Delays hit several energy projects

(AFP)   

A liquefied natural gas (LNG) storage facility being developed by LNG Impel has joined the growing number of delayed energy projects in the region.The project, set to be the first independent LNG storage hub in the world, will be pushed back a year later from its schedule date due to “operational” issues, Ed Elrahal, the firm’s Managing Director told Emirates Business.

“It is an ongoing project. This is a project that should go ahead and should happen,” he said.“There are some issues that have not yet been finalised but we hope they will be this year.”Elrahal said construction will start by the end of 2008 and completion will be pushed back a further 12 months from the target date.

The initial schedule was to begin construction in early 2008 for completion of the first phase in 2011. This kind of project takes about 36 months to complete.Elrahal declined to elaborate on the issues delaying the project on grounds of confidentiality, but Thomas Dawson, LNG Impel President, said most of them “are not commercial issues but more of an operational nature”.

The project was first announced in August 2006 as part of a plan that will be used as the basis to set up an LNG derivatives market. State-run Dubai Multi Commodities Centre (DMCC) and the Techno Park economic zone had said then they would develop the facility with LNG Impel, a subsidiary of private Canadian company Galveston LNG.

They said the Dubai LNG Storage Hub would have a capacity ranging from 40 billion cubic feet to 65bn cubic feet and would allow customers to store and trade LNG.

The hub would also provide LNG loans and LNG quality blending. Over time, it is expected the hub will also offer financial derivatives based around LNG and shipping.

The storage facility was scheduled to cost $1 billion (Dh3.6bn) in 2006 but in the second quarter of last year the company said the cost may increase due to the rising price of materials, such as steel.The final cost of the project, however, depends on the number of tanks that will be built. “The cost could be $1bn to $2bn depending on the final configuration.

We will know it once we finalise the commercial clause,” Elrahal said.LNG projects have been reeling from the pain brought by the tight market squeeze and escalating material and labour costs. Cost inflation has hit LNG projects around the world, including Russian Sakhalin 2, Norway’s Snohvit, Australia’s Gorgon and Qatargas 2.

The cost of building liquefaction plants has trebled since 2000 to as much as $600 per tonnes per year of capacity, according to US contractor Bechtel.The delay in LNG Impel venture, however, has incurred no financial impact as “there is still no large capital commitment”, Elrahal said. The company, he said, is speaking to a number of people, including banks, to finance the plan.

And although the project is in partnership with Dubai Government, most of the funding would come from private sources. “Our customers are a mixture of producers, consumers and traders,” Elrahal said.“The business model allows customers to have a large equity. So there will be funding from the developers and there will be funding from the customers. But the largest block of owners will be customers.”

“Funding will mostly come from customers, who will be the single largest group of shareholders, but it would not be a majority ownership by any means,” Dawson added.

One of the main drivers for independent storage is the increasing demand for LNG, Elrahal said. With most countries moving away from crude oil to gas as a preferred source of energy – thanks to strict environmental standards – LNG has become a popular fuel worldwide.

Shell forecasts growth in demand of as much as 10 per cent a year until 2020 when LNG could be meeting 20 per cent of global needs.The number of buyers is also rising. By 2020, 40 countries could be importing LNG, compared to 17 last year, say energy consultants Wood Mackenzie.

Today, almost all LNG is earmarked to long-term customers even before it is produced. The agreements for LNG trade are generally long-term portfolios (about 10 years to 25 years) that are relatively inflexible both in price and volume. The current spot market for LNG is therefore seen as a junior partner with a market that is 90 per cent dominated by long-term contracts.

Contracts today are becoming more flexible too. Diversion clauses are being built in to facilitate arbitrage so suppliers can send cargoes destined for one market under a long-term contract to another, depending on the need and, of course, the price.

But storage can further enhance the flexibility of the LNG industry, said Elrahal. “LNG storage can enhance flexibility for both buyers and sellers,” he said.

“It will free it from being tied to strict and inflexible supply schedules over long periods of time.“It will enable core LNG suppliers and buyers to capture value by storing and trading across different periods. It will also allow  multiplicity of buyers, sellers and traders to arbitrage across various regions and support derivatives trading as a spot market emerges around the storage facility.”

Energy experts said, while there are only 10 per cent spot trades, the growing trend of LNG producers to increase the amount of LNG sold on a spot basis indicates that the marketplace is changing.The location of the LNG storage hub is still uncertain. Impel and DMCC have yet to decide where to build the facility. Initially, the two had earmarked land in Dubai for the project.

But potential customers said storage may be better placed elsewhere, possibly outside the shipping chokepoint of the Strait of Hormuz. About 20 per cent of world crude supply, 16 million to 17 million bpd, and all of Qatar’s LNG, goes through the strait.Iran has threatened to disrupt shipping operations in the Strait should the US attack the country.

Elrahal, however, downplayed political reasons; saying accessibility is a major factor in choosing the location. Three locations are being considered by the company: Fujairah, Oman and Dubai.Currently, LNG Impel is speaking with potential customers.

But Elrahal guaranteed the storage project is a good investment to bank on.“From a financial point of view and for the customer there is an extremely high rate of return on investments,” he added.

Qatar plans to supply LNG to Kuwait

Qatar is in talks with Kuwait to supply liquefied natural gas (LNG), a senior Qatari energy official said yesterday.“We are in early discussions for the supply of gas,” Hamad Al Mohannadi, Managing Director of gas company RasGas, told Reuters on the sidelines of an industry conference in Qatar.

Mohannadi declined to give a timeframe or details about the amounts the two countries were discussing, but said the gas would not be provided through a pipeline as was envisaged in the 1990s.Mohannadi told reporters that train six of Rasgas III would come online in the first quarter of 2009 and train seven would start by the end of the same year.

He said in December that train six would start late in 2009. The trains, or production lines, will each have a capacity of 7.8 million tonnes a year.The two production lines, with a project investment of around $13 billion (Dh47.7bn), will take gas from the North Field and cool it to liquid form for shipment to the US market.

Qatar plans to boost total production of LNG to 77 million tonnes per year in 2010, up from 31 million tonnes now.Rasgas is 70 per cent owned by Qatar Petroleum and 30 per cent by US oil and gas major Exxon Mobil. (Reuters)