*This article was contributed by Mary Hemmingsen when she worked at KPMG as Partner, National Sector Leader, LNG, Power and Utilities.
If the front-runners in FLNG can meet a number of key technical, commercial and financial challenges, we predict it will emerge as a key pillar of a 2020’s LNG business that looks quite different from that of today.
But the outlook for gas in 2016 is not clear sailing and not all projects are suitable for floating solutions. With FLNG still in its very early stages, proponents are navigating a number of new risks and project management challenges. Today, economic uncertainty may slow down a predicted rapid roll out of FLNG projects on top of two general scenarios for the future of FLNG development as a:
- Niche technology applied by a few companies to solve specific problems, with land-based configurations remaining the default. Drivers for this would be first FLNG plants encountering cost or operational difficulties or if land-based costs fall as the current construction boom ebbs. For smaller offshore gas fields, compressed natural gas or small-scale gas-to-liquids may become viable competitors.
- Standard approach that eases the industry’s cost inflation problems and opens up a much wider range of fields and companies. The concurrent development of floating regasification giving access to a range of smaller markets, and the development of new pricing methods and unconventional gas-to-LNG projects, may lead towards a faster moving, more diverse – and more flexible global LNG industry under the momentum of the first few projects being successful.
KPMG has set out 10 reasons companies may to choose FLNG:
- Unlock smaller fields that would be uneconomic if developed through conventional land-based facilities.
- Access remote fields that would otherwise necessitate long and costly pipelines to onshore locations.
- Avoid onshore ‘no-go zones’ where onshore plant locations may face lengthy legal and permitting delays and community objections.
- Reduce environmental footprint from avoided long seabed pipelines and fuel gas for compression to send gas to shore, dredging for jetties or onshore roads and construction, and after decommissioning, the vessel offers removal and re-deployment potential.
- Deliver projects cheaper and faster in reduced capital costs, particularly once shipyards have gained experience with construction and standardized solutions are employed. Substantial improvements present in integrating the hull and processing units and with modular components being constructed at several locations.
- Avoid the gold-rush in effectively mitigating supply shortages of sufficient skilled personnel required for simultaneous construction on numerous projects. FLNG projects can also widen the circle of contractors beyond the seven world-scale LNG EPC companies. Shipyard construction also spreads the risk of currency appreciation, with 50 percent of project costs for onshore projects typically in local currency.
- Put projects in a safe pair of hands at an established ship yard with existing depth of labour resources, logistics and infrastructure already set up, with productivity being more predictable and safety performance established.
- Achieve peace of mind from security worries by placing the facility offshore making it less accessible to would-be attackers.
- Mitigate political risk of onshore LNG plants huge sunk investment, making the project developer vulnerable to a change of mind from the political authorities – which can include tax increases, nationalization or outright expropriation.
- Access other financing options that may include financing opportunities such as leasing the LNG vessel, taking advantage of tax incentives or accessing concessionary or export financing for shipping. The greater security offshore may make it easier to access financing for more risky host countries.
Conclusion: The nascent FLNG industry is entering a critical period under close watch to see whether the first FLNG projects are delivered on- time and on-budget – and whether they perform well – with no serious design or operational flaws.
Proponents will weigh the 10 key reasons to consider floating LNG when making an investment decision. In some cases, onshore or floating solutions may both be viable. In others, the choice will be between a floating system or no project at all.
As standardization and experience drive down costs, FLNG may widen its reach. FLNG is not radically different from other projects the industry is familiar and comfortable with. It does, however, present some novel challenges – less on the technical side and more to do with the supply chain, project management, stakeholder engagement, financing, regulation and tax.
Floating plants can emerge as part of a more diverse, faster, cheaper and more agile global LNG industry.
Yes or No? - Will the first FLNG projects be delivered on-time an on-budget? Leave your comments below.
This article came courtesy of Mary Hemmingsen from KPMG Global Energy Institute. Mary presented at the Gastech conference last year. Find out more about next year's event: Gastech Japan 2017.
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