NATURAL GAS AND
LIQUEFIED NATURAL GAS
PROF. CHIJIOKE NWAOZUZU
DSc, PhD, MBA, MBA in Oil & Gas, BSc
DIRECTOR
EMERALD ENERGY INSTITUTE
UNIVERSITY OF PORT HARCOURT
1
PART 1
OVERVIEW OF NATURAL GAS
2
WHAT IS NATURAL GAS?
• Gas obtained from natural underground reservoir, and trapped in
sedimentary rocks.
• Contains mostly methane (CH4), and some ethane, propane, butane,
pentanes.
• Usually contains some impurities such as H2S and CO2
• As one of the primary energy sources from most oil producing
countries
3
HISTORY OF NATURAL GAS





First observed thousands of
years ago
Chinese burned gas about
2,500 years ago to make
salt
1816: First lamps in
Baltimore using gas
1821: First gas well drilled
in the US– only 27 feet deep
Currently produced in 32
Countries
4
CLASSIFICATIONS OF NATURAL GAS BASED ON
ITS SOURCE
1. Conventional natural gas is usually obtained from deep
reservoir
2. Natural gas usually co-exist with crude oil (Associated gas,
AG)
3. Natural gas in reservoirs that contain little or no crude oil
(Non-associated gas, NAG)
4. Associated gas is produced with the oil and separated at the
casing head or wellhead
5
5. Non-associated gas is sometimes referred to as dry gas
NATURAL GAS EXTRACTION & COMPONENTS
Natural gas based on its source
6
COMPONENTS OF NATURAL GAS
7
NATURAL GAS COMPOSITIONS ACROSS
JURISDICTIONS
8
ENERGY CONTENT OF NATURAL GAS VS OTHER
COMMERCIAL ENERGY PRODUCTS
http://www.naturalgas.com.au/about/references.htm
9
NATURAL GAS COMPOSITION & SEPARATION
Natural gas compositions
10
NATURAL GAS PRODUCT SPECIFICATION
1. The composition of natural gas varies considerably from location
to location
2. Natural gas product specification includes:
- Wobbe number,
- heating value,
- water,
- oxygen,
- sulfur content.
 The first two criteria relate to combustion characteristics.
 The latter three provide protection from pipeline plugging and
corrosion
11
NATURAL GAS PROPERTIES
Colorless, odorless, tasteless, shapeless, and lighter than air
12
SPECIFICATIONS FOR PIPELINE QUALITY
NATURAL GAS
13
NATURAL GAS COMBUSTION MEASURES
1. Pipeline gas is normally bought and sold (custody transfer)
on the basis of its heating value, ex: MMBtu/Cuft (cubic
feet). MMBTU stands for one million British Thermal Units
(BTU). A BTU is a measure of the energy content in fuel, and is
used in the power, steam generation, heating and air
conditioning industries. One BTU is equivalent to 1.06 Joules.
2. Heating Value: the amount of heat released during the
combustion of a specified volume of fuel
3. The heating value of a fuel involves two arbitrary but
conventional standard states for the water formed
14
during the reaction:
NATURAL GAS COMBUSTION XTERISTICS CONTD
 All the water formed is a liquid (Gross Heating Value,
frequently called Higher Heating Value [HHV]) – including
latent heat of vaporization
 All the water formed is a gas (Net Heating Value,
frequently called Lower Heating Value [LHV])
The heating value is normally calculated at 60°F and 1 atm
(15.6°C and 1.01 atm), standard conditions for the gas
industry
15
NATURAL GAS COMBUSTION MEASURES CONTD
Wobbe Number
defined as the gross heating value (Btu/scf) of the gas
divided by the square root of the specific gravity (the ratio
of the density of the gas divided by the density of air)
16
NATURAL GAS: EXPLORATION
17
NATURAL GAS: EXPLORATION CONTD
Petroleum System Elements
Gas
Cap
Oil
Entrapment
Water
Seal Rock
Reservoir
Rock
Migration
120° F
Generation
350° F
18
24803
Reprint permitted by the American Association of Petroleum Geologists
NATURAL GAS: EXPLORATION CONTD
Reprint permitted by the American Association of Petroleum Geologists
19
NATURAL GAS: EXPLORATION CONTD
Christmas
Tree
Pipeline to
Flow
Process
and
Storage
Surface
Casing
Cement
Intermediate
Casing
Cement
Production
Casing
Tubing
Completion
Fluid
Packer
Well
Fluids
Cement
Oil or Gas Zone
Perforations
20
NATURAL GAS PROCESSING -FLOW DIAGRAM
21
NATURAL GAS PROCESSING- MADE EASY
22
NATURAL GAS TRANSPORTATION
Pipeline Transmission System
23
NATURAL GAS TRANSPORTATION
Floating LNG
ConocoPhillips_Cascade_LNG_Project1.jpg
24
NATURAL GAS TRANSPORTATION- LNG VESSEL
25
USES OF NATURAL GAS





Heating for homes and
businesses
Generation of electricity
Manufacturing
Industrial
49%
Ingredient in fertilizer,
glue, paint, and
detergent
Transportation
Transport.
2%
Utilities 13%
Commercial
14%
Residential
22%
26
NATURAL GAS ISSUES
PRICE VOLATILITY
27
CAUSES OF PRICE VOLATILITY
 Inherent
variation in demand
 Supply interruptions
 Weather
 spikes
 The
in winter, small spike in summer
fluctuations themselves!!
 Contracts
vs. spot pricing
28
PRICE VOLATILITY
NATURAL GAS SUPPLIES
29
IMPLICATIONS OF PRICE VOLATILITY

