Liquefied natural gas (LNG) industry is able to deliver these remote gas reserves into markets and designs supply of energy for those countries are highly depended on oil or natural gas delivered by pipelines. This delivery process requires supply chain in high technical standards with economic concerns.
Basics of LNG
LNG is one form of the natural gas and it’s distinguished from the other forms that are used in gas literature such as NGL, CNG, LPG and ANG. NGLs (Natural Gas Liquids) that are hydrocarbons such as such as propane, ethane, isobutene, butane and natural gasoline (pentanes) extracted from natural gas production stream in natural gas processing plants and stored in liquid forms. NGLs are generally at small percentage in gas wells compared to crude oil reserves.
LPG is liquefied petroleum gas which is crude oil distillation and consists of propane, butane and mixture of the two. LPG energy content is much higher than natural gas (Mokhatab et al., 2014). CNG is compressed natural gas stored in gaseous state, typically in 200-250 bars high pressure cylinders. On the other hand, LNG refers to cooled natural gas at the liquefaction facilities and the main content of the LNG is methane.
Natural gas to liquefied natural gas process is done by cooling down the gas at atmospheric pressure at a temperature of -162°C and enables to transport approximately 600 times bigger volumes compared to gas phase.
LNG has no odour or colour and it’s non-corrosive cryogenic liquid at normal atmospheric pressure. The configuration of the LNG depends on the reserve of the gas and fractionation records. Figure 1 illustrates elements of the natural gas. Main component of the LNG is methane and it varies from 87% to 99% by mole. Other composition of the LNG is hydrocarbons C2 to C4, ethane, propane, butane and nitrogen. LNG contains almost zero sulphur, very low nitrogen oxide as a promising clean energy source.
LNG ‘s density is usually between 430kg/m3 and 470kg/m3 which makes LNG less than half of the water. Therefore, LNG spill over water floats on top and vaporizes quickly. Boiling point of LNG depends on composition, however typically it’s -162. LNG vapours are heavier than air only at initial stage, however once it starts to warm up due to environment conditions, approximately at temperatures of -110°C, vapor density becomes lighter than air.
Flammable limits for methane/air mixtures are between 5% and 15% by volume in air. Out of this range methane/air mixture is not flammable. Small quantity of LNG leakage at well-ventilated area or open air will rapidly mix with air and dissolve to less than 5% concentration. On the other hand, LNG is nontoxic, however, any gas release from LNG can cause asphyxiation due to lack of oxygen in an enclosed area and can be ignited if mixed with air within flammable limits.
LNG Exploration and Production
Exploration and production are upstream stage of oil and gas industry. LNG exploration involves millions of dollars and highly risky to find a dry well. Exploration either could be onshore or offshore. Seismic surveys, environmental assessments, drilling processes could take over years. Strong financial sources and economic feasibility are always decisive to start drilling out the reserve. Gas gathering and transferring to liquefaction plants are critical parts of the system. It is argued that a liquefaction plant requires about 1.5 Tcf of natural gas reserve in order to produce each million tons per year of LNG (47 Bcf per year) for 20 years.
Conventional natural gas sources are underground wells which are usually non-associated gas, condensate reservoirs (pentanes and heavier hydrocarbons) and large oil fields (associated gas). Unconventional gas sources are:
- Tight Sands Gas which is trapped in sandstone and carbonate;
- Coalbed Methane is extracted from coal mines which is observed by the solid coal particles;
- Shale Gas is trapped in clay particles which is formed in low permeability shale rock;
- Methane Hydrates are usually formed deep under Arctic permafrost that methane molecules are trapped in a form of porous ice.
LNG terminals could be installed permanently onshore, which provides a more permanent solution with longer term supply security. Larger storage capacity and lower operating expenditures (OPEX) are advantages of onshore terminals. On the other hand, liquefaction, regasification and storage processes could be performed on offshore facilities. These are mainly built in purpose for specific area and have limited flexibility in terms of storage capacity and time in use.
