World economic growth pushing LNG use

Robert L. Brown
Mobil Oil Corp.
Fairfax, Va.

Roxanna Clary
Mobil Technology Co.
Dallas

Natural gas is abundant, burns cleanly, and is highly efficient in combined-cycle, gas-turbine power plants. Moreover, the comparative remoteness of much of the resource base to established and emerging markets can make LNG a compelling processing and transportation alternative.

Discussed here are the resource distribution and emerging market opportunities that can make LNG attractive for monetizing natural-gas reserves.

Strong growth

Natural gas has already come a long way from when it was largely a by-product sent to the flare so that oil production could continue.

Worldwide gas production was relatively insignificant as recently as 50 years ago but now supplies 20% of the world's energy requirements. Strong growth rates are expected to continue.

Over the next 10 years, worldwide natural-gas demand is forecast to grow 3.5%/year (Fig. 1 [33870 bytes]). This compares to about 2.2% for oil and exceeds anticipated general economic growth trends.

Use of gas as LNG is a relatively recent contributor to this gas growth. Nevertheless, anticipated growth of 7%/year over the next 10 years will increase LNG's share of energy use to about 2% worldwide.

Matching remote gas supplies to remote and emerging markets is central to this healthy LNG outlook.

Although natural-gas production (expressed in "barrels of oil equivalent") is only about half that of oil, gas has an equivalent reserve base and a substantially higher future potential.

Estimates1 2 of world-wide proved (P1) and probable (P2) gas reserves are about 5,339 tcf (OGJ, Dec. 13, 1993, p. 59). Mobil Technology Co., Dallas, estimates that approximately 5,000 tcf remain to be discovered.

Distribution of gas reserves and future potential in the world's seven major economic areas are shown in Fig. 2 [46545 bytes]. Much of the future potential is from deepwater continental shelf areas of the world associated with technological advances in drilling, reservoir definition, and recovery.

Other additions will result from improved production methods in known fields near world markets such as Europe, the nations of the Commonwealth of Independent States (CIS) of the former Soviet Union (FSU), and North America.

More than half the world's gas reserves and future potential occurs in seven countries that are remote from established markets: Russia, Iran, Kazakhstan, Saudi Arabia, Qatar, Turkmenistan, and Australia (Fig. 3 [41584 bytes]).

Despite this remoteness, these resources will play a dominant role via long-haul pipeline and LNG. Russia is already a large producer with significant exports via long-haul pipeline. Australia is also expanding its LNG trade.

Further, LNG focus for significant reserve development is on such countries as Qatar, with giant gas fields that have not been significantly depleted.

The FSU and the Middle East clearly dominate the world potential for gas resources. The FSU has 30% (1,518 tcf) of the world's total remaining gas reserves and an estimated 40% (2,357 tcf) of the world's gas future potential. The majority is in remote arctic areas such as Western Siberia.

Industry interest in the CIS and the North Caspian regions is high and includes the countries of Kazakhstan, Uzbekistan, Azerbaijan, Turkmenistan, and the Ukraine.

The Middle East has approximately 35% (1,857 tcf) of the world's remaining gas reserves and 11% (590 tcf) of its undiscovered potential.

Qatar's North field is the world's largest natural-gas field, with reserves of more than 300 tcf. With contractual sales to Japan and Korea, it will soon be one of the world's largest suppliers of LNG.

The Asia-Pacific Rim countries contain 10% (492 tcf) of the world's gas reserves and 12% (634 tcf) of the world's undiscovered gas potential.

With 60% of the world's population, this region is destined to have the largest demand for oil and gas resources. LNG will help to balance supply and demand between the Middle East and Asia-Pacific Rim, linking these two major resource regions.

Europe's estimated gas resources are currently 6% (333 tcf) of the world's remaining reserves and 8% (434 tcf) of the undiscovered potential.

Gas fields in the U.K., The Netherlands, Norway, Germany, and Italy supply substantial quantities but almost 40% is imported from Russia, Algeria, and elsewhere.

LNG supplied from other Middle East countries will eventually be significant.

North America's gas market is the most mature with a consumption of 21 tcf/year and estimated to increase to 25-26 tcf/year by 2010 (AIC World Oil & Gas Summit, London, June 13, 1994).

In the 21st Century, gas reserves along the Canadian east coast and the Scotian Shelf may also become significant. LNG is not expected to be a major contributor given the substantial future potential-880 tcf-remaining in North America.

African natural-gas sources contain 7% (357 tcf) of the world's remaining gas reserves and 5% (248 tcf) of the undiscovered gas potential. Potential gas contributions should be concentrated in Algeria and along West Africa.

South America has 5% (244 tcf) of the world's remaining gas reserves and approximately 6% (300 tcf) of the undiscovered gas potential. Most of the gas resources are in Venezuela and Colombia.

In some exploration areas in Venezuela, much undiscovered potential is expected to be natural gas. The southern portion of South America is still generally considered immature, as reflected in the estimates of the future potential.

Options for remote gas

Long-haul international pipelines along with the waterborne nature of LNG make economy of scale a physical necessity for keeping unit costs ($/MMBTU) competitive with other fuels. Large gas reserves are required to support such scale.

More remote supplies must be evaluated on a project-vs.-project basis to decide if LNG development is preferable to other gas-monetization possibilities.