Increased natural gas costs are passed along
to consumers in…
 Higher
home heating bills
 Higher electric bills
 Higher cost of goods that use natural gas in
production

In general, higher natural gas costs cause
significant inflationary pressure
30
ONE POTENTIAL SOLUTION
LIQUID NATURAL GAS (LNG)

Liquid Natural Gas
 Condenses
 Takes
up 1/600th the volume of natural gas
 Much
 Purer
at -260 Of
cheaper to transport
than natural gas
 Liquefaction
removes S, CO2, H2O, SO2
31
GLOBAL NATURAL GAS RESERVES
One of the world’s most abundant fossil fuels.
 Only 15% of world’s natural gas endowments used
up.
 Since 1970s, world gas reserves have increased
6% a year.
 Since 1970s, world gas consumption increased
only 3.0% a year.
 Share of natural gas in world energy mix has risen
from 10% in 1965 to about 25% in 2010.

32
GLOBAL NATURAL GAS RESERVES
Natural gas reserves
33
GLOBAL NATURAL GAS RESERVES

A significant proportion of earlier world’s
potential supplies of natural gas are not
located near big markets.
34%
40%
6%
10%
10%
-
Middle East
Former USSR
North America (USA, Canada, Mexico)
Africa (Nigeria, Libya, Egypt)
Rest of the World (South America, etc)
34
GLOBAL NATURAL GAS PRODUCTION
Natural gas production
http://www.eia.gov/todayinenergy/detail
35
NATURAL GAS PRODUCING & CONSUMING
COUNTRIES
36
GLOBAL HISTORICAL AND PROJECTED NG PRODUCTION (WORLD
ENERGY ANNUAL REPORT 2018-2050)
37
GAS FLARING OR WASTE

10% of world’s production (3.5 trillion cubic feet
per year) is flared.

This represents a. loss in energy revenue of $5 –
$9 billion per annum.

Flaring also contributes substantially to the world’s
carbon emissions. However, the level of flaring has
been decreasing until recently.
For Example – Middle East Gas Flaring Stats
1976 -
71% of natural gas was flared
1995 -
23%
2010 -
15%
38
RECENT GLOBAL DEVELOPMENTS IN GAS FLARING

The amount of natural gas flared at oil production sites
worldwide has been on the increase in the last 6 years,
thereby reversing a previous reduction trend.

According to the Global Gas Flaring Reduction Partnership
(GGFR), the latest data show that an estimated 141 billion
cubic meters (bcm) of gas was flared in 2013, 145 bcm in
2014, 147bcm in 2015, and 149 bcm in 2016.

Russia remains the world’s largest flaring country, igniting
about 21 bcm per annum, followed by Iraq (16 bcm), Iran
(12 bcm), US (12 bcm), and Venezuela (9 bcm)..
39
GLOBAL DEVELOPMENTS IN GAS FLARING

Nigeria has made significant progress among gas flaring nations, by
reducing ignitions by 18% since 2013 to 8 bcm in 2015. From being
the second largest gas flaring jurisdiction, Nigeria is now the sixth.

The worldwide initiative to end routine gas flaring at oil production
sites has been endorsed by 62 oil companies, governments, and
development institutions, according to GGFR.

The global target is to end routine flaring at oil fields by 2030.

Governments and oil companies that have endorsed the initiative
represent about 53% of global gas flaring.
40
WHY THE WASTE

Transportation difficulties

Inefficient domestic markets

Poor gas infrastructure

Poor funding for gas projects

Gas is usually produced with oil, and the latter is
easily and more cheaply transported than gas.

Many countries that produce and use large quantities
of oil lack a ready market for gas or the means to
transport it internationally.
41
WHY THE WASTE

Developing a domestic market for natural gas requires
a substantial demand for gas for space heating,
electricity generation, industrial power, fertilizer
manufacture, etc, and many gas- producing nations
have relatively small needs in these areas.

Many gas- producing nations lack the infrastructure or
the capital to build the infrastructure to use natural
gas domestically or transport it abroad.
42
WHY THE WASTE

Transportation of natural gas is a problem. Natural gas must be
transported in its gaseous form by pipeline or in a liquefied form by tanker.
a) It costs 4 - 5 times as much to transport gas over land by pipeline
compared to the cost of transporting oil. via pipelines
b)

Transporting natural gas by tanker (in liquid form) may cost 30 times
as much as shipping oil.
World markets prefer liquefied natural gas forms, which have much higher
energy content on a per unit volume basis and are easier to transport than
natural gas in gaseous form.
43
NATURAL GAS IN ITS GOLDEN AGE

Previous Impetus (1973 Israel/Middle East War)

Energy disruption of the 1970s taught both producers
and consumers the importance of alternative fuels.

Energy price increases that accompanied those
disruptions made investments both in natural gas
conservation and distribution systems more possible
and attractive.

As a result, large-scale flaring rapidly declined.
44
NATURAL GAS IN ITS GOLDEN AGE

Outcomes
Projects)
(Gas Re-injection & Investments in Gas

Producers are now either voluntarily or by law reinjecting gas that they do not sell or use, which
maintains the pressure drive of oil reservoirs and
increases the ultimate production of both oil and
natural gas.

