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Understanding:

LNG

Liquefied Natural Gas

(LNG) - Report 2012                                                                                                                                                                                                

                                     

Market Trends and Opportunities

in the Philippines                                                                                                                                                                                                

                                     

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a. SummaryLNG (Liquefied Natural Gas) is used mainly for

heating, cooking and electricity generation; it also has other industrial uses.

LNG facilities convert methane from gas into a liquid that takes up much less volume. This allows the transport of LNG through ships to be more economical. Consequently, LNG technology is closely associated with a global market for natural gas. There are few trading opportunities specifically related to liquefied natural gas, LNG has a substantial effect on the structure of the gas market. On a smaller scale, LNG storage provides an alternative to traditional natural gas storage facilities.

There has been active LNG trade in the Pacific region for many years. However, the opening up of LNG regasification plants in the North American and European markets have provided a much larger consumer base for LNG producers. This increased customer base allows aggressive investment into better liquefaction technology, in turn, spurring more demand. As a result, LNG is rapidly becoming a major factor in natural gas trading after several decades of relative obscurity.

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Key facts:

Liquefied natural gas is produced by freezing methane to -260°F.

Being able to turn methane into a liquid is creating global market for natural gas (methane) to replace the isolated markets that have historically defined the natural gas market.

As liquefaction and gasification technologies become more energy efficient, LNG becomes more efficient and more economical.

b. Liquefied Natural Gas (LNG)Natural gas reserves are found in reservoirs deep beneath the surface of the earth. These

reservoirs are trapped or stranded in porous rock formations (i.e. sandstones, marine shales, etc.) and forms pockets of gas over crude oil deposits. They contain mainly carbon and hydrogen components from the remains of plants and animals that build up over million years ago at the bottom of the ocean. After a very long time of being buried deep beneath the earth, layers and layers of other sediments pile up and build up high pressure from these sediments and along with the heat from the core of the earth turns these organic materials forming reservoirs of crude oil and natural gas. These fossil fuels are then extracted from marine shales in which they were deposited and from there they go into porous sedimentary rocks. 1

In its purest form, natural gas is colorless, odorless, tasteless, shapeless, and lighter than air type of fossil fuel. It is gaseous at any temperature over -161C and for safety purposes a chemical odorant, Mercaptan is mixed to it so that it can be smelled if there is a leak. 2

Natural gas is deemed to be an environmental friendly clean fuel, presenting significant environmental benefits when compared to other fossil fuels. The finer environmental qualities of natural gas over coal or oil are that it is neither corrosive nor toxic. Commercialized natural gas is sulphur free, it doesn’t produce sulphur dioxide (SO2). Aside from this the level of nitrous oxide and carbon dioxide emissions of natural gas is also lower compared to the other fossil fuels. According to Eurogas emissions of natural gas are “40-50% less than coal and 25-30% less than oil.” 3 This helps to lessen problems of ozone layer, acid rain and greenhouse gases. In addition, its specific gravity of 0.60 which is lower than air makes it very safe because it can dissipate or rise when there is a leak. Natural gas is also a harmless source of energy when it is transported, stored and used.

There are two forms of natural gas; one of these is liquefied natural gas (LNG), which is a form of natural gas when it is cooled to a temperature of approximately -260F at atmospheric pressure. It weighs less than one half that of water and is odorless, colorless, non-corrosive, and non-toxic. When mixed with air it burns only in concentrations of 5%-15%, hence neither LNG nor its vapor can detonate in an unconfined environment. Given that LNG has less volume and weight it’s easier to be stored and transported. 4 Aside from LNG the other form of natural gas is compressed natural gas (CNG) which is natural gas that is compressed to less than 1% of its volume at standard atmospheric pressure. Its energy density is approximately 42% of that of LNG.

Natural gas is converted to liquid at standard atmospheric pressures by lowering its temperature to -260°F. The process of liquefaction reduces the volume of the gas to 1/600 th of its gaseous form. This allows liquid natural gas (or liquefied natural gas) to be more compact and allows easy storage and transportation when regular pipeline and storage facilities are not available. Due to the

1 "Natural Gas." UNCTAD website. http://www.unctad.org/infocomm/anglais/gas/characteristics.htm (accessed September 10, 2011).

