LIQUEFIED NATURAL GAS (LNG)

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Liquefied Natural Gas
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What is LNG?
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LNG Environmentally Friendly

• Because LNG is a gas at ordinary temperatures, it
  is environmentally friendlier than oil
• Since it largely consists of methane it is not
  toxic
• It is, however, extremely flammable, and when
  released can quickly drive all of the oxygen out
  of an enclosed space

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Commercial Aspects of LNG
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Example
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LNG Markets

• The global LNG market was valued at USD 30.34
  billion in 2020, and is expected to reach USD
  66.13 billion by 2027, at a CAGR of 6.92 during
  2022. 
• This market demand has been attributed to natural
  gas transformation to being more competitive in a
  variety of end-user sectors such as power
  generation, industries and transportation.
  Geopolitics with current Russia unrests in Europe
  are also driving LNG appetite in European
  Countries seeking to reduce dependency on Russian
  Gas.

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LNG Markets ctn

• The three distinct trading regions of the
  present-day LNG market Asia Pacific ,
  EuropeAfrica and the Americas 

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The three distinct trading regions of the
present-day LNG market Asia Pacific (East of
Suez), EuropeAfrica and the Americas showing
markets and trading routes.
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LNG Markets ctn
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LNG Markets ctn
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LNG Projects

• LNG Projects have a development lead-time of up
  to 10 years. Two factors are essential for an LNG
  Project and require attention to project
  commercial structure.
• A secure source of supply at prices that is
  competitive with other fuels. In order to enter
  the LNG market, a supplier will need to
  demonstrate to Purchasers and Lenders that it has
  an export base of about 4TCF of proved reserves
  available for export. This quantity of gas is
  necessary in order to support a contract with the
  duration of 15 - 20 years.
• The sponsors must demonstrate that the market has
  sufficient depth and financial strength to
  underwrite the financing for project
  development. 

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Projects Approvals
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Project Cost

• Project costs are substantial, with each
  liquefaction train costing about US 850 million
• The cost profile for an LNG project can be
  categorized in four parts 
• Production- US 2 billion 
• Liquefaction- US 2 billion 
• Shipping- US 1- 2 billion 
• Receiving Terminal- US 1- 2 billion 
• Total project cost can reach US 8 billion,
  excluding the generation and distribution systems
  at the receiving terminal. If facilities for
  generation or gas distribution are included,
  project costs are increased by US 4 billion.

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The table shows the approximate allocation of
costs for each project component
Facility   Purpose  Percent of Project Cost 
Gas Production  Produce fields Separate Contaminates NGLs  15-20 
LNG Plant  Processing of LPGs Liquefaction of methane  30-45 
LNG Shipping  Transport from LNG Plant to Receiving Terminal  10-30 
LNG Receiving Terminal  Unloading, Storage, Regasification  15-25 
LNG Projects are structured through joint
ventures that may include Upstream Producers as
well as Downstream Buyers
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Project Tenders

• LNG projects involves Integrating the operations
  of major facilities
• Upstream - Production facilities including wells,
  field treatment and gathering pipelines.
• Midstream - Liquefaction units, port storage and
  manifolds for loading the LNG.
• Transportation - LNG is shipped in a fleet of
  purpose-built cryogenic vessels that operate on
  predetermined schedules.
• Downstream - Facilities at the receiving terminal
  for unloading, regasification and storage.
• Consequentially, an LNG Project is launched at
  the conclusion of a tender process initiated by
  the buyer.  The tender can be conducted in either
  one or two stages depending upon whether the LNG
  Supplier will be responsible for shipping and
  operation of the loading terminal.

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Selection of LNG Supplier

• If the project is unbundled, the LNG Supplier
  will be selected independently of the Terminal
  Operator in a two-step process
• Selection of an LNG Supplier will be based on
  source of supply, pricing philosophy and
  acceptance of the pro forma supply and purchase
  Agreement attached to the Request for Proposal

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Several questions are addressed in preparing a
RFP in order to pre-qualify potential LNG
Suppliers including
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Selection of a Terminal Operator is based on two
primary considerations
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Project Agreements

• Development of LNG projects is characterized by
  multi-party agreements. It is essential that the
  terms and conditions of these contracts reflect a
  uniform approach towards the critical issues
• Project Management - The means for coordinating
  supply, transportation I and receipt.
• Consents - Permits and licenses for construction
  as well as export-import approvals
• Completion - Ownership structures, turnkey
  contracts and arrangements for construction
  financing
• Shipping - Construction, ownership, flagging and
  crewing of LNG carriers
• Force Majeure - Definition of events and the
  obligation to Make-good quantities deferred
  during upsets

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List of LNG Project Agreements and documents
COVERED IN SLIDES BELOW
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LNG Facilities

• Until recently, both shipping and receiving LNG
  terminals were operated on a proprietary basis.
  However, the growth in the LNG spot market,
  together with regulatory policies forcing the
  sharing of terminal access has provided the
  incentive for the establishment of merchant
  terminals. 
• The current market for LNG is characterized by
  multiple supply sources, leaner shipping pools,
  larger capacity vessels, destination flexibility,
  and multiple users sharing capacity at LNG
  receiving terminals. Under the TUA, Storage-based
  terminal agreements allocate capacity rights to
  Users, which can restrict future deliveries into
  the terminal unless the Users have drawn down
  their gas.

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Multi-User Terminals
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Floating Storage and Regasification Units
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LNG Shipping
LNG carriers are usually chartered to carry LNG
under time-charter contracts. This means a vessel
is hired for a fixed period of time, usually
between 20 and 25 years, and the charter rate is
payable to the owner on a monthly basis 
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LNG Pricing

• There are three major pricing systems in the
  current LNG contracts
• Crude oil parity, which is used primarily in
  Japan, Korea, Taiwan and China
• Oil products and alternative energy indexed
  contracts used primarily in Continental Europe
  and
• Hub indexed contracts used in the US and the UK.
• A number of suppliers, notably Qatar, which is
  now the worlds largest LNG supplier, have sought
  pricing parity with oil.
• In most of the East Asian LNG contracts, price
  formula is indexed to a basket of crude imported
  to Japan called the Japan Crude Cocktail (JCC).
• In Indonesian LNG contracts, the price formula is
  linked to Indonesian Crude Price (ICP).
• The prospect of substantial deliveries of LNG
  from the US is putting pressure on oil-linked
  prices in East Asian markets because the price of
  this LNG is likely to be quoted as Henry Hub
  liquefaction and transportation.

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LNG PROJECT DOCUMENTATION CHECKLIST
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Joint Venture Agreement
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Upstream Participation Agreement
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Downstream Participation Agreement
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Government Agreements, Licenses and Consents
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Construction, Engineering Design
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Operating Agreement 
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Financing Arrangements 
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Project Insurance 
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LNG Purchase and Sale Agreements
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FORMATION OF LNG JOINT VENTURE
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