Some producing countries (e.g. Saudi Arabia) have
invested in large gas plants, that use natural gas as
feedstock and also as fuel , in near-by gas fields.
45
NATURAL GAS IN ITS GOLDEN AGE
Why such downstream investments?
a)
Such investments are based on the theory that
chemicals, plastics, fibers, fertilizers or even steel are
more easily transportable and exportable than gas.
a)
In 1996, Saudi Arabia exported $5.5 billion worth of
such products!
46
CURRENT DRIVERS OF USAGE OF NATURAL GAS


•
Environmental Concerns (Ozone Layer
Climate Change, and Global Warming)
Depletion,
Kyoto Protocol
The need to transit to low carbon products- nuclear,
renewables, natural gas
a)
In
December
1997,
in
Kyoto
(Japan),
representatives of most nations of the world agreed
that the world’s industrialized nations should reduce
emissions of the major “greenhouse” gases (carbondioxide, nitrogen oxide, and methane) by 2012 to
levels between 6 – 8% below the 1990 levels.
47
POLLUTION COMPARISON AMONG FUELS
48
CURRENT DRIVERS OF USAGE OF NATURAL GAS
b)
No restrictions were placed on developing nations.
c)
7% reduction was mandated for the United States
which translated to a reduction of about 33% from
their current actual levels .
d)
As a result, pressure is growing to move from “dirty”
energy sources, such as coal to “cleaner” fuels, such
as natural gas.
e)
For instance, substituting natural gas for coal could
cut carbon dioxide emission by 58% and nitrous oxide
emissions by 81%.
49
CURRENT DRIVERS CONT’D

Availability of Shale Gas

Ample availability of shale gas (unconventional
natural gas found in the US, China, etc) actually lower
average gas prices.
50
SHALE GAS

Shales are fine- grained organic rich sedimentary rocks
that can be rich sources of petroleum and gas.

Shale gas refers to natural gas that is trapped within
shale formations.

Shale is one of the most common sedimentary rocks in
the world and primarily composed of clay and
fragments of other minerals such as quarts.
51
RECOVERABLE SHALE GAS BY COUNTRY
A map of 48 shale basins in 38 countries, based on US Energy Information
Administration data, 2011.
52
ESTIMATED RECOVERABLE RESERVES (TCF)
Country
World
China
Argentina
Algeria
United States
Canada
Mexico
Australia
South Africa
Russia
India *
Rest of the World
Reserves
7,299
1,115
802
707
Year
2013
2013
2013
2013
665
2013
573
545
437
390
285
245
1,535
2013
2013
2013
2013
2013
2013
2013 53
SHALE GAS CONT’D

Shale gas is tightly locked in very small spaces within
the reservoir rock requiring advanced technology for
extraction, called the FRACKING TECHNOLOGY.

Different types of sedimentary rocks contain natural
gas deposits, e.g. sandstone, limestone or shale.
54
CURRENT DRIVERS CONTD

China’s Ambitious Gas Policy

Implementation by China of an ambitious policy for gas
production and use.

China has 21.8 Tcm technically recoverable shale gas
resources. In 2016, overall shale gas production in China was
around 7.9 bcm, which increased to 10 bcm in 2017, and 30
bcm in 2020.

China holds 184 trillion cubic feet (Tcf) of proven gas reserves
as at 2017, ranking 10th in the wolrd.

This accounts for about 3% of the world’s total natural gas
reserves of 6,923Tcf.
55
CHINA NATURAL GAS
Million Cubic Ft
(MMcf)
Global Rank
163,959,000
10th in the world
Gas Production
4,559,626
8th in the world
Gas Consumption
6,738,152
3rd in the world
Yearly Deficit
-2,178,526
Gas Imports
2,202,597
Gas Exports
116,331
Net Imports
2,086,265
Gas Reserves
56
CURRENT DRIVERS CONTD


Lower Growth of Nuclear Power
Particularly in the wake of the nuclear accident
at Fukushima, Japan, and the likelihood of a
reduced role for nuclear power in some
countries, e.g. some Arab countries.
57
CURRENT DRIVERS CONT’D
Use
of Natural Gas in Road Transport, NGVs, CNGs

More use of natural gas in road transport (LNG vehicles or
NGV, natural gas vehicles).

Popular in most Asian and South American countries.

NNPC made a start, and the effort fizzled out.
58
MAJOR NATURAL GAS DEVELOPMENT
INITIATIVES IN NIGERIA
1.
NLNG project (Bonny) - Joint Venture between
NNPC/Shell/Agip/Total.
2.
Brass LNG ($3.5bn)
3.
OKLNG (US$.7bn)
59
GAS DEVELOPMENT INITIATIVES IN NIGERIA CONT’D
Major Natural Gas Development initiatives
4. West African Gas pipeline (natural gas from Nigeria to
Ghana, Togo, Benin Republic, Ivory Coast).
5. NPDC – subsidiary of NNPC is being positioned as a
dominant gas supplier to the domestic market.
6. Oredo Integrated Gas Handling Facility – 65m scf/d
60
GAS DEVELOPMENT INITIATIVES IN NIGERIA CONT’D
Major Natural Gas Development initiatives
7. 120km East –West Gas pipeline (contract awarded) to
link huge gas reserves in the East- Niger Delta and the
Western Region.
8. Calabar – Ajaokuta – Abuja – Kano Gas Pipeline
(1000km) infrastructure expansion to open gas access
to the Eastern and Northern parts of the country.
61
KEY TO EXTENSIVE INTERNATIONAL TRADE
IN NATURAL GAS

Integrated pipeline grid (substantial).
LNG tanker fleets (where navigable water access is
available).

