<< previous next >>
The LNG Value Chain
The LNG "value" or "supply" chain consists of four highly linked, interdependent segments - exploration and production (or E&P); liquefaction; shipping - from the point of liquefaction to the final destination; and receiving, storage and regasification at the final destination. We use the term "value" because at each stage investments are made to take natural gas from an unusable state to one in which optimal use of natural gas as a critical energy fuel and feedstock for materials can be achieved.

Figure 6. The Global LNG Supply (Value) Chain

Exploration and Production

The first segment in the LNG value chain is exploration and production. E&P activity ranges from the development of ideas about where natural gas resources might occur (prospect generation), to the mobilization of financial capital to support drilling and field development, to ultimate production. The E&P segment incorporates geologic risk - the chance that natural gas resources in a "play" (an area of interest) either do not exist or exist in quantities or subsurface conditions that do not favor commercially successful exploitation.

U.S. natural gas reserves increased by more than 11 percent, from 183.5 to 204.4 Tcf, between 2001 and 2005.19 To a large extent, this increase in reserves reflects the impact of higher natural gas prices since 1999; higher natural gas prices both spur drilling and increase the amount of natural gas resource that can be recovered (higher prices facilitate production from higher cost fields that might otherwise not be economic). The U.S., and North America, remains rich in natural gas resources. Natural gas trade - via pipelines and LNG - helps to provide a diverse portfolio of supply options that can offset tight domestic supplies and soften impacts of higher prices during periods when the U.S. demand for natural gas exceeds deliverable supply.

For the year 2005, worldwide proved reserves of natural gas were 6,348 Tcf, an increase of 25 percent over the year 1995, and more reserves of natural gas continue to be discovered.20 Much of this natural gas is stranded a long way from market, in countries that do not need large quantities of additional energy. The leading countries producing natural gas and selling it to world markets in the form of LNG are Indonesia, Malaysia, Qatar and Algeria. Trinidad & Tobago is an example of a small country that has benefited hugely from its LNG export strategy. Several countries are growing rapidly as natural gas producers and LNG exporters, such as Nigeria and Australia. Countries like Angola and Venezuela are striving to reach their full potential in the global LNG marketplace, and countries like Saudi Arabia and Iran, that have vast reserves of natural gas, could also participate as LNG exporters.

LNG Liquefaction

Currently, liquefaction capacity to serve the Atlantic and Pacific basins is about the same; all together, including Middle East facilities, about 170 million tons per year (MTPA) of capacity is in place (as of March 2007). Another 91 MTPA is under construction and 285 MTPA are planned.21 Egypt joined the club of LNG exporters in May 2005 by shipping a first cargo from newly constructed Idku terminal on the Mediterranean Sea.

In 2006 two liquefaction projects came into operation: Australia started its second LNG project in Timor Sea, and Qalhat terminal in Oman shipped first cargoes to Japan and Spain. Feed gas to the liquefaction plant comes from the production field.

During liquefaction, contaminants found in produced natural gas are removed to avoid freezing up and damaging equipment when the gas is cooled to LNG temperature (-256o F) and to meet pipeline specifications at the delivery point. The liquefaction process can be designed to purify the LNG to almost 100 percent methane.

The liquefaction process entails cooling the clean feed gas by using refrigerants. The liquefaction plant may consist of several parallel units ("trains"). By liquefying the gas, its volume is reduced by a factor of 600, which means that LNG at -256o F uses 1/600th of the space required for a comparable amount of gas at room temperature and atmospheric pressure.

LNG is a cryogenic liquid. The term “cryogenic” means low temperature, generally below -100o F. LNG is clear liquid, with a density of about 45 percent the density of water.

At both liquefaction and receiving and regasification facilities, the LNG is stored in double-walled tanks at atmospheric pressure. The storage tank is really a tank within a tank. The annular space between the two tank walls is filled with insulation. The inner tank, in contact with the LNG, is made of materials suitable for cryogenic service and structural loading of LNG. These materials include 9 percent nickel steel, aluminum and pre-stressed concrete. The outer tank is generally made of carbon steel or pre-stressed concrete.22

LNG Shipping

LNG tankers are double-hulled ships specially designed and insulated to prevent leakage or rupture in an accident. The LNG is stored in a special containment system within the inner hull where it is kept at atmospheric pressure and cryogenic temperature (-256ºF).