However, on positive side, provides flexibility in land and port requirements, requires lower capital expenditure (CAPEX) and allows quick fuel switching as energy sources. Although it depends on the location, generally requires fewer regulations. Currently, there are 352 LNG import terminals and their size ranging from 0.001 mmt/y to 29 mmt/y by the end of January 2021. There are also 191 export terminal across the world and their size range is between 0.04 mmt/y to 15.6 mmt/y .
Unlike crude oil, LNG does not have harmonized global price which have regional segmentation in contracts. The world’s first gas markets have been created in USA since 1990s. Gas buyers and sellers began using these markets for physical trade along with traders, marketers and aggregators. Henry Hub was selected by NYMEX (New York Mercantile Exchange) in 1990 as natural gas futures contact.
Currently, there are three main markets in LNG pricing: The Asia Market with Japan custom-cleared crude price index, The European market with National Balancing Point (NBP) price index and The North American market with the Henry Hub price index. LNG pricing structure is evolving from oil indexed to gas-on-gas pricing structure according to well-established global reference points.
The USA market has derived from a transparent market-based mechanism since Federal Energy Regulatory (FERC) issue order in 1992. Deregulation of natural gas commodity along with extensive natural gas pipeline network has allowed to develop a natural gas market. Henry Hub, Louisiana, is the main hub, in addition to some as AECO Alberta, Dominion South Point.
Reforms in USA followed by European Union and development of gas market have begun in Europe. National Balancing Point (NBP) and Title Transfer Facility (TTF) have emerged as gas hubs in the UK and the Netherlands respectively.
Asia-Pacific market started emerging in the early 2010s with the signing of Henry-Hub based LNG tolling contracts. Following this, Singapore Exchange created a price index and SGX LNG Index group, launched derivative contracts in January 2016 Another price indexing was established as JKM (Japan-Korea-Marker).
Growing LNG spot market and short-term contracts allows market to go divertible and uncommitted structure. As record low of international gas prices, in Asia average spot LNG prices were recorded as 5.49USD per MMBtu in 2019. Increasing USA’s LNG exports shape the market with new business models, as they take the Henry Hub as reference, despite the dominated oil indexed price, now there is increasing trend to tie NBP, TTF and JKM for hybrid pricing models.
Netback concept is important benchmarking particularly for producing countries as it allows to understand differing value of LNG in different markets. It is determined by taking the net revenues from downstream sales of LNG/natural gas in the destination market, less all cost associated with gas till getting it to the market. The starting point of the netback could be well at the liquefaction plant inlet or at the exit of liquefaction plant. Delivery point of the LNG depends on the contract of the parties; free onboard (FOB), costs insurance and freight (CIF) as at the liquefaction facility; or delivered at terminal (DAT), delivered at place (DAP) sale at the destination point.
Gas projects could have different contracts at the different stage of the supply chain. In parallel to growing LNG market and diversifying supply chain, contracts are evolving more flexible or short-term trading agreements. Different contractual components of the LNG supply chain are illustrated in Figure 2.
Traditionally buyers and sellers position remained at downstream and upstream respectively. However, trend in LNG market shows that buyer side extend its control further upstream by joint venture structure. On the other hand, integration of diversified sellers allows them to engage in short-term trading. Integrated upstream groups and downstream groups contracts were utilised as long-term contracts with CIF or DES terms and take-or-pay terms. This type of contracts was provided to sellers guaranteed sales, low-risk return for investments.
However, during 1990s, emerging non-integrated LNG supply chains which allows buyers to operate ships and to make FOB agreements brough flexibility to buyers, particularly Japan and Korea. Expanding their LNG fleet also help them to influence over long-term shipping charters.
However, traditional integrated LNG supply chain is evolving away from this structure. Changing market structure with new buyers and uncertain long-term gas requirements affected LNG contracts. Renewable energy sources’ contribution, declining costs and increased competition create different risk profile for developing markets, which are seeking more speculative contracts, consequently, buyers’ demands are transformed to lower demand volumes and greater delivery flexibility.
Pipeline gas has been the main way to transport natural gas over the years. However, developing economies in Asia, new reserves, technological improvements lead to making LNG more competitive against pipeline gas. Despite the fact that significant uncertainties as the scale and stability of demand for LNG, in 2019, LNG inter-regional trade rose 12.7%. IEA report also points out that market share of LNG in total gas demand growing from in 20% in 2018 to 40% by 2040.