2 "Overview of Natural Gas." NaturalGas.org website. http://www.naturalgas.org/overview/background.asp (accessed September 14, 2011).

3 "Natural Gas." UNCTAD website. http://www.unctad.org/infocomm/anglais/gas/characteristics.htm (accessed September 10, 2011).4 "What is LNG? : LNG." Hazira LNG and Port website. http://www.haziralngandport.com/whatislng.htm

(accessed September 15, 2011).

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difficulty in domestic production because of the “hard-to-extract” nature of natural gas, LNG is becoming an economical alternative wherein cargo ships are able to transfer enough fuel at low costs as compared to small-scale transportation to meet domestic and international energy demand.

The natural gas industry is divided into the upstream and downstream section. The upstream section is responsible for exploration and production of natural gas. To be more specific it includes the exploration for potential underground or underwater gas fields, the drilling of exploratory wells and afterwards operating the wells that would retrieve and bring the raw natural gas to the surface. In the Philippines, the only currently operating upstream plant is the Malampaya gas field in Batangas. Malampaya natural gas field extends up to Tabangao, Batangas wherein the raw natural gas or the wet sour gas from the wells is being processed. Here the impurities of the raw natural gas are being removed such as water, condensates, hydrocarbons, as well as other solid particles.

On the other hand, the downstream section consists of the selling and distribution of natural gas. It includes the different power stations such as the Ilijan, Sta. Rita, and San Lorenzo power plants that are responsible for the distribution of the natural gas industry to be used as energy for different purposes of electricity, transportation, household use, etc.

The LNG market allows natural gas producers to monetize their investment. They can build an LNG liquefaction terminal, and then sign a long-term agreements and contracts to sell their product overseas. Instead of sitting on a natural gas field that might or might not ever be worth something in the future, producers can build a pipeline to the nearest LNG terminal and ship their product as a liquid into a major consumer market. This gets low cost producers access to the best consumer markets, and it provides them with money to search for new suppliers.

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i. LNG Composition Varies

LNG Composition

a.) Lean LNG (e.g., Atlantic LNG, Trinidad)

Composition:

Nitrogen (0%) Methane (96.8%) Ethane (2.7%) Propane (0.3%) Butane+ (0.1%)

b.) Rich LNG (e.g., Oman LNG)

Composition:

Nitrogen (0.4%) Methane (87.9%) Ethane (7.3%) Propane (2.9%) Butane+ (1.6%)

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Nitrogen

Methane

Ethane

Propane

Butane+

Nitrogen

Methane

Ethane

Propane

Butane+

c. LNG ProcessThere are three main steps in the LNG process: liquefaction, transportation, and regasification.

i. Liquefaction and Exporting. Liquefaction plants are located near regions where natural gas is produced. Short-range pipelines transfer the gas from wells to the liquefaction plant. The liquefaction plant cools natural gas down to -260°F, then loads it into storage containers for transfer to a specially designed tanker ships.

Bringing natural gas to -260°F is an extremely energy intensive process. A considerable amount of energy is consumed during the liquefaction and subsequent reheating processes. From a climate perspective, the CO² emissions resulting from this processing has to be included in the greenhouse gas emissions of LNG as a fuel source.

ii. Transportation. LNG tankers have to be specifically designed to handle extremely cold liquids and keep them installed. Even then, some of the liquid methane will convert back into gas. A small percentage of the natural gas will be lost in transportation for this reason. Faster journeys and cryogenic systems to refreeze the boiled-off gas can reduce these losses.

iii. Regasification and Importing. Once LNG is transported, it must be turned back into gas before it is delivered to customer. This is usually done at a regasification plant. This plant transfers the liquefied natural gas from the tanker ships and stores it in specially designed containers to keep the LNG at low temperature until it is ready to be warmed up. After it is warmed up, it can be placed into a pipeline for delivery to customers.