Integrated Gas Pipeline Facilities

These do not presently exist in much of the world.
Currently, these are being built rapidly around the world.

62
INTERNATIONAL TRADE IN NATURAL GAS
CONT’D

In 1997, 54% of world’s oil production was exported to
world markets, while only 19% of the world’s natural
gas production was exported across any border.

In 1991, international gas trade was focused in North
America, Europe, and former Soviet Union (FSU).

Also, a list of potential new transportation projects,
using natural gas, is rapidly growing.
63
PART 2
NATURAL GAS ECONOMICS
64
FACTORS DRIVING NATURAL GAS ECONOMICS
Two factors drive natural gas economics: gas transportation
costs and economies of scale.

Transportation Costs

The economics of natural gas rapidly differs from that of
crude oil in terms of the high cost and relative inflexibility of
the transport systems required to get gas to market.

High transportation costs and inflexible delivery systems
have tended to isolate regional gas markets from one
another making it difficult to create a World Gas Market.
65
GAS ECONOMICS: INTERNATIONAL GAS MARKETS
THE THREE GRIDS
SEVEN ISOLATED REGIONAL MARKETS
 North American free Trade
Agreement (NAFTA Zone)
 Brazil/Central South America
Bolivia, Peru, Argentina
 Western Europe
 The South American (Southern
Cone) Chile, Uruguay
 Former Soviet Union/Central
Europe





The Eastern Mediterranean
The Indian subcontinent
South-East Asia
North – East Asia
The Coastal Trio (Japan, S.Korea,
Taiwan)
66
REGIONAL GAS MARKETS
Regional market
Main Anchors)
Supply sources
Brazil/Central South
America
Brazil
Bolivia, Peru, Argentina
South America (Southern Chile
Cone)
Venezuela, Argentina
Eastern Mediterranean
Turkey, Greece, Israel
LNG, Russia, Egypt,
Turkmen
Indian Subcontinent
India, Pakistan
LNG, Qatar, Iran,
Turkmenistan
South-East, Asia
Thailand, Indonesia
Myanmar, Indonesia
North –East Asia
China
LNG, Siberia, Central Asia
The Coastal Trio
Japan/Korea/Taiwan
LNG, Siberia
67
NATURAL GAS ECONOMICS CONT’D

Economies of Scale

Not only are gas transportation cost much higher than
those for oil, also gas transportation costs exhibit strong
economies of scale. The higher the volumes, the lower the
unit cost of delivery.

In international trade of gas, large gas discoveries and
large markets enjoy substantial economic advantages over
small gas discoveries and small markets.
68
NATURAL GAS ECONOMICS CONT’D

Therefore, the drivers of natural gas economics are
principally high cost of gas transport systems and scale
requirements.

As a result, natural gas markets have historically
developed first in countries with substantial natural gas
reserves of their own,

Then, later in ‘gas – poor’ countries with a large enough
energy demand to justify the importation of gas through
large international pipeline grid system or LNG.
69
GAS PIPELINE CONSTRUCTION COSTS
U.S $800,000 per 1km – US $2m per 1km (for large
diameter projects over difficult terrain).



Examples
The 24 inch Yucantan Peninsular gas pipeline,
completed in 1999 and running 432 miles form the
Mexican State of Tobasco to power plants in the
Yucantan Peninsula cost $266 million.
70
GAS PIPELINE COSTS CONT’D

The 460km line completed in 1996, from La Mora in
Argentina to Santiago in Chile cost US $360 million.

The 3,700 km pipeline from Bolivia to Soa Paulo in
Brazil cost US $1.8 billion.
71
HUGE COSTS ASSOCIATED WITH GAS PROJECTS
A typical LNG project may require more than US $10bn of
investment and lead time of 6-10 years from conception to
completion.


LNG Tanker ships cost about US $ 200m.
Pipeline grids must be developed internally,
internationally (within nations), and between nations.

Grids should be linked to target markets (electricity
generators and industrial users, particularly those that use
natural gas as a feedstock).

72
FINANCING GAS PROJECTS: MODEL
1. Project Finance

Revenues generated by a new distribution system are
sufficient to pay off its financing costs.
2. Incremental Investment

3.
Whereby cash flow from the existing system can be
used to finance a new construction.
Early Payback

Where political and economic conditions permit,
service delivery could commence with high tariffs that
gradually decrease over time.
73
FINANCING GAS PROJECTS: MODELS CONT’D
4. Anchor-Store

In this case, gas supply begins with a few large
industrial or electric generation users, which
potentially create the driver for network development
74
BENEFITS TO GOVERNMENTS FROM NATURAL GAS
DEVELOPMENT

Governments derive revenue from the sale of natural gas
to domestic petrochemical firms.

For governments’ holding large shares of the
petrochemical plants, it also derives revenue from valueadded associated with the export of the petrochemicals.
75
BENEFITS TO GOVERNMENT FROM NATURAL GAS DEVELOPMENT CONT’D

Governments also benefit from increases in employment
and multiplier effects on their countries’ economies that
come from increases in natural gas development.

A major project such as liquefaction or petrochemical
plant mobilizes local labor for construction work and can
cause local business to provide services to the new
projects (restaurants, material suppliers, engineering
constructions.)
76
WHY HAVE INTERNATIONAL OIL COMPANIES NOT PLACED A
HIGHER PRIORITY UPON INVESTMENT IN GAS INFRASTRUCTURE

Gas infrastructure development generally costs
substantially more than oil development (20 – 30 times
as much) and takes much longer.

