290 mtpa in 2013 to 396 mtpa in 2018. That will almost entirely come in the form of onshore facilities. But with FPSO technology beginning to scale up and prove itself, energy companies may begin to increasingly turn to floating LNG, both for regasification, and eventually for production and liquefaction as well.