An Economic Appraisal of Technological Innovations in LNG Shippir

Kenneth Wilson, Shipping Consultant, K.C. Wilson &Associates, Singal

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In this twc)-part artiicle the a1uthor pre:;ents somle of the results of Ihis appraisal of the commercial benefit! costs ar~drisks a!rsociated with rece!nt and ennerging tt!chnologilcal innovations in the transport of LNG.
hat there is a wide range of evolving developments in LNG shipping and alternative means of tra~isporting natural gas by sea is made readily apparent in Figure 1. However, few of these prospects liave yet been implemented and, conseguently, the information garnered for this research from shipyards, offshore equipment fabricators, classification societies and other authorities - and tlie data analyses performed - are suL>ject to further investigation and qualification.

\Vitliin the LNG sector prospects c u r rently under study include a range of new propulsion systems, boil-off gas reliquefiers and cargo containment design improvenients, all of u~liich are being evaluated with respect to Lmth larger and smaller size sliips. Innovative means of conveying LNG by sea are presently focused on offshore structures - both production facilities and receiving terminals. Additionally, onboard regasification is an option for LNG delivery and one that has witnessed a revival in fortunes recently. are also Several promising de\relop~iients taking place at tlie "ship-shore" interface, ~articularly with respect to open water operations. Part 1 of this article addresses tlie comniercial background, scale economies in shipping anti onboard reliqueiaction. Part 2, in a suhserluent issue of tlie LNG Journal, shall consider alternative propi~lsiioioptions, liquid containnient and cargo handling.

readily apparent from Figure 2, showing the numbers of newbuildings in coniparison x\~~tli sliips in the existing fleet categorised by year of build. The rush to conimission new ships came about mainly as a result of the coincidence of two events both in Korea- during the late-1990s. Firstly, the Korean shipbuilders proved tlieir ability toconstruct quality LNGcarriers by virtue of orders obtained originally from local owners and, secondly, tlie Asian financial crisis which drove down the Won currency and made tlie yards ultra-coni~etitive in the contracting market. During the afternlath of the 1997 meltdown in Asia, contract prices of LNG carriers fell: by 40X, in fact, fro111some US$ 240 nullion just prior to the crash. CVliilst being a sharp drop it was, however, consistent with a downward trend which had originally come about as a result of the competitive~iessof Asian vards vis-a-vis tlieir counterparts in Europe. Currently, the contract price of a 145,000 1n3 standard size ship at a Korean yard is slightly less tlian US$170 million. The delivered price, after capitalisation of interest on instalrnents and expenses incurred during construction, will be about 10% or so higher. A corollary of the sharp decline in has k e n a spate of orders prices ~ost-1997 for shim variouslv described as beine " u.liich will he ~ 1 4 ~ 1 to 3 transp~~rt c a r g o ~ s "speculativea',"spot" or "merchant" which, fro111Egypt to France for Gaz de France. A unlike most of their predecessors in the newbuilding contract for a second 153,000 fleet, have not been pre-dedicated to longm3 sliip - which, interestingly, will L w a term contracts. Moreover, these ships Franco-Japanese venture featuring NYK - have been commissioned by independent should lw finalised by July. The French yard Cliantiers De L'Atlantique is also assisting Hudong-Zlionghua in China to builil turn sliips for the Guangdong LNG project and which are due for delivery in 2007. The Dutch have just co~npletedtlie r\.orldCstiniest LNG carrier - the Knutsen Pioneer, only 1,100 ni3 - and which came not long after delivery of a 2,500 m3 type built by Kawasaki Heavy Industries. Incidentally, the Norwegian owner Knutsen just managed to secure deliver), of its ship from the Rijlsma's Lemlner Werft in Holland as, shortly afterwards, tlie yard was declared bankrupt mainly as a result of cost overruns on the LNG project. That there !has k e n an extraordinary b o r n in ordertnn activity in recent years is

last one of 5 ships conimissioned by local owners and which were the first LNG orders placed in that country since delivery in 1970 by the Ferrol yard of the Laieta, which remains in service today. The French rvho, along with the Japanese, Norwegians, Germans and Americans, built a high proportion of older sliips in tlie fleet, are constructing just two sliips. Firstly, a 74,000 1n3 vessel aimed at the Mediterranean trade, and secondly, the world's largest ship to date - all of 153,000 m3 -

