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The two following schemes show our view on the most likely development of LNG connections: the current situation is relatively simple, but things will...
Author: Walter Wilson
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The two following schemes show our view on the most likely development of LNG connections: the current situation is relatively simple, but things will probably become more and more complex. Initial scheme was simple…… 100

Asia Pacific (Gm3)

50

1980

1990

2001

Asia Pacific 100

Atlantic - Med (Gm3)

50

1980

1990

2001

Source : TOTALFINAELF 7ème Gas Summit - Paris, 10 oct. 2002

…….But LNG trade is becoming more and more complex Existing flows

Asia Pacific

New flows

Atlantic - Med

Future flows

Asia Pacific

Usine de liquéfaction existante Usine de liquéfaction existante - projet

Import capacity 2000 : 27 Gm3/y 2010 : 60 Gm3/y

Terminal de regazéification Terminal de regazéification - projet

Import capacity 2000 : 42 Gm3/y 2010 : 65 Gm3/y

LNG

Source : TOTALFINAELF

Looking only at the horizon 2010 we have estimated that there will be a substantial development of LNG import infrastructure in Europe, from 42 Bcm in 2000 to 65 Bcm in 2010. During the same period import capacity in the US area (Atlantic basin) would more than double, from 27 Bcm in 2000 to 60 Bcm in 2010 but not exactly for the same reasons: o

It has been indicated above that Europe was requiring more than 500 Bcm of imported gas around 2020, and this gas has to come from more and more remote sources, involving distances where LNG is fully competitive with pipelines (Middle East, South America). But LNG could also be preferred for security of supply reasons as far as it is not required in this case to cross several countries involving political risks. This is reflected by current LNG projects under study for gas from Stokhman and Yamal fields in Russia. There would be in this case to accept an additional cost for security of supply.

o

The question in USA is different as far as this country is starting a process in which it becomes progressively a massive importer of gas as a result of exhaustion of reserves and thus declining production. Most operators in the US think that the best strategy to deal with gas decline is to import gas (mostly in the form of LNG). As power generation is a very large potential consumer of gas, the alternative of clean coal technology is seriously considered and substantial progress is made. This alternative provides emissions profiles close to those of gas, but it is now admitted that this technology will not be fully commercial before 2010 at least.

4-

The magnitude of required infrastructure investment for pipeline and LNG connections

Demand and supply projections recently developed for Europe (see chapters 1 and 2), even based on moderate expectations of natural gas future demand, have shown the existence of a substantial gap between demand and potential supply from outside Europe. However In the real world there is no supply or demand gap but market forces and decisions of leading actors are continuously at work to establish a sustainable balance. Establishing this balance clearly requires a substantial amount of capital investment in both production and transmission infrastructure. The following map shows the extensions and new gas interconnections to be implemented for meeting demand in 2020, involving mainly: o o o o

New pipelines from Russia (Stockhman and Yamal fields) New pipelines from Algeria (to Italy and Spain) New pipelines to supply gas from Caspian sea area to Europe via Turkey New LNG terminals to receive LNG from Egypt and Middle East.

A rough estimation of the bill for these infrastructure projects is in the range 150 to 200 Billion US$.

Network investment to 2020

20

Capacity Bcm/ Bcm/year Upgraded networks Projects

Yamal

Shtockman

NadymNadym-PurPur-Taz

150 Billion $

450

10 20

Existing networks LNG Terminal in operation

72

66

8

20

LNG Terminal projected

20?

125

28

Kazhakstan

28 10?

110 38

56 16 Turkmenistan

15 8 19

8

10? 30

10 Irak

Azerbaidjan

Iran

10 0

500 km

1.3(1)

Typical LNG chain investment To fix the ideas on the magnitude of infrastructure investment, we provide below a recent estimation of and LNG chain (1,700 miles from Egypt to Cartagena in Spain): Capacity: 3.50 million tons of LNG (4.8 Bcm) corresponding to the capacity of one standard LNG train. A liquefaction plant in line with recent technological improvements and capital cost reduction estimated at 900 million US$ (liquefaction cost equivalent to 1.0 US$/MMBtu). Shipping: 2 tankers of 135,000 tons representing a capital investment of 360 million US$, to link the liquefaction plant close to Port Said to Cartagena (1,700 miles) with turn round times of 10.5 days. The resulting shipping cost is 0.40 US$/MMBtu.

Regaseification in a terminal including 240,000 M3 of storage (3 tanks of 80,000M3) for a total capital investment of 320 million US$. The resulting regaseification cost is found at 0.41 US$/MMBtu. Such a typical small LNG chain involves a capital investment of 1,580 Million US$ (excluding upstream field development) , to deliver 4.8 Bcm of gas to the pipeline network at 2.56 US$/MMBtu (technical cost assuming production cost in Egypt of 0.65 US$/MMBtu). Typical gas pipeline interconnection investment Similarly an example of new interconnection by pipeline is the MEDGAZ project from Algeria to Spain, with the following characteristics: o o o

Onshore line of 547 Km from Hassi’Rmel field in Algeria to Beni Saf on the coast Onshore line of 200 km from Beni Saf to Almeria Capacity of 8 Bcm per year

Such a pipeline link involves a capital investment of 1,166 million US$ including compression, to deliver gas in Spain at 1.17 US$/MMBtu (technical cost assuming production cost in Algeria of 0.45 US$/MMBtu)

5-

Impact of technological progress on pipeline and LNG costs

Capital investment required for gas transport infrastructure will be substantially affected within the next decade by technological progress, both for pipelines and LNG facilities. This will mainly result in reductions in future gas transport costs particularly sensitive on long distance connections, and will favour the connections between more remote production and consumption centres, with an obvious impact on security of supply. The magnitude of cost reductions presented below are based on a recent study carried out by IFP /ENI for the European Commission “GATE 2020” (Gas Advanced Technology for Europe). Concerning pipelines, current high capacity onshore connections use steel grades up to X70 and operating pressures under 75 bar. Recent studies have concluded that by using higher steel grades (X80 and even X100) pressure levels could be increased to 140 bar, allowing for the same pipe diameter: o o

To transport a higher gas volume And to make savings in compression needs.

