SINGAPORE (Sept 3): Natural gas is increasingly replacing oil and coal as the fossil fuel of choice in large economies such as China and India, in part to curb emissions, as it is viewed as the cleanest fossil fuel. Seen as a “bridge” to renewables, it is sometimes termed a bridging fuel. New technology by Petronas Gas and Royal Dutch Shell is set to raise global accessibility to natural gas.

Asia is projected to have the highest natural gas demand growth over the next 15 years, mainly driven by China, which is expected to contribute 40% of the global growth of gas demand over the next four years as it shifts towards cleaner alternatives to replace coal (see Chart 1). The International Energy Agency projects global gas demand to grow 8% from 2017 to 2022. Higher consumption from the industrial sector is expected to be the main growth driver of gas consumption.

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Natural gas is mainly used as a source of energy, primarily for heating and electricity generation. For instance, 95% of Singapore’s electricity is generated using natural gas, up from just 26% in 2001. Currently, the US is the world’s largest consumer and producer of natural gas and is expected to account for more than 20% of world gas production by 2022.

Liquefied natural gas is natural gas cooled to liquid form for easy and safe storage and transport. In the next few years, as global gas demand rises, the LNG industry is likely to come into focus (see Chart 2). LNG is likely to be the fastest-growing gas supply source (see Chart 3) and make up more than half of the increase in natural gas production.

LNG, apart from its primary usage in storage and transport, is used as a fuel for high torque and internal combustion engines. The outlook for LNG to replace oil and become a mainstream fuel for transport is bright, albeit still in the early stages of development, with China at the forefront of the usage of LNG-powered vehicles.

Elsewhere, LNG is also used for storage and refuelling services in the maritime industry. The shift towards sulphur-free LNG from high-sulphur bunker fuel has reinvigorated the demand for LNG. Countries such as Singapore, Japan, the US and China are working at constructing and approving pertinent LNG infrastructure and regulations within the next few years.

Surprisingly, there is no global gas price or index. Most LNG prices are pegged to and move in tandem with oil prices. This is because the gas trade is predominantly limited by the number of long and costly pipelines.

These pipeline (gas) trades are usually based on long-term contracts. The rigidity makes it hard to price gas, and in most cases, the price is benchmarked to crude oil. Furthermore, less than 10% of global gas produced is traded as LNG, reflecting LNG’s marginal significance in the gas sector.

However, technological advancements are set to transform the trade and pricing dynamics of gas, particularly LNG. It is becoming increasingly viable economically to have the production and extraction of gas from remote and smaller fields and to then ship it to clients. Previously, companies such as Gazprom, in which national governments had meaningful stakes, usually controlled and monopolised these long pipelines, which in turn binds them to a single market of suppliers.

Furthermore, hub-based spot trading of gas is also growing in popularity. The growing gas and LNG trade is likely to lead to a global gas price in the future, so long as there is a shift away from capital-intensive pipelines and LNG vessels, which are built to serve specific terminals and are only available for long-term usage.

The latest technology: Floating LNG platforms

The traditional method of producing LNG was to extract gas from designated fields offshore and then transfer it to plants located onshore for processing, liquefaction and storage. The transport is done via long and costly pipelines, as the designated fields are usually located far away from the onshore plants (usually hundreds of kilometres). New technology is currently being developed and tested to extract gas from remote and smaller fields. These fields, also known as “stranded” gas fields, are usually located offshore on the seabed.

Floating LNG (FLNG) platforms are offshore floating platforms that are connected by pipes to these remote gas fields to extract gas from the seabed. The gas is then processed, liquefied and stored in these floating platforms, which are located directly above the stranded gas fields, making it easier to offload it into an LNG tanker/vessel to be transported to buyers.

With FLNG technology, smaller, remote gas fields become accessible. This is because the technology allows extraction from these fields at a smaller capex than previously. FLNG platforms are more cost-effective and efficient than onshore gas plants. They do away with extended and costly pipelines that are needed to transport the gas from sea to shore. In addition to their economic viability, FLNG platforms also require significantly less time to construct compared with a traditional onshore LNG plant. They are also more environmentally friendly, as they reduce the need for gas flares, which in turn reduces carbon emission and the disturbances to the seabed and land usage. FLNG platforms are also very suitable in areas where conventional and traditional offshore and underwater pipelines are not logistically viable.

The main drawback of constructing FLNG platforms revolves around the uncertainty of monetising remote and stranded gas fields, as the technology and projects can fail when venturing into uncharted waters. This ultimately makes it harder for private companies to obtain funding for these projects.

Petronas Gas’ PFLNG-Satu was the first FLNG platform to be built. It started operations in November 2016 and cost US$2 billion. This project pioneered the FLNG platform technology. In mid-2018, Royal Dutch Shell’s US$12 billion Prelude FLNG project and Golar LNG’s Hilli Episeyo in Cameroon commenced operations. Petronas Gas’ PFLNG-Dua is currently undergoing commissioning and is expected to begin operations in 2020. Many more FLNG projects are expected from other companies from 2021. The success of current projects should ease the ability to obtain funding for these projects.

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