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Should Sri Lanka engage floating LNG regassification vessel to secure electric power?

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Continued from yesterday…

A Floating Storage Regasification Unit (FSRU) technology is based on FPSO (Floating production storage and offloading ) technology which originated with Shell’s very first FPSO in Tunisia in 1976. Since then, about 500 FPSOs have been installed in various parts of the world. FSRUs developed as a spin off from FPSO technology, which are all called ‘Floating Systems’. The first FSRU was installed by GOLAR2009 a pioneer in the business.

There are currently about 40 FSRUs in the world, most of which are owner operated. Some are leased and operated by the vessel owner. The technology of these vessels is considered to be extremely complex with a combination of both offshore process system technology and marine system technology with unclear boundaries of demarcation.

A typical FSRU costs USD 300 to 500 mil whilst a typical FPSO cost typically USD 500mil to USD 1 bil. Shell’s FLNG vessel Prelude which produces LNG offshore on the vessel cost USD 12 bil, installed offshore Perth Australia is the largest marine vessel ever built. It is 488m-long, 74m-wide and weighs approximately 600,000t. It comprises a deck area longer than four football fields, making it the biggest facility worldwide. Some of its technology will be in the FSRU proposed for SL.

Where are FSRUs in the region?

The FSRUs in the region are located in India, Bangladesh, Pakistan, Indonesia, Thailand, Myanmar, Philippines and Vietnam. Some countries have more than one terminal such as in India, Pakistan, Indonesia, Bangladesh in having their LNG regassification concept proven to have been a wise decision.

In 2020, 8 new FSRU terminals were commissioned in Bahrain, Croatia, Brazil (2 terminals) . India, Indonesia, Myanmar and Puerto Rico.

Vietnam with their long shoreline is planning for 128.5 GW of power generation with LNG, with 4 FSRUs under construction. Interestingly they have oil majors such as Exxon-Mobil investing in them in their transition togas.

Cambodia is planning to have 3,600 MW LNG powered power generation by 2030 with Japanese and Chinese assistance which will have some FSRUs installed.

Countries such as India, Bangladesh, Brazil, Indonesia have their own natural gas developed domestic reserves currently in production but are supplementing their own supply from regassifying LNG in FSRUs. Countries such as Australia being the largest LNG supplier in the world are also planning their own FSRUs to be installed in Victoria and South Australia. These are by Vopak, LNG Australia in Port Philip Bay Victoria and Viva Energy Geelong for gas delivery in 2024. This is because LNG is a cost-effective form of transport than installing very long pipelines from Australia’s own natural gas production plants, which are remotely located.

There are about 40 such FSRU terminals now in operation globally. Golar Spirit became the first vessel of this kind, which regasified LNG aboard the FSRU in Jan 2009. NFE has purchased GOLAR’s FSRU businesses to be a major player, with interests in the Indian ocean region.

Who are the LNG suppliers?

The main LNG suppliers are Qatar and Australia each supplying about 75 mtpa out of a global supply of about 350 mtpa. US is also a recent major supplier looking for markets.Qatar is a long-term supplier planning to expand to about 125 mtpa in the next few years. Qatar is a very low-cost LNG producer and are the market leader. Russia is the market leader in natural gas supplying Europe with some LNG exports. The regional major LNG exporters are in Indonesia, Malaysia and Singapore.

South Asia is becoming the epic entre for these FSRU terminals with the number of existing and proposed FSRUs. Given economies of scale this would offer competitive large volume LNG procurement terms via an alliance of regional LNG buyers, local to SL. This alliance concept of procurement has been under discussion with the rise in LNG regional buyers, led by China and India.This would be beneficial to SL not to be a single source buyer, having to pay a premium for relatively small cargoes.

Many countries are now LNG re exporters, including India. India has been planning to export LNG to SL for some time. India’s H Energy FSRU will be exporting natural gas from their FSRU to Bangladesh, whilst bunkering LNG to ships.

Regional policy changes

The following regional policy changes are relevant as quoted from recent oil and gas journal- Natural Gas World.

India is trying to boost the use of gas in the economy to fight air pollution. It wants to raise its share in the energy mix to 15% by 2030 from the current 7% .

