The role of mid-scale import solutions in emerging LNG markets

Henrik Austgulen's picture
Henrik Austgulen, Co-Founder, Dreifa Energy
Jostein Ueland's picture
Jostein Ueland, Co-Founder, Dreifa Energy
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Global LNG supply is expected to grow at an unprecedented rate from 340 million tonnes per annum (mtpa) in 2016 to 486 mtpa in 2021, up 43%. While China has absorbed much of that recent growth, it is unlikely the Chinese demand will be the sole outlet for this further growth. Increase in demand in the other mature LNG markets of Asia and Europe is expected to be modest or flat. In this environment we can probably conclude the following:

1- New emerging and smaller LNG consumers becoming increasingly important to soak up the LNG supply flowing to the market. The majority of these potential demand centres are small and constrained island markets (South East Asia, The Caribbean) and frontier markets with limited or non-existing current demand (Africa).

2 - As suppliers’ bargaining power is reduced, customers have demanded shorter and more flexible contracts. This is especially vital to the emerging markets, where cash flows are modest and poor credit ratings make it difficult to obtain financing for infrastructure investments and long-term LNG SPAs.

To address these challenges the industry has come up with alternatives to the traditional high CAPEX, long construction time, land-based import terminals, namely the floating storage and regasification unit (“FSRU”). The conventional FSRU can be put into operation within 2 to 3 years and once demand reaches the appropriate size, i.e. matches the FSRU capacity of 3-7 mtpa, offers excellent economics. Clearly, the quicker LNG demand reaches design capacity of the FSRU, the better. This makes the FSRU a well-suited solution for new LNG markets of a relatively large size and with existing gas infrastructure such as Egypt, Pakistan and Bangladesh. However, for the smaller markets that will probably never see demand increase to the FSRU’s critical size, the commercially viability is a challenge and consequently finance is difficult to secure. With demand below 1-2mtpa, conventional large-scale FSRUs become prohibitively expensive unless vessel owners are willing to accept a significantly lower return on capital and higher residual value risk when compared to today.

We believe projects of this scale and in these locations should be seeded using more appropriately sized mid-scale units on short-term flexible chartering arrangements. If and when actual demand justifies it, the customer can swap into a larger scale FSRU, thereby allowing for substantial savings at the critical early stage of a project.

Dreifa Energy is currently following 80+ projects in various stages of development worldwide. Of these opportunities, around 70% have an initial demand below 1.5 mtpa, making the FSRU a sub-optimal solution. As examples we can mention a few well-known opportunities:

  • Lebanon: Ongoing tender for up to three FSRUs, each with initial demand between 0.5 and 1.0 mtpa.
  • Cyprus: Plans to put an FSRU at the port of Vasilikos to supply a 700 MW power plant. Cyprus needs LNG imports quickly to meet EU emission regulations.
  • Croatia: The project started out as a large land-based terminal, but is now tendering for a FSRU to be located at Krk Island. There are plans to become a LNG hub with exports to neighbouring countries, but this can take time. The existing domestic demand in our viewpoints to a smaller and less costly facility at inception and possibly longer.
  • Myanmar: Has relied on domestic natural gas production and hydropower to meet its power requirements. During the dry season the demand for gas has intensified, but as domestic power demand increases, and with significant quantities of indigenous gas contracted under pipeline exports to China, Myanmar is looking to import LNG to meet its gas requirements. Four new power projects have been shortlisted, three of which are intended to be fuelled by regasified LNG from an FSRU. All three FSRU project are based on gas to power projects with demand below 1.5 mtpa.

Dreifa is offering its Terminal solution to new LNG markets and industrial consumers worldwide. The Dreifa Terminal consists of a low CAPEX floating regas unit (“FRU”), working together with a seasoned steam turbine LNG carrier chartered in as floating storage (“FSU”). This combination avoids the costly construction of new cryogenic storage and allows for customized capacity to meet specific project demands.

In order to meet the expected strong growth in supply, the LNG market needs to quickly build new LNG demand. Dreifa argues that applying mid-scale import solutions is the most cost-efficient way to achieve this.

To hear more on small and mid scale LNG, register now to attend the Gastech Exhibition and Conference, taking place on 17-20 September 2018 in Barcelona. 

Image courtesy of Drefia Energy