These others include delivery to market by pipeline or local production of alternative export products such as liquid fuels or fertilizer. Depending on distance and terrain, pipeline sales may be more economic.

Generally, the economic balance point between pipeline and LNG shifts to LNG for distances of 1,000-2,000 miles or greater.

Very long haul mega-pipeline projects require an economy of scale even greater than for LNG, meaning an initial investment that could be in the tens of billions of dollars. These pipelines have the added disadvantage of absolute point-to-point rigidity.

As the LNG business has grown and matured in recent years, increased flexibility has developed in the overall network providing more flexibility than pipelines possess to sell to multiple destinations and divert cargoes to alternative destinations when necessary.

Natural-gas conversion to synthetic fuels has long been a physical reality.

In New Zealand in the 1970s, Mobil Oil New Zealand Ltd. built a commercial-scale plant. It converted natural gas to methanol and the methanol to gasoline. Mobil operated it successfully for many years before selling its interest a few years ago.

Only of late are technical and unit investment-cost strides being made that may give synthetic-fuel production economic viability in competitively open markets.

Shell has been operating a plant in Malaysia producing high-quality fuels and specialty products.

Exxon has announced an improved process with lower capital requirements (OGJ, Mar. 24, 1997, p. 28; Dec. 30, 1996, p. 85) and Mobil is pursuing leads toward cost reductions for its process to make gasoline.

Even so, gas conversion may prove less a development alternative to pipeline and LNG than a means to augment such projects in remote locations that hold enormous gas resources, such as in Siberia and the Middle East.

LNG is itself making similar technology and unit-cost advances.

Even greater scale than in the past is one way to accomplish this. Typical LNG plant individual process trains are now being sized up to 3 million tons/year output, compared to 2 million tons/year or less in the last decade.

Such innovative concepts as smaller-scale prefabricated units, special cryogenics for offshore loading, and even concrete gravity-based offshore LNG plants are under study and testing.

Business chain

Fortunately for those who want to move natural gas to market, gas is as attractive to buy as it is to sell. It is the cleanest hydrocarbon fuel, and its physical simplicity combined with custom-built facilities throughout the value chain yield an exceptionally high reliability.

Power generators can also take advantage of modern combined-cycle gas turbine designs. These attain fuel efficiencies on the order of 60% in relatively low-cost plants that can be quickly permitted and built.

Ironically, the very physical characteristics that make gas clean and reliable also make it expensive to transport and store. This is especially true if export markets are being targeted and distances are great.

International pipeline sales that involve long distances often have the added political complexity of crossing intervening countries. LNG waterborne transport can reduce the intervening political complexity in exchange for its added steps of liquefaction and regasification.

Despite seemingly simple physical fuel characteristics, this relatively high cost of gas transportation has led to a business structure that is both varied and commercially complex.

For various historical reasons, both commercial and political, there is substantial variety in both who participates in the business phases (production, transportation, storage, and consumption) and how the commercial structure is set up in the various countries to tie these phases together.

Indeed, no two gas markets are exactly alike. This complexity is illustrated for the natural-gas/LNG business chain (Fig. 4 [32307 bytes]).

In some markets, sales occur at the wellhead. In others, integrated ownership or direct access to others' systems take the primary commercial transaction closer to the burner tip.

Commitments range from short-term, month-to-month, variable-priced, interruptible sales in some largely self-sufficient domestic markets to very long-term, 25 year-plus, price-indexed, firm sales in more internationally interdependent markets.

Particularly for LNG, an inherently international business, firm seller commitments are matched by buyer commitments ensured through take-or-pay obligations.

The size and complexity of individual projects have made this a practical necessity to protect the various parties from financial and political risk.

This results from long lead times, large investments, and limited physical flexibility for transporting natural gas to alternate destinations.

Markets

Historically, the most successful LNG projects have relied on such arrangements selling into strong markets in relatively developed economies such as France, Japan, and Korea.

Traditional buyers in such countries are expected to continue to be the backbone of LNG growth as their own needs grow commensurately with expanding end-user needs.

The high demand-growth potential that sets LNG apart from the general energy pack, however, is leveraged by the emergence of two new customer groups-new buyers in traditional market areas and new markets in economically emerging countries.

In both cases, a key to anchoring new LNG projects is the advent of independent power producers (IPPs).

In established markets, IPPs are being encouraged by regulatory change aimed at creating more competitive power supply. In emerging markets, IPPs are being encouraged by governments eager to attract foreign investment and expertise.

Strategies

Regardless of these customer particulars, the fundamentals that support LNG development remain the same: Large reserves are essential to ensure long project life for sellers' as well as buyers' custom-built facilities.

Sellers whose own reserve base is diverse bring an extra dimension of security. Technical know-how is imperative for controlling costs, attaining maximum efficiency, and adapting designs to local needs.

Great financial strength is both a comfort to the other parties and a practical necessity to help raise the huge up-front capital involved. As is increasingly true of international business in general, it is equally important to team up with excellent partners who bring complementary talents and dedication.

No LNG project will succeed without certainty of customers as dedicated to the business as the project sponsors themselves.

Especially for emerging markets, project developers may have to become to some degree the customers themselves. They would do this by actively participating in the creation of the market, including integration of ownership into the regasification and IPP phases.

References

The Authors