Distance continues to drive LNG costs for US delivery

EIA's report includes several components of LNG costs but does not combine the numbers to provide a total delivered cost of LNG. A rough estimate of the cost of gas supply can be included with the EIA numbers to arrive at a total cost of LNG (Table 1).

BG Group, the largest importer of LNG into the US, also provided illustrative numbers for the cost of LNG delivered to the east and gulf coasts of the US from various countries.²

Table 2 summarizes BG's total delivered costs, which are somewhat lower than EIA's costs except for LNG delivered from Norway.

ExxonMobil Corp. believes it can achieve lower delivered costs for Qatar LNG by increasing the scale of the equipment involved. Both the EIA and BG show total delivered cost more than $3/MMbtu for LNG from Qatar primarily because it is significantly farther than other Atlantic Basin sources.

ExxonMobil believes that by scaling up the process, delivered costs for Qatar can be reduced to less than $3/MMbtu.³ Trains 4 and 5 in Qatar will utilize GE Frame 9 turbines and world-scale compressors as components in the largest-ever LNG production trains. Each train will have a capacity of about 7.8 million tons/year (tpy), which compares with 3 to 5 million tpy for most trains.

ExxonMobil and Qatar will also use larger, more efficient ships to transport the LNG. These will be 200,000-250,000 cu m ships instead of the typical 145,000-cu m LNG tanker design. ExxonMobil estimates that the larger ships will save $0.20/MMbtu to $0.40/MMbtu on LNG delivered to the Gulf Coast.

The company's Senior Vice-Pres. Rex W. Tillerson summarized the company's approach for making LNG from distant Qatar competitive, "Coupling the savings of the large train design with large ships, and innovative terminal design, offers the ability to lower the cost of supply to the US to below $3/MMbtu and equates to a competitive advantage in the growing LNG market."³

West Coast LNG

LNG costs for delivery to the West Coast are not widely available but can be estimated based on the shipping distance (Table 3).

Costs for West Coast delivery of LNG are generally higher than for east and gulf coast costs because of the greater distances involved for many Pacific supplies. Shipping-cost estimates in Table 3 are based on a fixed cost of $0.05/MMbtu and a distance charge of $0.00015/mile, based on analysis of costs from the EIA Global LNG study.

These shipping costs are based on standard size ships and not the new, larger size ships.

Distances are estimates and could vary depending on the tanker route and destination terminal; northern Baja, Mexico, is used.

Such distant LNG sources as Indonesia, Brunei, the East Timor Sea, and the Northwest Shelf of Australia would have total LNG costs of more than $3.60/MMbtu for delivery to the US West Coast. Several companies are interested in bringing in LNG from Russia's Sakhalin Island; LNG from this source would have a distinct cost advantage over most other West Coast supply sources because it is considerably closer to the US.

Royal Dutch/Shell Group is part of the Sakhalin Island LNG development and has joined with Sempra Energy LNG Corp. for one of the Baja LNG import terminals. Mitsubishi Corp., parent company of the developer of the Long Beach, Calif., terminal proposal is also a partner in the Sakhalin LNG development.

Delivery of LNG from Alaska to the US West Coast would have a considerable cost advantage over alternative West Coast sources, but limited amounts of Alaskan LNG are available unless a pipeline is constructed to the North Slope.

Component costs

LNG costs consist of four principal components, listed below. The EIA Global LNG report included costs on the first three components, which appear in Table 1.

BG also provided illustrative numbers for the component costs of LNG.⁴ BG's numbers in Table 4 include a low and high range for some components. BG's component costs are similar to those from EIA, including liquefaction and gas supply costs in the $1/MMbtu range.

Gas supply costs include royalty costs for the host country, as well as exploration and production costs. The cost of finding, developing, and producing the gas that is converted into LNG can be significant for some supplies because the developments are offshore in new regions.

Other sources of LNG can have low exploration, development, and production costs because the supply is already known or is associated with the exploration and production of oil.

Maritime shipping costs consist of amortization of capital cost of an LNG tanker and such operating costs as costs for crew, fuel, and maintenance. LNG shipping costs are a function of the distance traveled and the time required.

Fuel costs vary with distance, and crew costs are a function of the time that a trip takes. Capital costs must be amortized over the time required for the trip.

LNG tankers are expensive compared to conventional ships, costing in the range of $155 million, according to the EIA Global LNG report. A shipment that requires 20 days will have higher tanker-related capital costs than one that takes only 12 days.

Liquefaction costs derive from the fact that LNG is produced in a series of steps that comprise a production train.

The liquefaction equipment includes compressors and the turbines to run them. Heat exchangers are also needed to reduce the temperature of the natural gas to –260° F., at which point it changes to a liquid and has been reduced volumetrically to 1/600 of its vapor size.

Some facilities also require separators to remove the more complex hydrocarbons. The liquefaction facilities also include jetties, loading equipment, and storage tanks.

Regasification costs are associated with the LNG import terminal and the equipment that converts the LNG back into a gaseous state. The terminal consists of land, jetty, unloading equipment, vaporization equipment, and storage tanks.

BG's regasification costs (Table 4) are slightly higher than the EIA estimates and as listed include marketing costs.

A range of regasification costs is not unexpected, however, given that the costs of proposed terminals vary widely.

For example, the Sempra-Shell terminal proposed for Baja, Mexico, carries a $600-million development cost, while the BG-Keyspan conversion of an existing LNG peaking plant in Providence, R.I., to a full LNG import terminal is estimated at $50-60 million.^{5 6}

These proposals would obviously have different regasification costs given the difference in capital costs involved. The size of the facility also needs to be considered; the proposed Sempra-Shell terminal would be bigger than the BG-Keyspan terminal, 1 bcfd compared with 500 MMcfd.

Annual throughput is also an issue in determining the number of units over which capital costs can be amortized.

Ranges, markets

The cost for delivering LNG to the East Coast appears to be in the range of $2.50/MMbtu to a little more than $3.00/MMbtu.

The range on costs for delivering LNG to the West Coast is $3.25/MMbtu to $3.80/MMbtu, with Alaskan LNG costing less.

Costs could vary depending on the source, tanker route, tanker size, equipment costs, and other factors. LNG costs have declined in recent years, and many analysts expect them to continue downward as the technology improves and increases in scale.

LNG suppliers probably prefer that LNG prices not be determined by the cost of LNG. An approach used for Japanese LNG has been to set LNG contract prices based on the equivalent price of oil.

LNG prices can also be determined by the market price of natural gas in the buying country. LNG costs look attractive compared to the price of natural gas of more than $5/MMbtu in the last few months in the US. The difference between the delivered cost of LNG and the price of natural gas in the US probably goes a long way in explaining the massive interest in developing LNG terminals and supplies for this country.

References

1. US Energy Information Administration, The Global Liquefied Natural Gas Market: Status and Outlook, DOE/EIA-0637, December 2003.

2. Chapman, Frank, and Martin Houston, BG's LNG Business, BG-Group.com, Nov. 13, 2003.

3. Tillerson, Rex W., Taking on the World's Toughest Energy Challenge, presentation to Goldman Sachs Global Energy Conference, Jan. 13, 2004.

4. Chapman, Frank, and Martin Houston, BG's LNG Business, BG-Group.com, Nov. 13, 2003.

5. "Sempra Energy LNG Corp. and Shell propose to develop Mexican LNG receiving terminal"; www.sempra.com; Dec 22, 2003.

6. "KeySpan LNG Providence Facility Expansion"; www.keyspan.com; Oct. 23, 2003.