IS LNG IMPORT ECONOMICALLY VIABLE?

S.K. ANSARI, SEEMA ANSARI (feedback@pgeconomist.com)
Feb 1 - 7, 2010

Globally, LNG demand has reached approximately 172.4 million metric tons (MMton), about 8 percent rise of 13 MMton over last year. The Europe experienced the largest growth rate in imports due to cold winter and strong demand in UK.

The America's imports declined by over 7% due to mild weather and ample storage, which stabilized prices and enabled cargoes to be directed to other high value markets, particularly Asia.

Asian imports posted flat but strong growth rates of 11% in 2007 and 12% in 2008, making the region the most stable, high growth market in the world.

Pakistan is fraught with the energy crisis. The government of Pakistan is developing the import policy of LNG, which will facilitate on spot purchases based on market and commercial considerations to be determined by the government. Private sector is unclear about this condition, and demands of the government to clarify its role in determining market and commercial considerations, since it is impossible for the private sector to bid for the spot cargoes and wait for the government's determination.

It also does not make sense that without developing the internal infrastructure the government is negotiating with Qatar to import LNG to meet the domestic requirements. Pakistan intends to import 3.5 - 3.7 million tons per annum of LNG from Qatar at a competitive price. Imported LNG will meet the demand of industries in peak winter season, and power production. According to the petroleum ministry, the cost of LNG would be less than the furnace oil.

Government needs to construct LNG terminal, which has an estimated cost of $200 million for an initial capacity of 3.5 mmtpa. As per recent calculation, LNG from Qatar would cost $12/MMbtu pegged to $100/bbl, while the price of Iranian gas would cost $11/MMbtu.

The latter needs building of the 2,700-km Iran-Pakistan-India (IPI) natural gas pipeline, which will cost $7.4 billion, and requires high maintenance cost. To build such a long pipeline along with high maintenance cost is not feasible for the county.

Pakistan asked Iran to link the gas price to 70% of the price of crude oil against Iran's insistence on 80%. This talk is still underway. According to ministry of petroleum, the Iranian gas would be feasible only for power generation. It would be too costly for domestic and commercial gas consumers.

Recently, natural gas tariff was raised by 18%, which was due to commitments to international lending agencies. According to the notification, the average increase determined by Ogra with effect from January 1, 2010 is as follows.

- The first lowest slab for 50 m3/mo for domestic consumer is Rs.80.65-Rs 95.20/unit.

- Second slab (50 - 100 m3/mo.) from Rs.84.45 - Rs.99.65/unit.

- Third slab (100 - 200 m3/mo.) from Rs.153.73 - Rs.181.40/unit.

- Fourth slab (200 - 300 m3/mo.) from Rs.325.48 - Rs.348.07/unit.

- Fifth slab (300 - 400 m3/mo) from Rs.423.42 - Rs. 499.64/unit.

- Sixth slab (400 - 500 m3/mo) from Rs.550.44 - Rs.649.52/unit.

- Seventh slab (over 500 m3/mo) from Rs.730.17- Rs.861.60/unit.

An average price per unit is Rs.335.47-Rs.390.72/unit, which is not less than the international price.

Earlier, the rates for the commercial and domestic users were used to be different, but now the increase was across the board. The government increased the prices without considering the inflationary impact of price rise, and revised the rates up to the level of international tariffs despite the fact that gas is still a national commodity.

1m3 = 0.0392 MMbtu

Qatar will sell LNG to Pakistan at US$12/MMbtu. 1MMbtu energy requires 25.5m3 of natural gas that is equivalent to 1MMbtu LNG. Therefore, 1 m3 of natural gas (LNG) will cost US$ 0.47 or 47.

Cost of 1mm3 of natural gas (US$0.47x85) will be Rs. 40.00. Difference between imported gas and our lowest slab is Rs.52.25.

Excess margin with the existing natural gas tariff

- First lowest slab (Rs.95.20/unit); excess margin with 131%.

- Second slab (Rs.84.45 - Rs.99.65/unit); excess margin 250%.

- Third slab (Rs.153.73 - Rs.181.40/unit); excess margin 453.5%.

- Fourth slab (Rs.325.48 - Rs.348.07/unit); excess margin 870%.

