Shell backing LNG growth with huge investments

The company is currently amongst the largest global LNG suppliers, with seven projects in operation and another four under development. Indeed, this year the fuel made up more than half of the company’s upstream production, and the company is expecting this to increase further as energy demand booms.

Mehdi Chennoufi, general manager for LNG Trading in the Atlantic Basin and Greater Middle East at Shell International Trading and Shipping Company, believes that the shifting dynamics of fuel trends here in the Middle East – where natural gas is steadily taking ground in the energy industry – is a close reflection of the global increase in gas demand.

“First of all, global gas demand is likely to grow by around 2% per year, probably for several decades.

“By 2030, we expect demand to reach as much as 4.5 trillion cubic metres (tcm) of gas per year, compared with 3.1 tcm today. That is almost a 50% increase. The electricity sector will drive most of this growth, as natural gas offers an affordable, fast and cleaner route to meet demand.”

Chennoufi suggests that a combination of green-power credentials and easier installation and connection is progressively encouraging power producers to look to gas to meet future fuelling needs.

“A modern gas plant emits only half the CO2 of a modern coal plant, and 70% less than decades-old steam turbine coal plants, of which there are still hundreds in operation in North America, Europe and China. Many of these older plants are expected to be decomimissioned in the next 5 – 15 years, leading to the question of what will take their place.

“In deciding what replaces all that old coal capacity, governments and utilities are increasingly recognising that natural gas plants are faster and cheaper to install than other new-build sources of electricity. They are also easier to link into intermittent wind or solar electricity than either coal or nuclear.”

Supply
Of course greener credentials mean little without an assured fuel supply, and here too Chennoufi suggests that, with sufficient investment, gas presents some particular advantages in terms of sustainable supply.

Regionally, the gas reserves of Qatar, Iran and Saudi Arabia rank in the top five global conventional gas holdings, amounting to almost 22% of the world’s gas production. Globally too, the outlook looks promising.

“The International Energy Agency (IEA) estimates that the total technically recoverable gas resources are worth 250 years of current global production. However getting this gas out of the ground will require significant investment.

According to the IEA, to grow supplies by 40% over the next twenty years, cumulative global investment of some US $8 trillion in gas supply infrastructure will be needed – that is more than a quarter of a billion dollars per year.”

If this level of investment can be maintained, the advantages of natural gas also extend to the flexibility of supply which improves fuel security.

“LNG offers unique supply security advantages because of its flexibility. Unlike pipelines, LNG ships can follow demand as it shifts and fluctuates around the world. We saw the value of this flexibility after Fukushima, when Japan ramped up its LNG imports to make up for the shutdown of its nuclear plants.

Right now, supplies are growing at a rate of around 6-8% per year, around three times the rate natural gas overall. The number of LNG exporters is likely to increase by nearly one third by 2015, providing buyers with the comfort of a diversified supply portfolio.”

Shell is playing a significant part in this side of supply itself, being amongst the largest LNG vessel operators in the world. The firm currently manages over 50 LNG carriers and, together with its joint ventures, is involved with around 30% of the planet’s LNG carrier operations.

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Global demand
The emphasis numerous countries have placed on diversifying their domestic fuel supplies has also driven the gas market substantially.

“You only have to look at China to observe the trend in increasing demand and the diversification of gas supplies. As China seeks to diversify its energy supply, the government has thrown its weight behind natural gas.

It aims to more than double the share of gas in its primary energy mix to the 8-10% mark by 2020. It is investing in shale gas, LNG regas terminals and contracts, domestic pipelines and supply contracts with Central Asia and Russia. The result will be a more flexible and integrated gas market, allowing China to import more gas.”

These developments in China, Chennoufi believes, are part of the broader story of increasing LNG demand around the world.

“Despite the tight LNG short-term market we have today, world-wide LNG demand is likely to continue to grow rapidly. In fact, demand for LNG is increasing at a faster pace than overall natural gas demand, and it could double in this decade.

“This growth will be driven not only by China, but also by Europe’s growing import requirements and a host of countries in Asia that will ramp up or begin importing LNG – including Indonesia, Malaysia, Thailand, Singapore and few more in South America. Between 2000 and 2010, the number of countries electing to import LNG more than doubled and the number of LNG exporters increased by 50%.”

“Why is LNG – which represents less than 5% of the global energy mix – so sought after? Because LNG is to the energy industry what salt is to the food industry: relatively small but absolutely necessary.”

Meeting Future supply
Meeting this burgeoning demand will require some hefty investment, alongside rapid technological developments that can help bolster current supply.

“Along with investment, the industry will have to use an array of innovative production methods to successfully extract this gas. Over the next decade, advances in technology will further accelerate the expansion in unconventional gas production such as tight or shale gas, sour and coal bed methane.

