Energy World’s Newest Supership Misses the Boat on LNG Pricing

Energy World’s Newest Supership Misses the Boat on LNG Pricing

It’s longer than three soccer fields, heavier than two aircraft carriers and powerful enough to chill gas

into liquid colder than the surface of Jupiter.

And its maiden voyage couldn’t have come at a worse time.

The world’s first modern vessel for producing liquefied natural gas was ordered by Petroliam Nasional

Bhd in 2012 when LNG traded for more than $15 per million British thermal units. It was launched last

month, with prices down by about two-thirds. Royal Dutch Shell Plc faces a similar problem with its

version of a floating LNG plant, which will be larger than any ship ever built.

“At $15 and above you can do anything, so everyone went and did everything,” said Trevor Sikorski, a

natural gas analyst for Energy Aspects Ltd. in London. “Now all these projects start to come online at the

same time, and all of a sudden you have all this supply and now your margins are next to nothing.”

The plight of the PFLNG Satu, as the first vessel is known, reflects the larger struggle facing all producers.

Projects approved years ago when energy prices were high are coming online now, adding to a global

supply glut that has pushed spot LNG down to $4.62 per million Btu this week.

Annual LNG demand is forecast to increase by 140 billion cubic meters (5 trillion cubic feet) from 2015

through 2021, which isn’t enough to absorb almost 190 billion cubic meters of new capacity slated to

become operational, the International Energy Agency said in its Medium-Term Gas Market Report 2016

published Wednesday.

“LNG projects take four to five years to get delivered,” said Prasanth Kakaraparth, Wood Mackenzie

Ltd.’s LNG supply analyst for Southeast Asia. “By the very nature of these long delivery periods, they get

hit quite a bit by these commodity cycles.”

Petronas, Malaysia’s state-owned energy company, is betting the cycles will even out over the long run.

PFLNG Satu will produce about 1.2 million tonnes of LNG annually for the next 20 years from the

Kanowit gas field, which is located about 180 kilometers (112 miles) north of the coast of Borneo.

“We are taking a long-term view for this project,” Petronas said in a written statement. “In terms of

profitability, the project is still viable as an additional supply point within our larger portfolio of LNG

assets.”

Some Advantages

Floating LNG has some advantages over land-based liquefaction, Rafael McDonald, the Cambridge,

Massachusetts-based global director of gas and LNG for IHS Inc. It eliminates the need for pipelines to

connect far-flung fields to shore. Companies also hope that they can better control costs in a shipyard

than on a distant construction site, he said.

Putting production on the water isn’t a new idea in the LNG world. In fact, it’s the original idea. The first

plant to chill natural gas for transport was mounted on a barge in a Mississippi shipyard in 1954,

according to an account from Cedomir “Cheddy” M. Sliepcevich, a chemical engineer instrumental in the

birth of the industry. The barge, which was to liquefy gas for shipment to the Chicago Stock Yards,

couldn’t operate economically, and the LNG industry moved on shore for the next 60 years.

LNG Movement

The modern LNG movement began in 2011. Crude oil rose back to $100 for the first time since the

recession, and the Fukushima nuclear disaster led Japan to shut its nuclear power plants and increase

LNG imports for gas-fueled power generation. The fuel in Japan rose from $11 per million Btu at the

start of 2011 to nearly $17 by the end.

Shell approved its facility, called Prelude, in May 2011. The platform will produce three times as much

LNG as Satu and also extract condensate, an ultra-light form of crude oil, and liquefied petroleum gases.

Shell says it’s not technically a ship because it won’t propel itself between destinations. Prelude is

expected to be generating “material” cash by 2018, Shell Chief Executive Officer Ben Van Beurden said

in April.

Current prices have dampened demand for floating LNG projects. Petronas has delayed its second

floating liquefaction plant by two years. The ship had its keel-laying ceremony at a South Korean

shipyard at the end of April and is expected to be operating by 2020. Colombia’s Pacific Exploration &

Production Corp. terminated in March a contract to lease a floating liquefaction facility from Exmar NV.

Shell, Woodside Petroleum Ltd. and other partners in March shelved a $40 billion project in western

Australia.“The fact that we have not gone ahead with that project at this stage as a consortium doesn’t

mean the concept of floating LNG doesn’t work,” Van Beurden said at a conference in Perth in April. “It

does mean that the commodity cycle makes projects of that scale and investment level uninvestable at

this point in time.”

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