SPE-171510-MS

Cluster LNG New Paradigm for Small and Medium LNG Business

JungHan Lee, LNG Solutions Co., Ltd.

Copyright 2014, Society of Petroleum Engineers

This paper was prepared for presentation at the SPE Asia Pacific Oil & Gas Conference and Exhibition held in Adelaide, Australia, 1416 October 2014.

This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contentsof the paper have not been reviewed by the Society of Petroleum Engineers and are subject to correction by the author(s). The material does not necessarily reflectany position of the Society of Petroleum Engineers, its officers, or members. Electronic reproduction, distribution, or storage of any part of this paper without the writtenconsent of the Society of Petroleum Engineers is prohibited. Permission to reproduce in print is restricted to an abstract of not more than 300 words; illustrations maynot be copied. The abstract must contain conspicuous acknowledgment of SPE copyright.

Abstract

Small and medium scale LNG is different from conventional LNG in trading distances, target markets,and application areas. Small and medium scale LNG may liaise needs between regional gas producers andconsumers. Restrictions and differences of the regional energy tasks may call for different approaches intechnology and business model. Cluster LNG is new concept LNG technology suitable for the emergingmarket environments. High performance of Cluster LNG is originated from higher liquefaction temper-ature and the adoption of efficient refrigerants for the temperature ranges. The inherent high performanceof Cluster LNG enables low CAPEX and low OPEX. Despite of increased containment system cost overConventional one, cost reduction in the Cluster LNG liquefaction system prevails overall economicswithin 3,000 ~ 5,000 Km distance from production to consumer sites. The high performance of the ClusterLNG brings competitiveness in small and medium scale LNG business requiring 75 ~ 85% of CAPEX and65 ~ 75% OPEX compared with Conventional one. In addition, the CO2 emission per unit LNGproduction for Cluster LNG is 60 ~ 70% of the Conventional LNG. The Cluster LNG technology andbusiness is well matched for small and medium LNG business with cost-effectiveness and flexibility.After extensive engineering verifications and test plant operations, several commercial Cluster LNGprojects are under negotiation stages. The Cluster LNG technology also increases local contents withwider choices of equipment vendors and system providers together with less project budgets. Flexibilityand cost competitiveness of the Cluster LNG would bring paradigm change in small and medium LNGbusiness.

BackgroundsEnergy is basic necessity like agricultural products for human beings and indispensible for individualwellbeing. Meeting increasing electricity and energy demands for industries and households has becomenational agendum for some of the Southeast Asian countries. Among other energy resources, natural gasand LNG take important roles with relative abundance and environment-friendly benefit. However,natural gas and LNG are difficult to be moved from production to consumer sites with large volume andhandling difficulties. The limitations have prevented remote area small quantity users from advantagingthe cost-effective energy.

Traditionally, LNG has been developed targeting large volume of production and sales to achieveeconomy of scale. Consequently, small scale LNG has been only minor portion in the global LNG

production. However, there are many necessities forregional energy infrastructures and technologieswhich are different from those of traditional LNG.In Southeast Asian countries, natural gas and LNGsometimes compete with diesel oil rather than largescale pipeline gas or LNG. At the same time, thereare many small scattered gas sources to be mone-tized for domestic markets in the region.

LNG for global exports and the one for regionaldemands may need different approaches. Typical large scale LNG aims to export up to 10,000 Km radius,on the other hand, small and medium scale LNG may need only 500 ~ 2,000 Km boundary. Refer toFigure 1.1 for the radius difference between large and small and medium scale LNG. Therefore, businessmodels and technologies for global LNG and the ones for regional LNG should be different from eachother.

In Southeast Asian countries such as Indonesia, Vietnam, Malaysia, there are many gas sources to beutilized for domestic use, which are not similar from traditional large scale LNG project developments.Nevertheless, the domestic gas fields could not be properly developed so far because of small unit ofproduction and as a result expensive unit cost. In this regard, new technologies which are suitable for smalland medium scale LNG development may be necessary.

