Liquefied Natural Gas Liquefied Natural Gas (LNG) Production and (LNG) Production and

MarketsMarkets

By: Jay Drexler, Dino By: Jay Drexler, Dino Kasparis, and Curt KnightKasparis, and Curt Knight

OutlineOutlinePurpose of the presentationPurpose of the presentationWhat is Liquefied Natural Gas? (LNG)What is Liquefied Natural Gas? (LNG)LNG OperationsLNG OperationsBrief History of LNGBrief History of LNGImporters/ExportersImporters/ExportersLNG Markets & TradeLNG Markets & TradeDeclining CostsDeclining CostsSafety and the EnvironmentSafety and the EnvironmentMajor AccidentsMajor AccidentsConclusionsConclusions

Purpose of the PresentationPurpose of the Presentation

This presentation This presentation was designed to was designed to provide an provide an overview of the overview of the LNG industry and LNG industry and markets as well as markets as well as its environmental its environmental and safety and safety implications. implications.

LNG VideoLNG Video

What is LNG?What is LNG?

Liquefied natural gas Liquefied natural gas (LNG) is natural gas that (LNG) is natural gas that has been cooled to the has been cooled to the point that it condenses to point that it condenses to a clear, colourless, and a clear, colourless, and odorless liquid. (approx. odorless liquid. (approx. --265oF or 265oF or --161oC) 161oC) Liquefaction reduces the Liquefaction reduces the volume by approximately volume by approximately 600 times thus making it 600 times thus making it more economical to more economical to transport throughout the transport throughout the world via specially world via specially designed ocean vessels. designed ocean vessels.

Source: Center for Energy Economics

Where does it come from?Where does it come from?Indonesia, Algeria, Malaysia, Qatar and Trinidad are Indonesia, Algeria, Malaysia, Qatar and Trinidad are currently the leading exporters of LNGcurrently the leading exporters of LNG

Russia and Iran have the greatest potential for LNG Russia and Iran have the greatest potential for LNG productionproduction

TABLE 4. Current Regional Natural Gas Status (in tcf)

Region Current Production Proved Reserves -R/P Ratio

CurrentConsumption

North AmericaSouth AmericaEuropeFormer USSRAfricaMiddle EastAsia/OceaniaTOTAL WORLD

25.52.19.225.72.63.96.575.5

312.7189.1216.32057.5341.61594.3350.65062.1

12/190/124/180/1131/1409/154/167/1

24.42.713.320.91.64.77.875.4

Why the interest in LNG?Why the interest in LNG?The most important quality that LNG holds The most important quality that LNG holds is its ability to be distributed throughout is its ability to be distributed throughout the world.the world.Other forms of energy transportation are Other forms of energy transportation are confined by space, terrain and oceans. confined by space, terrain and oceans. (examples:pipelines, electricity lines etc.)(examples:pipelines, electricity lines etc.)This quality of LNG allows countries to tap This quality of LNG allows countries to tap into global gas markets and to diversify into global gas markets and to diversify gas supplies.gas supplies.(this is most important to the U.S)(this is most important to the U.S)

LNG OperationsLNG Operations

In order to make LNG available for use, countries must invest inIn order to make LNG available for use, countries must invest in a a number of operations that are highly linked:number of operations that are highly linked:

1.1.Exploration to find natural gas (usually found Exploration to find natural gas (usually found during searches for oil)during searches for oil)

2.2.Liquefaction to convert natural gas into a liquid Liquefaction to convert natural gas into a liquid state so that it can be transportedstate so that it can be transported

3.3.Shipping the LNG in special purpose vesselsShipping the LNG in special purpose vessels4.4.Storage and RegasificationStorage and Regasification

Exploration and ProductionExploration and ProductionAccording to World Oil, for the year 2001 According to World Oil, for the year 2001 worldwide proven reserves of natural gas worldwide proven reserves of natural gas were 5919 trillion cubic feet and more were 5919 trillion cubic feet and more reserves continue to be discoveredreserves continue to be discoveredMost natural gas reserves are discovered Most natural gas reserves are discovered through oil exploration through oil exploration Many of these reserves are in remote Many of these reserves are in remote locations of countries who do not need locations of countries who do not need large quantities of additional energylarge quantities of additional energySo the issue is getting these reserves to So the issue is getting these reserves to profitable marketsprofitable markets-- LNG is the answer!LNG is the answer!

