Tuesday, March 4, 2014

Some LNG Economics

Making LNG from natural gas costs money and makes the natural gas that is delivered to the end client significantly more expensive than what is coming out of the ground.  One reason countries like Qatar and Australia hopped onto LNG was that their own national markets could not make use of the natural gas and exporting LNG was their only option.   Here in BC we are part of a the large North American market for natural gas.  

For natural gas to make sense to be made into LNG in BC it has to be cheap enough locally that the price after making the LNG does not make the product too expensive.   How much is too expensive and what does it cost to make LNG?

What I am looking at is what the cost would be to bring LNG from BC to Asia fob (free of burden) based on a 6 mpta (million tonnes per annum) train LNG plant on the north weat coast (a train in LNG terms is a single plant entity, some LNG plants have up to three or four trains, each train can be operated separately)

Capital Costs
Capital costs for the LNG plant and the pipeline - $15,000,000,000
Amortized over 25 years of 90% production levels is 6,561,000,000 MMbtu of natural gas, which is a capital cost of $2.29 per MMbtu over 25 years assuming zero percent return on capital

When you add the financing cost to the $15,000,000,000 capital cost and use a rate of 6% over 25 years this will add something like $14,00,000,000 to the project costs.  This adds another $2.13 per MMbtu to the price.  The 6% number is based on the average combined cost of debt and equity used in a number of large scale commercial projects in recent years, cheaper financing would reduce the costs.

Liquefying Costs
Based on the best information I can find it will be in the range of $0.90 to $1.35 per MMbtu
Assuming the cost of energy in BC is lower elsewhere and that the lower ambient temperature is a benefit, I am going with $1.10 per MMbtu

Shipping Costs
$1.40 per MMbut based on shipping costs from Australia and Qatar to Asia.  Since a lot of LNG producers own their own LNG tanker fleet there are fewer good data points for this than I had hoped for.  These costs rise much higher if one off charters are used so I have discounted those as comparable numbers

Regasification Costs
$0.30 per MMbtu based on US markets - this assumes none capital costs of the regasification plant are part of this equation

BC tax on the LNG
Assuming we end up with a 1.5% tax, this is $0.21/MMbtu based on selling the product for $14.00 per MMbtu.  This price and tax rate would be just a bit more than $55,000,000 a year in taxes to BC from a 6 mpta capacity LNG plant.

Total Cost of Producing and Delivering BC LNG Before the Input Natural Gas Cost
$7.43 per MMbtu

Current Henry Hub spot price for natural gas is $4.60/MMbtu which, when added to the other costs, brings the price to $12.03 per MMbtu.

On a price of $14.00/MMbtu this is a  reasonable profit but it would not take much to erase that profit margin.  LNG from BC is dependent on a continued price differential between North America and Asia of around $7.50/MMbtu.  

Ernst and Young did a paper on LNG pricing around the world and assumed a Henry Hub price of $4/MMbtu had the break even price for two of the BC projects at $11/MMbtu which is broadly in line with the numbers I have worked out and means a $7.00/MMbtu price differential as a minimum.  Ernst and Young found that the break even point for many of the new proposed LNG plants around the world were as high or higher than the BC projects

If LNG plants in BC did not need the pipelines to be built the cost drops by around $1.40/MMbtu.  It is the need to build the pipelines that is really pushing the BC LNG projects to the edge of economically feasible.

BC LNG makes some economic sense based on the current capital costs, but if the capital costs rise the projects become economically very marginal.   A 25% rise in capital costs would add $1.10/MMbtu to the cost of BC LNG.   The tendency of large scale capital projects is for pre-construction estimates to be low,   Bent Flyvbjerg at Oxford has studied this tendency in detail.

Be it $7.00/MMbtu or a $7.50/MMbtu price differential needed to make BC LNG economic, this is higher than the price differential has historically been.   BC LNG will only make sense as long as there is a glut of natural gas in North America and there is enough demand in Asia.  I do not have enough data to know what the state of the natural gas market in North American will be in five years or ten years time.  Without having some degree of certainty of the cost of natural gas in 2024 it would be hard to make a decision to go ahead with any LNG plant.

Some of my sources:
A paper on LNG plant costs and financing
Various reports and forecasts from the US Energy Administration
Timera Energy data various aspects of LNG
Ernest and Young paper on Global LNG pricing
IGU 2013 World LNG Report

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