Easwaran Kanason

Co - founder of NrgEdge
Last Updated: July 11, 2017
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Gas & LNG
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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.

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In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
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