Gas infrastructure investments leave international
investors more exposed to the risk of expropriation or
politically – inspired violence.
77
WHY HAVE INTERNATIONAL OIL COMPANIES NOT PLACED A
HIGHER PRIORITY UPON INVESTMENT IN GAS INFRASTRUCTURE
3.
Gas is sold in a local market, rather than in international
market (except LNG).

Thus, investments in gas infrastructure are likely to be
regulated by National Governments as public utilities.

Gas infrastructure investments would result in a relatively
low rate of return as it would be sold locally, and
international investor may not generate enough profits in
local currencies.
78
POWER GENERATION AS A MAJOR DRIVER OF
GAS USAGE

Environmental concerns have made the use of natural gas
attractive, and is recognized as a major driver.

However, surging electricity demand is now an associated
major factor driving increased consumption of natural gas.

Globally, natural gas use for electric power generation is
expected to increase more than 25% faster than fuel use
of all types over the next 20 years.
79
GAS TO POWER GENERATION CONT’D

Converting gas to electricity outside the end-use region
also eases air pollution problems in urban areas.

Even in the US, the most mature energy market, the use of
natural gas to generate electricity is expected to increase
by 21/2 times between 1999 and 2020.
80
SYNERGIES BETWEEN NATURAL GAS DEVELOPMENT
AND POWER GENERATION SECTOR

International gas marketing activities, outside of the US
and Europe, have experienced dramatic growth in relation
to supplying natural gas for power generation.

The increase in international gas marketing opportunities
has been brought about by synergies between gas
utilization and electricity generation. Such synergies
include:

Environmental benefits of ‘clean burning’ gas over other
fossil fuel competitors.
81
SYNERGIES BETWEEN NATURAL GAS DEVELOPMENT
AND POWER GENERATION CONT’D

More favorable economics of a gas-fired power station
when compared to other fossil fuel and nuclear options.

Recent technological breakthroughs in combined-cycle
technology make gas-fired power generation equipments
significantly more efficient than its fossil fuel competitors.

Natural gas can displace imported fuel oil for industrial
energy consumption and also increase available crude oil
for export.
82
PART 3
GAS SALES CONTRACT
83
GAS SALES CONTRACT

The absence of a truly international market for gas
means that pricing for gas deliveries is carried out on
an ad- hoc basis.

There is no global benchmark price for gas.

Therefore, the disadvantages and significant costs
associated with transportation of gas from field to
market dictates the need for gas to be sold on the
basis of long-term sales contracts.
84
GAS SALES CONTRACT CONT’D

Thus, gas deliveries and ‘take-or-pay schedules are
designed to ensure constant utilization of the highpriced gas production and transportation facilities.

Pricing uncertainties are continually resolved by
adjusting prices in line with market forces (supply
/demand).

When gas marketing efforts reach the contracting
stages, the first issue to resolve is the selection of the
appropriate contractual structure for the intended gas
sale.
85
TRADITIONAL CONTRACTUAL FRAMEWORK FOR
GAS SALES
1. A Gas Sales Contract – whereby the gas producer and
gas purchaser enter into a bulk-purchase contract.
2.
The gas purchaser may be:

the end- user of the gas;

may resell the gas to another intermediate purchaser; or

may resell to the ultimate gas- users.
3 The gas producer is obligated to the purchaser to deliver
gas.
86
TRADITIONAL CONTRACTUAL FRAMEWORK
FOR GAS SALES
4.
The gas purchaser is obligated to the producer to pay for
the gas.
5 In the case of gas contracts with ‘take-or-pay provisions’,
gas must be paid for, though not currently taken.
87
ALTERNATIVE GAS SALES CONTRACTUAL
STRUCTURES

The traditional contractual structure may be inappropriate
for a particular gas marketing situation or in a particular
Host Country.

Therefore, a variety of alternative contractual structures
have be fashioned to address peculiar situations, with due
regard to applicable legal or regulatory provisions within a
given Host Country.
88
THE INDONESIA EXAMPLE

Domestic natural gas sales in Indonesia were modeled on
the contractual framework of their existing LNG
transactions.

Producer enters into a Supply Agreement with the State Oil
Company (PERTAMINA) to supply and deliver gas to
PERTAMINA at a specified point (gas- gathering location).
89
THE INDONESIA EXAMPLE CONT’D

Purchaser (PERTAMINA), simultaneously, enters into a
Sales Contract with a third-party gas purchaser, whose
off-take point is the gas- gathering location.

Under this structure, the gas producer is obligated to
PERTAMINA to deliver gas.

PERTAMINA is obligated to deliver and sell gas to the
third-party purchaser.
90
THE INDONESIA EXAMPLE CONT’D

The third-party purchaser is obligated to PERTAMINA to
pay for gas delivered, and for take-or-pay amounts (where
the contract provided for this).

