It was roughly a decade ago when the initial introduction of floating liquefied natural gas (FLNG) solutions sought to help bring uneconomic gas reserves offshore, such as those in remote locations, to the market. Over the past few years, however, we’ve watched as offshore FLNG capabilities have moved closer to the mainland, offering a very flexible and economical solution to operators looking to offload their supply around the world.
Early adopters of this inventive strategy looked to supply their end users quickly, efficiently and economically, and in 2018, we saw the first major successes. Golar LNG’s Hilli Episeyo’s maiden shipment from Cameroon to China and Shell’s Prelude FLNG vessel receiving its first delivery of LNG for commissioning are more than just major milestones. They have opened the door to what’s possible by better serving the world with a critical reliance on diversified energy.
LNG production and shipping technologies, particularly FLNG, have now been proven and are rapidly gaining momentum for moving supply to demand-heavy markets. Demand for gas in India and China, despite that country’s push to meet renewable energy goals, reflects an all-encompassing approach to power generation that should keep natural gas in the discussion for years to come.
Just as one would weigh the viability of any capital investment decision, however, FLNG solutions must make sense financially to take hold in the market. That’s why it’s no surprise that nearly two-thirds of the 2019 Strategic Directions: Natural Gas Report survey respondents listed return on investment as a major driver for making FLNG investment decisions, followed by lower CAPEX/OPEX at 55 percent (Figure 1).
FLNG offers a faster return on investment than its land-based rivals as it results in a shorter period from final investment decision (FID) to commercial operation. Proliferation of FLNG projects hinges on the ability to get them financed, and while FLNG solutions are both complex and technical, it’s the financial element that can present the most roadblocks. While international oil companies such as Shell have the means to fund these projects internally, smaller outfits must make the financial forecast of their FLNG operation look appetizing to investors.
With the successful delivery in the books from the world’s first converted FLNG vessel, the Hilli Episeyo, suddenly traditional on-land baseload LNG export production plants aren’t the only viable options. FLNG facilities also are proving to be a lower-risk opportunity for investors because they offer a quicker speed to market, aren’t fixed to one location and have greater operational flexibility with smaller trains. Another key advantage is that they can be built by repurposing existing assets. FLNG projects also have a smaller footprint with a lower CAPEX burden. For example, by using our patented PRICO® technology on the Hilli Episeyo, Black & Veatch is able to leverage PRICO’s minimal equipment requirements and compact process footprint, making it an ideal choice for clients pursuing offshore liquefaction solutions. FLNG operations with multiple smaller trains also benefit from providing manageable offtake capacity to serve single or multiple sales contracts, all while being built within the controlled environment of a shipyard anywhere in the world. The benefits of not having to wait for local permitting processes to break ground while ensuring consistent high quality in a controlled environment of a shipyard cannot be overstated. Operators are realizing the benefits of shifting away from massive baseload plants on land, and when asked what Hilli Episeyo’s maiden voyage’s impact on the industry would be, the majority (67 percent) of survey respondents predict that small- to mid-scale FLNG operations will become more popular (Figure 2).
This approach bucks the “bigger is better” orthodoxy, or at the very least the notion that more size is more economical. Having a smaller operation run with multiple, smaller trains allows the project to be compartmentalized into smaller financial packages that investors are more likely to support. In addition, running one 10-million-ton train at a facility, versus multiple 2-million-ton trains, carries special risks.
For example, if one 10-million-ton train needs maintenance, malfunctions or goes offline for any reason, the facility’s production halts altogether. Having multiple trains not only maintains uptime but also offers flexibility for meeting the needs of offtakers. With natural gas as cheap as it is today, the market strongly favors the buyer. Gone are the days of long contracts; therefore, securing offtakers for the supply becomes much less predictable. A 10-million-ton train running at one-third capacity suddenly isn’t a very efficient allocation of resources.
Combining a favorable position with lenders with the global energy demand forecast — BP’s 2018 Energy Outlook predicts a 1.2-percent year-over-year increase — makes it understandable to be excited about the future of FLNG. LNG is a clean fuel without the intermittency issues that renewables face today, and as energy projects spring up across the globe, developers are entering the market as confidence in the economics of smaller-scale LNG soars. In fact, 64 percent of survey respondents believe more developers are likely to enter the market in the wake of the recent Hilli milestones.
When developers aren’t in positions to satisfy guarantee demands of lenders, particularly when project costs reach into the billions of dollars, it becomes exceedingly difficult to make progress on large-scale projects. This applies to both large FLNG and land-based facilities. Developer entry into the market is a strong indication that the successes of small to mid-scale FLNG facilities are putting investors at ease.
In today’s low-priced environment, it’s critical that investors start seeing their return as quickly as possible. The larger land-based LNG facilities are more complex, can’t scale down to match fluctuating offtaker demand and can take upward of four to five years before coming online. FLNG is simply a faster solution for moving supply with a much lower financial risk for investors.
Now that FLNG as a solution for monetizing and exporting from both nearshore gas reserves and land-based pipeline networks has proven to be feasible, what’s next? The demand for cleaner, cheaper energy is on a steady incline, and the operational and financial flexibilities of FLNG are on full display. With a more efficient and economical solution now a reality on the open market, operators and developers are primed to explore just how far this ship can take them.