- Fifth slab (Rs.423.42 - Rs. 499.64/unit); excess margin 1249%.

- Sixth slab (Rs.550.44 - Rs.649.52/unit); excess margin 1624%.

- Seventh slab (Rs.730.17 - Rs.861.60/unit); excess margin 2154%.

LIQUEFIED NATURAL GAS

- The density of LNG is 435kg/m3, or density (?) = M/V.

- Therefore for 1 MT (1000kg) of LNG the volume of NG will be V = M/? = 1000 kg / 435 (kg/m3).

- Volume of 1 ton of LNG will be 2.298m3.

- Pakistan plans to import 3.5 mmtpa.

Following the above density equation, the imported gas in metric cube will be:

- V = 3,000,000,000 kg / 435 (kg/m3) = 6,896,551.74m3 per annum.

- Transporting of LNG via normal shipload is approximately 138,000m3.

- To import 3.5 mmtpa the shipment requires 6,896,551.74m3/138,000m3 = 50 shipments.

- Shipment required each month will be 4 - 5 shipments.

Density of CNG is 175 kg/m3 at 200 bars or 2940 psi (~3000 psi). This mean that for a given capacity fuel tank, an LNG powered vehicle can travel up to 2.5 times the distance of the CNG or in another way , for a given vehicle range, an LNG powered vehicle needs up to 2.5 times less fuel tank capacity than the CNG tank. A LNG powered vehicle cost less to manufacture than a CNG powered vehicle.

The capital and maintenance costs of LNG refueling stations are a fraction as compared to CNG station and they do not allow any electricity. LNG is portable, so it is free from the pipes, and the fueling stations can be built at any place, best for remote areas in Pakistan.

WHAT IS LNG?

- LNG is natural gas that is super cooled to minus 260 degree Fahrenheit (minus 162 degree Celsius). At that temperature, natural gas condenses into liquid. When in liquid form, natural gas takes up to 575 times less space than in its gaseous state, which makes it feasible to transport over longer distance.

- In the form of LNG, natural gas can be shipped from the parts of the world where it is abundant to where it is in demand.

- LNG is an energy source that has much lower air emissions than other fossil fuels, such as oil or coal.

- LNG is odorless, colorless, non-corrosive, and non-toxic. Its weight is less than one-half than that of water.

- Natural gas is the world's cleanest burning fossil fuel and it has emerged as the environmentally preferred fuel of choice.

LNG FEATURES

- Natural gas is compressed to 575 times to be converted into LNG.

- 1 MT of LNG contains 51.8 MMbtu.

- 1 MT of LNG is equivalent to 8.94 barrel of oil.

CHARACTERISTICS OF LNG

LNG is a very pure form of natural gas and is not carcinogenic or toxic. For natural gas to be liquefied all impurities must be removed such as

sulfur, carbon dioxide, and mercury-which are corrosive to LNG equipment-, water-which could freeze and cause equipment blockage-, and heavier hydrocarbons-which could not freeze like water.

The removal of these contaminants makes LNG, when re-gasified in a receipt terminal, a very clean and reliable natural gas source for cooling, heating, and power.

LNG is not odorized because the odorant would freeze out as a solid when natural gas is cooled down to minus 260 degree Fahrenheit. When LNG is vaporized and distributed, the natural gas is odorized as required by government regulations.

In order for LNG to remain a liquid, its extremely cold temperature must be maintained. The temperature is maintained by heavily insulating the tanks to keep heat out and by removing the vapor that forms in the tank. LNG's low temperature requires that it be stored in special designed tanks that can withstand extreme cold. LNG released into the environment immediately begins to evaporate, turning back into a gas.

Some have raised concerns about the possibility of LNG explosions. LNG is not stored under pressure. If the tank is rupture, there is no massive release of energy and thus no explosion.

For an explosion to occur, LNG must first return to its gaseous state and then the natural gas vapors must accumulate in a confined space in a perfect mixture of five percent to 15 percent of gas in air, and encounter an ignition source.

LNG Value Chain are the five types of process which start from:

1. Gas production

2. Liquefaction plant

3. Shipping

4. Re-gasification terminal

5. Pipeline delivery

LNG value chain represents US$7 to US$14 billion of investment from start to finish. It begins with natural gas extracted from underground reservoirs and is sent through a pipeline to a liquefaction facility.

