Browse decision highlights cost benefits of FLNG

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Woodside’s recent decision to recommend floating LNG (FLNG) technology as its preferred development option for the Browse gas fields offshore western Australia is highly significant. It is the latest in a series of developments that highlight how the industry’s attitudes towards FLNG have radically changed in a remarkably short time.

No longer is FLNG regarded as just a way of developing remote stranded gas fields for which an onshore solution would not be economically feasible. Today FLNG is increasingly seen as a game-changing technology that could solve one of the industry’s most daunting challenges: how to reduce the escalating costs of constructing gas liquefaction projects.

That said, the trend is not without its controversies.

Not proven: Firstly, some argue that the economics of the technology are not yet demonstrated. They have a point. While three FLNG projects are currently under construction in shipyards in South Korea and China, even the most advanced of them – the proposed Pacific Rubiales project in Colombia – is not due to enter service until at least the end of 2014, and 2015 looks more likely. The most ambitious of them – Shell’s Prelude development offshore north-western Australia – will not enter service until the end of 2016 at the earliest and more probably 2017. The third project – Petronas FLNG 1 (PFLNG1), being developed by Malaysia’s Petronas for the Kanowit field offshore Sarawak – is not due on stream until the end of 2015. So no one can be sure just how the economics of FLNG will pan out in reality.

Celebration of the laying of the Keel for Shell's Prelude LNG projectTAKING SHAPE – In May Shell and its partners in the Prelude FLNG project – INPEX, Kogas and CPC – celebrated the laying of the keel for what, when completed, will be the world’s largest-ever floating structure. The hull is now being assembled in a dry dock at Samsung Heavy Industries’ Geoje shipyard in South Korea. French engineering contractor Technip is responsible for the topsides.

Secondly, we have yet to see whether the technology will work as expected. This is less of an issue for near-shore projects such as Pacific Rubiales, or the Lavaca Bay project being pursued by Excelerate Energy in the United States. But it is very much an issue for the FLNG facilities that will be operating out in the open ocean, hundreds of kilometres from shore, such as Prelude and PFLNG1. Shell has designed Prelude to cope with the most severe metocean conditions – Category 5 cyclones. But we have yet to see how the FLNG facility will cope with such conditions for real.

Thirdly, the politics can be tricky. Over the course of this year Australian politicians have been arguing about the merits and the disadvantages of FLNG versus onshore development, with particular regard to Browse.

For instance, Western Australian Premier Colin Barnett is fiercely opposed to Browse going forward as an FLNG project, not least because an onshore development would create more jobs. Federal Resources Minister Gary Gray, meanwhile, argues that it should be left to the project’s participants to choose how best to develop the Browse resources. Preventing them from choosing the FLNG option could mean that the resources remain undeveloped, costing Australia billions of dollars in lost royalty revenues . . . and jobs.

Still waiting for Sunrise: This is not a new argument. Woodside and partners and East Timor have been arguing for years over how best to develop the proposed Sunrise LNG project. East Timor wants the liquefaction project onshore, because of the economic benefits it would bring to a small, young and poor nation. Woodside and partners want to develop Sunrise as FLNG because that would be, they believe, a much cheaper and consequently more profitable option. The current political deadlock has meant that the project languishes at the bottom of the list of growth opportunities that Woodside is planning to pursue – leaving East Timor with no revenue at all from the Sunrise resources . . . for now.

Onshore versus FLNG development is also a political issue in Mozambique, a nation seemingly on the threshold of becoming a world-class LNG exporter, following a string of large gas discoveries since 2010 that have identified more than 170 Tcf of gas resources.

An ideal setting for FLNG: At the LNG 17 conference in Houston earlier this year the nation’s Mineral Resources Minister Esperança Bias told Gastech News that the Mozambican government was minded to go for an onshore plant rather than FLNG because of the economic benefits the investment in infrastructure would bring. However, FLNG has not been ruled out and the numbers for capital expenditure could well end up being the deciding factor. One of the poorest countries in Africa, Mozambique is a prime example of a developing nation with little onshore infrastructure in place – an ideal setting for the new FLNG business model.

So how is it that attitudes towards FLNG have changed so radically? And how feasible are the claims being made by some FLNG developers that their projects are likely to end up much cheaper than onshore developments?

Shell’s answer, in a paper presented at LNG 17, is: “In the first instance, Shell considered FLNG as a technology for developing smaller gas-condensate fields (3-5 Tcf) at a relatively large distance from shore (200 km or more) which could otherwise not be developed economically. Economic feasibility studies since Prelude FID [in May 2011] hint, however, at a much wider application area . . . Besides applications that are similar to Prelude or a development where multiple smaller fields are exploited by means of sub-sea tie-backs, internal economic analyses show that multiple FLNG facilities operating on a large field may be a competitive proposition versus an onshore LNG plant.”

“At the right place in the cost curve” However, Shell has been coy about the costs of Prelude. Last year, when Gastech News asked Shell’s then general manager for FLNG, Neil Gilmour, about the costs of Prelude, all he would say was: “We’ve been asked this question many, many times. We said before FID that this has got to produce cost-competitive LNG. If it didn’t do that, it wouldn’t be competing for capital inside Shell, nor would we be able to build the type of relationships we’ve got with the partners in Prelude. FLNG’s got to be at the right place in the cost curve – and I’m absolutely confident it is.”