In addition, regional company initiatives without much depending on global companies would bebeneficial for regional industries.

Small and Medium Scale LNG Business

TasksTable 2.1 summarizes differences between conventional large scale and small and medium scale LNG.The differences would bring different understanding of the tasks and solutions. Small scale LNG hasdisadvantage over conventional one in unit production cost, but it may have some freedoms and variationsin transportation distances and compatibility with other LNG products.

As shown in Figure 2.1, typical regional coverage of 500 ~ 1,000 Km is broad and feasible range forsmall and medium LNG business. Within the range, there would be several gas sources and consumers.Supplying of gas with priority to vicinity areas would make sense by reducing the transportation costs. Forsmall and medium scale LNG, there would be little possibility of LNG exporting to long distance.

Though pipeline natural gas is ideal fuel for replacement of expensive diesel oil in industrial plants andother applications, it cannot be reached for many remote areas due to economic and technical reasons of

Figure 1.1Global and Regional LNG Target Radii

Table 2.1Conventional and Small & Medium Scale LNG

Conventional LNG Small and Medium LNG

2 ~ 8 mtpa/train capacity 0.1 ~ 0.5 mtpa/train Capacity

130 ~ 260 K Ship Size 3 ~ 30K Ship Size

3,000 ~ 10,000 Km Distance 500 ~ 3,000 Km Distance

Mainly for Point to Point Trades Flexible with Multiple Trades

Global Energy Business Regional Energy Business

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pipeline installation. Therefore, small and mediumscale LNG competes with diesel oil rather thanpipeline gas in many cases. Small and medium scaleLNG plant usually gets the feed gas from existingpipeline. The high price of diesel oil may justify theconstruction of small and medium scale LNG plantas long as the price difference between diesel oiland feed gas price is more than 4 ~ 8 USD/mmbtu.Figure 2.2 illustrates typical energy prices in South-east Asian countries.

Differences from Large scale LNGIn conventional LNG, parcel size of LNG is typi-cally 140,000 ~ 150,000 cubic meters whereas thatof small scale is 40 ~ 10,000 cubic meters. Custom-ers for conventional LNG are usually large gascompanies who own dedicated LNG receiving ter-minals and extensive distribution networks. In con-trast, customers for small and medium scale LNGare end-users who run industrial or small scalediesel power plants. Target customers, LNG trans-portations, and applications are not the same for the 2 cases. The differences call for different technologiesand business models.

Simplification of the ProcessSimplification of the LNG plant would be important in the project economics. Most of the cases, heavycomponents of propane and butane have to be removed to comply with calorific value of pipeline gas.LPG extraction sometimes brings additional revenue. On the other hand, it adds complexity of a plant.Stringent gas purity requirements of Conventional LNG, especially N2 and CO2 contents, naturally bringhigher plant EPC cost. End-users boilers or gas engines would not have problems as long as pipeline gas

Figure 2.2Typical Energy Prices in Southeast Asian Countries

Figure 2.1Regional Energy Task

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quality is met. As shown in Table 2.2, the pipeline gas qualities are much different from LNG qualityrequirements. Pipeline gas in most of the countries allow 2~3% CO2 and 3~4% of N2 contents.

Integrated SystemUnlike global large scale LNG, small and medium scale LNG may not need interchangeability with otherLNG. Hence, small and medium scale LNG may be optimized for specific applications without complyingwith all other standards. In the small and medium LNG, integrated service would be necessary ascustomers may not be familiar with complicated LNG cargo handling systems and safety features.

Economic SolutionWhile large scale LNG equipment vendors are very limited, small and medium LNG may have morefreedoms in the selections of equipment vendors. In some cases, ironically, buying multiple units of smallcapacity equipment would be more cost-effective than buying the same capacity of single big capacityequipment. With the reason, small and medium scale LNG may have price competitiveness even thoughunit production volume would be small.

