Luke F. Gale

Sept 2015

It’s the chemical and physical properties of LNG that inform the characteristics of the supply chain. Once liquefied, LNG will eventually return to a gas. During liquid transport heat eventually finds its way into the liquid resulting in some boil off gas – which can be used to power the ship.

In other words, the liquid has to be delivered on time before it boils back to a gas. Therefore the supply chain is tight and the timing of ship landing has to be carefully coordinated – a ship can’t sit anchored in a harbour indefinitely such as the recent vessel logjam outside Argentina’s Bahia Blanca regasification terminal.

Some ships have re-liquification units but they require significant amounts of energy to run.

It is transported in special tankers that cost around $200 million a piece. Rates for these ships can run at US$125,000 per day. Not surprisingly, contracts are complex and revolve around the concept of “take or pay”. In other words, if the buyer doesn’t take the cargo as agreed, then they’re paying for it away. Ca. 75% of contracts are long-term, the terms of which are mostly opaque to the market.

LNG cargoes are not pure liquid methane, but rather a mixture of liquid methane, ethane, propane, and butanes with methane accounting for ca. 90-98 % v/v and varies from basin to basin and deposit type. For example, unconventional coal seam gas from Queensland is mostly methane, also known as “lean” LNG.

Once regasified, the gas can have heating values of between 990 -1160 mmBtu per cubic foot of gas. Heating appliances in Japan require gas rich (high calorific value) in these natural gas liquids making conventional North West Shelf cargoes attractive as well as traditional suppliers Indonesia, Malaysia and Brunei.

Regasification terminals can add or remove NGLs to suit the local pipeline requirements. NGLs can also be removed at the liquification plant to suit cargoe requirements and sold separately, used to power the plant, or as a refrigerant. Cargoes can also be landed, stored, and then re-exported onto ships for destinations off contract. LNG tankers can accommodate cargoes with varying NGL content. Singpore aspires to being a hub for this.

In the strategy presentation it published in February 2013, TEPCO said it expected world LNG production to change from a mix in which rich LNG predominates to a fairly even balance of rich and lean LNG, within a decade or so.

All of these factors combine to make LNG cargoes fungible goods and LNG transport a fungible service which is important if the LNG trade is to converge to an interconnected global market.

Oil Indexation

Most long-term contracts have LNG prices linked to the price of oil to some degree. This is in part because competing fuels can be substituted for power generation. The Japanese have complained that this is unfair when crude is above $USD100 per barrel. But just recently crude has fallen off a cliff to below $USD50 per barrel.

LNG substitutes such as fuel oil are considered on a thermal parity basis expressed in mmBtu’s when contracts are negotiated. But I would submit that LNG should attract a premium over thermal parity because LNG has more order. This order can be attributed to the informational order contained in the intellectual property that builds the liquefication plants, including floating LNG platforms, and the thermodynamic order contained in the purified gas that is condensed to a liquid. This is not merely a subjective intangible abstract value. Consider the Exxon Valdez oil spill in Alaska. If this ship was transporting LNG instead of crude oil it would have almost zero effect on the environment as the non-toxic cargeo, if spilt, would have vaporised away. The cost ($USD 1.1 billion, 1991) of that spill to Exxon is a measure of order’s value. Oil businesses are contracted to supply mmBtu’s of energy, not pollution. Pollution is a form of disorder. Consider the ultra low sulfur content of LNG. This means less acid rain and respiratory disease – also forms of disorder.