In an interconnected world, where international LNG trade is growing and poised to grow even more dramatically, buyers and sellers become inextricably linked.
Knowing something about each others’ businesses and preferences, sharing risks, cooperating (even while competing), and understanding and engaging the public at large all become important components of successful commercial strategies for both upstream and downstream participants.
Building a full LNG value chain-upstream and liquefaction, shipping, receiving-regasification, and delivery-is among the largest of capital investment projects.
For international LNG trade to flourish and LNG value chains to be built to benefit both risk takers and societies in general, neither stranded capacity nor unmet demand can occur. A high-quality information flow between buyers and sellers will help ensure that neither of these events happens.
An example of such buyer-seller dialogue is the expansion of LNG import receiving capacity in North America and development of greenfield liquefaction projects, of which Nigeria’s Brass LNG is a case in point.
New upstream ventures can only be launched successfully if adequate downstream markets are developed. New receiving terminals can only be launched successfully if upstream supply is available.
North American receiving capacity
Among the major industrial economies of the world, the US stands out for LNG’s small share of its natural gas portfolio (Fig. 1). Blessed by an abundant domestic resource base, the US has long been able to satisfy natural gas demand largely with domestic production.
Beginning in the 1980s, pipeline imports from Canada made up for any shortfall, reaching about 16% of total delivered supply in recent years. By comparison, LNG has come to constitute 2-3% of natural gas supplied to US customers.
Maturing natural gas fields in the US and Canada, burgeoning demand growth in Mexico, and underinvestment in oil and gas exploration and production in that country lie behind the resurgence of interest in LNG.
Against many odds, not least of which is winning public acceptance for new projects, several new LNG import terminals are under development, while three of the four existing land-based terminals are expanding. About 50 new projects throughout North America, including such locations as the Bahamas, have been proposed, planned, are moving through the regulatory process, or are beginning to be built.
Many of these projects are being pursued by familiar names; ExxonMobil Corp., Chevron Corp., Royal Dutch Shell PLC, ConocoPhillips, BP PLC. New entrants include Freeport LNG Development LP, Cheniere Energy Inc., and Calhoun LNG LP, as well as such established energy utilities as Sempra Energy and Florida Power & Light Co.
New thinking is permeating the industry. In early April 2005, Excelerate Energy’s Energy Bridge, using an LNG ship with onboard regasification technology developed in conjunction with Exmar, delivered its first 138,000-cu m cargo to a terminal about 100 miles from the Louisiana coastline.
Excelerate and competitors, including Suez LNG NA (formerly Tractebel LNG North America), which operates the Everett terminal near Boston, are looking to use Energy Bridge or similar approaches off New England.
Most of the international oil companies have offshore LNG facilities on the drawing boards that would receive, store, and regasify LNG for shipment via offshore pipelines to customers ashore. Freeport-McMoran Energy LLC is hoping to receive LNG and regasify it on an offshore platform, utilizing salt-cavern storage for the regasified LNG.
In Mexico, onshore facilities at Altamira, Tamaulipas, on the Caribbean (Shell and Total SA), and Baja California (Sempra and Shell) are under construction. Irving Oil Ltd. and Repsol YPF SA are developing a receiving terminal in St. John, NB, and Anadarko Petroleum Corp. is proceeding with its project in Nova Scotia.
LNG from Atlantic Canada and Mexican projects will principally serve customers in the US to offset scarce North American domestic production.
The dynamism in this early wave of new LNG developments means that nearly any of the developments mentioned here could already be out of date. In addition, given that the last thing developers of new terminals will want is stranded capacity, achieving regulatory approval will not necessarily mean full development of projects.
Fig. 2 highlights the competitive position of new entrants and provides a context for LNG receiving-capacity additions in light of the US Energy Information Administration’s outlook for long-term demand in the Lower 48 states, which will remain the dominant consumer region in North America.
Based on current estimates and outlook for LNG import requirements, the US and North America eventually will be well-endowed with receiving and regasification capacity.
During this initial period of announcements, pre-filings and filings, competitive positioning, and early development, certain realities have set in with respect to where new projects might be located, how they will be operated and managed, and whether they can achieve commercial success.
A large number of “first entrants” (new greenfield projects under development now) will be built and operated along the upper Gulf of Mexico coast. A friendlier development climate and strong cluster of downstream petrochemical, chemical, and other industrial buyers have provided an edge to projects in this region. With the decline in natural gas production along the Gulf of Mexico Outer Continental Shelf, pipeline capacity is available to carry natural gas from LNG projects to customers further north, or to displace gulf onshore production from local use.
As of Jan. 1, 2006, all new US LNG receiving-regasification projects that have been approved are along the Gulf Coast with one exception, Weaver’s Cove in Massachusetts.
In some instances, building new facilities or expanding on existing LNG import receiving and storage capacity will be easy, relatively speaking. More difficult will be the necessary expansions or additions to natural gas pipeline capacity, including disputes about pipeline rights-of-way.
All of these realities are grounded in a common theme: whether, where, and how the consuming public and its political representatives accept new LNG projects or any other new energy infrastructure projects. LNG developers have abandoned locations where public opposition caused progress to grind to a halt.
Supply questions
In public meetings, among the trade press and news media, within the policy and regulatory communities, a common question is “Where will the LNG come from for North America?” A call on LNG exporters of 40 million tonnes from the US alone over the next 2 decades is no small matter.
As things now stand, and notwithstanding competition from growing demand for natural gas worldwide, customers of existing projects in North America have enjoyed a rich array of supply sources from both the Atlantic and Pacific basins. Worldwide deliveries of LNG derive from three regions (Fig. 3).