Necessity of New Technology and Business ModelLarge conventional LNG may not be suitable for the new pattern of business and market situations. Butmost of the small scale LNG technologies and business models basically follow those of conventionalLNG by reducing the capacities of the systems. With the background, new different technologies andbusiness models specifically tailored for the different market may be necessary to be more competitive.

Local ContentsEnergy independency is important national agendum and energy industry takes important role in nationalindustry. Since LNG industry is capital and technology intensive, execution of LNG projects have beendominated by limited business, licenser, and EPC companies in the world. However, less project budgetand multiple choices of equipment vendors for small and medium scale LNG may expand local contentsin equity, engineering, and construction. Proving more portions to local companies would be advisable forenergy independency and activation of local industries and communities.

Cluster LNGConceptCuster LNG is proprietary LNG liquefaction and storage system. Main characteristics of the Cluster LNGare high liquefaction efficiency with higher pressure liquefaction and integration of the whole LNG chainsof liquefaction, transportation, and regasification. Providing gas to gas solutions to end-users is basis of

Table 2.2Typical Pipeline Gas Composition in Australia

Characteristics andComponents Limit

Wobbe Index Minimum 46.0 MJ/m3

Maximum 52.0 MJ/m3

Oxygen Maximum 0.2 mol %

Hydrogen sulfide Maximum 5.7 mg/m3

Total sulfur Maximum 50 mg/m3

Water content Maximum Dewpoint 0C at the highest MAOP in therelevant transmission system (in any case,no more than 112.0 mg/m3)

Hydrocarbon dewpoint Maximum 10 degrees Celsius between the pressuresof 1000 kPag and 10,000 kPag

Total inert gases Maximum 7.0 mol%

Carbon dioxide Maximum 3.0 mol%

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the integrated service task. Minimizing the final gas delivery price is achieved by optimizing all relatedsegments and interfaces of LNG chains.

Figure 3.1 illustrates the integrated service solution for Cluster LNG. Contrary to Conventional LNG,where each of LNG production, transportation, and regasification is functionally segregated, wholeservices to customers are provided in Cluster LNG. Therefore, end-users may not have to care aboutdifficult LNG technologies and related systems. Customers receive necessary energy as gas form not asLNG form. With the concept, integrated LNG storage and regasification works at customer sites arestandard scope of supply of Cluster LNG project team unless customer specifically requests.

High EfficiencyCluster LNG has very high efficiency with higher pressure and corresponding higher liquefactiontemperature combined with efficient refrigerant application. The theoretical backgrounds may be referredto in Ref. [2] and [3].

Figure 3.2 shows conceptual scheme of highly efficient Cluster LNG technology. Since the fuelconsumption for the LNG production is low in Cluster LNG, the equipment size, consequently plant sizeand CAPEX can be small compared with Conventional one. The low fuel consumption brings lowerOPEX and lower CO2 emission together with more LNG outputs (less shrinkage from feed gas). Thelower CAPEX and lower OPEX enable competitive business and project developments.

CO2 and N2 Tolerant CharacteristicsCluster LNG is very tolerant for carbon dioxide (CO2) and nitrogen (N2) contents in the feed gas. Figure3.3 shows typical CO2 solubility and frost formation (freezing) characteristics in pure liquid methane(CH4). In higher temperature and pressure LNG, the CO2 solubility can be increased to percentage (%)level in lieu of traditional 50 ~ 100 ppm. The CO2 tolerant characteristic simplifies traditional acid gasremoval unit (AGRU). CO2 tolerant characteristic of Cluster LNG can be referred to Ref. [3].

