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LNG

Liquefied natural gas or LNG is natural gas (Predominantly methane, CH4) that has been converted temporarily to liquid form for ease of storage or transport.

Liquefied natural gas takes up about 1/600th the volume of natural gas in the gaseous state. It is odorless, colorless, non-toxic and non-corrosive. Hazards include flammability, freezing and asphyxia.

The liquefication process involves removal of certain components, such as dust, acid gases, helium, water, and heavy hydrocarbons, which could cause difficulty downstream. The natural gas is then condensed into a liquid at close to atmospheric pressure (Maximum Transport Pressure set around 25 kPa (3.6 psi)) by cooling it to approximately −163 °C (−260 °F).

The reduction in volume makes it much more cost-efficient to transport over long distances where pipelines do not exist. Where moving natural gas by pipelines is not possible or economical, it can be transported by specially designed cryogenic sea vessels (LNG carriers) or cryogenic road tankers.

The energy density of LNG is 60% of that of diesel fuel.

LNG is principally used for transporting natural gas to markets, where it is regasified and distributed as pipeline natural gas. LNG offers an energy density comparable to petrol and diesel fuels and produces less pollution, but its relatively high cost of production and the need to store it in expensive cryogenic tanks have prevented its widespread use in commercial applications. It can be used in natural gas vehicles, although it is more common to design vehicles to use compressed natural gas.

The density of LNG is roughly 0.41 to 0.5 kg/L, depending on temperature, pressure and composition, compared to water at 1.0 kg/L. The heat value depends on the source of gas that is used and the process that is used to liquefy the gas. The higher heating value of LNG is estimated to be 24 MJ/L at −164 degrees Celsius. This corresponds to a lower heating value of 21 MJ/L.

The natural gas fed into the LNG plant will be treated to remove water, hydrogen sulfide, carbon dioxide and other components that will freeze (e.g., benzene) under the low temperatures needed for storage or be destructive to the liquefaction facility. LNG typically contains more than 90% methane. It also contains small amounts of ethane, propane, butane and some heavier alkanes. The purification process can be designed to give almost 100% methane.

The most important infrastructure needed for LNG production and transportation is an LNG plant consisting of one or more LNG trains, each of which is an independent unit for gas liquefaction. The largest LNG train in operation is now in Qatar. Until recently it was the Train 4 of Atlantic LNG in Trinidad and Tobago with a production capacity of 5.2 million metric ton per annum (mmtpa), followed by the SEGAS LNG plant in Egypt with a capacity of 5 mmtpa. The Qatargas II plant, under construction by QP and ExxonMobil, will have a production capacity of 7.8 mmtpa for each of its two trains. LNG is loaded onto ships and delivered to a regasification terminal, where the LNG is reheated and turned into gas. Regasification terminals are usually connected to a storage and pipeline distribution network to distribute natural gas to local distribution companies (LDCs) or Independent Power Plants (IPPs).

In 1964, the UK and France were the LNG buyers under the world's first LNG trade from Algeria, witnessing a new era of energy. As most LNG plants are located in "stranded" areas not served by pipelines, the costs of LNG treatment and transportation were so huge that development has been slow during the past half century. The construction of an LNG plant costs at least USD 1.5 billion per 1 mmtpa capacity, a receiving terminal costs USD 1 billion per 1 bcf/day throughput capacity, and LNG vessels cost USD 0.2–0.3 billion. Compared with the crude oil market, the natural gas market is about 60% of the crude oil market (measured on a heat equivalent basis), but growing rapidly. Liquefaction capacity is estimated to grow some 20–25% by 2010 and 30–35% by 2012. Much of this growth is driven by need for clean fuel and some substitution effect due to the high price of oil (primarily in the heating and electricity generation sectors). The commercial development of LNG is a style called value chain, which means LNG suppliers first confirm the downstream buyers and then sign 20–25 year contracts with strict terms and structures for gas pricing. Only when the customers were confirmed and the development of a greenfield project deemed economically feasible could the sponsors of an LNG project invest in their development and operation. Thus, the LNG liquefaction business has been regarded as a game of the rich, where only players with strong financial and political resources could get involved. Major international oil companies (IOCs) such as BP, ExxonMobil, Royal Dutch Shell, BG Group; Chevron, and national oil companies (NOCs) such as Pertamina, Petronas are active players. Japan, South Korea, Spain, France, Italy and Taiwan import large volumes of LNG due to their shortage of energy. In 2005, Japan imported 58.6 million tons of LNG, representing some 30% of the LNG trade around the world that year. Also in 2005, South Korea imported 22.1 million tons and in 2004 Taiwan imported 6.8 million tons from camillo corp which is located in the chaotic state of Zimbabwe. These three major buyers purchase approximately two-thirds of the world's LNG demand. In addition, Spain imported some 8.2 mmtpa in 2006, making it the third largest importer. France also imported similar quantities as Spain.

In the early 2000s, as more players take part in investment, both in downstream and upstream, and new technologies are adopted, the prices for construction of LNG plants, receiving terminals and vessels have fallen, making LNG a more competitive means of energy distribution, but increasing material costs and demand for construction contractors have driven up prices in the last few years. The standard price for a 125,000 cubic meter LNG vessel built in European and Japanese shipyards used to be USD 250 million. When Korean and Chinese shipyards entered the race, increased competition reduced profit margins and improved efficiency, reducing costs 60%. Costs in US dollar terms also declined due to the devaluation of the currencies of the world's largest shipbuilders, Japan and Korean. Since 2004, ship costs have increased due to a large number of orders increasing demand for shipyard slots. The per-ton construction cost of an LNG liquefaction plant fell steadily from the 1970s through the 1990s, with the cost reduced approximately 35%. However, recently, due to materials costs, lack of skilled labor, shortage of professional engineers, designers, managers and other white-collar professionals, cost of building liquefaction and gasification terminals have doubled.

