LOW oil-linked liquefied natural gas prices are feeding interest in leased floating LNG plants, considered by cash-strapped oil and gas companies as viable balance sheet-light options to commercialise the development of stranded gas reserves, according to two leading floating production contractors.
Though much touted for its cost effectiveness and efficiency over conventional offshore field developments, FLNG is not exactly cheap: the first units of its kind - newbuild or conversion - cost above US$1 billion each.
Only Shell and Petronas have demonstrated the ability to carry newbuild FLNGs on their balance sheets - Shell's Prelude FLNG is being built by South Korea's Samsung Heavy Industries while Petronas' first FLNG, PFLNG-1, is under final stages of construction at Daewoo Shipbuilding & Marine Engineering, also in South Korea.
But as Bumi Armada's head of gas business, Luc Pescio, pointed out, even among majors, there is a swing in favour of lease and operate over newbuild contracts for FLNGs as they scale back on capital expenditures.
Lease and operate FLNG contracts are likewise more palatable to small- and mid-cap independents that lack the financial muscle to underwrite the construction of newbuild FLNGs.
More importantly, as Mr Pescio suggested, leased FLNGs can be economical even with oil-linked LNG cargoes now trading at about US$8 per million British thermal unit. This explains why interest in FLNG - leased over newbuild - has held out despite oil-linked LNG spot prices plunging to half their 2013 peak of US$14-16 per mmBtu.
At low LNG prices, investments in gas import over export infrastructure may make more economical sense, but as SBM Offshore's managing director Martin Hruska noted, most industry players are acting earlier than later, taking into account the long gestations of FLNG projects. "You can't stop development; you still need to have the 5-6-year outlook (in the gas business)."
SBM is pursuing six to 10 FLNG prospects, mostly for lease and operate units. Mr Hruska acknowledged that most of these prospects are in the early conceptual or engineering studies stage and progressing them towards final investment decisions will probably take years.
Yet he is optimistic that the cash crunch facing oil and gas firms plays to the advantage of leased FLNGs and the participation of floating production contractors in this challenging offshore marine segment.
FPSO contractors such as SBM and Bumi Armada have already taken on billion-dollar oil production floater contracts. FLNGs are more costly than the average floating production, storage and offloading (FPSO) vessels, but SBM could lean on its 30-year track record in delivering complex offshore floating structures to seek buy-ins from financiers.
Mr Hruska said that FLNGs are largely similar in equipment configuration to third-generation FPSOs, save for the cryogenic and liquefaction modules. He acknowledged that for small FLNGs to be economical, standardisation and modularisation of the topsides will be the key.
SBM is targeting one million to 2.5 million tonne per annum (mtpa) FLNGs, which can be built using facilities in existing yards. Going for conversions of existing LNG carriers opens up yard options outside South Korea for SBM. "If it is a newbuild, you will need to build the containment system, (but with conversions), yards can also build the modules elsewhere and bring them in for integration with existing LNGC hulls," said Mr Hruska.
SBM's FLNG concept calls for the joining of two Moss spherical type LNGC hulls. SBM has gone with Moss type LNGCs because these are readily available in the resale market and easier to convert.
"There may be a prescribed number of yards capable of joining the LNGC hulls, but these can also be done afloat and I think Keppel Offshore & Marine can do it if we can find space within the yard group," Mr Hruska said.
Bumi Armada is also considering small-scale conversions for its proposed FLNG concept, but unlike SBM, it is not using Moss type LNGCs as Mr Pescio argued that "the available first-generation tankers in the market do not offer large enough storage capacities and deck space, not to mention the flexibility for potential topsides design expansion during project specific front-end engineering and design or detailed design".
First-generation Moss LNG tanks average 120-130 cubic metres in storage capacity, which would make for more complex and costly offloading operations, he explained.
SBM is working around the limitation by joining two hulls under its proprietary concept. By contrast, Bumi Armada's concept is premised on the conversion of a vessel type that Mr Pescio would not divulge into a 170-190 cubic metre storage FLNG, with annual throughput of one to two mtpa.
The proposed FLNG will be able to support production from fields with 0.5 to three trillion cubic feet (tcf) of reserves. Bumi Armada is also offering a 2.5 mtpa newbuild FLNG concept through an industry partnership.
Mr Pescio said that a mid-scale 2.5 mtpa FLNG can be used for development of gas fields with one to three tcf of reserves or in multiples of units to develop a larger field, as is how Woodside Petroleum is taking on the Browse LNG off Western Australia.
SBM is touting its ability to raise funding through unconventional sources such as the US$450 million in US private placement for the Deep Panuke mobile offshore production unit, which boasts 300 million cubic feet per day of production capacity, as an advantage in financing FLNG and other large capex offshore projects.
But Energy Maritime Associates managing director David Boggs warned of the mixed track record of the FPSO industry. "For the financial sector, it comes down to the ability to execute projects within budget and on schedule," he explained.
"Many FPSO contractors have been looking at FLNGs for some time, but none of them has moved forward," he also noted.
Part of this stems from the stream of FPSO projects in the past few years keeping industry players busy within their comfort zone. Leased FLNGs are considered more complicated to engineer financially because unlike oil, which can be easily traded, LNG projects typically require gas offtake agreements before taking flight.
Only Exmar and Golar LNG - two contractors active in the LNG transportation and regasification space - seem to have early successes in securing buy-ins from oil and gas companies to go with lease or tolling FLNG agreements. Exmar and Golar FLNGs are mainly designed for liquefaction purposes with limited or no gas processing capabilities.
Golar has a tolling agreement with Cameroon's state-owned SNH and Perenco to produce 1.2 million tonnes per annum of LNG for about eight years using an FLNG under conversion at Keppel Shipyard from the second quarter of 2017.
Exmar will supply a barge-based LNG vessel for the Douglas Channel project near Kitmat, British Columbia. Processed gas will be sourced over 20 years from the shale gas reserves held by a joint venture between Idemitsu and AltaGas in west Canada's Pacific Northern Gas (PNG). Électricité de France will market the LNG supplies from the project, which is targeted for a final investment decision before the year-end. Operational startup for the project is targeted for 2018.
Along the coastline of North America, shale gas producers' interest to step up monetisation of their reserves through exports overseas means the region has emerged as a hot spot for near-shore leased FLNG demand.
But as Exmar's experience with its Caribbean FLNG shows, these projects face delay or cancellation risks. Exmar is seeking a new home for Caribbean FLNG after the intended client, Pacific Rubiales Energy, postponed taking delivery of the vessel.
Norwegian funding has emerged as a key source of financing for Exmar and Golar FLNG projects, partly due to a greater risk appetite for untested offshore marine solutions in the Scandinavian country, according to Mr Boggs. Belgium-based Exmar has teamed up with Norwegian tycoon John Fredriksen's Geveran. Both parties will transfer assets to the Flex LNG joint venture to pursue growth in the LNG segment.
For more of BT's year-in-review stories: bt.sg/review_15