There has inevitably been much speculation in the Australian media and within the LNG industry about the capital expenditure that will be required for Prelude. The consensus is between $10 billion and $12 billion, including the upstream phase of the project.

Translating this into a cost per tonne per year ($/t/y) of liquefaction capacity is tricky because Prelude will also produce large amounts of condensate and LPG. That said, Shell has designed a version of Prelude for the development of dry gas fields which would have liquefaction capacity of 6 mtpa for around the same cost. That suggests a cost of around $2,000/t/y for the whole development.

To put that in context, the Gorgon project is currently expected to cost around $52 billion for 15.6 mtpa of capacity, suggesting a cost of $3,300/t/y for the whole development.

Lavaca Bay: In contrast with Shell, Excelerate Energy has been very open about the expected costs of its Lavaca Bay FLNG project, a near-shore development in the US. Front-end engineering and design (FEED) was completed in February, and the company now claims to have plus-minus-10% estimates for capital costs. In coming up with the cost estimates, Excelerate worked closely with Samsung, which is to build the hull for the project, and Black & Veatch, which will be doing the topsides.

“We’re very comfortable with where we are,” says CEO Rob Bryngelson. “We are going see ourselves at less than $600/tonne/year, all in. That includes the land-based infrastructure that we have to dock to, the vessel, everything. We’re looking at a 4.4 mtpa project so it should be right around or south of $2.4 billion.”

These numbers need to be seen in context. Lavaca Bay will take its gas from the pipeline grid, so there are no upstream costs to factor in. Nevertheless, the numbers are impressively low. So how come the project will be so cheap to construct, in relative terms?

“If you want to build an LNG project in a remote location,” says Bryngelson, “you have to go in and spend half a billion dollars to build a town and infrastructure and roads and an airport to get people in and out. And that’s just the beginning. You’ve also got to fly everybody in to build tanks and to put the whole plant together.

“We do all that in a shipyard. The workers are there. All the equipment is there. You don’t really have to change anything. And all you’re building on site is pretty basic infrastructure. It’s either just a simple jetty and a pipeline – the vessel can do gas processing on board or you can put it onshore – and if it’s a far offshore location it’s a subsea [pipeline and] buoy system, like we use to moor the regas vessels offshore the Gulf of Mexico and Boston.”

The company has encountered scepticism. However, says Bryngelson: “We’ve had three or four groups come through and do detailed due diligence work on our floating liquefaction. They’ve come in being sceptical and they’ve left being convinced it works.”

Woodside’s won over: The Browse LNG project aims to develop three gas and condensate fields – Brecknock, Calliance and Torosa – that lie in the Indian Ocean, 425 km north of Broome in Western Australia. They are estimated to hold combined contingent reserves of 15.9 Tcf of dry gas and 436 million barrels of condensate.

Map showing location of the Browse gas fields off shore Western Australia in the Indian OceanTHE BROWSE FIELDS – Brecknock, Calliance and Torosa lie in the Indian Ocean, 425 km north of Broome in Western Australia, not far from the Prelude and Concerto fields that Shell is already working to develop using FLNG technology.

In 2010 the joint venture participants opted for a development concept that targeted the Western Australian government’s proposed Browse LNG Precinct near James Price Point as the preferred location for the onshore liquefaction facilities – in compliance with the Browse Retention Lease conditions that the joint venture had accepted the previous year.

However in April this year, having completed the FEED process, Woodside announced that “the development concept does not meet the company’s commercial requirements for a positive final investment decision”. The company added that it intended to “immediately engage with the Browse Joint Venture to recommend evaluation of other development concepts to commercialise the Browse resources”. The joint venture is currently made up of Woodside, as operator, along with Shell, BP, Japan Australia LNG and PetroChina.

One such concept was to utilise FLNG technology and at the end of April Woodside announced it had entered into an agreement with Shell, setting out the key principles that would apply if the Browse resources were to be developed using Shell’s FLNG technology.

The company’s CEO, Peter Coleman, said at the time that: “This agreement enables Woodside . . . to strengthen our development and operational capabilities through the potential use of Shell’s ‘design-one-build-many’ FLNG technology. It also provides the opportunity for Western Australia to become an industrial, operational and technology centre for excellence for FLNG world-wide.”

Last month, Woodside confirmed that, of the various development options that had been considered, FLNG was the one it intended to recommend to the joint venture participants.

The following day, at the company’s first half financial results presentation, Coleman said: “I’m hopeful that we will receive approval from the joint venture partners shortly, allowing us to move quickly into Basis of Design (BOD) phase . . . We expect to move quite quickly . . .  towards a target of a final investment decision by mid-2015.

“Given the combined size of the Browse fields, the reference case is a phased development comprising three FLNG facilities. This ability to stage the capital expenditure and build the production profile reinforces the benefits of FLNG technology in managing project risk. It combines lower up-front capex with earlier cash generation to make the project more attractive for our shareholders. In short, it is clearly the best option we have to unlock the Browse resource, to the benefit of our shareholders and the broader community.”

Vote of confidence: While there are still only three FLNG projects under construction, the list of credible projects at various stages of planning and development continues to grow. Woodside’s decision – given the rationale behind it – is a vote of confidence in a technology that promises to re-shape the LNG industry.

by Alex Forbes

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