These are:
  • The spherical (Moss) design (as shown in the photo above);
  • The membrane design; and
  • The structural prismatic design.

Historically most of the LNG ships used spherical (Moss) tanks. Moss-type ships are easily identifiable as LNG ships because the top half of the tanks are visible above deck. However, the trend is toward membrane design. The figure below shows that 44 percent of LNG ships were spherical design in 2006; this compares to 52 percent of LNG ships in 2002.

Figure 7. LNG Fleet Containment

The shift toward membrane design is even more obvious by analyzing the structure of orders for LNG carriers (see below).

Figure 8. LNG Fleet Containment – Ship Orders

The typical LNG carrier can transport about 125,000-138,000 cubic meters of LNG,23 which will provide about 2.6-2.8 billion standard cubic feet of natural gas. The typical carrier measures some 900 feet in length, about 140 feet in width and 36 feet in water draft and costs about $160 million to build. This ship size is similar to that of an aircraft carrier but significantly smaller than that of a Very Large Crude Carrier (VLCC) used to transport crude oil. LNG tankers are generally less polluting than other ship ping vessels because they burn natural gas in addition to fuel oil for propulsion.

The LNG shipping market has been expanding. According to Maritime Business Strategies, as of March 2007, there were 224 LNG tankers in operation with 145 on order.24 By comparison, forty two new LNG tankers were ordered in 2005. About 40 percent of the fleet is less than five years old. The LNG tanker fleet size is estimated to continue to grow to well over 300 tankers by 2010.

Figure 9. Number of LNG Ship Builds

Storage and Regasification

At final destinations, LNG may be used in various ways. For instance, LNG may be used as a transportation fuel for truck and bus fleets; in these cases, LNG import receiving terminals will include facilities to dispense LNG into tanker trucks for distribution to central re-fueling locations. Or, LNG import terminals may be located with electric power generation stations, allowing use of the cryogenic properties of LNG to help cool the power plant natural gas vapor is burned for power production. In the U.S. , LNG is converted back into natural gas for shipment to customers through the U.S. natural gas pipeline system.

To return LNG to a gaseous state, it is fed into a regasification facility. On arrival at the receiving terminal in its liquid state, LNG is pumped at atmospheric pressure first to a double-walled storage tank, similar to those used in the liquefaction plant where LNG is stored at atmospheric pressure until needed. At that time, LNG is then pumped at higher pressure through various receiving terminal components where it is warmed in a controlled environment. The LNG can be warmed by passage through pipes heated by direct-fired heaters, or pipes warmed by seawater, or through pipes that are in heated water. The revaporized natural gas is then regulated for pressure and enters the U.S. pipeline system as the methane used in homes and businesses. Residential and commercial consumers receive natural gas for daily use from local gas utilities or in the form of electricity.

Of great interest is the development of new LNG receiving terminals in the U.S. and North America as well as worldwide. Of all world regions, the U.S. and North America as a whole have been the most active with respect to receiving terminal development. Seven terminals are in operation (four existing, with expansions, and three new facilities, including an offshore LNG ship-based design), six are under construction, 11 have been approved by regulatory bodies (including both onshore and offshore terminal designs), and more than 50 terminal projects are planned or have been proposed. This last figure compares with about 49 planned or proposed receiving terminal projects in the entire remainder of the world. Several factors account for the interest in developing terminals in North America, particularly the U.S. Most important of these is the size and competitiveness of the U.S. natural gas market and expectations that LNG will be an important part of the U.S. supply portfolio in the future. But LNG is also viewed to be an important, strategic part of the supply portfolios for Canada and Mexico as well, even though these countries have large and prolific domestic natural gas resources.

19 U.S.EIA: 2006 Annual Report, U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves. Advance Summary, February 2006.

20 BP: Statistical Review of World Energy 2006, July 2006.

21 From various industry sources and trade publications.

22 Details on LNG tank designs, construction, and materials can be found in CEE's report, LNG Safety and Security, at www.beg.utexas.edu/energyecon/lng.

23 Typically, LNG ship size is designated by cubic meters of liquid capacity.

24 Maritime Business Strategies, LLC: http://www.coltoncompany.com/.