Figure 3.1Cluster LNG Concept

Figure 3.2High Efficiency Cluster LNG Concept

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In LNG liquefaction, N2 higher than 1% shouldbe removed from feed gas to prevent excessive N2content in boil-off gas (BOG) because boiling tem-perature of N2 is far lower than that of methane(CH4). Refer to Figure 3.4 for the N2 contents inBOG for different N2 % in LNG. Removing N2during LNG liquefaction process requires additionalrefrigeration load and distillation column process.The complexity of the system and required energyare unfavorable for plant economics. Though highnitrogen content in Conventional LNG is not ac-ceptable in most of the cases, high N2 content inCluster LNG does not bring problem in actual op-eration due to higher pressure LNG storage. Hence,separate N2 removing system may not be necessary up to approximately 3% N2 content in the feed gas.

Simplification and Specific ApplicationEach country has its own natural gas calorific value standards. The heating value requirement of pipelinegas is very lean compared with untreated natural gas condition. With the reason, heavier components, suchas propane and butane, have to be removed from the feed gas to meet the calorific value. Heavyhydrocarbon components removal (HHR) requires complicated distillation column and separate coolingand storage system. Even though the extracted propane and natural gas liquid (NGL) may be sold todifferent markets for larger capacity LNG plant, the additional system is burdensome in LNG productioncost for small and medium scale LNG. In Cluster LNG, since the integrated system can be designed forend-user requirement, no separate HHR system may be necessary unless specific requirement (forexample, methane number) is imposed.

Technology DevelopmentCluster LNG experiments and bench scale unit operations have been carried out for several years andcommercial scale demonstration plant is being constructed in DSME. Therefore, the technology isbelieved in commercial application stage. In parallel with the project commercialization, improvements incontainment system designs and cost-effective CO2 removal system are being carried out for bettereconomics.

Figure 3.4Nitrogen % in BOG

Figure 3.3Typical CO2 Solubility in Methane

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Economics and ApplicationEconomic ComparisonLike other energy industries, economics of Cluster LNG are important. In this study, economics forConventional and Cluster LNG have been compared under the same external conditions. Emphasis hasbeen given to relative comparisons by simplifying the same common factors.

Power Plant ApplicationAs a case study of the comparison between Conventional and Cluster LNG, gas engine diesel power planthas been selected. Overall economics from feed gas, LNG liquefaction, transportation, and powergeneration have been evaluated in this study.

Figure 4.1 shows conceptual scheme for the LNG production and power generation. The feed gas isobtained from existing pipeline. The pipeline gas is usually more expensive than the gas sourced directlyfrom production gas fields. On the other hand, it has advantage in gas quality and stable supply of the feedgas. In the comparison of the 2 systems, difference between feed gas and LNG sales prices is moreimportant than the absolute prices. The feed gas is liquefied at LNG plant and the produced LNG is storedin the storage tanks. In Cluster LNG case, different liquefaction technology from Conventional one isapplied. The liquefaction cost difference between 2 systems virtually determines the overall economics.

The produced LNG is transported by shuttle LNG carriers. The shuttle LNG carrier capacity for thisproject is small, around 8,000 ~ 12,000 M3 capacity. Since the capacity is small, the LNG carrier may beimplemented by installing multiple IGC type C LNG storage vessels in a small bulk carrier orcontainership instead of dedicated LNG carrier construction. Cluster LNG needs higher pressure tanks forthe produced LNG storage, which would increase the LNG storage and transportation costs somewhat.

Buffer LNG storage tanks are necessary in power plant area depending on LNG supply intervals. TheLNG is regasified by ambient air type or sea water type vaporizers and supplied to multiple gas dieselengines. The power plant system is fairly standard, so there are no special power generation costdifferences between Conventional and Cluster LNG except the delivered LNG prices.

Table 4.1 shows basis of the economic calculations. Figures in the table are only indicative for relativecomparisons between Conventional and Cluster LNG costs. The figures in the table are commonly appliedto both systems unless specifically described in Notes.

In this study, qualitative explanations have been made to derive relative comparisons. Detailedcomparisons between Conventional and Cluster LNG for specific application may be referred to Ref. [1].

