July-02-2008

July-02-2008

On the natural gas fight card this year, the main event is clearly the big pipeline: Denali, created by BP and Conoco Phillips, squaring off against TransCanada, backed by the state and looking for legislative approval.

That's undoubtedly the heavyweight match, but there is a highly competitive undercard as well: two smaller proposals for bringing northern gas to markets in Southcentral Alaska.

The Alaska Natural Gas Development Authority, or ANGDA, wants to build a spur line connecting the mainline to Anchorage, while Enstar Natural Gas Co. wants to build a "bullet line" connecting gas fields in the Brooks Range northern foothills to Anchorage.

The debate came up during legislative hearings this month.
This summer, ANGDA is spending $1.2 million to $2 million, by far the largest single expense in the five-year history of the state agency, to study a 370-mile spur line corridor from Delta Junction to Beluga through Glennallen.

"If they don't hurry up, we'll figure out a way to get all the way north," Harold Heinze, chief executive of ANGDA, told the Palmer Chamber of Commerce in late 2004.
Both ANGDA and Enstar believe in that call to "hurry up," but as each company looks into the near future, it sees a different outcome on the horizon -- one less optimistic than the other.

"We have a precipitous fall off over a period of time," said Andrew White, of Enstar, talking to lawmakers about natural gas supplies from Cook Inlet. "And in terms of where Enstar is right now, that's led us to not only thinking of gas contracts with Conoco Phillips and Marathon through 2013, but also looking elsewhere ... for a natural gas pipeline from the foothills to Southcentral Alaska with a spur into Fairbanks."

With a 20-inch bullet line, Enstar believes it can get gas to Southcentral five or six years sooner than it would by waiting for the mainline and building a spur.  The $3.3 billion bullet line could have gas flowing to Anchorage as soon as 2014, said Gene Dubay, senior vice president and chief operating officer of Semco, the Michigan utility that owns Enstar.

While Enstar no longer wants to wait for a pipeline, Heinze says it's not too late.  He believes the Alaska Gasline Inducement Act, or AGIA, prompted the producers to create Denali-The Alaska Gas Pipeline LLC and quickly prefile with the Federal Energy Regulatory Commission, an early first step toward permitting the 48-inch main pipeline.
Believing the entire timeline is now moving fast, Heinze wants lawmakers to approve the TransCanada application and let the company battle it out with Denali in the marketplace.  "Frankly, the only reason I can't start building tomorrow is that people don't know and aren't sure if a big project is going to be built," Heinze told lawmakers.

Even with pre-building, where work on a 20-inch spur line begins as soon as the main line gets final approval, the project could take longer to bring online than a bullet line.

Still, ANGDA sees its $1.25 billion project as the cheapest source of gas for Alaska, because local prices would be tied to an outside market, rather than competing with oil.
Heinze points to Fairbanks Natural Gas as the alternative. The natural gas utility of Fairbanks charges residential customers $23.35 per thousand cubic feet of gas, most likely the highest natural gas rate in the country.

But whether the price is high depends on the context. Compared by energy content, natural gas is still cheaper than fuel oil in Fairbanks, but it's also more than two and a half times more than what natural gas customers pay in Anchorage.  "You pay the competitive alternative price and you're locked into it," Heinz told lawmakers. "And that's one of the things you're trying to break by bringing a big pipeline down through the spine of the state."

Enstar uses indexes now to price its natural gas supply from Cook Inlet. In the new contracts before state regulators, Enstar pulls the middle price from a selection of indexes as a way to avoid unexpected cost swings in the market like those felt after Hurricane Katrina.
With these indexes, Anchorage would probably pay a little more to get natural gas from the bullet line than it currently does from Cook Inlet, while Fairbanks would probably pay a lot less than it does now to get that same Cook Inlet gas trucked north.
"We are paying market prices and we will continue to pay market prices," said Enstar spokesman Curtis Thayer.
ANGDA also believes the spur line is the best way to create a petrochemical industry in Alaska, using by-products from the gas stream on the North Slope.

As the debate continues on the large pipeline, both Enstar and ANGDA want to avoid a provision within AGIA that keeps the state from supporting a competing project after awarding a license.  In fact, speaking to lawmakers, both companies said they planned to work with either TransCanada or Denali and both companies used almost identical language to defend their respective plans for bringing gas to Southcentral.  "We're not a competitive project. We're a compatible project," Heinze said.
"This is not a competing project and it's a complementary project," Dubay said.

The pipeline is expected to come into operation by 2013-2014.

LNG Trade 2008
Al_Safliya The first Q-flex ship
By Stephen Chan, Global Business Manager, Gas Ships, Lloyd’s Register Americas, Inc.
The world gas consumption has grown faster than total energy consumption, at a rate of 2.4% per year over the last 10 years, with world energy consumption growing at an average 2.1% per year. Liquefied Natural Gas (LNG) trade takes the lead in this growth and remains one of the fastest growing sectors in the energy industry — one that is essential for the world gas requirement.

