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Recently two of the world's largest energy companies announced they were joining to develop a record-breaking liquefied natural gas (LNG) project – one that could deliver huge profits for the companies and investors.
Exxon Mobil Corp. (NYSE: XOM) and BHP Billiton (NYSE ADR: BHP) announced earlier this month they were forming a joint venture to build the biggest floating LNG, or FLNG, facility ever. It'll be located off the northwestern shore of Australia.
FLNG is the industry's answer to accessing supplying much needed LNG to energy-hungry Asia, but trying to avoid the increasing costs of onshore plants in Australia.
An increasingly number of companies plan to invest in FLNG over the next few years.
Energy research firm Douglas-Westwood recently reported that global spending on FLNG projects will reach $47.4 billion between 2013 and 2019. About $28 billion will go to FLNG liquefaction spending, and $19 billion on import terminals.
"For more than 30 years FLNG export has been an ambition of the offshore industry, but it is now well on the way to reality," said report author Murray Dormer.
What is FLNG?
With FLNG, natural gas is pumped from a field located below the sea floor. It is pumped up to a vessel above where the gas is liquefied and stored.
The gas is later transferred to specialized LNG tanker ships for delivery to markets.
FLNG technology is perfect for so-called stranded gas fields that are too remote or not economical enough to justify the building of a vast pipeline network to an onshore facility. It is also ideal for sites like Australia that have lots of environmentally sensitive areas along its coasts.
The number of offshore natural gas discoveries has climbed dramatically in recent years, according to Royal Dutch Shell (NYSE ADR: RDS.A), the recognized leader in FLNG. Shell estimates that there is at least 300,000 billion cubic feet of natural gas lying in offshore fields.
That's a conservative estimate that does not include gas that is stranded in shallow water, very small fields, ice-prone areas, or obviously fields yet to be discovered.
A big advantage of FLNG is that once a gas field is exhausted, FLNG vessels can be deployed elsewhere to exploit another gas field.
Energy Companies Leading the FLNG Race
Exxon and BHP made a huge step in being major LNG providers to Asia with this latest deal.
The plant would be using the gas located in the Scarborough field located in the Carnarvon Basin, which is believed to hold between 8-10 trillion cubic feet of natural gas reserves.
The floating platform would be almost as long as five football fields end to end. Targeted production for the project is 6-7 million metric tons per year. This would be enough to supply Japan's LNG needs for about a month. The final decision to go ahead with project will be made in 2014 or 2015, with production beginning in 2020 or 2021.
But Shell is a step ahead in FLNG.
Shell has already begun work on its $11.5 billion Prelude project.
Its Prelude vessel will weigh 600,000 tons, be six times bigger than the largest aircraft carrier (534 yards long and 81 yards wide), be anchored by an 11,500 ton turret and will be moored offshore Australia (in the Browse Basin offshore northwest Australia) for at least 25 years. It is estimated there is 2-3 trillion cubic feet of gas located there.
Prelude is expected to produce at least 3.6 million metric tons of LNG per year with development due to start in 2017, according to Shell.
With Exxon's project expected to cost even more than Shell's Prelude, it is reasonable to ask whether these projects will be money makers for the companies.
The crucial factor in determining how successful these companies are with FLNG is price.
For decades, LNG contracts in Asia were based on the price of oil.
But that is changing swiftly. More and more LNG contracts globally are having pricing tied to natural gas prices in the United States.
Tilak Doshi of the Energy Studies Institute in Singapore, told the Financial Times "Convergence [among regional natural gas markets] will happen a lot faster than people expect."
Natural gas prices in the U.S. are a quarter to a third the level of what LNG prices are in Asia at the moment. This means companies like Shell and Exxon may have to sell their LNG for less if they want to find ready buyers.
This change will affect not only the newer buyers of LNG such as China, but also the more established buyers like Japan.
In Japan, many existing contracts that literally date from the 1970s and 1980s will be expiring over the next several years. Needless to say the Japanese are extremely anxious to negotiate lower prices for the LNG they need.
It is logical to assume the price for LNG globally will converge somewhere between the U.S. gas price and the current $16-$17 per million Btu paid for LNG in Asia.
But as Money Morning global energy expert Dr. Kent Moors has explained, U.S. natural gas prices will climb. Moors sees an average U.S. natural gas prices of about $4.35 by summer, and a range of $4.85 to $5.15 by the end of 2014.
That should increase the prices agreed upon in any negotiated contracts with Asia.
As long as the managers of these FLNG projects keep a tight rein on costs, these could be yet another source of profits in the rising trend of LNG.
Natural Gas Price Update: Our oil and energy expert Dr. Kent Moors recently detailed the five reasons why natural gas prices will continue to rise. You can read Moors' full analysis here.
- Financial Times:
Exxon Floats Offshore LNG Plan
- Bloomberg News:
Exxon Expects Australia Floating LNG Project Start by '21
Exxon, BHP Plan World's Largest Floating LNG Plant Off Australia
- Financial Times:
Japan's LNG in Crucial Pricing Shift