“These unconventional resources have already proved to be a game-changer in North America, where an abundance of natural gas supplies changed the US from a prospective energy importer, to a potential exporter. By 2020, our industry will be producing new supplies of natural gas from a host of new locations which haven’t been discovered as yet.”

Shell, for example, is working to develop floating LNG, which Chennoufi says will open up resources that were once considered too remote or expensive to tap into. In addition, once production from one gas field has been completed, the 3.5 million tonnes per annum floating LNG facility can be redeployed to another site.

“Shell’s floating LNG plans for Australia are the most advanced, but we think that there may be opportunities to use the concept in the wider Asia-Pacific region, Latin America, the Mediterranean and West Africa. So between now and 2030, the global LNG story is one of surging demand, massive investment, tremendous innovation and rapid globalization.”

Other examples of innovation to utilise global gas reserves can be seen in both the region and further afield.

“The role of technology and innovation has played a pivotal role in the LNG market thus far, from the mega trains in Qatar, to the birth of Floating Regasification and storage terminals in Dubai and Kuwait, enabling markets a speedier access to LNG.

“We are also seeing other advances in small scale LNG in the liquefaction process on the Moveable Modular Liquefaction System, which offers a low cost solution to monetise small stranded gas resources or to convert pipeline gas to LNG for small scale users. In downstream applications, we see examples of innovation in Shell’s recent entry into fuelling barges on the Rhine with LNG and uses of LNG for trucking in North America.”

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US Exports
Some commentators – such as Facts Global Energy – have forecast that around 40 mtpa of LNG production from the US could target the premium East of Suez market by 2020, a prospect that Shell believes may be increasingly realistic over a longer timeframe as US exporters move closer to FID.

“Unlike conventional LNG projects, the feed gas for US LNG exports is priced on a commodity basis traded on the Nymex, competing with domestic demand from a wide variety of sources.
With the US contributing perhaps 10% of overall LNG demand in 2025, the LNG spot market will remain a function of LNG supply and demand, and not that of domestic US supply/demand, however Henry Hub will continue to have some influence.”

US exports, Chennoufi believes, could help to respond to a need for additional LNG volume globally, as well as contributing to the pricing dynamics of LNG in short, medium and longer term sales.

At the same time, there are still issues to be considered that will impact the final size of this export market.

“It is worth noting that US LNG is lean compared to Asian-source LNG, correcting for quality will add to the price of LNG sourced from the US.

The politics of US energy security, as well as other regulatory challenges, will also play a key role in determining the extent to which US LNG exports will be permitted.

“Current HH prices are lower than the marginal cost of supply, and hence not sustainable. The dynamics of shipping capacity from US GoM to Asia is also complex given the distances involved, the widening of the Panama Canal and potential for LNG carriers to pass will influence these dynamics. All of these interplay to affect the price of US sourced LNG to Tokyo Bay, China or the Middle East.”

Prelude construction underway
Shell confirmed the cutting of first steel for the game-changing Prelude floating liquefied natural gas (FLNG) facility’s substructure in October.

Joint venture participants, Inpex and KOGAS, and lead contractor, the Technip Samsung Consortium were present for the momentous occasion at Samsung Heavy Industries’ Geoje shipyard in South Korea.

“We are cutting 7.6 tonnes of steel for the Prelude floating liquefied natural gas facility today, but in total, more than 260,000 tonnes of steel will be fabricated and assembled for the facility.

That’s around five times the amount of steel used to build the Sydney Harbour Bridge. This marks a major milestone in this project, when the innovative thinking and new technology and engineering solutions which will make FLNG possible begin to be realized,” said Shell’s Projects & Technology Director Matthias Bichsel.

When completed, the Prelude FLNG facility will be 488 metres long and 74 metres wide, making it the largest offshore floating facility ever built. When fully equipped and with its cargo tanks full, it will weigh more than 600,000 tonnes. There will be over 3,000 kilometres of electrical and instrumentation cables on the FLNG facility, the distance from Barcelona to Moscow.

“Making FLNG a reality is no simple feat,” Matthias continued. “Shell is uniquely positioned to make it a success given our commercial capability; our LNG, offshore, deepwater and marine technology; and our proven ability to successfully deliver megaprojects.”

The Prelude FLNG facility will be deployed in Australian waters over 200km from the nearest point on the coast. It will produce gas at sea, turn it into liquefied natural gas and then transfer it directly to the ships that will transport it to customers.

At peak levels, around 5,000 people will be working on the construction of the FLNG facility in South Korea; and another 1,000 will build the turret mooring system, subsea and wells equipment in other locations across the globe.

This is the first of what Shell expects to be multiple Shell FLNG projects.