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iv. Three Main Business Variants of Liquefaction Plants

Same participants throughout the supply chain

– Avoids need to negotiate transfer price and gas qualities

Qatar Gas, Rasgas, Sonatrach, NWS Australia, Darwin LNG

– Qatari plants have taken this to complete integrated projects including

import terminals in selected markets.

Liquefaction plant a separate profit company

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SHAREHOLDERS

ConocoPhillips 56.72%ENI Australia 12.04%INPEX 10.52%Santos 10.64%Tokyo Electric 6.72%Tokyo Gas 3.36%

UPSTREAM

DARWIN LNG

LIQUEFACTION

DARWIN LNG

SHIPPING

Tokyo Electric Tokyo Gas

BUYERS

Tokyo Electric

Tokyo Gas

FOBLNG

SALESAGREEMENT

Physical Supply Chain

Corporate Relationships

Shareholdings

– Flexibility of ownership

– Negotiated feedgas price

– Main cost is purchase price of feedgas which is sometimes fixed as %age of

LNG price

Oman LNG, Atlantic LNG 1, Nigeria LNG, Malaysia LNG, etc

Malaysia LNG (Dua)

Liquefaction plant as a cost center owned by the NOC or by producers

– Tolling type model covers OPEX of plant, plus small margin

– Flexibility of ownership

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PRODUCTION SHARING

Petronas/ Sarawak Shell

UPSTREAM

Petronas: OwnerSarawak Shell: Operator

Petronas 60%

Shell 15%

Mitsubishi 15%

Sarawak 10%

Liquefaction & Trading

MNLG 2

Petronas 62.44%Government 12.98%Foreign Investors 15.64%Public 8.95%

Charter Parties (MISC)

SHIPPING

MNLG 2

BUYERS

Kansai Toho Gas Tohoku

Shizuoka Gas CPS Sendai Kogas

GAS SALESAGREEMENT

LNG SALESAGREEMENT

Physical Supply Chain

Corporate Relationships

Shareholdings

Indonesian plants, Atlantic LNG 2 ,3 & 4, Egyptian LNG , etc

Atlantic LNG 2 & 3

Source: Gas Strategies

v. More and New Global LNG Players

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UPSTREAM PRODUCTION

BP, REPSOL

ECMA JV

BG 50% CVX 50%

NCMA JV BG 45.9% Eni 17.3% Veba 17.3%

Petrotrin 16.9%

LNG PLANT

BP 42.5% Repsol 25%

BG 32.5%

BUYERS

Gas Natural Distrigas Gas de Euskadi BG Repsol Tractebel

QUASITOLLINGAGREEMENT

LNG SALESFOB

Physical Supply Chain Corporate Relationships

- All have different (and changing) positioning in the global LNG business

d. Products and ServicesNatural gas can be used as both a fuel and as a raw material in manufacturing chemicals. As a

common fuel, used in households it may be burned in furnaces, used in water heaters, cooking stoves, and clothes dryers. On the other hand as an industry fuel, it is burned in kilns (special furnaces) which

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GLOBAL LNG

MARKET

NOCs- Algeria, Egypt- Qatar, Oman, Adgas- Indonesia, Malaysia- Nigeria- Gazprom

IOCs- Total- Shell- BP- ENI, Statoil- Exxon, Chevron- ConocoPhillips

Atlantic Gas Players- BG- GDF / Suez- Distrigas- Stream (GN/Repsol)- Botas

Asian Gas Players- Tepco, Tokyo Gas- Chubu, Osaka Gas,…- Kogas- CPC (Taiwan)- CNOOC (Mainland)- Petronet, Hazira (India)

Utilities- EDF- Union Fenosa- Iberdrola- Endesa- Essent- EON- Centrica New Players

- Cheniere, Sempra- Vitol- Goldman Sachs- Merril Lynch- Japanese Shoshas

are used in order to manufacture bricks and ceramic tiles. It may also function as a steam generator for water boilers and a source of heat for glass and food production. Basically natural gas serves as a primer for petrochemical engineering which are chemicals that are extracted from natural gas or petroleum. Petrochemicals are also used as a base in producing fertilizers, detergents, pharmaceuticals, plastics and the like.