PERTAMINA is obligated on a back-to-back basis, to the
producer to remit the producers’ share of gas payments.
91
FINANCIAL SAFEGUARDS FOR GAS SALES
CONTRACT
1
Paying Agent

2
The paying agent receives payments from the thirdparty purchaser and distributes to the gas producer
and PERTAMINA their respective shares of payments.
Vetting of Purchasers’ Financial Status
The third-party purchasers’ financial capabilities must
be ascertained and verified, as well as credibility to
satisfy its contractual obligation during the term of the
gas sales contract.
92

FINANCIAL SAFEGUARDS TO GAS SALES CONTRACTS CONT’D
3.
Remedial Financial Safeguards

If a purchasers’ financial status becomes impaired or
deemed uncertain, certain modifications to the
contractual structure may be required to assure the
producer that the purchaser will comply with its
contractual obligations

Prepayment for gas deliveries
Barter arrangements (where goods/services are traded in
exchange for gas deliveries) may be adopted.

93
FINANCIAL SAFEGUARDS TO GAS SALES CONTRACTS CONT’D

Issuance of financial supports, e.g. Letters of Credit,
Bank Guarantees, Parent Company Guarantees.

Issuance of sovereign guarantees by the Host Country.

Most importantly, the contractual structure has to be
determined and the financial status of the third-party
purchaser ascertained and accepted before the
negotiation and drafting of the Gas Sales Contract could
proceed.
94
PART 4
OVERVIEW OF LNG
95
LIQUEFIED NATURAL GAS

History of LNG



First introduced by Michael
Faraday: 19th century
First LNG plant in West
Virginia: 1912
First LNG tanker: The
Methane Pioneer: 1959


35,000 bbls. from LA to UK
Subsequent plants in
Indonesia, Algeria, Trinidad
and Tobago, and the UK
96
LNG

Production Process

Liquefaction


Shipment


Auto-refrigeration
Large Tankers
Re-gasification

Increase pressure and
then slowly warm
97
LNG

Current Situation- US and ASIA are main
consumers

US re-gasification terminals in…
 Cove
Point, MD
 Everett, MA
 Elba Island, GA
 Lake Charles, LA

Main supply from Trinidad and Tobago, some from
Qatar, Algeria, Nigeria, UAE

113 total storage, production, transportation sites for
LNG in the world
98
LNG SAFETY AND ENVIRONMENTAL ISSUES

Explosion

Natural gas only burns in the presence of O2


LNG is mainly methane


No explosion hazard
Spills

No slick created if a spill occurs


NG concentration of 5-15%
NG quickly dissipates
Worker safety


No deaths/injuries/accidents in 25 years at US plants
No spills, fires on any LNG vessel
99
LNG USAGE / RESERVES

Liquid natural gas consumption


Is currently 1-2% of total NG consumption
Estimated to rise to 15.8% per year through 2025


Representing 30% of total by 2025
Natural gas reserves

Current proven NG reserves = 5,919 tcf
3% NG use growth rate
 CURRENTLY PROVEN reserves exhaustible in year 2106


US NG reserves = 250 tcf
100
LNG USAGE
18.00
16.00
12.00
10.00
LNG
Natural Gas
8.00
6.00
4.00
2.00
20
22
20
24
20
18
20
20
20
14
20
16
20
10
20
12
20
06
20
08
0.00
20
02
20
04
Trillion Cubic Feet
14.00
101
LNG DEVELOPMENTS

Tankers


136 tankers currently in
operation, 57 ordered
Very large!!



Potential explosion hazard


130,000 m3 of LNG
2.70 bcf of NG
Energy equivalent of 0.70
megatons of TNT
(Trinitrotoluene)
Re-gasification plants

US Plans to build in major
cities – New York City, etc
102
LNG PRODUCTION

Much of world’s NG is in remote locations
 NG
extremely cheap in these jurisdictions
 example:
Saudi Arabia NG = $1.50/MM BTU
United States NG = $7.13/MM BTU

Based on economies of scale

Used as needed
 “turned
on” or “turned off”
103
LNG PRODUCTION COSTS
-BUT... Costs are decreasing
104
LNG PRODUCTION COSTS DECREASING

NG E&P costs



3D seismic modeling
Complex wall architecture
Improved sub-sea facilities


Under-sea production
LNG plant capital costs


Design efficiencies
Technology improvements
105
LNG PRODUCTION COSTS DECREASING

Tanker costs




Ship size increasing
Ship power system efficiency
improvement
Longer operating life
Re-gasification costs

Plant costs down 18% in
last 20 years
106
CURRENT LNG PRODUCTION COSTS

Current production cost



$1.80/MM BTU
Feedstock cost
 Varies by production
location
Current total cost =
$3.20 - $4.00/MM BTU
107
THE FUTURE OF NATURAL GAS
LNG theoretically
provides a “cap” on NG
prices


If NG costs more than
$4.00/MM BTU, LNG
becomes cheaper and is
imported
If NG costs less than
$4.00/MM BTU, LNG
becomes more expensive
and not needed
12
10
8
$/MM BTU

6
4
2
0
Jan-98
May-99
Oct-00
Feb-02
Jun-03
Nov-04
108
PART 5
TRADE IN LNG
109
TRADE IN LIQUEFIED NATURAL GAS (LNG)

LNG is natural gas that has been super-cooled under
pressure to – 256 oF. Super cooling liquefies the gas and
shrinks it to 1/600 of its original volume, which permits
easier, more economical handling and transportation.

LNG is shipped in cryogenic tankers to terminals in the
importing countries, where it is re-gasified.