Figure 4.1LNG Plant and Power Plant Scheme

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Figure 4.2 shows conceptual cost composition for gas fired diesel engine power plant. In this case,integrated project combining feed gas, LNG production, supply to power plant, and electricity generationhas been considered. Main cost contributors are feed gas and LNG production costs. Considered that thepower generation CAPEX, efficiency, and feed gas price are not much different from plants to plants, theLNG production cost including LNG storage and transportation is governing factor in the economics.Noting that LNG production cost is much dependent on applied technologies whereas feed gas price isdetermined by external factors, the LNG production cost virtually decides the power generation cost. Withthe reason, keeping competitive LNG production cost with efficient liquefaction technology is importantfor project success.

From Figure 4.2, technology dependent variable part has been extracted and more detailed comparisonshave been made in the following. As illustrated in Figure 4.3, LNG production costs are composed ofthose of LNG liquefaction, storage, transportation, and regasification.

Liquefaction cost is dependent on the LNG plant EPC cost, feed gas price, fuel consumption for theLNG production, and other operational expenses. As described in Section 3.2, there are distinct perfor-mance gaps between Conventional and Cluster LNG. Since larger capacity equipment is required for

Table 4.1Basis of Evaluation

LNG Plant Typical Conventional LNG Case 1) Power Plant

Feed Gas amount 40 mmscfd Capacity 200 MW

Feed Gas Price 8 USD/mmbtu Gas Engine Type Gas Driven Diesel Engine

Liquefaction Capex 5) 1,400 USD/ton-year Generation Efficiency 42%

Liquefaction Cost 2) 3 ~ 4 USD/mmbtu Plant Average Load 80%

Liquefaction Efficiency 16 ~ 22 KW/ton-day Plant Capex 1,000 USD/KW

Plant Average Load 90% Power Generation Cost 4) 0.4 USD/KW-hour

LNG Storage Capex 5) 1,200 USD/m3 Electricity Fee 0.16~0.20 USD/KW-hour

LNG Storage Cost 2) 0.3 USD/mmbtuLNG/Power Plant Common

Transportation Cost 2), 3) 1 ~ 1.2 USD/mmbtu Project Period 15 Years

Regas Cost 2) 0.3 USD/mmbtu Loan to Equity Ratio 70:30 %

LNG Cost at Power Plant 6) 14 ~ 17 USD/mmbtu Interest / Discount Ratio 7%

Notes:1) Relative comparison purpose only2) Capex plus Opex Cost per mmbtu3) Based on 1,000 Km distance to power plant4) Capex plus Opex excluding fuel cost5) For Conventional LNG case6) Including Profit and Contingency

Figure 4.2Electricity Cost Composition

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Conventional LNG plant, the increased cost by the larger CAPEX is burdensome. In addition, sinceConventional LNG consumes far more fuel for the LNG production, the OPEX of the Conventional LNGis very high.

Cluster LNG needs higher pressure LNG storage tanks. Hence, CAPEX for the storage tanks is higherover Conventional LNG case. However, since the distance from LNG production site to power plant isrelatively short in this case, around 1,000 Km, the CAPEX increase by the storage tank CAPEX is not sosignificant. LNG transportation cost for Cluster LNG is a bit higher than that of Conventional LNG, butthe difference is small in sea transportation.

Regasification processes for 2 systems are almost the same, so the regas operation cost differencebetween 2 systems is very small.

EvaluationFigure 4.4 shows comparison summary of the 2 systems. The common costs are equally applied to bothsystems. On the contrary, there are large differences in the profit or contingency. Since the electricityfee is fixed by external and market situations, the LNG production cost determines the profit andcontingency portion. The cost difference is mainly caused by the LNG liquefaction efficiency. It explainsthe importance of the LNG technology selection in LNG project economics.