The liquefaction facility, impurities are removed from the gas, and it is sent through three cooling processes until it reaches a final temperature of minus 260 degrees Fahrenheit.

The chilled gas, now LNG, is then loaded on to specially designed tanker ships where it is kept chilled for the duration of the voyage, which may last anywhere from four to thirty days, depending on the destination port.

Once the ship arrives at a re-gasification terminal, the LNG is offloaded into large storage tanks, built with full-containment walls and systems to keep the LNG cold until it is turned back into a gaseous state.

When the LNG has been warmed back to its natural state, the gas is moved into pipelines, which deliver the natural gas to consumers, power plants, and industrial customers.

DESIGNING OF LNG TERMINAL

LNG receiving and re-gasification terminal must be flexible due to higher unloading rates, increases in LNG carrier size (LNGC), new operational modes, volatility of LNG markets, and natural gas grid specification.

CONVENTIONAL LNG TERMINAL OPERATION

LNG terminal consists of six main systems: marine system (jetty, berth, and unloading arms), unloading and recirculation system, LNG storage tanks, LNG sends out system, vapor handling system, and off sites and infrastructure.

LNG projects are among the most expensive energy projects. Accurate data on LNG plant costs are difficult to pinpoint since costs vary widely depending on location and whether a project is Greenfield, i.e. built in a new location, or an expansion of an existing plant.

According to an independent LNG consultant, there are four main price components of an LNG project, from the gas field to the receiving terminal.

1. Gas production: from the reservoir to the LNG plant, including gas processing and associated pipelines (15 to 20 percent of costs).

2. LNG plant: gas treating, liquefaction, LPG and condensate recovery.

3. LNG loading and storage (30 to 45 percent of costs).

4. LNG shipping (10 to 30 percent of costs); and receiving terminal: unloading, storage, re-gasification and distribution (15 to 25 percent of costs).

LIQUEFACTION COSTS

1. The largest cost component in the LNG value chain is the liquefaction plant, which consists of one or more trains, or production units. LNG plant costs are typically high relative to comparable energy projects for a number of reasons, including remote locations, strict design and safety standards, large amounts of cryogenic material required, and a historic tendency to overdesign to ensure supply security.

2 . The construction of a liquefaction plant that annually produces 390 Bcf (8.2 million tons) of LNG could cost $1.5 to $2.0 billion. Half of that amount is for construction and related costs, 30 percent is for equipment, and 20 percent is for bulk materials. The liquefaction trains account for approximately half the costs of operating an LNG plant, storage and loading facilities for 24 percent, utilities 16 percent, and other facilities account for the final 11 percent.

3. An independent consultant estimates that generic liquefaction costs amount to around US$1.09 per million Btu for a two-train, 8-million-tpy Greenfield LNG project and US$0.97 for an expansion train. The cost of adding trains to existing projects (expansion trains) are significantly lower than building a new Greenfield plant, since many of the facility components are already in place.

4 . Major economies of scale have been achieved by increasing the size of liquefaction trains, therefore requiring fewer trains to achieve the same output. In the early days of the industry, trains with annual capacities of 49 Bcf to 97 Bcf (1.0 to 2.0 million tons) were the norm; today, trains with annual capacities of 242 Bcf (5.1 million tons) are under construction, and a 380-Bcf-per-year (7.8-million-tpy) train is planned for Qatar.

5. Other factors driving costs downward include reduction of over-design margins; larger and fewer storage tanks; improved technology, e.g. gas turbines, larger axial compressors, multiple compressors, turbines on a single shaft; improved engineering techniques; and competitive lump-sum bidding.

CONCLUSION

LNG is expensive. It is another thing that the people of Pakistan are already paying exorbitant tariffs. World over, the price of CNG is 50% lower than gasoline product, but in Pakistan the difference level is only 10%. Instead of LNG, the government has many other options, which are quite inexpensive. Government should not imitate western countries that can afford LNG for domestic needs because of their good per capita incomes. In contrast, Pakistan cannot bear the expenses of import and re-gasification especially when people would not reach the price level of the outputs.