owners - some of whom are new to the business - .uld Shell and BP who previously had Lwen involved solely in project ship-, ping. Shell, doubtless, was encouraged by its eventual success in reassigning the several laid up sliips it bought in the late1980s and which had previously been ordered speculatively or rendered idle following the failure of El Paso's Alkeria-U.S. project earlier that decade. The upshot of tlie ordering trends recently has been a shift in tlie ownership structure of the fleet as made apparent in Figure 3. Independent sliip owners, representing about 13% of the e~istingfleet, account for 28% of sliips on order. I11 conhxt, the Korean shipping companies - having established a fleet of 18 ships during the late 1990s and early part of this decade tluoogh tenders awarded by monopolv supplier Korea Gas Corporation (KOGAS) -are entirely absent from tlie current order book. Other nationmeanrvhile, including those al conipa~iies, belonging to LNG exporting states and tlie Japanese utilities, are set to increase their involvement in the sliipping business. Even liiore remarkable is tlie shift in the pattern of chartering as de~nonstrated in Figure 4. Tlie share of ships on order that liave been dedicated to long-term projects is just 43%. compared with 72% of the existine " fleet. The state netroleuni and shipping companies of LNG producer countries - presently accounting for less than 5% fleet charters - are committed to using almost one-fifth of those on order. They recognise the importarice of

Commercial Background
Refore I.iunc11ing into .I d e s i r ~ r t ~ o of n tlre vartous ilevelopments i t wo~1Ii1 be constructlve to review the LNG fleet structure and ident~fv the nialn d r i v ~ n g forces I7eht~idleclinologicnt innovatton rccentl\, ,\t the beginnin$ of hlay 2004 there were 60 sliipc on order u.hicli, In total cargo capacity ternla, was equ~valentto J5"., of the e\~stingfleet of 164 sliiys Korean varrls acciwnt for no l e ~ s than 70". of the sliips under construction. Tlir. Japa~ieae u.lio 1 ~ 1 lover t one-third of the ships in exi~tence - are construct~ng just 13 nouf, 01 less tli'in a qllarter of those on order. Spa~i~ jh~plw~lders ~h are co~npletingthe
LNG lournal May/June 2004 page 20

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co~itrolling such strategic tools to leverage their position in the markets. Notable participants here include Nigeria and Algeria and, east of Suez, Qatar and Oman. Malaysia is rapidly building u p its fleet, which, moreover, will ultimately he significantly in excess of any conceivable need of Petrollas' MLNG subsidiary at Binh~lu. The general trend at the mornenl is, hourever, tourards FOB contracts and ~vhicli accounts for tlie increasing number of shipschartered by gas utilities and power producers u ~ h o have access to re-gasification facilities and often additionally an interest in upstream facilities. Finally, independent ship owners also feature quite prominently. In some cases the origfailed while inal chartering arra~ige~nents in others ourners seem interested in the possibility of achieving superior returns through particifation in the short-term charter market.

ly, the prospwt of improved economies of scale in transport, or the ability to deliver larger volumes over greater distances at similar or reduced cost was a factor behind this increase in size. However, the shift tousarcis larger ships was mainly coincidental: a result of a reduction in the numlvr o i tanks that enabled increases in cargo carrying capacity whilst retaining standard dimensions. Tank numbers have been redoced from 6 to S or 4 in the case of hloss spherical designs, and fro1115 to typically -1 for menibrane ships. As Figure 5 illustrates, a fairly strong correlation has existed between the development in the average size of LNG ships and the typical throughput of the liquefac-

tion trains. Also sho\vn here are eupectations of the growth in the maximom sizes of ships and production facilities based on project developments presently pla~med or underway. It appears likely that 2004 will mark a significant leap in the average size of LNG ship with orders expected to L w placed for those of 200,000 1113or more. Table 1 conipares tlie dinlensions of various desigiis up to 250,000 1ii3 u,itli those of the standard 145,000 m3 sliips presently under co~istruction. Qatar Petroleum and EuxonMobil are planning two Phase I1 expansion projects, at tlie Qatargas and RasGas plants, to supply the UK and US. Both these projects call for tuso trains with an