LNG exports reached to 430.6 billion cbm by the end of 2019. Asia-Pacific takes the largest part in LNG exports and measured as 164.3 billion cbm as of 36.5% share. Since 2015, Asia-Pacific has taken the leadership from Middle-East which represents 26.5% share by 2019. Relatively steady exports increased only 2.3% which is the lowest positive difference compared to other regions. Strong growth observed at North America (39.5%) as out of its historical trend and reached 69.8 billon cbm.
The second biggest increase observed at Europe and CIS region as 30.8% and reached to 36.7 billion cbm by the end of 2019. Another export region Africa is relatively stable and reached to 61.2 billion cbm, despite the 14.2% increase in 2019. Figure 3 illustrates historical trend of LNG exports by region.
Distribution of LNG exports in 2019 is illustrated in Table 1. Qatar keeps it’s largest LNG importer position narrowly ahead of Australia and takes 22.1%. Australia’s ambition for LNG exports are growing over the years and reached to 104.7 billion cbm by the end of 2019.
USA and Russia recorded the highest growth rate in 2019. as 66.3% and 57.9% respectively among important exporter countries. However, the biggest increase was observed in Egypt exports as 129.8% globally, compared to 2018. Egypt’s export quantity reached to 4.5 Billon cbm and take 0.9% share at global market. Indonesia is the only country negatively differentiated among top LNG exporter countries as it observed significant decline at LNG exports, although they have one of the world’s largest gas reserves. Interesting reflection of the table is that top 10 exporter countries take 88% of the total global exports and only three countries accounted more than 50% of the whole exports.
LNG demand increased 12.7% in 2019 and reached to record-high as 485.1 billion cbm. Figure 4 indicates that LNG import distribution is not homogeneous by region. Asia-Pacific is far the largest importer region as 68.9% share and 334.1 Billon cbm quantity. Europe is the second largest market and accounted for 24.7% by the end of 2019. The rest of the regions are not taking share more than 2.7% of global imports. Although production has more homogenous distribution for LNG, demand centres are concentrated in Asia-Pacific and Europe. LNG trade, pricing, and security are shaped according to this market overview.
Regional imbalance is reflected in LNG distribution by countries in Table 3. Japan takes the highest share in LNG imports with 21.7% as 105.5 billon cbm by the end of 2019, despite the 6.6% decline in 2019. China is the second LNG importer with 15.4% growing rate and was recorded as 84.8 billion cbm by the end of 2019. This is behind the last ten years growth average 2008-2018 as it was 31.8%. South Korea’s imports declined 7.6% and were recorded as 55.6 billion cbm.
However, South Korea keeps its third largest LNG importer position and contributes to the domination of Asia-Pacific’s in global market. A record-high increase in the demand was observed in the United Kingdom as it increased from 7.2 billion cbm to 18.0 billion cbm. All European countries have significant increases on LNG demand by 2019, ranging between 46% (Spain) and up to %117.9 (Belgium) and reflected in total quantity in Europe as 119.8 billion cbm. Significant increase on Europe’s LNG imports compensated decline in domestic production and pipeline imports. On the negative side, USA’s LNG imports narrowed 30.9% and recorded as just 1.5 billon cbm.
Natural gas could be carried for long distances and to locations where pipeline connection is not practical in LNG form. LNG is liquefied form of natural gas at -162°C and reduces natural gas volume 600 times. Cryogenic form of natural gas could be carried by LNG ships to long distances economically. LNG supply chain involves production, gasification, transportation, and regasification stages before delivery to end users. It’s an important energy market and has a momentum to increase its share as energy sources.
It’s the cleanest fossil fuel to fight air pollution. However, contribution to CO2 mitigation targets is limited and arguable. LNG requires high technical capability throughout the supply chain and market structure developed according to this technical difficulty, natural gas reserves and demand centres. Being an energy source for power generation and domestic use at home has gained another dimension in shipping as alternative fuel. Rationale of emission control measures, alternative fuels and LNG bunkering option are discussed in the following chapters.