LiquefactionLiquefactionThe liquefaction The liquefaction process entails cooling process entails cooling the gas by using the gas by using refrigerantsrefrigerantsThe liquefaction The liquefaction process can be process can be designed to purify designed to purify LNG to almost 100 LNG to almost 100 percent methanepercent methaneThe natural gas is The natural gas is liquefied for shipping liquefied for shipping (volume is reduced by (volume is reduced by factor of 600)factor of 600)

TransportationTransportationSpecially designed Specially designed ships are used to ships are used to transport LNG to transport LNG to terminals around the terminals around the worldworldThey have double They have double hulls and are hulls and are constructed of constructed of specialized materials specialized materials that are capable of that are capable of safely storing LNG at safely storing LNG at extremely low extremely low temperaturestemperatures

The Coast Guard provides security while the LNG vessel is approaching the unloading bay

Transportation Transportation A typical LNG carrier A typical LNG carrier can transport about can transport about 125,000125,000--138,000 138,000 cubic meters of LNGcubic meters of LNGThe LNG shipping The LNG shipping market is expanding. market is expanding. According to According to LNGOneWorld, as of LNGOneWorld, as of December 2002, there December 2002, there were 136 existing were 136 existing tankers, with 57 on tankers, with 57 on order order LNG has economic LNG has economic advantages over the advantages over the usage of pipelinesusage of pipelines

Storage and RegasificationStorage and Regasification

Upon arrival at the receiving Upon arrival at the receiving terminal, LNG is pumped terminal, LNG is pumped into a storage tankinto a storage tankThe return of LNG to a The return of LNG to a gaseous state, is achieved gaseous state, is achieved through a regasification through a regasification plantplantLNG is warmed by passing LNG is warmed by passing it through heated pipesit through heated pipesThe vaporized gas is then The vaporized gas is then regulated for pressure and regulated for pressure and enters the local pipeline enters the local pipeline system as natural gas.system as natural gas.

History of LNGHistory of LNGKey PointsKey Points

Natural gas liquefaction was first experimented with by a Natural gas liquefaction was first experimented with by a British chemist/physicist named Michael Faraday in the 19British chemist/physicist named Michael Faraday in the 19thth

centurycenturyThe first practical compressor refrigeration machine was The first practical compressor refrigeration machine was built by a German named Karl Von Linde in Munich in 1873built by a German named Karl Von Linde in Munich in 1873The first LNG plant was built in West Virginia in 1912The first LNG plant was built in West Virginia in 1912The first commercial liquefaction plant was built in The first commercial liquefaction plant was built in Cleveland, Ohio in 1941Cleveland, Ohio in 1941The first LNG tanker was introduced in 1959(a converted The first LNG tanker was introduced in 1959(a converted WW2 liberty freighter)WW2 liberty freighter)This first tanker carried LNG cargo from Lake Charles This first tanker carried LNG cargo from Lake Charles Louisiana to Canvey Island, U.K Louisiana to Canvey Island, U.K --demonstrating that large demonstrating that large quantities of LNG could be transported safely across the quantities of LNG could be transported safely across the oceanocean

History of LNGHistory of LNGKey points Key points

After the concept was shown to work in the UK (not until After the concept was shown to work in the UK (not until late 60late 60’’s) additional liquefaction plants and import s) additional liquefaction plants and import terminals began to be constructed around the worldterminals began to be constructed around the worldFour terminals were constructed in the U.S between 1971Four terminals were constructed in the U.S between 1971--19801980After reaching a peak volume of 253 BCF (billion cubic feet) After reaching a peak volume of 253 BCF (billion cubic feet) in 1979, LNG imports began to decline due to a gas surplus in 1979, LNG imports began to decline due to a gas surplus in North America and price disputes occurring with Algeria in North America and price disputes occurring with Algeria (a major provider of LNG to the US)(a major provider of LNG to the US)The first exports of LNG from the US to Asia occurred in The first exports of LNG from the US to Asia occurred in 1969 when Alaska LNG was sent to Japan1969 when Alaska LNG was sent to JapanThe LNG market has continued to grow worldwide The LNG market has continued to grow worldwide especially in Europe, Asia and North Americaespecially in Europe, Asia and North America

Major LNG Exporters, 2002Major LNG Exporters, 2002

CountryCountry ( million ( million tonnestonnes))IndonesiaIndonesia 23.023.0AlgeriaAlgeria 19.619.6MalaysiaMalaysia 15.615.6QatarQatar 14.914.9NigeriaNigeria 8.28.2AustraliaAustralia 7.77.7OmanOman 7.37.3BruneiBrunei--DarussalamDarussalam 7.27.2UAEUAE 7.27.2RussiaRussia 4.84.8TrinadadTrinadad & Tobago& Tobago 4.04.0USAUSA 1.41.4

Major LNG Importers, 2002Major LNG Importers, 2002CountryCountry ( million ( million tonnestonnes))JapanJapan 188.3188.3South KoreaSouth Korea 40.740.7FranceFrance 10.710.7TaiwanTaiwan 7.57.5BritainBritain 7.37.3USAUSA 4.84.8TurkeyTurkey 4.64.6PortugalPortugal 3.33.3SpainSpain 2.72.7BelgiumBelgium 2.62.6ItalyItaly 2.62.6IndiaIndia 2.52.5

LNG TradeLNG Trade

LNG prices in North America are LNG prices in North America are pegged to the Henry Hub, which is pegged to the Henry Hub, which is the pricing point for natural gas the pricing point for natural gas future contracts traded on the New future contracts traded on the New York Mercantile Exchange (NYMEX).York Mercantile Exchange (NYMEX).