Scale Economies
Despite the high degree oi activity in LNG over the past several years or so, to a casual ohserver of the fleet and order hook little seems to have changed in tlie general appearance of the ships. The first purpose-built LNG ship, the Methane Progress commissioned in 1964, had a 10 capacity of 27,500 m3. In the follou~ing years, ships increased to 125,000 11i3. Since then, however, there has been only an evelutionary increase to 145,00011i3. Natural-

annual capacity of 7.8 million tolmes each and for r\,liicli ships of about 200,000 m3 have heen judged to provide optimum trading flexibility ~vitlun 1~1thmarkets. The sponsors were obliged to assess their transport requirements and ship design specificatio~isgiven a stringent 12 nl draught restriction at Ras Lafian. Whilst ships are able to operate in this all existi~ig depth of water, the larger types must he draughts and comdesigned rvitli shallo~v pensating long hulls and wide beams. The 200,000 m3 capacity hull - dublwri the QatarFlex featuring a 320 m length and 50 m beam - is considered the largest that co~iiplies with the draught limitation whilst k i n g capable of sustaining normally accepted service speeds utilising a single propeller propi~lsionsystem. Matters at Qatar are now at the bidw awardding stage with contracts due to L ed to ship owners and yards shortly. Apparently 8 standard size units of 145,000 m3 will be awarded, follo~ved eventually by contracts for a similar number of @Flex types. This portfolio approach to fleet development reflects the conirnercial risks attached to larger size ships, which cannot presently call at ally of tlie world's existing LNG terminals. It is esti~iiatedthat the maximum slze of ship acceptable at any port today is about 160,000 m3 - the main impediments being tlie strength of the jetties, storage capacity, draft restr~ctions, and turning basin limits.

the increased capital costs. As regards the monetary savings likely to be achieved by larger ships Figure 6 compares tlie approximate cost of transporting LNG cargoes to various points in tlie Pacific from a liquefaction facility in tlie Arab Gulf. For the world's esisting routes, the difference in delivery costs should average about 20%. Naturally, scale econo~iiiesbecome more realisable the greater the distance travelled. If the American Pacific market opens u p tlien i t is quite possible that larger ships would enable Middle Eastern exporters to compete with those located inSouth East Asia.

Onboard Reliquefaction
Considering lengtlder distances in LNG trade leads into the topic of onboard reliquefiers. Whilst scale economies can be achieved by deploying larger ships on longer hauls, the benefits are mitigated somewhat by boil-off gas which arises as a result of heat leakage through tlie cargo tank insulation and the motion of the ship. Traditionally, shore liquefaction plants were constructed with a production capacity in excess of the delivered quantity actually sold under tlie project SPA. Tra~isportcapacity was generally sized to match the total plant capacity which meant there was a certain amount of builtin redundancy in tlie system. For this reason, and also because SPA contracts used to be mostly CIF or "ex-ship", there was a tendency to burn natural gas rather than fuel oil. More recently, there has been a trend towards matching the contract quantity with the maximum capability of the liquefaction plant in order to improve project econoniics. Indeed, in many cases, supply chain optimisation has been achieved through sales of surplus output by way of "spot" or short-term contracts. This trend has added some impetus to reliquefy the boil-off gas on-board and deliver the maximum possible quantity of LNG. Another factor driving these considerations has been the increasing numLwr of SPAS that are being concluded on an FOB basis. Whilst a supplier with surplus output capacity delivering cargoes ex-ship might consider boil-off gas as being "cheap", today's price-sensitive buyer acquiring cargoes FOB naturally has a stronger incentive to maxiniise the quantity he ultimately receives. The quantity of boil-off released in a modern ship is usually not niore than 0.15% of cargo per day. It is conipressed, heated and piped to the engine room to be burned as fuel for ship propulsion. If LNG transport capacity is in excess of sales' requirements tlien boil-off burning is often used for nearly 100'X of fuel needs, with additional amounts being generated through spray cooling of the tanks or forced vapourisation. Assunling then an average daily boil-

In tlie case of the Qatdrgas and 1ZasC;as I I projects, terminal facilities in tlie UK and US will L v purpose built to accept larger ships. It is also believed feasible that several existing LNG terminals can be upgraded to accept tlie 200,000 m3 sliips. This size range is also considered suitable for the Qatargas Ill project that Qatar Petroleu~nand ConocoPhillips are planning. The project will comprise one 7.5 million tonnrs per annum train supplying

tlie US market and requiring R ships. Following tlie initial phases of the fleet developnient program for the Phase I1 projects, tlie partners envisage ordering up to a dozen 250,000 m3 ships duhhed tlie QatarMax featuring a 350 m length and 55 m Lwam - and wliicli will have dual propeller propulsion systems. The scale economies achieved deploying these ships on ultra-long haul routes to purpose-built terminals are expected to more than offset

Table 2 Reliquefaction Plant Economics

Consumption Ship Capacity Boil-off ( a v e r a g e ) S e a d a y s p.a. Boil-off p.a.

