LNG: Going the extra mile

12 March 2004
The biggest event in the liquefied natural gas (LNG) calendar is coming to town. In the third week of March, world gas leaders will descend on Doha for LNG 14, a four-day conference which will cover the latest developments in the gas export business. For the hosts, the event will confirm its status as the rising star of the LNG industry and provide a platform to present its ambitious plans for growth to an informed audience.

As is the norm at such events, Qatar will no doubt use the occasion to seal a series of new agreements. Ras Laffan Liquefied Natural Gas Company (RasGas) is expected to sign a sales and purchase agreement (SPA) with Taiwan's China Petroleum Corporation (CPC) to supply 3 million tonnes a year (t/y) to a new power station project, for which a heads of agreement (HoA) was reached last year. Qatar Liquefied Gas Company (Qatargas) is looking to convert its 30 million-tonne HoA with Spain's Gas Natural into a long-term SPA, and may well sign an outline agreement with Total, providing for the French company to participate in the Qatargas II project as a shareholder.

Such deals may take most of the headlines, but for delegates, the real interest will be reserved for the two projects that look set to revolutionise the way LNG is produced and delivered into the international market.

Qatargas II, which centres on the construction of two 7.8 million-t/y trains, and RasGas II's own plans to build two trains of similar size are truly groundbreaking. They will be the first projects east of Suez to target the liquid markets of the UK and the US. They will be the first integrated schemes where the shareholders - Qatar Petroleum (QP) and the US' ExxonMobil Corporation - will be involved throughout the LNG chain and the foreign partner will act as the offtaker. They will be the first to employ the next generation of LNG carriers, with capacities of 200,000 cubic metres and above. And with the Qatargas II project alone costing $11,000 million, they represent two of the biggest energy projects ever attempted.

LNG projects are by their very nature complex. But when they take in gas production, liquefaction, shipping, receiving terminals and offtakes, the level of complexity reaches new heights. As a result, both RasGas II and Qatargas II are taking nothing for granted. 'We have done a lot of preparatory work and tested the ground, but the fact is that until we move from an HoA to an SPA, nothing is binding,' says RasGas' vice-chairman Ibrahim Ibrahim. 'There are some major issues that need to be resolved but we are hopeful that all the project agreements will be signed in the coming months, which will allow us to hit our target of first gas into the US in 2008.'

Qatargas II is also confident that it will meet its schedule of the fourth quarter 2007 to deliver first gas into the UK. Like RasGas II, it is in the process of completing its final project agreements, which total more than 60. However, Qatargas II has a potentially greater obstacle to overcome than its Ras Laffan neighbour. Whereas in the US, developers are offered exclusive usage of receiving terminals for any duration, the UK falls under EU rules, which stipulate that 20 per cent of terminal capacity should be available to third party access.

Qatargas II has asked the EU for an exemption from third party access rights on its planned 15.6 million-t/y Milford Haven terminal in Wales. It argues that without a secure terminal for the 25-year duration of the project, the economics of the entire scheme are compromised, especially as it will have to compete with North Sea gas produced at a fraction of the North field's distance. It also points out that it will be carrying all the risks of a project, which will contribute to the EU's goal of creating greater competition in the European gas market.

The developer has received support from UK gas regulator Ofgem, which said in mid-February that it expected to grant a formal exemption. However, the EU will have the final say. Only once it has made its ruling, expected before the summer, will tenders be issued for the construction of the terminal.

Both RasGas II and Qatargas II have done months of work on the technical aspects of their projects to determine the feasibility of both the 7.8 million-t/y trains and the 200,000-cubic-metre LNG carrier. Front-end engineering and design (FEED) work is now under way for the new capacity at Ras Laffan, although a final decision has still to be taken on the contracting strategy.

Both companies have a range of options for building the new trains. Having recently commissioned the third RasGas train, the Japanese/Italian/local consortium CMSA is now working towards the completion of the 4.7 million-t/y fourth train. Conceivably, the same team could be re-engaged for the mega trains, which would save time on tendering and mobilisation. Alternatively, RasGas II could call a new tender, most likely covering one train as a firm order, with the other as an option. Qatargas II has already launched prequalification of engineering, procurement and construction (EPC) contractors for its train programme on such a basis. However, there is another option. The four trains planned, plus a fifth under the less advanced Qatargas III project, could be rolled into a multiple-train tender.

Tenders have already been floated to serve the first train shipping requirements on both the Qatargas II and RasGas II projects. Qatargas II is looking for eight vessels of about 200,000 cubic metres, while RasGas is talking of up to 20 of the more conventional 145,000-cubic-metre capacity ships. All the shipping contracts are being handled through a joint team, which will decide on receiving the bids whether the vessels should be purchased outright or chartered on long-term leases.

QP is co-ordinating the financing for both schemes, in a move that will ensure there is clear water between the two transactions entering the market. Qatargas II will be the first to be tied up, with financial close set for October. A multi-tranche approach has been adopted. Negotiations are under way with the US Export-Import Bank and Italy's Sace for the export credit component. Once concluded, the preliminary information memorandum (PIM) will be sent out to banks, probably in April, for the commercial bank loan. Two other tranches, an Islamic and a capital markets option, may also be sought.

Both projects have huge challenges to overcome, not least as they are targeting distant and highly competitive markets. While the economics are robust, they are predicated on the assumption that everything, including the construction, shipping and financing costs, comes in on estimate. If one piece of the jigsaw fails to fit, reviews will have to be carried out.

In its favour, Qatari LNG will be able to take advantage of rapidly declining costs on the new capacity, brought about by economies of scale at Ras Laffan and technological advances. RasGas' Ibrahim estimates that the upstream and downstream capital unit costs on the new build will be 30-40 per cent less than on the first two trains. Although the Qatargas II and III projects will triple Qatargas' production capacity to an estimated 30 million t/y, the size of the company's workforce will remain unchanged.

Overcoming risk and setting precedents have become hallmarks of Qatar LNG over the past eight years in its pursuit of becoming a global LNG supplier. On the technology side, every single train built by Qatargas and RasGas has at its time been the biggest ever undertaken. On shipping, it is credited with expanding the stock of LNG carrier shipyards and raising competition by being one of the first to order from South Korea.

But it is in marketing that the real breakthroughs have been made, as was highlighted in January, when RasGas II delivered its first cargo into India under a long-term SPA. 'We took a lot of risks to be the first to sell into a developing market,' says RasGas' Ibrahim. 'It took a lot of effort to educate people, to get taxes reduced and to make sure everyone understood what needed to be done to import gas. We persevered with India, we were innovative, and that is what made the project fly.'

Perseverance, or what Ibrahim describes as a 'bulldog policy', has been apparent on other deals too. Despite signing its first HoA with Taiwan back in the late 1990s, it is only now that an SPA is close. In Italy, RasGas agreed last year to revise its long-term SPA with Edison, pushing back the start date for deliveries to 2006 and taking a stake in the planned regasification terminal at Rovigo, to safeguard the deal.

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