Monday, 12 March 2018 11:48 Ramesh Raman, Arup, USA, and Charles Mantell, Arup, UK, explore the changing face of LNG storage. The LNG market is showing no signs of slowing down. New trading opportunities and additional applications for the fuel are demanding changing storage solutions alongside traditional facilities. Change is coming for the industry and traders will have their pick of storage solutions to meet demand and optimise return on investment. A changing trade The volume of LNG transported around the world has increased rapidly from 160 million tpy in 2006, to 264 million tpy in 2016. This represents a compound annual growth rate (CAGR) of 5.2% in this period. While pipelines remain the dominant mode of conveying natural gas, LNG transport has increased its share of global gas trade over recent years. In 2016, LNG transport represented 32% of world gas trade, compared to 26% in 2006. LNG availability has expanded significantly over the last decade. Export volumes from Australia have increased from 13.6 million tpy in 2006 to 29.5 million tpy in 2016, and over the last 18 months the US has begun to ramp up LNG exports. While the US is expected to see LNG exports surge further in the near-term, these volumes are likely to be joined by other exporters in Southeast Asia, East Africa and Russia. Overall, global trade increased by nearly 8% in 2016, following more anaemic growth in preceding years. French major Total estimates LNG trade will increase by a CAGR of 4.5% between 2017 and 2030, far outstripping the expected growth in demand for either oil or coal in this period, as well as the projected growth in overall gas demand. Consequently, the volume of available cargo to be traded has increased, and regional pricing is now encouraging that trade. Prior to the growth in shale, and the more recent sharp fall in global oil prices in 2014, delivered LNG prices were highest in Asia, with Europe a close second, and the US experiencing very cheap gas prices were often set at the price of Brent crude oil. However, since 2014, the prices in each of these three regions have come closer to parity. In Japan, delivered prices fell from close to US$20/mBtu to a low of US$6/mBtu roughly the same as in Europe. This has opened up new trading opportunities. On the price indices we are beginning to see the evolution of regional LNG price indices such as the Japan-Korea Market (JKM), and the National Balancing Point (NBP) pricing in the UK, as importers locked in long term contracts look to develop short term trading arrangements to monetise this situation to their advantage, using these indices to trade. As such, there has been a rapid expansion of the short term market. The expansion of the short term market has begun to disrupt the existing to contracts, and this in turn has expanded the demand for associated infrastructure to facilitate this process. Indeed, LNG may need to be stored at a hub before being traded and shipped on again to its ultimate destination, potentially requiring greater levels and availability of LNG storage. The next chapter As mentioned, the nature of LNG contracts have changed too. Once, longer-term contracts between exporters and companies spanning decades were common. Significant LNG importers, such as KOGAS of South Korea and TEPCO in Japan, were often tied into offtake agreements lasting decades, with destination clauses stipulating where the LNG must be delivered. Today in Japan, still the worlds largest importer of LNG, demand has begun to decline following its peak in the wake of the Fukushima nuclear disaster, and the country's power sector is being deregulated. On a fundamental, macro level, Japan no longer needs all the gas it had signed up for on a long term, take-or-pay basis, and the Japanese government has deemed destination clauses anti-competitive removing a key barrier to trading LNG. This has opened the door for Japan and other traditional offtakers to negotiate for LNG to be resupplied directly into a market where demand is higher, such as the Philippines. Japan wants to take advantage of these opportunities and has ambitions to become a trading hub. To do this, it needs storage that enables LNG to be exported, as well as imported, through its terminals. Indeed, a trading hub in Japan or South Korea would complement Singapore's LNG trading and bunkering hub in the south of the region, plans for which are already well underway. Bunkering opportunities Another factor driving new LNG storage opportunities is the push to use LNG for low carbon power generation and for maritime fuel. The International Maritime Organisation plans to implement a global 0.5% limit on the sulfur content of fuel from 2020, down from the current level of 3.5%. In Emission Control Areas (ECAs), the sulfur content of fuel is already limited to 0.1%, and China introduced three new domestic ECAs in 2015, with a limit of 0.5% on fuel sulfur content becoming mandatory in Q2 2016. This means many ship owners and operators are considering converting their ships or replacing ageing vessels with ships that can utilise LNG fuel alongside traditional oil derived fuels. If this becomes a significant growth area amongst the global shipping fleet, demand for LNG refuelling (bunkering) facilities and their storage tanks – will increase dramatically.
Figure 1. Many ship owners and operators are considering converting their ships or replacing ageing vessels with ships than can utilise LNG fuel alongside traditional oil derived fuels.