Regasification means that the pressure is reduced to
allow the liquid to warm up to gaseous state, and is then
fed into local LNG pipelines.
110
HISTORICAL PERSPECTIVES (LNG)





The LNG technology became economically viable
during the energy crisis of the 1970s. With high oil
prices, alternative energy became a very real goal for
those industrial nations that relied heavily on oil
imports.
Less than 5% of world’s natural gas production is
traded internationally as LNG.
However, LNG remains an economic lifeline, both for its
producers and its users.
Between 1990 and 1997, worldwide LNG trade
increased by 45%.
By 2010, LNG trade had increased by 80%.
111
EXPORTERS OF LNG

Major exporters are oil producing developing countries.

In 1996, three nations accounted for more than 70%
of world supply of LNG (Indonesia, Algeria, Malaysia).

In 1996, Indonesia was the largest supplier (35% of
global supply ) and traded more than 25 million tons of
LNG. Note: 1 ton of LNG = 50m cubic feet of gas.

Algeria contributed 20% of the total (14.5 million tons)

Malaysia supplied about 17% of the market (12milion
tons)
112
1996 DATA
Major LNG
Exporters
Volume (Millions of
tons)
% Market Share
Indonesia
25.0
35
Algeria
14.5
20
Malaysia
12.0
17
72%
 Other exporters – Abu Dhabi, Libya, Brunei, Qatar, Australia, Nigeria
(1999)
113
LNG EXPORTERS: COMMON FACTORS

These countries have limited domestic markets.

Export by pipeline is not a viable alternative because of
their geographical location and lack of infrastructure.

For these countries, LNG exports are an alternative to gas
flaring or shut – in of oil production.
114
MAJOR LNG IMPORTING COUNTRIES

In 1996, three Asia countries (Japan, Korea, Taiwan) took
delivery of almost 77% of the world’s LNG supplies.

Japan was the largest importer, taking 61% of the total.

India, Thailand, and China have electricity demand growth
of 8% per year, and later joined the LNG importers group..

The Asian financial crisis that began in 1997 slowed the
near-term future of LNG in Asia.
115
MAJOR LNG IMPORTING COUNTRIES CONT’D

US has four LNG receiving terminals (Massachusetts,
Maryland, Georgia and Louisiana terminals).

LNG was uncompetitive in the US by 1996.
 Large gas reserves
 Well- developed pipeline systems
 Almost free gas market
Note: US imports of LNG in 1996 were just over 1% of the
world total. It is a different story today.

116
LNG TRADE/PROJECTS: LIMITATIONS




Increased trade in LNG is marred by serious economic and
geographic limitations.
The major importers of LNG are driven by::
 Necessity
 Need to achieve security of energy supply
For example, some LNG importers such as Japan and Korea
are geographically located such that they lack both domestic
gas reserves or gas pipeline access to gas producing countries.
Consequently, LNG projects are technically complex and very
expensive.
117
CONSTRUCTION STAGES OF LNG PROJECTS
1.
2.
3.

Liquefaction facilities to be located in the producing
countries.
Cryogenic tanker ships to transport the LNG (cost is roughly
US $200 million).
Re-gasification plants to be located in the receiving
countries (Typical projects cost more than US $10 billion).
LNG projects are economically feasible only where there are
large proven natural gas reserves, and where markets and
politics permit operation at a high load-factor over a long
period of time.
118
CONSTRUCTION STAGES OF LNG PROJECTS: RISKS

The producing country is unlikely to be able to finance all
stages of an LNG project on its own.

Importing countries are unlikely to be willing to provide
financing for the liquefaction stage without assurances of
gas supply.

The enormous capital requirements and risks associated
with LNG projects explain why most of the projects never
take-off.
119
STRUCTURING, NEGOTIATING AND DOCUMENTING LNG
PROJECTS
LNG is one of the most complex energy ventures because of
 Its size
 Multitude of players and issues
 The interdependency of the LNG chain.

Each project is uniquely structured because
There is no one distinct pattern of participation in:
 Gas supply
 Revenue – sharing
 Financing ,etc.

120
STRUCTURING, NEGOTIATING AND DOCUMENTING LNG PROJECTS CONT’D

Over time, trends have developed and one of these three
models is generally utilized for structuring the LNG export
projects

Project company,

Non-Incorporated JV company, and

Tolling company
121
LNG PROJECT COMPANY MODEL (FOR
DEVELOPING COUNTRIES)

The participants become shareholders in a new LNG project
company (usually incorporated in the country where the gas is
located and produced).

The project company finances and owns the LNG plant.

The project company purchases gas from upstream producers,
liquefies the gas, and resells the LNG to third-party purchasers.
based on long-term contracts

Thus, the project company is the entity that receives revenue
from the LNG sale.
122
THE PROJECT COMPANY STRUCTURE (FOR DEVELOPING COUNTRIES) CONT’D

The LNG sales revenues are passed back to the participants
through shareholder dividends or based on the specified equity
split

The owners of gas reserves, if they are participants, also profit
from the separate sale of their feed gas.

Such upstream profits are taxed at a different rate
(PETROLEUM PROFIT TAX, PPT) from the project company’s
overall tax rate (Corporation Tax).

Examples: Nigeria, Malaysia, Qatar, Oman, etc.
123
THE NON-INCORPORATED JOINT- VENTURE
MODEL (FOR DEVELOPED COUNTRIES)
Projects in Alaska (US) and Australia followed this model
due to the following considerations:

Legal Issues

Tax Issues

Marketing


For instance, each of the Six participants in the NorthWest shelf project in Australia owns one sixth of the LNG
plant, supplies one sixth of the gas, and is entitled to one
sixth of the revenues.
124
THE NON-INCORPORATED JOINT VENTURE MODEL (FOR DEVELOPED
COUNTRIES) CONT’D

Woodside Petroleum, one of the participants is appointed
‘the operator of the venture’ on behalf of all participants.