For India to meet its 2015 COP 21 commitments, it has to adopt ever cleaner and more cost-efficient fuels, depending on the sector of industry they are to be used in. “LNG has emerged as one such fuel. Thus, a need has arisen for an integrated policy for the procurement, storage, transportation and use including sale and marketing of LNG,” the draft LNG policy paper stated.

IEA International Energy Agency said that the main sector where gas is clearly competitive is transport: CNG Compressed Natural Gas prices are around 40 to 50% lower than petrol and diesel prices, which also have a high tax component. Natural gas is also well placed to compete in smaller scale industries that require consistent levels of adjustable process heat but now have to switch to coal, biomass or furnace oil owing to supply problems.

Gas is well suited to the needs of lighter industrial sectors such as textiles, manufacturing, and food and beverages. These tend to be in or near large population centres, where air quality becomes an issue of growing concern. “Policy incentives for such clusters of small and medium enterprises (SME) to switch to gas burning equipment are therefore key to unlocking further growth,” it said.

According to the draft policy, every 1mn m3/day of natural gas demand that replaces liquid fuels can reduce around 270,000 metric tons (mt)/yr of CO2. LNG as import substitute of liquid fuel can also save foreign exchange in the tune of $200/mt/yr.

The government of Bangladesh had decided to scrap the approval for 10 coal-based power plants in the country as the construction progress on those plants was not satisfactory. The total generation capacity of the scrapped plants is 8.5 GW, it added

In the Philippines, a report stated that “We feel gas is the best friend of renewable energy, which is intermittent in nature. Sun is shining in the Philippines but not always. The wind is blowing but not always. You need grid stability and that is when gas comes in.”

What is an energy mix?

To meet its energy needs, each country uses the energy available to it, in different proportions. This is what we call the ‘energy mix’. While it varies significantly from one country to another, globally fossil fuels account for over 80% of the energy mix.

The term energy mix refers to how final energy consumption in a given geographical region breaks down by primary energy source. It includes fossil fuels (oil, natural gas and coal), nuclear energy, waste and the many types of renewable energy (biomass, wind, geothermal, water and solar). These primary energy sources are used to generate electricity and those such as oil provide fuel for transportation, and heat (although not in Sri Lanka) and cool residential and industrial buildings

For each region or country, the composition of the energy mix depends on:

•The availability of usable resources on its territory or the possibility of importing them.

•The extent and type of energy needs to be met.

•Policy choices determined by historical, economic, social, demographic, environmental and geopolitical factors.

•Other external trading opportunities such as ship bunkering and energy export.

Any definition of the energy mix should not only be driven by the demand for electrical power but by all the various other users of primary energy sources, some of whom are significant.

Finally, the appropriate energy mix for any country (such as SL) is a balance between energy security, affordability and most importantly, being harmless to health, ensuring safety of the environment in the long term.

The confusion in the energy mixes has been driven by policy blunders on renewable energy in some countries. This in turn led to energy insecurity which had an increased focus on Paris climate change targets. Obsessive posturing by interest groups, public servants, advisers and regulators such as on renewables offering the ’final solution’ have seen unintended consequences and given rise to power shortages, such as in Australia, although blessed with large fossil fuel reserves.

LNG degasification concepts

Developers of regasification facilities have a multitude of options to consider. Each FSRU project remains unique in its technical and contractual content in the procurement of LNG .An important initial decision is whether to opt for an onshore regasification terminal or procure a floating regasification vessel. In the latter, some consideration should also be given to the type of vessel:(a) FSRU, (b) floating storage unit (FSU) with onshore regasification or (c) a gas to power unit where the electrical power is exported directly from the floating vessel.

FSRU developers need to decide whether to lease or purchase and whether to elect for a new-build vessel or convert an existing LNG carrier. Today, the leased concept of converted vessels has turned out to be the preferred choice. The lack of operational experience is a deterrent for developers wishing to purchase FSRUs.

FSRU would typically cost in the range US$300 to USD 500 million to purchase, whereas a land-based terminal of comparable size would be in the region of US$1 billion. A new build FSRU unit would cost much more than a conversion.

