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The Investment Case For Floating LNG

Published 12/01/2021, 04:08 AM

Floating liquefied natural gas (FLNG) technology is back as surging natural gas prices and a focus on a coal-to-gas switch in the world’s key gas import market, Asia, seem to have renewed demand for offshore LNG facilities to tap remote or currently stranded gas assets. FLNG is just a small part of the growing global LNG market, accounting for around 5 percent of it. Yet, record-high LNG prices in recent months, expectations of continuously rising gas demand—especially in Asia—for decades, and efforts to reduce power generation emissions are giving a new life to floating LNG technology.

FLNG projects have much lower capacity than onshore liquefaction facilities, but they can be flexible and can move to various locations to process gas in remote offshore sites or process gas from oil projects that is sometimes flared.

Some technical challenges also exist with the mobile LNG units. Yet, FLNG projects have lower capital investment costs than huge onshore plants and offer earlier returns on investment at a time when companies are sticking to capital discipline in light of increased volatility on the commodity markets.

Before the pandemic, FLNG projects faced difficulties obtaining the necessary partners, buyers, and financing against huge high-capacity projects, Wood Mackenzie said back in 2019. A year before COVID upended all commodity markets and demand projections, Mackenzie said:

“The lack of economy of scale is likely to limit FLNG projects to small scale and remote developments as it competes for buyers, financing and partners in a busy LNG marketplace. However, FLNG has established itself as a credible development option and – with further experience and cost reduction – further projects may quickly appear in an otherwise quiet FLNG FID outlook.”

LNG Demand Set For Continuous Growth

The pandemic didn’t upend the forecast that LNG demand would continue to grow as power and industrial demand rises and countries look to use more gas in the power mix at the expense of coal, especially in the fastest-growing gas market, Asia.

Asia’s natural gas demand is set to nearly double by 2050, Wood Mackenzie said last week, noting that the region needs incentives and investments in domestic supply if it is to avert the next gas crisis and cater to its energy security.

At the same time, spot LNG prices in Asia are holding at levels close to the October records, at $36.10 per million British thermal units (MMBtu) as of last week, industry sources told Reuters.

FLNG Is Popular Again

Thanks to high prices and demand, as well as the benefits of gas compared to coal in terms of emissions in power generation, floating LNG projects are attractive again and could play an important role in filling in a niche on the LNG market in coming years, analysts tell Houston Chronicle’s Marcy de Luna.

“There seems to be renewed interest in FLNGs,” Rystad Energy analyst Kaushal Ramesh told Houston Chronicle.

Currently, there are five operational FLNG projects globally, and at least three more are expected to come on stream over the next two years. FLNG developers are optimistic that the current strong LNG prices could drive momentum for potential new floating projects.

Shell’s Prelude off western Australia became, in 2019, the first operational FLNG facility, although it took Shell (LON:RDSa) and its partners eight years to bring it online.

Golar LNG (NASDAQ:GLNG), which operates the Hilli Episeyo FLNG offshore Cameroon, put the project into production in three years. Earlier this year, Golar LNG, Perenco Cameroon, and Cameroon’s state firm Société Nationale des Hydrocarbures (SNH) decided to raise the utilization of the FLNG unit by 200,000 tons to 1.4 million tons in 2022.

In the Q3 results release in November, Golar LNG said that:

“The current strength of LNG prices and favorable price outlook further increases the attractiveness of our FLNG (OL:FLNG) solutions. This is driving momentum for potential new FLNG projects.”

More FLNG Coming Within Two Years

Golar LNG is also working on an FLNG project for BP (NYSE:BP), FLNG Gimi, expected to be deployed offshore Mauritania. The unit is now around two years from the scheduled start-up date for the 20-year lease and operating agreement with BP, Golar said this month.

Eni SpA (NYSE:E) expects to start production from the Coral-Sul FLNG—part of the Coral South Project in the Rovuma basin offshore Mozambique—in the second half of 2022, the Italian major said in November.

New Fortress Energy (NASDAQ:NFE) announced earlier this year a final investment decision on what it calls “Fast LNG”—a modular liquefaction facility with a capacity of 1.4 million tons per year. NFE chief executive and chairman Wes Edens said in March 2021:

“This technology can be installed quickly and cheaply to access stranded, low-cost natural gas at a fixed price to meet the global demand for more affordable, reliable and cleaner energy. Alongside our terrific partners, we look forward to deploying one of the world’s lowest-cost LNG production facilities by 2022.”

In the United States, Delfin LNG looks to develop export projects using floating LNG technology offshore Louisiana. Delfin asked in July the Federal Energy Regulatory Commission (FERC) for an extension until September 2022 of the permit to build pipelines to connect to the offshore FLNGs, which in total, would produce 13 million tons per year of LNG.

“Delfin asserts that economic conditions are recovering from the global coronavirus pandemic, and the spot and short-term market for the LNG have significantly improved. Delfin views these developments as a precursor for an improved longer-term market, which it asserts will support long-term LNG offtake contract(s),” the company said in its application.

Floating LNG projects have a much smaller capacity than onshore plants, but they could be used to tap remote gas assets that are uneconomical to develop with connections to onshore liquefaction facilities.

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