In the last decade, LNG growth has averaged 7.7% outpacing the international pipeline trade, which averaged 4.7%.
In the 1980s the introduction of higher efficiency combined-cycle gas turbine generation power stations was one of the main factors for the demand in natural gas consumption. This is also due to its environmentally friendly nature and stable supply through long-term contracts.
Energy-hungry countries like Japan and Korea spurred the impetus of LNG trade in Asia. In 2006, both Japan and Korea set records in their import of LNG with a 7% increase up to 62.1 million tonnes and 13.25% increase up to 25.3 million tonnes respectively.
Another milestone was set in 2006 when China and Mexico become two new LNG importing countries, making a total of 17 importing countries.

The LNG fleet
We have seen an increase in capacity of 16% with 26 new ships being delivered in 2006, but other milestones are also being set. As of June 2007, there are 242 LNG ships in operation, with another 141 on order with a combined capacity of 52.4 million cubic meters.
Traditionally, LNG ships are propelled by steam turbine system where the boil-off gas is burned in the boilers. In December 2006, we saw the delivery of the first large size (154,000 cubic meters) LNG ship with a dual-fuel diesel electric system, able to use the boil-off gas as fuel in the diesel engine.
In other significant progress, there was an increase in cargo carrying capacity, with the first orders of Qataris Q-flex and Q-max LNG ships of capacity up to greater than 160,000 cubic meters and greater than 260,000 cubic meters, respectively. The first Q-flex ships were delivered at the end of 2007 and the launching of the first Q-max ships was in November 2007. These Q-flex and Q-max ships are also significant in that they are the first to be fitted with slow speed diesel engines with onboard reliquefaction plants.
The pool of ship ownership and operators has also widened in the last few years from the traditional oil majors and shipping companies. The practice of shared ownerships has also increased — another indication of the industry moving from a very conservative nature to a much more open and flexible nature.
South Korea continues to dominate the bulk of the new building orders. Some shipyards will be delivering their first LNG ships in the next few years; or example, STX in Korea, Imabari in  Japan and Hudong-Zhonghua in China.

New Challenges
With innovation and increased efficiencies in the transportation of LNG, the traditional LNG value chain structure has grown more complex and challenging. The combination of new technologies and greater demand for this environmentally-friendly energy promotes a more globalized market.
Potential projects waiting for the final investment decision are being postponed, with no light at the end of the tunnel for many of them. Some reasons for this are higher construction costs and tighter and more expensive labor costs. Liquefaction plants under construction are delayed, with ships for these projects being delivered on time and waiting for their first cargo.
Sourcing for competent and experienced crew for running these newer and bigger types of ships with different propulsion systems and reliquefaction plants onboard is an uphill task. Many shipowners are investing in training of late but there is still a big gap to fill.

Asset Life Cycle Risk Management
The key decision makers in the LNG transportation industry need to be wise. When a shipbuilding contract is signed, the specification must be correct, and there must be confidence that the contracting parties can deliver what is needed.
Successful LNG ventures often arise from the creation and application of commercial trading models which are managed simultaneously with the development of contract specifications and the securing of gas supplies and charter rates. Success does not come without experience, nor is it simple to achieve.
Lloyd’s Register understands these issues in the context of both the pre- and post-contract phases. We have years of experience helping builder and operator clients with these challenges. Lloyd’s Register was the first classification society to help clients develop a practical approach to using safety cases for qualification of cutting-edge technologies such as reliquefaction plants, dual-fuel, diesel—electric propulsion systems, and novel LNG-delivery systems, including the regasification technology that facilitated the import of LNG into the US. These services, usually delivered jointly to the contracting parties, have provided our clients with a fuller understanding of the designs of these systems, adding clarity and confidence as the design process has moved forward. Our experience is extensive, and includes the delivery last month of the first-ever 209,000 cubic meter Q-flex LNG ship from Korea’s Daewoo Shipbuilding & Marine Engineering.

Americas Focus
Russia and the U.S. together accounted for 39.7% of global supply of natural gas in 2006. Most of the production in the US is used domestically and in Russia it is for both domestic use and for export by pipeline.
The growth of LNG trade has been influenced primarily by the supply from Middle Eastern, Asia/Pacific and West African countries as well as the demand for natural gas in faraway countries where pipeline infrastructure is not possible.
The U.S. is expected to be one of the key drivers for the growth in the LNG trade. Dwindling domestic gas production and the demand for energy has placed the US as one of the key drivers for growth in the LNG trade.
There are currently five import terminals in the U.S. with a combined peak capacity of 44.5 million tons per annual (mtpa). Cheniere’s Sabine Pass and Freeport LNC terminals are both expected to commence commissioning work in April 2008. An additional 63.3-mtpa capacity could be added, considering new terminals under construction and planned expansions to existing terminals.
However, looking at the imports in the last few years, utilization of the existing terminals has been disappointing. In 2005 it was down 3.2% and in 2006 a further 7.6% decrease was reported. With limited availability of spot cargoes and a general appetite for more energy elsewhere, American importers are not able to compete with Asia importers on price, more so during the crisis in Japan when nuclear power plants were shut down. In March and April in 2007 there were successive monthly records of growth, but unfortunately this has not been repeated and LNG terminals in the U.S. have gone quiet again in 2008.
Another contributing factor in determining import cargoes in the US is pipeline domestic natural gas prices, which is a deregulated market As most of the U.S. LNG imports are spot- or short-term cargoes, the deciding factor in securing an LNG cargo by seaborne to the U.S. markets against pipeline supply is how competitively priced the seaborne cargo is against pipeline.