In the Philippines natural gas is mostly used for power generation. Several power plants in the country such as the San Lorenzo Power Plant, Sta. Rita Power Plant, and the Ilijan Power Plant utilizes this type of energy which gets its supply of natural gas from the Malampaya natural gas field. Aside from this, the transportation sector in the country is also using this type of energy. Its use is being promoted in the transportation sector for environmental purposes and to reduce the country's dependence on imported oil thereby protecting the country from increasing oil prices around the world. Compressed Natural Gas fuelled buses in particular is an example of a public utility vehicle that runs on natural gas and a total of 41 Compressed Natural Gas buses are already operating in the country which run from Batangas-Manila. 5 This bus program is known as “Natural Gas Vehicle Program for Public Transport”. For more information on the uses of Natural Gas, refer to Appendix Section 4.

e. LNG Supply and Value Chain

i. LNG Imports vs. LNG local use

There are three major sorts of LNG activities:

1. International gas supply: method of transporting natural gas large distances around the globe for bulk gas supply.

2. Local onshore use: natural gas transported in liquid form around a country usually in special road tankers for local gas distribution or use as vehicle fuel.

3. Seaborne fuel: new market developing.

ii. LNG Supply Chain:

The Supply Chain normally consists of 4 links:

1. Upstream: field development, production, processing and transportation to the coast

2. Liquefaction (& export): the natural gas is cooled to its liquid state (LNG) and stored

3. Shipping: LNG shipping tanker transportation to market in another country

5 Jacob, Don. Interview by author. Personal interview. Department of Energy , August 10, 2011.

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4. (import &) Regasification: the LNG is stored and then the liquid gas is returned to its gaseous form.

iii. Conventional Feedgas

iv. Key Project Decisions and Variables

Four key project decisions that have to be considered:

a.) Markets: geographically, where?b.) Customers: who?

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c.) LNG Price: how much?d.) Contact Strategy: risk profile?

Some key variables at stake:

a.) Liquefaction plant: - How big?- Process selection?- How many trains?

b.) Ships:- Ownership or chartered?- How many?- What size?

c.) Storage tanks:- How many?- How big?

v. LNG Project: Terminologies

Feasibility: initial investigations and considerations Pre-FEED: more detailed considerations and calculations FEED: exhaustive Front End Engineering Design study FID: Final Investment Decision (to proceed with project or not) EPC: Engineering, Procurement and Construction contract (main build contract) Commissioning: first LNG from liquefaction or through import regasification De-Bottlenecking: enhancing performance of existing, operational plant after several

years of operation.

vi. LNG Projects – Typical Timeline for an LNG Project in the U.S.A.

Source: http://www.oregonlng.com/pro_timeline.php

vii. Liquefaction Plants – Basic commercial models

Gas Ownership Model (take price risk but not volume risk)

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Service Model(provide service and charge tolling fee)

f. Product ProcessTo locate deposits of natural gas, exploration geologists search for geologic regions containing

the ingredients necessary for the formation of natural gas: organic-rich source rock, burial conditions

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sufficiently severe to generate natural gas from organic material, and rock formations that can trap hydrocarbons.6

When a geologic formation that may hold natural gas is identified, usually but not always in a sedimentary basin, wells are drilled into the formation. If a well goes into porous rock containing a significant reserve of natural gas, pressure within the porous rock may force the natural gas up to the surface. Typically, the pressure eventually declines until the natural gas must be pumped to the surface.7

Once natural gas has been extracted from the ground, it is usually transported by pipeline to a refinery, where it is processed. Natural gas is processed in an extraction unit to remove the non-hydrocarbon compounds, especially hydrogen sulfide and carbon dioxide. Two processes used for this purpose are absorption and adsorption. 8

Absorption uses a liquid that absorbs the natural gas and impurities and disperses them throughout its volume. In a process known as chemisorption, the impurities react with the absorbing liquid. The natural gas can then be stripped from the absorbent, while the impurities remain in the liquid. Common absorbing liquids are water, aqueous amine solutions, and sodium carbonate. 9

