In about three weeks, a mammoth ship will arrive at the Browse Basin, some 475km off the coast of Broome in Western Australia. It will anchor there to 16 mooring chains, floating above the Prelude and Concerto fields, processing natural gas into valuable LNG, then transferring it to gas carriers that will ship it to the rest of the world. This is Shell’s Prelude, the largest floating LNG (FLNG) facility in the world, and its completion marks a new era in the LNG world.
As it departed from the Samsung Heavy Industries shipyard in Geoje, South Korea on a month-long journey, the vital statistics of the Prelude are this – 488m long, 74m wide, using 260,000 tons of steel. It has the capacity of some 3.6 mtpa of LNG, 1.2 mtpa of condensate and 400 ktpa of LPG, rivalling some of the largest onshore plants. Commissioned in 2011 during the ascendance of LNG, repeated delays saw completion postponed since its 2012 construction start and also saw costs spiral. The initial estimate of cost was US$10.8-12.6 billion back in 2012; Shell (with partners Inpex, Kogas and CPC) in 2014 admitted the costs were rising, putting the price at US$3.5 billion per mtpa capacity – which means the upper range of costs are US$17.85 billion. With production beginning in 2018, Prelude starts life in a world very different from when it was first conceived. Back then, LNG prices were strong as demand outstripped supply. But now supply has outpaced demand, and prices have fallen in response. Spot LNG prices in Asia are now hovering at about US$5/mmbTu, compared to US$15/mmBtu back in 2012. Those aren’t good numbers; and with the wave of LNG coming out of Australia, Canada and the US growing, those prices could fall even further.
But Prelude is a long game. All FLNG vessels are. Designed to be gigantic industrial complexes on ships, their strength is versatility – they can sail to where the gas is. Shell certainly has the financial muscle to weather some rocky times of low LNG prices, and its acquisition of the BG Group gives it a larger portfolio to pour LNG into, and clients to sell to. The process of creating this vast new LNG portfolio, however, piled debt onto Shell’s financials books – which explains why the supermajor has been furiously cutting debt and selling assets over the past 18 months. Prelude is a calculated gamble, and one that Shell took at a very high buy-in.
Others also remain convinced that FLNG is the future. While Qatar seems happy with expanding its onshore Ras Laffan facilities and landed LNG plants spring up along the North American Pacific Coast, Malaysia’s Petronas believes in a life at sea. The first ever operational FLNG facility is actually a Petronas facility – the PFLNG Satu that delivered its first cargo from the Kanowit field off Bintulu in Malaysia in April. With a capacity of 1.2 mtpa of LNG, it is certainly smaller, but that keeps the stakes lower, though it too saw cost overruns and delays, with a price tag of some US$10 billion. And soon, it will have a brother – PFLNG Dua – which is scheduled to be completed in 2020 and join Satu in the South China Sea.
Elsewhere, FLNG projects are still far and few between. The mammoth upfront cost does not always offset potential versatility, particularly since LNG prices waned. GDF Suez and Santos’ Bonaparte FLNG project, for example, was shelved in favour of a more traditional pipeline approach. But there is still interest. Keppel Offshore & Marine will soon be delivering the first FLNG conversion (from an LNG carrier) to Golar LNG, who will put the Hilli Episeyo to service offshore Cameroon. And China seems to believe in the strength of numbers – it will be investing up to US$7 billion in FLNG projects on both coasts of Africa to secure LNG supplies for what it projects will be a boom in Chinese natural gas demand. With multiple projects, that can spread the cost – and also capitalise when, or if, LNG prices begin to recover.
The world will need more energy in the future and that is certain. It requires cleaner, reliable and accessible fuel options, and LNG does fit that bill in a long way. FLNG operators, especially Shell in this instance will be hoping the demand for LNG will keep rising at a pace that will make their investment (or gamble) eventually pay off.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
Headlines of the week
Midstream & Downstream
GEO ExPro Vol. 16, No. 1 was published on 4th March 2019 bringing light to the latest science and technology activity in the global geoscience community within the oil, gas and energy sector.
This issue focuses on new technologies available to the oil and gas industry and how they can be adapted to improve hydrocarbon exploration workflows and understanding around the world. The latest issue of GEO ExPro magazine also covers current training methods for educating geoscientists, with articles highlighting the essential pre-drill ‘toolbox’ and how we can harness virtual reality to bring world class geological locations to the classroom.
You can download the PDF of GEO ExPro magazine for FREE and sign up to GEO ExPro’s weekly updates and online exclusives to receive the latest articles direct to your inbox.
In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell