New Dawn Fades - Floating LNG Prospects Fizzle as Operational Issues Emerge

Over the past decade, floating LNG — for liquefying and shipping offshore natural gas supply — emerged as a promising technology that would enable development of smaller, more remote offshore gas fields around the world. But with a handful of projects now completed and in commercial operation, the challenges of financing, developing, and operating this relatively new technology are overshadowing its prospects. Of the more than 20 FLNG projects that have been proposed since 2007, only five have crossed the finish line and only two others have reached a favorable final investment decision (FID). Moreover, Shell’s Prelude FLNG offshore Northwest Australia — the largest of the existing FLNG facilities — has been dogged by issues since its commissioning in mid-2019, and the operator last week said the unit will not produce any more LNG cargoes this year, after being shut down since February for electrical problems. Today, we examine the headwinds facing FLNG projects.

2020 has been a challenging year for all of us, but perhaps U.S. LNG facility operators more than most in the energy sector. As we detailed in last week’s blog, Sultans of Swing, international LNG arbitrages have been squeezed this year due to the COVID pandemic, causing mass cargo cancellations. But the struggles of LNG producers extend beyond our shores — beyond any shores for that matter — with FLNG projects facing a host of their own issues.  

As noted in the intro, the predicament of the Prelude FLNG project is a major disappointment not only for Shell, but for those in the industry who believed that floating LNG offered an important medium for monetizing stranded gas. In the 2007-10 period, the talking heads at conferences made extensive claims about the number of small, isolated offshore gas fields whose location precluded onshore LNG production, and there was no shortage of promoters touting their credentials as potential providers of FLNG technology. These included newcomers such as Flex LNG as well as established players such as Hoegh and SBM Offshore.

For its part, Shell planned Prelude to be the first (hence the name) of more units to come under the mantra of “design one, build many” and in July 2009 signed a master agreement with Technip and Samsung Heavy Industries for multiple units over a 15-year period. Prelude’s costs to date are estimated at between $10-$13 billion. But, as we mentioned, the unit struggled to hit its stride, and has produced only eight cargoes of LNG so far, out of a nameplate capacity of 3.6 million metric tons per annum (MMtpa), or about 0.5 Bcf/d.

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