Adsorption is a process that concentrates the natural gas on the surface of a solid or a liquid in order to remove impurities. A substance commonly used for this purpose is carbon, which has a large surface area per unit mass. For example, sulfur compounds in natural gas collect on a carbon adsorbing surface. The sulfur compounds are then combined with hydrogen and oxygen to form sulfuric acid (H2SO4), which can be removed.10

When the impurities have been removed in the extraction unit, the natural gas is transported to a processing plant, where compounds such as ethane, propane, butane, and other substances are separated and removed for different uses.

After being processed it is then transported to the users thru pipelines which includes both onshore and offshore, as a liquefied natural gas thru LNG vessels and LNG trucks, and lastly it is also transported as compressed natural gas thru CNG vessels and multiple accumulator transport system. 11

6 NaturalGas.org." NaturalGas.org. http://www.naturalgas.org/naturalgas/processing_ng.asp (accessed July 24, 2011).

7 Ibid8 Ibid9 Ibid10 Ibid11 Ibid

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Figure 1.Natural Gas Process Source: Department of Energy

g. Producing LNG by Liquefaction

In order for liquefaction process to take place, the raw feed gas supply which comes from a producing must first be clean and dry. The raw feed gas is scrubbed of dirt and hydrocarbon liquids which are entrained, and then treated in order to eliminate trace amounts of two common natural gas contaminants. These contaminants are hydrogen sulfide and carbon dioxide. The gas is then cooled to permit the water to condense and then further dehydrated so as to get rid of the small amounts of water vapor. The mercury must be removed at this stage if it is present in the feed gas. Next, the clean and dry gas may be filtered before the process of liquefaction begins. To make sure that the liquefaction is an efficient process, the gas must consist mostly of methane with only small amounts of light hydrocarbons. 12

Liquefaction occurs via the cooling of gas using heat exchangers. In these vessels, gas flowing through aluminum tube coils is exposed to a compressed hydrocarbon-nitrogen refrigerant. As the refrigerant vaporizes, heat transfer is achieved, cooling the gas in the tubes before it is restored to the compressor. The liquefied natural gas is pumped to a storage tank that is insulated where it remains there until it can be loaded onto a tanker. 13

Liquefied Natural Gas molded in each train which has a temperature of about 260°F, is then transferred to insulated tanks designed for storage at atmospheric pressure. Even if heat is added, the temperature of boiling LNG at atmospheric pressure remains constant, providing that the gas vapour or LNG steam is removed. The boil off gas, which is about 0.15 percent of the volume per day, fuels the liquefaction facility, LNG transport ships and receiving terminals where the LNG is regasified. 14

At the liquefaction plant, LNG is transferred from storage tanks to the ship through pumps which are specially constructed and jointed loading pipes devised to withstand the very low or cryogenic temperatures necessary for liquefaction. Figure summarizes the process of LNG liquefaction.15

12 The Department of Energy. "Liquefied Natural Gas: Understanding the Basic Facts." Department of Energy. http://www.fe.doe.gov/programs/oilgas/publications/lng/LNG_primerupd.pdf (accessed August 28, 2011).

13 Ibid14 Ibid15 Ibid

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Figure 2.Components of an LNG Liquefaction PlantSource: US Department of Energy

h. Preparing LNG for Use by Regasification

At a satellite installation or a marine terminal, pumps transfer LNG from storage tanks to warming systems. In the warming systems, the liquid quickly returns to a vaporized state. 16

Ambient temperature systems utilize heat from surrounding air or from seawater in order to vaporize the cryogenic liquid. On the other hand, above-ambient temperature systems add heat through burning fuel in order to indirectly warm the LNG through intermediate fluid bath. The natural gas is then set for delivery into the network of transmission and distribution of pipelines for usage by industries, residential consumers or nearby power generation plants. 17

16 Ibid17

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Figure 3.Components of Liquefied Natural Gas (LNG) Source: US Department of Energy

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