Rotterdam in the west and Singapore in the east have both put themselves forward as potential LNG bunkering hubs. Both areas are already two of the largest traditional bunkering hubs for the global shipping fleet. Indeed, they are already building jetties, bunkering ships, storage tanks, and the other facilities that would be needed to facilitate this transition. Powering ships is one emerging opportunity; powering communities is another. In areas such as the Philippines, Latin America, and the Caribbean, LNG is an attractive low-cost and low-carbon fuel for smaller scale power stations that, historically, have been used either coal or fuel oil. New applications such as bunkering or small scale LNG-to-power will require new storage facilities. Today, nearly 50% of the world's LNG storage is located in just 20 terminals most of which are in Asia. While increasing demand may mean that these facilities continue to grow, new uses for LNG are driving demand for new types of storage in new locations. These are uncharted waters for the industry and will bring new challenges. For example, a single tank in a trading hub may have to service multiple buyers. This has not been done before in the market so it remains to be seen exactly how it would work. Lessons will need to be learned from other commodities trading while taking into account the unique aspects of storing and handling LNG. Small scale storage Another challenge lies in the fact that uses such as bunkering or small scale LNG-to-power require smaller volumes of storage. Yet the market has, to date, functioned on huge economies of scale that come with the traditional model of shipping LNG from A to B via large terminals. Moving away from this means finding ways to carry and store smaller parcels economically. This is where the innovation is happening. Energy World Corporation and GTT are currently exploring full integrity membrane LNG tank designs for hubs in Indonesia and the Philippines, with Arup supporting the delivery of the detailed designs. This modular LNG tank has been developed using a single containment tank concept it eliminates the outer concrete wall traditionally used in tanks, reducing overall weight and cost and making it easier to transport.
Figure 2. LNG tank under construction at Pagbilao, Philippines (credit: Energy World Corp).
 FSRUs are another exciting technology. These can offer greater flexibility and can be established more rapidly than onshore terminals making them ideal for meeting seasonal demand, for example. In 2015, Egypt chartered two FSRUs to import LNG into the port of Ain Sukhna, while Pakistan and Jordan each secured an FSRU. In 2016, the UAE and Turkey both welcomed FSRUs into operation.  But FSRUs offer operators a lot less storage and regasification capacity for their money than onshore facilities. In locations where land prices would make onshore LNG storage very expensive such as Rio de Janeiro FSRUs make sense. But if they are going to be used more widely then they will need to store LNG for longer than they were designed to do. So will the industry see them combined with onshore storage, with LNG pumped to the FSRU for regasification? Or will more storage be added to FSRUs themselves? The new GNL Del Plata FSRU in Uruguay has 218 000 m3 of storage comparable to an onshore terminal. However, this is currently the exception rather than the rule and it remains to be seen whether more giant vessels will follow. Who will lead the way? Precisely what form new storage facilities will take is one question, and who will build them is another. Will anyone want to build new forms of LNG storage, for uses such as bunkering or small scale LNG-to-power, without the traditional long term contracts the industry has been used to? It will certainly be interesting to see who gets the ball rolling. Will it be the producers, the consumers, or the energy carriers? For as long as the construction of LNG storage infrastructure is capital intensive, major players, such IOCs, are most likely to come forward. Indeed, major LNG producers are already looking at an integrated model. Instead of simply supplying LNG, they will work with partners to build onshore gas-to-power plants that will provide them with decades of demand for their LNG. Financing LNG storage for bunkering, trading, or LNG-to-power will be tied to the quality of the contracts for offtaking. The idea of multiple parties having storage assets at the same location, as happens currently for traditional ship bunkering facilities, is not new. It happens in the fuel oil business, but now the LNG business needs to get to grips with it. Duration of contract tenure, the creditworthiness of the offtaker and the risks involved in building the storage facility will all be factors. However, new forms of storage for bunkering, LNG-to-power or other applications, should offer an attractive vehicle for financing. Ultimately, this should not be a barrier to the market moving in this direction. New storage could also bring new capital into the industry. Historically, banks have offered lending for storage without necessarily requiring equity. Now there is a more diverse range of investors looking at LNG, with oil investors equally comfortable investing in gas. Although the US gas market generally, and shale and LNG in particular, is already highly leveraged, there remains plenty of opportunities. Regardless of who finances the new wave of energy storage that looks set to emerge, one thing seems certain: Innovative approaches to storing LNG will be in demand for the foreseeable future.
EWC Price at posting:
28.0¢ Sentiment: Buy Disclosure: Held
