INSIGHTS FROM AMPHORA
Coming in from the cold – Arctic LNG takes its place on the world stage
An interview with LNG operations specialist Mehdy Touil
Russia’s Yamal Peninsula is a major LNG player, supplying Southeast Asia, China and Japan as well as Western markets. Mehdy Touil updates Amphora’s Ivan O’Toole on the Arctic projects and shares his insights into the future of global LNG.
Yamal LNG is the world’s northernmost natural gas liquefaction project, situated right above the Arctic Circle. Train 1 started in December 2017. By February 2020 Yamal LNG had shipped 30 million tons of LNG.
Yamal LNG, a joint venture between Novatek, Total CNPC and the Silk Road Fund, aims to maximise the thermal efficiencies of its Arctic location. Most LNG liquefaction trains use either air or sea water to cool down the process. The Yamal project aims to benefit from the coldest ambient temperature on earth to make the liquefaction process as efficient as possible.
This strategy has delivered results. The project’s three trains were designed to produce 16.5 million tonnes a year. In 2019, the first full year of simultaneous operation of all three liquefaction trains, Yamal LNG produced 18.4 million tons of LNG, exceeding the plant’s design capacity by 11% – or 1.9 million tons.
The next project, the $21.3 billion massive Arctic LNG2 located around 70km across the Ob Bay from Yamal LNG, will have three trains for a total production of 19.8 MTPA (3 x 6.6 MTPA), and will use Linde liquefaction technology.
Location, location, location
The location of Yamal LNG enables it to supply both Eastern and Western markets. During the summer season, usually June to October, most shipments go eastbound to Japan and China. During the winter season, due to ice pack limitations, most shipments go to Europe.
As the ice cover reduces, there is scope to start the eastbound route earlier in the year. This year, eastbound shipments started in mid-May and the company recently announced that it hopes to extend eastbound shipping to December. Only icebreaking carriers can take the eastbound route so Yamal LNG operates a fleet of 15 Arc 7 Ice class carriers carrying 174,000 cubic metres each.
LNG is increasingly contributing to the shipping and maritime sector itself. Until there is a solution to the issue of Green energy storage, there is no clear alternative to LNG to support shipping’s transition to renewables. While the energy bunkering sector is still a nascent market, it’s growing fast – as LNG is a big improvement on diesel in terms of emissions. Running on natural gas saves around 85% in emissions of nitrogen oxides and 99% of sulphur oxides1. LNG bunkering, driven by International Maritime organisation regulation, is seeing a major upswing to support container freight operations, cruise ships and bulk shipping.
From an economic point of view, developing a new-build LNG ship makes more sense than retrofitting – but as the latest sulphur emission limits apply to all ships, not just new ones, that is not always an option. So, we are seeing ships converted to dual fuel incorporating LNG. Most dual fuel engines, such as Wärtsilä dual fuel engines, are efficient. They are also very good at controlling methane slips, one of the biggest issues when it comes to emissions.
Meeting growing demand
Despite the ambition to leave behind fossil fuels, demand is set to increase, even in Europe. The COVID-19 pandemic created a reduction in energy demand in 2020, but that looks likely to be temporary. For example, Germany, a plateauing economy in transition to a carbon-neutral 2030, is expected to see an increase in demand for LNG of about 20 billion cubic metres in the next decade.
There are big projects underway to meet demand. Novatek is developing floating storage units, FSUs positioned in Murmansk in the western part of Russia, and the Kamchatka Peninsula in the far east to handle the production from the next wave of Arctic projects. These FSUs will be the largest ever built, with a massive capacity of 360,000 cubic metres each. They will be a game-changer, especially in the East, creating transhipment hubs that will save shipping costs for the ice-class LNG carrier fleet.
Kamchatka is right on the doorstep of Japan – and China, which has huge storage capacity under construction. The port of Qingdao is building enormous LNG infrastructure, needed for a hinterland of 60 million people and a largely industrial province. This would seem to be a clear sign of a government-funded strategy of increasing energy imports. Demand is also increasing in Vietnam and the Philippines.
In the US, and other Western markets, there is increasing concern about accessing funding for major projects. The US model is based on securing commercial LNG funding agreements. In other territories, the perspective of national oil companies, or private companies such as Novatek, who have huge support from the government in terms of funding, is quite different.
There is no doubt, too, that Qatar Petroleum (QP) has blindsided US developers – and it looks likely that some of the largest US projects may never see the light of day. Qatar had initially announced two mega-trains, 7.8 million each. Then they doubled this to four trains, which is huge in terms of funding and finance. As Qatar doubles capacity, the US source cannot compete at prices of less than $4/mmbtu.
Additionally, as the global LNG market enjoys the flexibility of spot contracts now, a lack of funding may affect the security of long-term supply – leading inevitably to spot contracts spiking in price in future. A harsh winter, combined with unscheduled downtime such as the recent reported shutdown of Qatargas Train 4 due to a mechanical failure on one of the largest, custom-made refrigerant compressors ever built – coincidentally just after the completion of Train 5’s 20-day planned shutdown – could push up prices overnight. And it won’t take much of an upswing post COVID to boost global LNG demand – a price spike looks likely to occur in 2025/26.
It is increasingly clear that future LNG supply stability demands either long-term ‘take or pay’ contracts, or a government willing to subsidise long-term projects through indirect and direct taxation. During the coming decade, LNG is set to play a vital role in replacing less clean fossil fuels and supporting the transition to renewables. Streamlining funding and revenues will be key to competing in that world.
In a market with price fluctuations and oversupply, it is challenging to maintain revenues and manage credit risk management. A single view of the commodity supply chain is vital.
Amphora is a unique provider in today's LNG marketplace. We offer CTRM and Shipping services under one roof, allowing LNG clients to go to market quicker and for significantly lower cost. In October 2020 Amphora set up a strategic partnership with nGenue, the market leader in Natural Gas ETRM and retail operations software. For more information, please visit amphora.net.
The views expressed in this article are solely those of Mehdy Touil.
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