Figure 4.3LNG Cost Composition Comparison

Figure 4.4Economic Comparison Conventional and Cluster LNG

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ContingencyIn energy business, there are external variables which deteriorate the business soundness, such aselectricity sales volume reduction, EPC cost increase, operation and maintenance cost increase, LNGdelivery price increase, and other unfavorable factors. With the reason, project initiators should considercontingencies. Small tight gap between sales price and production cost can bring business risks in futureunfavorable situations. Therefore, sufficient room needs to be preserved to cope with those unexpecteduncertainties. Cluster LNG has advantage in securing contingencies with lower production cost. In energyindustry, power generation efficiency and fuel cost are uttermost important. With those reasons, ClusterLNG is much safe in business by having sufficient contingency against various unfavorable externalfactors.

For project investors, internal rate of return (IRR) is an important criterion. Higher IRR would befavorable to investors by having contingency buffer and by rewarding stable returns. With the higher IRR,Cluster LNG may broaden chances of stranded gas field developments. Competitive LNG system wouldultimately beneficial to customers with lower electricity price.

Path ForwardCluster LNG has high potentials for small and medium scale LNG projects with lower CAPEX and lowerOPEX, and several projects are under feasibility studies and project negotiation stages. The inherent highefficiency of the Cluster LNG would secure competitiveness in small and medium scale LNG business.

Summaries and ConclusionsFollowing summaries and conclusions have been derived.

Small and medium scale LNG is quite different from conventional one. Cluster LNG is highly efficient and requires less Capex and less Opex. Cost comparisons between Conventional and Cluster have been made for 200 MW power plantproject case.

Electric power generation cost is much dependent on the LNG cost. Cluster LNG has advantage over Conventional one in economics. It has more room for contin-gency and it is robust against uncertainties.

AcknowledgementsAuthor appreciates project partners in Southeast Asian countries who have endeavored for the ClusterLNG technology and applications.

Abbreviations

AGRU : Acid Gas (mainly CO2) Removal UnitBOG : Boil-Off GasCAPEX : Capital ExpenditureCluster LNG : Increased pressure type Proprietary Integrated LNG SystemCO2 : Carbon DioxideDSME : Daewoo Shipbuilding & Marine EngineeringEPC : Engineering Procurement and ConstructionHHR : Heavy Hydrocarbon Components RemovalIGC : International Gas Code, from IMOIRR : Internal Rate of ReturnKW : Kilo Watt, 1,000 WattLNG : Liquefied Natural GasLPG : Liquefied Petroleum Gas, mainly Propane and Butane

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Mmbtu : Million British Thermal Unit, 1.05506 GJMmscfd : Million Standard Cubic Feet per DayMTPA : Million Ton Per AnnumMW : Mega Watt, 1,000 KWNGL : Natural Gas LiquidN2 : NitrogenOPEX : Operational ExpenditurePPM : Parts Per MillionRegas : Refasification, Vaporizing of LNGUSD : United States Dollar

References1. JungHan Lee, Dwi Suasti Antara, and Julie Kim, Economic Small Scale LNG Plant Implemen-

tation with Cluster LNG Technology, SPE-165752, Asia Pacific Oil & Gas Conference andExhibition, 2013

2. JungHan Lee and Kathleen Eisbrenner, and DongKyu Choi Stranded Gas Field Developmentwith Cluster LNG Technology, OTC 24205, Offshore Technology Conference, 2013

3. JungHan Lee, Jeheon Jung, and Kyeongmin Kim, Development of CO2 Tolerant LNG Produc-tion System, OTC 23261, Offshore Technology Conference, 2012

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Cluster LNG New Paradigm for Small and Medium LNG BusinessBackgroundsSmall and Medium Scale LNG BusinessTasksDifferences from Large scale LNGSimplification of the ProcessIntegrated SystemEconomic SolutionNecessity of New Technology and Business ModelLocal Contents

Cluster LNGConceptHigh EfficiencyCO2 and N2 Tolerant CharacteristicsSimplification and Specific ApplicationTechnology Development

Economics and ApplicationEconomic ComparisonPower Plant ApplicationEvaluationContingencyPath Forward

Summaries and Conclusions

AcknowledgementsReferences