Table 1 estimates total liquefaction capacity based on current operating trains, those under construction, and known plans. By comparison, 132 million tonnes of LNG were produced in 2004.
As with the outlook for LNG import requirements and terminal capacity in the US and North America (Fig. 2), not all planned projects in Table 1 will proceed. LNG trains are sensitive, as are other large capital investments, to political and country risk, market conditions, financing, and a host of other uncertainties.
When Table 1 is mapped out over time and matched against projected world demand, any increase in apparent demand beyond a reasonable base case would exceed available supply, based on all known upstream and liquefaction projects. Likewise, if planned liquefaction projects are not realized, a supply shortfall might fall below the base case.
Fig. 4 shows the potential worldwide supply-demand balance.
The shipping fleet to carry additional LNG supplies to existing and new customers is also expanding rapidly. Of the 189 LNG ships currently in operation as of November 2005, 155 are 120,000 cu m or larger in capacity. Most new ships on order, 128 of 133, are in this class with 20 ships on order that will class between 209,000 and 217,000 cu m, an historical first for the LNG industry. Of the vessels on order, 75 are for Qatar alone; of these, 28 vessel orders are confirmed.
The match between LNG supply and point of receipt is a function of shipping distance, to a large degree. In a world of short-term LNG arrangements and commercial arbitrage, shipping distance becomes even more important as a determinant of strategy (Table 2).
Clearly, for new receiving terminals and new LNG trains, the matchmaking process is crucial for project success. In the increasingly competitive LNG industry, wise positioning is everything.
Brass LNG
The Brass LNG project adds new greenfield liquefaction capacity into this mix of accelerated growth in LNG consumption in the Atlantic Basin and more dynamic LNG shipping and trade arrangements. Brass is one of several projects emerging in Nigeria that will contribute to increased natural gas utilization (Fig. 5).
Taken together, existing and new LNG projects in Nigeria will contribute more than 70 million tonnes to worldwide LNG supply (Table 3).
But a key question is whether Nigeria’s proved natural gas reserves can support its planned LNG liquefaction plants. Of the total world proved reserves of natural gas, 6,337 tcf, Nigeria contributes 176 tcf. With 1 million tpy of LNG over 20 years yielding 1.2 tcf of natural gas, 50% (88 tcf) of Nigeria’s proved reserves can support all announced LNG plants (more than 72 million tpy).
Clearly, Nigeria is poised to be a key LNG exporting country and dominant player in the Atlantic Basin.
Brass LNG was incorporated in December 2003. The shareholding reflects another key emerging factor in the LNG world-the desire for producing and exporting countries to participate in the value chain in ways that most benefit their equity positions and enhance long-term success. At Brass, Nigerian National Petroleum Corp. holds 49%, while each partner among ENI, ConocoPhillips, and Chevron Corp. holds 17%.
Brass LNG is to produce LNG at a competitive cost with other world-class LNG facilities and foster development and use of uncommitted shareholders’ gas reserves. The project envisioned a 10-million-tpy LNG plant next to the Brass terminal and two upstream developments.
The chronology of Brass LNG development (Table 4) reflects the overall vision and goals for the major shareholder and its partners. ✦
Bibliography
Background information is primarily from the Guide to LNG produced by the Center for Energy Economics at the Bureau of Economic Geology, the University of Texas at Austin (www.beg.utexas.edu/energyecon/lng).
The authors
Michelle Michot Foss ([email protected]) is chief energy economist and head of the Center for Energy Economics, Bureau of Economic Geology for the University of Texas at Austin. The center, in Sugarland, Tex., was formerly the Institute for Energy, Law & Enterprise at the University of Houston Law Center. At UH from 1991-2005, Foss was a UH Shell Interdisciplinary Scholar and Shell Graduate Fellow, coordinator of the Natural Gas Project, and founder and director of the Energy Institute. Previously, she was a director of research at the investment bank Simmons & Co. and director of research at Rice Center, an urban regional economics, energy, and transportation research group. Foss is a member of the Council on Foreign Relations, a member of Women’s Energy Network, and a partner in Harvest Gas Management, a Texas-based exploration company. Foss holds a PhD in political science from the University of Houston, an MS in economics from the Colorado School of Mines, and a BS in biology, with a geology minor, from the University of Louisiana-Lafayette.
Bala M. Wunti (Bala.m.wunti @brasslng.com) is part of the commercial LNG professional staff of Brass LNG Ltd., Victoria Island, Lagos. He has 14 years of industrial, marketing, and commercial experience in the oil and gas industry and is currently a member of the commercial negotiation team of the Brass LNG memorandum of understanding. He is a career employee with Nigerian National Petroleum Corp. Wunti holds an MBA in marketing from Abubakar Tafawa Balewa University, Bauchi, and a BSc in chemistry from Ahmadu Bello University, Zaria, Nigeria. Wunti was selected as a member of the new modeled contract for short-term LNG sales and purchase agreements by the Association of International Petroleum Negotiators (AIPN).
Correction
The articles entitled “Extensive North Sea commissioning, pigging pose challenges” by Christian Falck and Jarleiv Maribu (OGJ, Nov. 21, 2005, p. 66) and “Extreme conditions drive Ormen Lange concept development” (OGJ, Dec. 5, 2005, p. 62) by Asbjørn Wilhelmsen, Hilde Meisingset, Simen Moxnes, and Hans Olav Knagenhjelm were both based on presentations to the 2005 International Offshore and Polar Engineering Conference, Seoul, June 19-24, 2005.