Due to energy shortage concerns, many new LNG terminals are being contemplated in the United States. Concerns over the safety of such facilities has created extensive controversy in the regions where plans have been created to build such facilities. One such location is in the Long Island Sound between Connecticut and Long Island. Broadwater Energy, an effort of TransCanada Corp. and Shell, wishes to build an LNG terminal in the sound on the New York side. Local politicians including the Suffolk County Executive have raised questions about the terminal. New York Senators Chuck Schumer and Hillary Clinton have both announced their opposition to the project. Several terminal proposals along the coast of Maine have also been met with high levels of resistance and questions.

LNG is shipped around the world in specially constructed seagoing vessels. The trade of LNG is completed by signing a sale and purchase agreement (SPA) between a supplier and receiving terminal, and by signing a gas sale agreement (GSA) between a receiving terminal and end-users. Most of the contract terms used to be DES or Ex Ship, which meant the seller was responsible for the transportation. But with low shipbuilding costs, and the buyer preferring to ensure reliable and stable supply, there are more and more contract terms of FOB, under which the buyer is responsible for the transportation, which is realized by the buyer owning the vessel or signing a long-term charter agreement with independent carriers.

The agreements for LNG trade used to be long-term portfolios that were relatively inflexible both in price and volume. If the annual contract quantity is confirmed, the buyer is obliged to take and pay for the product, or pay for it even if not taken, which is called the obligation of take or pay (TOP).

In the mid 1990s, LNG was a buyer's market. At the request of buyers, the SPAs began to adopt some flexibilities on volume and price. The buyers had more upward and downward flexibilities in TOP, and short-term SPAs less than 15 years came into effect. At the same time, alternative destinations for cargo and arbitrage were also allowed. By the turn of the 21st century, the market was again in favor of sellers. However, sellers have become more sophisticated and are now proposing sharing of arbitrage opportunities and moving away from S-curve pricing. However, although much talk and discussion surrounds the creation of an OGEC OPEC equivalent of natural gas, there seems to be resistance from Russia and Qatar the number 1 and number 3 largest holders of natural gas reserves. If one thing is certain, it is that market power will continue to ebb and flow between sellers and buyers with the markets likely to favor sellers through 2008, with a transition to a buyers market emerging in 2009, and transitioning fully to a buyers market in 2010 based on increase supply of LNG relative to demand growth.

Until 2003, LNG prices have closely followed oil prices. Since then, LNG prices to Europe and Japan, have been lower than oil prices, though the link between LNG and oil is still strong In contrast, recent prices in the US and UK markets have skyrocketed then fallen as a result of changes in supply and storage. However, over the long-term, data would indicate that the price of natural gas in the US, north Asia and Europe tend to converge.

Therefore, although current divergence in prices between north Asia, Europe and the US is moderately high, over time price arbitrage should lead to price convergence in a global market for LNG.

In the last years of 1990s and in early 2000s the LNG market shifted to Buyer Market but again from 2003-2004 market turned to a strong Seller Market. Therefore, for the time being, the market is a seller's market (hence net-back is best estimation for prices). The balance of market risks between the buyers (taking most of the volume risks through off-take obligations) and the sellers (taking most of the value risks through indexation to crude oil and petroleum products) is changing.

Receiving terminals exist in about 18 countries, including Japan, Korea, Taiwan, China, Belgium, Spain, Italy, France, the UK, the US, and the Dominican Republic, among others. Plans exist for Argentina, Brazil, Chile, Uruguay, Canada, Greece, and others to also construct new receiving or gasification terminals.

Trade

LNG accounted for 7% of the world's natural gas demand.

The global trade in LNG, which has increased at a rate of 7.4 percent per year over the decade from 1995 to 2005, is expected to continue to grow substantially during next years.

The projected growth in LNG in the base case is expected to increase at 6.7 percent per year from 2005 to 2020.

Until the mid-1990s, LNG demand was heavily concentrated in Northeast Asia — Japan, Korea and Taiwan. At the same time, Pacific Basin supplies dominated world LNG trade.

The world-wide interest in using natural gas-fired combined cycle generating units for electric power generation, coupled with the inability of North American and North Sea natural gas supplies to meet the growing demand, substantially broadened the regional markets for LNG. It also brought new Atlantic Basin and Middle East suppliers into the trade.

By the end of 2007 there were 15 LNG exporting countries and 17 LNG importing countries.

The three biggest LNG exporters in 2007 were Qatar (28 MT), Malaysia (22 MT) and Indonesia (20 MT) and the three biggest LNG importers in 2007 were Japan (65 MT), South Korea (34 MT) and Spain (24 MT).

LNG trade volumes increased from 140 MT in 2005 to 158 MT in 2006, 165 MT in 2007, 172 MT in 2008 and it is forecasted to be increased to about 200 MT in 2009 and about 300 MT in 2012.

During next several years there would be significant increase in volume of LNG Trade and only within next three years; about 82 MTPA of new LNG supply will come to the market.

For example just in 2009, about 59 MTPA of new LNG supply from 6 new plants comes to the market, including:

• Northwest Shelf Train 5: 4.4 MTPA
• Sakhalin II: 9.6 MTPA
• Yemen LNG: 6.7 MTPA
• Tangguh: 7.6 MTPA
• Qatargas: 15.6 MTPA
• Rasgas Qatar: 15.6 MTPA