LNG is short for liquid natural gas. The benefit of LNG is that it is an easily transportable and storable liquid that takes up only 1/600th of the original volume of natural gas in its gaseous state.
The LNG Industry is based largely on a series of virtually self-contained projects made up of interlinking chains of large-scale facilities that are bound together by complex, long-term contracts. The industry is subject to intense oversight by host governments and international organisations at every stage of the process. All the LNG facilities together make up the “LNG chain”, consisting of the following components:
- Natural gas production.
- Liquefaction. Turning the gas into liquid (LNG) by cooling it down to -163 degree Celsius.
- Shipping. Large scale vessels equipped with spherical tanks or membrane tanks.
- Regasification terminals. Heating up the LNG and turning it back into gas.
- Delivery by pipeline or truck.
Natural gas production will not be discussed here, as it is the same for natural gas, CNG, and LNG.
The single largest investment in the chain is the liquefaction plant which removes impurities from the gas and cools it down to -163 degrees Celsius. Gas composition, quantity and location have important bearings on the design of the liquefaction plant, but at heart they are simply giant refrigerators. All LNG facilities generally require huge capital investments.
Shipping has become the most competitive and therefore transparent part of the LNG chain. Fleet ownership structures are:
- Fleet is owned by an independent shipowner and chartered out to seller or buyer under a long-term lease contract.
- Fleet is owned directly by the LNG seller or his SPV (indirect ownership through a special purpose vehicle).
- Fleet is owned directly by the LNG buyer or his SPV.
Tanker ownership, management and control are often separated. Control is often through the buyer or the seller (disponent owner, or time-chartered owner) since the ship is not registered with the actual owner.
The phases of ship operation are:
- Cooldown prior to loading. Often through keeping some LNG in the tanks after discharge (LNG heel).
- Boil-off. Used to power the ship’s steam turbines or dual-fuel marine diesel engines. Even today, insulation of the tanks is not perfect, so boil-off is still between 0.1-0.25% of cargo per day.
- Cargo loading/discharge, taking each up to 14 hours.
LNG is sold in two ways;
- Free on board (FOB). The buyer is responsible for arranging the shipping and title to the cargo transfers on loading. Used when buyer controls shipping.
- Delivered ex-ship or CIF (cost, insurance, and freight). Seller arranges the shipping and the title is transferred at the destination or after loading.
Regasification terminals are where LNG cargoes are discharged, turned back into gas by heating through vaporizers, and odorized for security purposes. Regasification terminals are also called loading or receiving terminals, which are usually owned by the customer and operated on a proprietary basis. On occasion, there may be leases for third-party access. A terminal consists of:
- One or more berths with unloading arms.
- LNG storage tanks.
- Vaporization equipment to move the regasified LNG into pipelines.
More than 60% of total cost of an LNG receiving terminal is associated with the construction of the storage tanks, marine and off-loading facilities, and safety systems. The final construction cost is determined by the following cost drivers for receiving terminals are:
- Local geologic considerations and the need to tailor infrastructure to them.
- Cost of real estate. In Japan, facilities are built on made land, which is expensive.
- Site layout, regulatory, and safety considerations. Number and type of storage tanks can account for cost variances of up to five times.
- Local labour and construction cost.
- Vaporization technology. Open-rack or gas-fired.
- Use of local power supplies or development of dedicated power generation.
- Need for downstream facilities to tie into the pipeline grid, including pipelines and gas treatment and odorization plants.
- Marine environment. Berth location, distance to tanks, etc.
- Licensing and permitting activities needed to accommodate local residential or environmental concerns.
- Upgrading existing infrastructure, roads, etc.
History of LNG
In the early stages of the industry (1960’s), there were only a handful LNG players, known as “the club”, as capital costs were very high with uncertain prospects of ever being profitable. Even a successful LNG project was only marginally profitable then. Today, it is contended that natural gas will be the number one energy source by 2020, surpassing coal. The EIA predicts that the world gas consumption will increase by 70% between 2005 and 2025.