Prelude: a new era for LNG?

Prelude, the world's largest floating LNG vessel, has arrived in Australia.

Shell, the developer and operator, has sounded the trumpets and declared it "a new era for the LNG industry." Indeed, it may be, but this is a very expensive way to produce LNG and one that is operationally unproven.

The world's first FLNG vessel, developed and operated by Malaysia's Petronas, the PFLNG Satu facility on the Kanowit gas field, only loaded its first cargo in April. It has yet to ramp up to full production.

Moreover, it is a much smaller beast than Prelude. PFLNG Satu will operate in 70-200 meters of water and has a processing capacity of 1.2 million mt/year of LNG.

Prelude, by contrast, will displace more water than six of the world's largest aircraft carriers, and is the world's largest ever offshore facility.

It will produce 5.3 million mt/year of liquids, of which 3.6 million mt/year will be LNG, 1.3 million mt/year condensate and 0.4 million mt/year LPG.

It will operate in 250 meters of water and experience category 5 cyclones over its 20-25 year forecast life, when it is expected to "shelter in place". Racking up the costs

No one is throwing around precise numbers for the final cost, which is never a good sign. A "brought in under budget" announcement would surely have been made, if it could have been.

First-of-a-kind technologies, particularly on this scale, are rarely cheap. Prelude's cost has been estimated by external observers at between $10.8 billion and $12.6 billion.

Shell said way back in 2011 that it would be competitive with other new LNG projects at between $3.0 billion and $3.5 billion per million tons of LNG production capacity.

More latterly, the phrase $3.5 billion per million tons of production capacity has become common, leaving it unclear whether this refers to total liquids or just the LNG component.

Petronas, too, has been somewhat vague about PFLNG Satu's costs. The company delayed construction of a second FLNG vessel, expressing confidence that the additional time could be used to bring the spend down.

If it can't be, FLNG makes little sense in the current LNG market, where low oil prices and burgeoning liquefaction capacity have seen both spot and oil-indexed long-term contract LNG prices fall. Child of Australia The reason for pursuing FLNG is that development avoids the need for and cost of a pipeline to shore, from often remote gas fields, and circumvents the lengthy permitting processes for major onshore industrial developments.

Prelude has very much been born out of the era of Australian LNG development, where multiple large LNG projects have seen construction costs overshoot by billions of dollars.

FLNG thus aims to create an LNG supply chain, based on modular vessels, that has fundamentally cheaper economics than onshore development.

FLNG is also less of a hostage to fortune, in that the vessel could be moved to another project if the attractiveness of the existing environment declines, for example as a result of regulatory changes or geological problems.

Offshore development also allows more flexibility in where to book the revenues, which can have significant tax advantages (albeit not for the host nation).

But the question now, with the money spent, is will Prelude work, not just initially, but over its entire project lifetime?

Shell's recent problems with its gasifiers at the Pearl Gas-to-Liquids plant in Qatar are a salutary reminder that proof of concept takes years as the stresses and strains of operation tell on the technology. Pearl was another hugely expensive world's largest, costing some $18-$19 billion.

It has not been followed by a string of new GTL plants, suggesting that it did not prove a new, cheap liquids production chain.

Pioneering companies are always needed, and indeed lauded, for taking risk, but in many cases it is not the first-of-a-kind investor, but the "nth of a kind" that reaps the rewards.