These leased units by FSRU suppliers are all supplied generally free of charge except for a nominal upfront payment for sunk costs for mobilisation and installation.

The fixed term of these leases varies from short to long term, with optional extensions of a few more years, where the fixed term duration may not determine accurately.

This may be due to the uncertainty of the domestic gas reserves being monetised or over the market price of imported LNG being supply-demand driven and becoming unaffordable.

A converted FSRU could be delivered within 20 to 22 months after receipt of order however a new -build vessel could exceed 34 months. However, given the hindrances from Covid 19 delays could occur. Most experienced FSRU suppliers deliver on cost and schedule.

The leased day rates of the vessel for a period of 12 to 15 years is about USD 150,000 to 200,000/day. The operating day rate is about 25,000 to about USD 45,000/day depending on the operating crew.

The operating crew is dependent on the mooring should the vessel be in transit requiring a qualified marine crew or not.

The cost of the LNG and the processing fee is in excess of the above, which is about $ 1 to 2 / mmBTU.

However, it is difficult to determine a “market rate” for FSRUs given the number of variables that need to be considered, vessel capacity, boil of rate, cost of mooring whether at a ‘protected’ jetty or in open water, new-build or converted tanker, fixed term duration and conditions of charter; clients’/ sovereign credit rating of gas buyer , operating jurisdictions, legal and taxation regimes.

But the deal by NFE is different from the industry standard, since GOSL is unable to offer payment guarantees to secure a bid in the open market.

Each FSRU is unique, project specific and custom designed. Although they are redeploy able the cost redepoyment is very high. Usually these vessels are leased for a minimum period of about 10 years during which the cost of the project would be amortized. They may be leased for even 25 years.

Alternatively, the entire facility may be leased on a formula to cover the entire investment recovery based on the LNG regassified on a $/mmBTU. Then the price of the LNG would be indexed to Platts JKM the LNG benchmark price or the Henry Hub LNG price in the distribution hub Louisiana. They reference LNG regassification deals in short, medium, and long-term contracts payable in $/mmBTU terms.

Mooring selection is highly complex is generally proprietary technology depending on well analysed met ocean conditions and bathymetry by well experienced analysis’s who have been accepted by insurance companies and classification societies.

SL is prone to monsoons and the mooring selection is vital and are generally determined after extensive model tests. The writer has been associated with these complex mooring selections in some of the environmentally sensitive regions of the world where poor mooring selections have led to very poor utilisation due to excessive vessel motions.

Generally, FSRUs are faster to deploy than onshore regasification terminals, some of the obstacles and hurdles surrounding the deployment of FSRUs should be considered in detail before making any presumptions. Even though FSRUs are moored offshore in the writer’s experience there is often a complex permitting regime that needs to be navigated prior to deploying a FSRU.

This may require several different licenses and permits relating to (among others) environmental impact and management, marine operation, gas processing and trading, employment/social security of shipboard personnel and often a general business or commercial license.

Additionally, from a tax perspective the FSRU owner will typically have to apply for an import tax exemption (in respect of the tax treatment of the vessel), in some cases an exemption from local employment laws in connection with shipboard (foreign) personnel and GST exemption in relation to the importation of goods and equipment in connection with the FSRU.

Flagging of the vessel is a major hurdle to be cleared in the writer’s experience in a number of countries, where a flag of convenience in a port of jurisdiction is required to offer the vessel as collateral to any lenders.

Such regulatory requirements vary significantly from project to project and can cause significant delays to the deployment of the FSRU in the relevant jurisdiction. That said, there are recent examples where FSRUs have been deployed swiftly to address acute power shortages.

BW who was engaged by the writer on a recent project of a leased vessel exceeding USD 200,000/day in Indonesia concluded a five year FSRU charter with Egyptian Natural Gas Holding Company (EGAS) which operated on the basis of a five month time frame from project inception to first gas – which represents a record short time for implementation.

The writer Gunasekera is based Perth Australia with 40 years’ global experience with Royal Dutch/Shell, Mitsui and Mitsubishi global leaders in LNG and FSRU technology across the value chain.

To be continued tomorrow…

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