The NIJV approach, which is common for upstream oil and
gas projects is a suitable choice for projects in countries
where:


The government takes a passive role in petroleum
development (i.e. receives royalty or tax only).
A well-known and robust legal system underpins such
ventures.
125
THE TOLLING COMPANY MODEL: THE
INDONESIAN EXAMPLE

Pertamina (Indonesia NOC) and its production-sharing
partners jointly market the LNG to buyers.

Since the companies liquefying the gas does not make
a profit, all revenue generated go to Pertamina and the
upstream partners and the revenues are split
according to the equity split specified in the relevant
production-sharing contracts.
126
THE TOLLING COMPANY MODEL CONT’D

Has been very successful in Indonesia.

Indonesia Government in 1973 financed and owned 2
LNG plants.

Two separate companies were incorporated to operate the
two LNG plants and liquefy the gas on a non-profit basis.

Neither company was permitted to either purchase natural
gas from upstream producers or resell the LNG to thirdparty purchaser.
127
THE TOLLING COMPANY

Since the mid- 1980’s, the Indonesia government no
longer funds the construction of LNG trains.

However, the Tolling Company structure has
successfully supported the limited- recourse financing
of four new trains.
128
PART 6
LNG CONTRACTS
129
PROVISIONS IN LNG CONTRACTS




Most important provisions in an LNG contract:

Volume (quantities)

Price clauses
Initial LNG contracts (1960s and 1970s) were long-term
(10 -12 years) and contained specific volume guarantees
and rigid price floors.
They resemble the take –or-pay agreements.
The parties to an LNG project may choose to use a
financial institution (in an economically and politically
stable country) as a PAYING AGENT, to collect and
disburse funds.
130
Conventional LNG Contracts
Designed to Recover Huge Investment In
Gas Production & Transportation Facilities
 Vertically-integrated multi-billion dollar
projects
 Contracts with risk-sharing schemes
required when financing the projects
131
Conventional LNG Contracts
Typical Terms
Oil-indexation: directly indexed to
international crude oil prices
Long duration: 15+ years
Take-or-pay: minimum level of payment
guaranteed
Destination clause: diversion or re-sell only
with sellers’ consent
Unclear or no clause on price-review or renegotiation
132
LNG Market – Getting Flexible
Cargoes with Flexible Terms Rising
Short-term or Spot Trade
Uncontracted volumes, re-exports, commissioning
cargoes…
US LNG Export
No destination clause
Less take-or-pay costs
Aggregators
Able to offer various types
of contracts with their portfolios
133
Fair LNG Trade as Importers See It
Reflective of Global Market Conditions
 Conventional contractual terms: snapshot of
market dynamics at the time of signing
 Regular review of contracts: price, volume,…
Not in Conflict with Competition Laws
 Destination clause on FOB: no rationale but
price discrimination
Reasonable Price Differentials across
Regions
 Differentials cannot be greater than
difference in transportation costs
134
GLOBAL LNG MARKETS

Most of this gas was contracted on inflexible Long
Term Agreements (LTAs) with pricing formulae
indexed to oil.

By 2000 global liquefaction capacity had grown to
115 mTpa with imports totaling 110 mTpa.

This close match in production and imports was
due to project sanctions for LNG infrastructure
only being granted once for all future production
135
LNG MARKETS

LNG is changing from a niche, high cost activity
focused on specific markets to a core feature of
the global gas balance

Demand is expected to grow by ~30% pa over
the next 10 years

LNG currently accounts for ~8% of gas demand
136
LNG MARKET – OUTLOOK TODAY




Today the global LNG market can be divided into two
distinct regions, the Atlantic Basin (AB) and the Pacific
Basin (PB).
Demand is strongest in countries surrounding the PB with
Japan being the largest individual market.
Growth is expected to be strongest in the regions that
surround the AB.
LNG markets are still dominated by LTAs but this is
changing as more flexibility is built into the markets.
137
LNG MARKET – OUTLOOK TODAY



The emergence of the US as a major market has
seen contracts evolve to allow a greater degree of
diversion flexibility across the AB, creating
opportunities for regional gas-on-gas arbitrage and
optimization.
The industry is heavily influenced by the regulatory
environment and competition to secure market
access is fierce.
Successful players will be those willing to offer nontraditional contractual arrangements.
138
LNG MARKET – SUPPLY &
DEMAND

Cooled Demand in NE Asia
 Importing
countries have demand uncertainties
 Slow economic growth
 Price competition with coal, oil

Surge of New Supply
 Australia:
86MMt/yr in 2017
 US: 62MMt/yr under construction

Buyer’s Market Ahead
 Supply
glut up to 2020, or beyond
(mid-2020s)
139
DIFFERENCES BETWEEN LNG & GTL
TECHNOLOGIES

LNG technology converts natural gas to a liquid state for
transportation and then back to a gaseous state for use.

GTL technology converts natural gas to light, synthetic
crude, and then to clean, light petroleum products, such
as gasoline, diesel fuel, kerosene, and naphtha.

An added bonus of GTL technology is that it produces zero
sulfur, making the light synthetic crude the most desirable
crude in the world.
140
GTL PROCESS TECHNOLOGY
141
LNG PROCESS TECHNOLOGY
142