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LNG costs and markets have both changed in recent years Dollars needed to build liquefaction plants and LNG tankers have come down 30-40 percent as industry expands in Atlantic Kristen Nelson PNA Editor-in-Chief
With lower costs and the beginnings of a more flexible market, the liquefied natural gas business is no longer the province of a small exclusive club, Demetri Karousos told the Senate Resources Committee Feb. 28.
Karousos, associate director of research for natural gas and LNG for Cambridge Energy Research Associates, said there is a Renaissance in the LNG industry driven by reduction in costs, particularly in the capital-intensive liquefaction and shipping segments. New supplies and new players in the market are also important, he said, along with increasing willingness on the part of those new players to build LNG facilities with some portion of the capacity not contracted, making the LNG industry look a little more like the oil industry and a little less like the natural gas pipeline industry.
Major cost reductions in last decade LNG involves gathering, liquefaction, shipping and re-vaporization, and Karousos said liquefaction and shipping are where the big cost reductions have occurred: a 30-40 percent cost decline in liquefaction in the last five to 10 years as the business has matured and attracted more players, creating competition.
“There’s also been an adjustment in philosophy of design,” Karousos said. This isn’t about engineering or technological breakthroughs, he said, but “a real philosophical adjustment” as LNG broadens beyond traditional Asian markets.
Because of security concerns in Asia, especially Japan where there is no pipeline backup supply of natural gas, purchasers wanted “gold plating” on plants — duplication of parts to ensure supplies.
Recent new plants in the Atlantic basin, serving markets with pipeline access, can eliminate “gold plating,” cutting the cost for new plants by 30-40 percent.
In shipping, costs per ship have dropped from the $260 million range down to $160 million, Karousos said, partly because new development is taking place outside Asia and isn’t tied to contracts specifying that to bring LNG to Japan, shipbuilding has to be done in Japan. LNG tankers are now being built by the Spanish and Koreans, who can participate because those ships aren’t targeting the Asian markets, he said.
This growing flexibility in the LNG market could even lead to a spot market in LNG in the next 10 to 20 years, Karousos said, and also means the LNG industry in the future could look more like the oil business today — once the oil gets on a ship it doesn’t matter where the supply goes. North American LNG future uncertain The future of LNG in North America is uncertain, Karousos said, but high prices and supply-demand imbalances have created a current LNG demand. There has been an acceleration of supply development in the Atlantic basin and LNG receiving facilities have been or are being reopened in the United States. There is also interest in greenfield import facilities into North America, “something that has been taboo for 20 years,” he said.
Looking at a theoretical Caribbean supplier into the U.S. Gulf Coast, Karousos said that Cambridge Energy uses 50-60 cents per million Btu as a producer netback basis and roughly $1 for liquefaction for a new project, plus shipping estimated at 60 cents and vaporization at facilities that have been mothballed and are full depreciated at about 25 cents.
At a wholesale market price of $2.50, those costs provide a producer netback of 65 cents a million Btu. “That’s a far-cry from the $3.50 to $5 per MMBtu that was traditionally associated with LNG,” he said.
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