Shell May Order at Least Three Floating LNG Ships

Source: Bloomberg 10/19/2009, Location: Not categorized

Royal Dutch Shell Plc may order at least three floating liquefied natural-gas plants for about $5 billion each as Europe’s biggest energy producer seeks to be first in the race to tap so-called stranded deposits using the untested technology.

“There will be a minimum of three units and maybe more,” said Bernard di Tullio, chief operating officer of Technip SA, hired by Shell along with Samsung Heavy Industries Co. to build the ships. “We could see the first ones floating within four or five years,” he said in an interview from Paris.

Floating LNG vessels are designed to chill natural gas to a liquid from distant offshore fields that lack pipelines and onshore processing plants, and would otherwise be uneconomic to develop. Earlier this month, Shell said it will deploy the first model, which will be the biggest ship in the world, off the coast of northwestern Australia.

“The market is heating up” for floating LNG, Steve Robertson, director of oil and gas at U.K. energy researcher, Douglas-Westwood Ltd., said by telephone. “There is a need for a major energy company like Shell to develop the first unit because until then it will be viewed by banks as unproven technology.”

Samsung Heavy, the world’s third-largest shipyard, already has contracts to build four smaller floating LNG vessels for Flex LNG Ltd., which is vying with Oslo-based Hoegh LNG along with Shell to be the first to liquefy natural gas on board a ship. Daewoo Shipbuilding & Marine Engineering Co., the No. 2 shipyard, is involved in the design of units for Hoegh.

Supply Chain
“Shell has control over the whole supply chain so it’s more likely to succeed,” said Robertson. The explorer plans to use the pioneering technique at its Prelude and Concerto discoveries off the coast of northwestern Australia. Flex and Hoegh are in talks with oil and gas companies to sell their models.

Santos Ltd. and France’s GDF Suez SA have also proposed using the technology for a 2 million-metric-ton-a-year project to tap fields in Australia’s Bonaparte Basin off the north coast.

Around $23 billion will be invested in floating LNG facilities from 2010 through 2016, according to forecasts by Douglas-Westwood. Most will be spent on floating liquefaction vessels used to turn gas into LNG at offshore fields, which cost about three times more than import terminals where LNG is converted back into gaseous form.

Australia, Asia, Africa
Australia, Asia and Africa remain the focus of plans for the vessels largely due to their large number of isolated gas fields, according to a report by the research group.

The Hague-based Shell awarded a contract in July to Technip, Europe’s second-largest oilfield-services provider, and Samsung Heavy to design, construct and install floating LNG facilities over 15 years.

Shell, which hasn’t revealed how many will be ordered and at what price, said a final investment decision still has to be made. It may order as many as 10 units, according to Samsung, citing industry estimates.

Technip said its design for Shell would handle about 3.5 million metric tons a year. The company already has a team of about 100 people working on floating LNG design at its headquarters near Paris and has said that number may triple.

Flex and Hoegh’s designs would process between 1.6 million and 2 million metric tons of LNG a year and cost as much as $2 billion, the companies said.

Coming of Age
“We have been talking about this technology for 20 years, it’s not new,” di Tullio at Technip said. “Floating LNG technology may be coming of age now because oil companies are developing fields that are increasingly remote and in deeper waters. It could start very quickly. There is world demand.”

Fields in the Asia Pacific region, Brazil and West Africa can accommodate LNG units with processing capacity of around 3 million tons a year, di Tullio said. “There are also a multitude of small fields that aren’t developed because they are too far out,” which would require smaller units with capacity of about 1 million tons a year, he said.

“One advantage is that floating LNG installations would be less sensitive to local construction costs,” di Tullio said, adding that the units could be built at shipyards in Asia for all geographic areas.

Design One, Build Many
Technip is helping to build some of the world’s biggest LNG projects in Qatar for Exxon Mobil Corp. and Shell. It has said it will focus more on offshore projects, which offer higher profit margins, and move away from building onshore installations in North America and Australia, where it has less control over building costs.

Shell’s planned vessel for Australian waters could be moved to other fields once production at one field is complete and the “design one, build many” approach will save costs, Shell said in an Oct. 8 statement.

Soaring building costs and delays in getting environmental permits have led developers to postpone onshore LNG ventures. The rate of project approvals has missed forecasts for the past two years, according to Wood Mackenzie Consultants Ltd.

Petroleo Brasileiro SA, the Brazilian state oil producer known as Petrobras, will commission an engineering study for a floating LNG project in the country’s deep-sea pre-salt region, whose Tupi field is the Americas’ largest oil find since 1976.

“We will choose a project and then go to market to build it,” Chief Financial Officer Almir Barbassa said in an interview. “Depending on capacity, we may need three or four units.”

Larger Share
Shell said last month it may spend a larger share of its investments in Brazil, depending on new government regulations for recently discovered offshore deposits.

“Brazil has the potential to be big in our global investment portfolio; now Brazil is relatively small,” said Marvin Odum, Shell’s director for exploration and production in the Americas, in an interview on Sept. 17.

If development of the Brazilian pre-salt fields goes ahead, the country may eventually need 10 to 15 LNG units, according to Technip’s estimates. The company is “working actively” on the Petrobras engineering study and isn’t in an exclusive agreement with Samsung for contracts outside Shell, di Tullio said.

“This is a big market for us,” he said. “If fields to be developed are deep and offshore then the proportion of floating LNG will be higher.”

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