Why Small To Midscale FLNG Is The Future And Your 3 Point Checklist To Getting It Right
Between 2014 and 2030, the US Energy Information Administration (EIA) has projected that global energy consumption will increase by 44 per cent. By 2035, promoted by demand in the growing Asian market, natural gas will move into second place in the global energy mix, behind oil and superseding coal.
Lack of transmission networks and the fact that four out of every five infrastructure mega projects in the oil and gas industry fail in their objectives due to long development times, high cost and substantial budget overruns, means that floating liquefied natural gas units are increasingly becoming seen as the solution to the future of natural gas supply.
When it comes to FLNG systems over traditional onshore terminals, there are many reasons behind the support, chief amongst which are:
- Flexibility: FLNG units are easily redeployed and can be used in both offshore and nearshore/inshore environments, drawing from multiple fields simultaneously and dealing with a range of gases.
- Overcoming land-based project barriers: In some cases, land access grants and delays on construction permits can add years to an LNG project. The seaborne nature of FLNG units can help circumnavigate some of these fundamental stumbling blocks common to onshore developments.
- Financial benefits: The floating units reduce the number of elements in the LNG supply chain, and costly ancillary infrastructure developments that are necessary for onshore terminals and subject to individual cost overruns and deadlines. This leaner, more cost-efficient chain also means that time to first production is also greatly reduced.
Does size matter?
In December 2013, Shell's gargantuan Prelude FLNG was floated out of the dry dock at the Samsung Heavy Industries (SHI) yard in Geoje, South Korea. At 488 metres in length, she is the largest hull ever constructed.
Once Prelude is in position some 475 kilometres north-east of Broome, Western Australia, she will begin her 25 year mission to produce approximately 3.6 million tonnes of liquefied natural gas per annum and 90 million tonnes over her commissioned lifetime. At a cost of $13 billion and with storage tanks equal to 175 olympic swimming pools in volume, Prelude will be the undisputed leviathan of the energy world.
Unlike Prelude, the majority of future FLNG projects will be conceived to monetise small marginal gas fields and will, therefore, have to be of a size and cost to compliment the economic profile of both company and field. Instead of being dominated by a relatively small fleet of multi-billion dollar, large-scale vessels, it is likely that the sector will be replete with small-midscale FLNG units.
Although a fraction of the size of Prelude, taking these vessels from drawing board to dry dock to deep water will be no mean feat for developers, who will have to surmount a number of challenges to get their projects started.
Getting it right
- Funding: As with any project without precedent, the traditional arms of finance are wary to commit funding capital to FLNG ventures. For conventional LNG projects, the gearing ratio for funding is summarily 70:30 debt to equity. However, in the case of FLNG project financing, banks are loathe to provide funds by means of a project finance structure because of the risks associated with bleeding edge technologies.
It will be necessary for the stakeholders - from operators to off-takers - to be ready to stump up higher equity contributions than is typical for most forms of project finance.
- Regulations: Because FLNG is a relatively new concept in a well-established and conservative industry, risk-averse regulatory authorities have also been extremely cautious when approaching FLNG ventures.
As of the beginning of H2 2014, only the Caribbean FLNG development spearheaded by Exmar and Pacific Rubliales and PETRONAS's Kanowit and Rotan FLNG projects have progressed as far as final investment decision (FID) status. As such, every party involved in the FLNG development must know its obligations at every step of the journey, and expect a long and punctilious path to approval.
- Technology: FLNG units are some of the most advanced vessels ever conceived of in the hydrocarbons industry. The addition of an onboard liquefaction plant to what would otherwise be a floating production, storage and offloading (FPSO) unit, adds a whole new layer of complexity to an already complicated beast.
Most FLNG units will only see land when they are initially floated out and then brought back in for decommissioning, spending decades moored in a single location. For this reason, it is key to choose your technology wisely, in sync with the demands of both weather conditions and field environment, and steering clear of short-term obsolescence of vital systems.