445978 Commercial Aspects of the LNG Value Chain

Tuesday, April 12, 2016: 8:00 AM
335C (Hilton Americas - Houston)
Bill Hauhe, Chevron-Retired General Manager, TX

Historically, Liquefied Natural Gas (LNG) projects have been characterized as large base-load facilities that are highly capital intensive, with development time frames ranging from several years to several decades.  Although construction, commissioning and start-up schedules are comparable to other processing systems, it is the activities leading up to a Final Investment Decision that drive overall development timing and ultimate success.

Capital costs for LNG projects are driven by many factors. Refrigerant compression horsepower, dedicated electric power generation and the need for materials suitable for cryogenic service, contribute significantly to the overall cost of LNG projects. Site development, environmental and local issues can also add significant costs and lengthen the development schedule.

The LNG industry has a track record of successful implementation of cryogenic liquefaction technology, in plants of ever-increasing capacity, resulting in safe, reliable and commercially viable ventures. Given the typical scope of investment these projects require, and the need for consistent natural gas pricing across multiple markets, LNG projects must have a robust commercial structure that guarantees reliable off-take with predetermined mechanisms for product pricing.

LNG commercial structures have been predicated on a few key attributes: a) coordinated supply/demand timing, b) long-term off-take agreements with credit worthy off-takers, c) a reliable and predictable feedstock supply, d) a strong internal balance sheet or third party financing, e) a willing host, and f) availability of a site and transportation capacity. The challenge is to implement all these activities, or “links” simultaneously.

Combining the links allows development of a commercial “chain”, which forms the basis of the LNG development. Hence the term “LNG Value Chain”.

In more recent years, some LNG industry paradigms have shifted in such a way that projects previously thought to be unlikely are now seen as the new generation for the industry.  Changes in gas supply mechanics and sources, pricing basis, contract term, new base-load liquefaction capacity geography, capacity tolling arrangements and non-traditional developers characterize these new LNG projects.


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