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Analysts: Offshore Liquefaction Offers Tap for Stranded Gas

With liquefaction -- not regasification -- recognized as the choke point in the supply chain for liquefied natural gas (LNG), a number of companies are looking at developing offshore liquefaction. Benefits of offshore versus onshore liquefaction are lower costs and quicker construction, according to a research note from Citigroup Global Markets.

"After many years of the subject being taboo, floating LNG is one of the 'hot topics' in the oil field services industry today," wrote a group of London-based Citigroup analysts. "Strong gas prices have made monetizing stranded gas fields conceptually viable; delays and cost overruns on onshore liquefaction plants make the industry look at other options, and advances in technology make offshore liquefaction plants a potential solution to the bottleneck in LNG liquefaction."

While offshore liquefaction can cost just one-third of a comparable onshore plant, offshore liquefaction facilities are quite a bit more expensive than conventional floating production, storage and offloading (FPSO) facilities, the analysts note. "However, once some of the technical challenges, such as offloading, are overcome, pricing on some elements may ease."

While it can take up to a decade to develop onshore liquefaction, an FPSO capable of liquefaction is projected to take three to four years to construct.

The Citigroup analysts note that LNG demand is expected to grow by 10% per year until 2015 and stranded gas reserves are becoming more attractive for monetization as the price of LNG rises. They cite Japan, where LNG prices have risen by more than 50% over the last 12 months. "Stranded gas may account for up to 390 Tcf, or 15%, of the world's proven reserves, onshore and offshore."

Another driver to develop stranded gas with floating liquefaction is pressure to reduce gas flaring. "The volume of gas being flared annually equals 75% of the global LNG trade," according to the Citigroup analysts.

The greatest challenge to development of offshore liquefaction is offloading to a tanker for delivery to a regasification terminal. Transferring LNG to an onshore terminal is old hat. Transferring LNG between ships is coming into its own. Excelerate, for one, has worked on LNG transshipment as part of its Energy Bridge (see NGI, March 6, 2006). The Citigroup analysts note that companies such as SBM Offshore, Flex LNG and Technip are working on offloading solutions for offshore liquefaction facilities. Others pondering offshore liquefaction are Shell, BW Offshore and Hoegh LNG.

"We believe that there will be an element of first-mover advantage in the [floating LNG] market, with the main FPSO operators competing at the highest level," the analysts wrote.

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