LNG Value Chain

=LNG Value Chain=

Natural gas is a hydrocarbon composed almost entirely of methane (CH4). It can be transported over distances via pipelines or across the ocean as Liquefied Natural Gas (LNG). In 2011, the natural gas accounted for about one-fifth of total primary energy supply (TPES) which was about 13,113 mtoe

LNG reduces the volume of gas 600 times making it more economical to transport over long distances where pipelines are not feasible or where other constraints may exist. Liquefaction and specially designed vessels allows natural gas to be transported throughout the world.

Exploration & Production
The LNG value chain starts with the exploration and production of gas reserves either onshore or offshore. In 2013, world proved natural gas reserves were estimated at 6,845 trillion cubic feet (tcf)

LNG Liquefaction
Once produced, gas is transported via pipelines to a liquefaction facility where it is purified and liquefied. Each liquefaction unit is referred to as a train. A typical LNG facility processing 1 billion standard cubic feet per day (bscfd) will produce approximately 7.3 million tonnes per annum (mtpa). Heavier hydrocarbons must be removed and sent for further processing to be marketed as natural gas liquids (NGLs). Hydrogen sulphide, carbon dioxide, mercury and any moisture must also be removed to meet LNG specifications and prevent fouling of the equipment. The gas is then cooled to -256 degrees F.

The processing cost of liquefaction plants will vary depending on the composition of inlet gas. Commercial arrangements are known as either "tolling" or "merchant". In the tolling structure, the upstream gas supplier sells LNG to the final customer and pays a processing fee to the plant owners (in most cases the government). The fee will be relatively low but guaranteed return on capital to the plant. The liquefaction cost will entail a capacity reservation charge and an operating cost charge.

In the merchant structure the upstream receives a fixed percentage of the FOB LNG Price. This will involve a more complicated commercial arrangement. This structure introduces some risk since it will be based on the LNG price which can vary considerably. If price is high then liquefaction cost will be high and vice versa.

In merchant plants, profit is made from the upstream while in tolling plants, profit is made from the fixed tolling fee paid by gas suppliers. Risk sharing and how the LNG price is shared between the upstream and LNG plant will be different. There is less risk for the plant owners with the tolling arrangement as a fixed fee is paid by the gas supplier even if no gas passes through the plant to be liquefied. On the other hand, the merchant structure is more risky because profits to stakeholders will depend on what gas price is received in the market. The sharing of profits from the LNG price will be fixed in merchant plants while in tolling plants it is independent of the price.

LNG Shipping
LNG vessels are specially designed double-hulled ships where the inner hull is kept at atmospheric pressure and cryogenic temperature (-256 F). Some of the fuel itself is used to maintain these low temperatures in a process known as "boil-off." This usually accounts for about 0.1-0.15% of the cargo per day. In addition, some LNG is usually left in the vessel to keep tanks cold when ships are being reloaded. This is called the "heel".

Most ships have a spherical (Moss) design or membrane design. The typical LNG vessel has a capacity of approximately 125,000-138,000 cubic metres which will provide about 2.6-2.8 billion standard cubic feet (bcf) of natural gas. Assuming a ship contains 131,000 cubic metres of LNG which is equivalent to 3,130,900 MMBtu (in terms of energy). If the price in Japan is US$16/MMBtu, this cargo will be worth approximately US$50 million.

Storage & Regasification
Regasification refers to the process by which LNG is reconverted to a gas for distribution to consumers. The regasification terminal consists of a receiving facility, LNG storage tanks, vaporizers and a metering and send-out facility. Terminal costs include storage costs, capacity cost for buyers reserving capacity at the terminal to regasify LNG, fuel cost for vaporisers and other operating and maintenance costs.

Capital Cost
LNG projects require a huge capital investment in the construction of fixed assets such as liquefaction and regasification facilities, and shipping costs. In general, liquefaction facilities account for about 50% of capital cost while shipping accounts for about 40%. These costs are site-specific and will depend on factors such as capacity and local construction costs.

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