LNG Trade LNG Trade

LNG prices in Asia are pegged to LNG prices in Asia are pegged to crude oil prices based on the Japan crude oil prices based on the Japan Crude Cocktail (JCC).Crude Cocktail (JCC).

LNG TradingLNG Trading

During the mid 20During the mid 20thth century, buyers century, buyers and sellers of LNG would engage in a and sellers of LNG would engage in a Delivery Ex shipping agreement Delivery Ex shipping agreement which costs included the costs of which costs included the costs of goods and freight insurance. The goods and freight insurance. The seller would be liable for the seller would be liable for the transportation. transportation.

LNG Trading LNG Trading

Now since transportation and Now since transportation and regasification costs have decreased regasification costs have decreased and to ensure a secure and steady and to ensure a secure and steady supply for buyers, LNG contracts are supply for buyers, LNG contracts are negotiated on a FOB shipping point. negotiated on a FOB shipping point. Buyers are now liable for Buyers are now liable for transportation.transportation.

LNG Trading LNG Trading

LNG contracts are based on a Take LNG contracts are based on a Take or Pay structure, which buyers enter or Pay structure, which buyers enter a long term and inflexible in pricing a long term and inflexible in pricing and volume.and volume.

There is a trend towards giving short There is a trend towards giving short term contracts to buyers in the 21term contracts to buyers in the 21stst

century.century.

LNG Niche Markets & OpportunitiesLNG Niche Markets & Opportunities

Possibilities for future market Possibilities for future market applications:applications:

Vehicle fuelsVehicle fuelsAlternative to propaneAlternative to propane

•• Used by isolated industrial complexesUsed by isolated industrial complexesEgEg. Mining and forestry companies. Mining and forestry companies

Economic incentives are administered in tax Economic incentives are administered in tax breaks as LNG constitutes as an alternative breaks as LNG constitutes as an alternative fuel source.fuel source.

Short Term Supply BarriersShort Term Supply Barriers

Availability of skilled workersAvailability of skilled workersAvailability of equipmentAvailability of equipmentPermitting and well developmentPermitting and well developmentWeather and delivery disruptionWeather and delivery disruption

General Barriers to Increasing General Barriers to Increasing SupplySupply

Land infrastructure Land infrastructure Pipeline infrastructurePipeline infrastructureThe financial environmentThe financial environment

Declining LNG CostsDeclining LNG CostsNew technologies New technologies and innovationsand innovations•• Construction costs Construction costs

of LNG plants, of LNG plants, vessels, and vessels, and receiving terminals receiving terminals

Higher demand Higher demand More competitionMore competition30% reduction of 30% reduction of costs in the past costs in the past 20 years20 years

Declining LNG CostsDeclining LNG CostsTankersTankers•• Longer operating Longer operating

liveslives•• Improved fuel Improved fuel

efficiency efficiency •• Increased carrying Increased carrying

capacity capacity

Plant costsPlant costs•• Economies of scaleEconomies of scale•• Competing Competing

technologiestechnologies

Is LNG flammable?Is LNG flammable?

Contact with warm air creates vapor Contact with warm air creates vapor cloudcloudOnly flammable if itOnly flammable if it’’s 5%s 5%--15% of the 15% of the air contentair content•• Only explosive within the flammable Only explosive within the flammable

rangerange

Security Security

ShippingShippingStorageStorageTerrorismTerrorism

Major AccidentsMajor Accidents

Cleveland, Ohio, 1944Cleveland, Ohio, 1944•• Result of poor tank construction, 128 Result of poor tank construction, 128

deathsdeaths

Staten Island, New York, 1973Staten Island, New York, 1973•• ReRe--construction mishap, 40 deathsconstruction mishap, 40 deaths

Cove Point, Maryland, 1979Cove Point, Maryland, 1979•• $3 Million in damage, 1 death$3 Million in damage, 1 death

SkikdaSkikda, Algeria, 2004, Algeria, 2004•• Explosion from a tank leak, 27 deathsExplosion from a tank leak, 27 deaths

Cleveland 1944Cleveland 1944

Algeria 2004Algeria 2004

Alternative argumentsAlternative arguments

Residential LNG facilities and Residential LNG facilities and pipelinespipelines•• Private ownership with no public Private ownership with no public

concernconcern

Environmental concernsEnvironmental concerns•• Rapid Phase TransitionRapid Phase Transition

Industry corruptionIndustry corruption

Is LNG a Safe Fuel?Is LNG a Safe Fuel?

Compared to refineries and other Compared to refineries and other petrochemical plantspetrochemical plants•• Environmental impact and residential Environmental impact and residential

safetysafety

More stringent operational and safety More stringent operational and safety regulations are in place since early regulations are in place since early incidentsincidents

ConclusionsConclusions

LNG industry marketsLNG industry markets•• Quality alternative fuel sourceQuality alternative fuel source•• Growing industry with large reserve base Growing industry with large reserve base

EnvironmentalEnvironmental•• Clean burning & harmless in most cases of Clean burning & harmless in most cases of

spillage and leakagespillage and leakage

Safety ImplicationsSafety Implications•• Only combustible in specific circumstances Only combustible in specific circumstances