BOG

1 35.000rn3 0.125% 54.000rn 3 2 !

Revenue foregone: @ US$4,901MMBtu (and 2 3 . 8 ~ ~ B t u l m ~ ) Alternative U s e of HFO ( S t e a m Turbine) 54.000 x 0.545' x US$175 1 2 x 3 2 0 x US$175 'LNG h e a t value conversion factor T h e annual operating cost saving Additional revenue L e s s extra fuel cost Annual Saving =

Us.$
6,297.250

off rate of 0.125%, on a 135,000 ni3 ship spending 320 days a year at sea, that would amount to 54,000 ni3. Given the increased incidence of FOB contracts in LNG, such volulnes of boil-off are becoming less acceptable, notwithstanding that it rniglit actually be cheaper to burn natural gas than fuel oil To date, only one LNG carrier, the LNG J a ~ n al owned by Japanese interests and employed helween Oman and Osaka - i s fitted with a reliquetier although several other ships are able to accommodate such equipment. Table 2 outlines the econo~nics pertaining to onboard reliquefiers. Taking the boil-off figure of 54,000 m3 and assuming a landed price of US$ 4 . 9 0 / i h ~ ~ t -u rvhicli is tlie average in Japan so far this year - tlien bur~iuigthis product as fuel \vould result in an amiual loss of sales' income of US$ 6.3 million. If this volu~ne was reliquefied and delivered, then the cost of fuel oil used instead of boil-off including some 12 tonnes a day to drive the reliquefier -should be deducted. The net benefit is, therefore, US$ 475,000 at today's fuel oil price of around US$ 175 per tonne. However, tliere is the cost of the reliquefier to consider and, indeed, the capital savings that would accrue by doing away with tlie cargo compression niacliine~y and related equipnient used to deliver the boil-off to the ship's propulsion chamber. The net adrlitional installed cost of the reliquefier - coniprising two identical units each capable of processing all nf the boil-off - is about US$ 4.6 million. If this cost were to be amortised over say 20 years at a mte of 8% tlien the annual capital cost would be about US$ 423,000 and tlie net benefit would be negligible. It should be borne in mind that the assumed landed cargo price in this case of US$ 4.9O/MMBtu - or USS262 per tonne LNG - is relatively high, at least over tlie long term. The price is approxiniately 1.5 times that of a tonne of heavy fuel oil presently, or 1.2 times on a heat value basis. These ratios do, in fact, represent the break-even points for tlie reliquefier vis-a-vis a traditional steam turbine mode of operation across a range of price levels. In view of the preceding economic analysis then, widespread adoption of reliqi~efiers seems quite unlikely. A more probable developnient is continued use of boil-off for propulsion, albeit in more efficient engines. The topic of alternative propulsion systems will be addressed in Part 2 of this article, together n~itliinnovations in LNG cargo containment and handling.

is therefore:
6,297,250 (5.822.250) 475.000

771isarticle nmr derirfedfiom a paper presented at the brlernafionol Q~mlih: & Prodrrctiviw Ceriler's serninar orr Cornmerciai Strategies for LNG Shipping R Punsport held at Kuola Lunrprrr in ,CIm 2004.

CAPEX 2 x Reliquefiers (100% redundancy) Less: C o s t of C a r g o Compression Machinery & related equipment Net Added Installed Cost: Annual Arnortised C o s t @ 8 % Net Benefit p.a. @ LNGIHFO US$2621175 per tonne*:

(8,750,000) 4.150.00Q (4,600,000) (423.200)

! m . i

A '

Kerrrreth U'ilsorr is an irrriependerit slrippirig corr.ru/tontbased iri Sirrgopore. He ad~.ises comporries on tlte comrrlerriol aspects of tlre btainess irrclrrding procrrremerit or~doperution qfslrips. F m ~ /!Xi i to 2001 Ire w a Plnrmitig & Prrjecrs dfonoger ot Orprey Maritime - nowoda~:rGolar LNG - ~vhere he rrtonitored the grontlr and dewloprrrent ofthe LNG indrrs/t~ and advised the corrrstakeho,ders n f the comnre~~ial rensori.~ behirid h fake-over 4 Go1oo.r-Lor:renSlrippirig Corporotiorr.

51,800

*U~$4.90/4.10 per MMBIU

K.C Wilson & Associoter hmv r~centiy relocnled to 30 Rafles Place #25-00, Singapore 048622. E-rirail: gasoil@irrgnet.conr.sg

LNG journal MayNune 2004 page 22