Europipe II has been the first pipeline using X-80 steel. Using higher grade X-100 steel allows a pressure of 140 bar without requiring a higher wall thickness as is used in traditional pipes. The combination of above advantages implies that the unit transport cost using X-100 steel can be reduced by 20% compared to current X-70 pipes. The following graph shows the reduction in transport cost for a pipeline connection of 1,000 Km, which can reach not far from 0.10 US$ /MMBtu

Pipeline Transport Cost reduction US$/MMBtu for 1000 Km function of volume 0.60 0.50 0.40 0.30

Steel X-70 Steel X-80 Steel X-100

0.20 10

20

30

Volume Bcm

With respect to LNG chain, technological developments and cost reduction are expected in 2010 and 2020, mainly in liquefaction plants design and tanker capital costs. Looking directly at the 2020 horizon, the following developments are expected: o Reduction of 20% in liquefaction plant capital cost, and maximum train sizes of 6 Million Tons/year (presently 3 MT/y) o Shorter plant construction period: 4years instead of 5. o Faster operation build up profile o Reduction of 10% on tankers capital costs with higher tanker size (200,000 M3 instead of presently 130,000 M3). The following graphs illustrate the reduction in liquefaction costs as a function of volume, and in total LNG chain cost for a 10 Bcm capacity (7.5 Million Tons/year) as a function of distance

LNG Liquefaction Cost reduction US$/MBtu function of volume 1.60 Year 2000 Year 2010

1.40

Year 2020

1.20 1.00 0.80 5

10

15

LNG Chain cost reduction for a 10 Bcm capacity US$/MMBtu function of distance 3.0

2.6

2.2

1.8 Year 2000 Year 2010

1.4

Year 2020

1.0 1000

6-

2000

3000

4000

5000

Discussion of constraints to realisation of infrastructure investment

In our view, the effective realisation of above huge infrastructure investments will have to face at least three obstacles: the uncertainty about future gas price, the difficulty of financing, and some possible adverse effects of excessive regulation. Uncertainty about future gas price Gas and oil prices relationship (coupling versus decoupling) is a subject of hot debate. However a simple analysis can highlight the specificities of the European gas market: in Europe the average value of gas is a netback value for its different usages and substitutes (half way between gas value in the USA and in Japan/Korea). As an average the EU gas import prices (pipelines or LNG) have been at 80% of Brent parity for 1985/2000 and this relationship has been rather stable. The much publicized « decoupling » has therefore not occurred, and will be more « optical » (pricing seasonality) than « real ». On the contrary the coupling could even improve (progressive shift toward a 100% Brent parity for gas import prices at EU borders). It is clear that the fear of a decoupling leading to lower gas prices linked to spot markets does not provide the right conditions for financing the huge projects for new supply. It would indeed secure a fair degree of market liquidity facilitating short term management, but would not be appropriate for long term security of supply.

Financing difficulties Development of gas infrastructure at such a scale is a complex and capital intensive effort. Many of the benefits such as energy efficiency and environmental improvement are manifested in ways that require governments to either mobilize the funds or set clear paths and guidelines to promote development by the private sector. Liberalisation in the downstream market unfortunately develops market uncertainty for traditional gas purchasers, and as a consequence for producers and transporters as to the ability of gas purchasers to commit on volumes and prices over the long term. This risk adds to the difficulty of securing adequate financing conditions. In this respect the European Commission has clearly understood the value of Long Term Contracts to secure financing and create confidence in the lending community. Innovative financing means will have to be worked out within an environment of capital competition. Political risk in some countries crossed by long distance pipelines may be also an impediment to securing appropriate and feasible financing packages. Partnership along the gas chain will provide an effective response to market uncertainty. Financing of gas development in producing countries will also be a major challenge. In this respect it can be suggested that partnership between National Oil Companies (NOC’s) and International Oil Companies (IOC ’s) would bring not only improved lobbying positions and improved financiability of new projects: its advantages go far beyond (efficiency gains all along the gas chain). Excessive regulation

An example how an excessive regulation could hinder the development of gas infrastructure was recently given by the Federal Energy Regulatory Commission (FERC) in USA. The obligation of open access to newly constructed LNG receiving terminals had to be eased, as major Companies argued that they could not justify building capital intensive new LNG terminals if they could not also control the shipments through the plants. On the same subject Japan has given the good example in its new deregulation draft Law by providing only negotiated third party use of Japan 24 LNG receiving terminals.

Conclusions o

The Enlarged Europe is faced with a major challenge over the next 20 years: how to secure required investment in gas infrastructure to import up to 525 Bcm of gas and even more if Kyoto commitments have to be fulfilled.

o

The development of LNG markets may ease some concern related to diversification and security of supply, but with an additional cost.

o

The question of uncertainty about future gas price is still not resolved and may have an adverse impact on raising appropriate financing.

o

Regulation applied to construction and access to infrastructure facilities (LNG terminals and pipelines) will have to be calibrated not to hamper their timely development. __________