Fundamentals about natural gas and LNG (Part 2)

LNG Tanker

By Abboud Zahr

Given this high cost in building LNG plants, several International Oil Companies (IOC) are thinking of abandoning traditional onshore LNG export plants to embrace so-called floating liquefaction (FLNG). This involves building a liquefaction vessel, anchoring it to a position offshore, where the LNG will be produced.

This way, an LNG producer may bypass the challenges posed by a country’s tight or expensive labor market, as well as burdensome onshore regulations. Presently several such vessels are under construction, hence the economic feasibility of large scale floating systems raises several doubts.

The high cost of LNG requires potential sellers to secure long-term contracts with buyers, called off-take agreements, covering a significant part (usually more than 70 percent) of the planned capacity before starting actual construction of an LNG plant. Usually, off-take agreements are a fundamental prerequisite to obtain the necessary financing for the plant construction.

Since 1960s, the LNG business has been dominated by a model whereby the plant owners are integrated oil companies that also produce natural gas. Consequently, they sell both the commodity and the services needed to transform it into a liquid. Since then, the price of liquefaction services has varied from place to place, while the price of natural gas has been indexed to that of oil in most LNG contracts.


Similar to what happens in selling gas by pipeline, LNG sellers require a “Take-or-Pay” (ToP) clause, which obliges buyers to pay for a minimum annual volume of gas even if they do not take it all. The contracts also contain a “destination clause”, which obliges buyers to use no less than 80-90 percent of the gas they purchase in a pre-defined market.

A completely different formula, however, is now emerging in the United States, based on “tolling fee” agreements, where the LNG plant owner is not an integrated company, but only sells capacity services.

Once liquefied, LNG is shipped to final markets in special, cooled vessels, which keep the gas liquid until final docking. It is finally returned to a gaseous state by heating it at a regasification terminal. Then it is sent to gas pipelines, which transport it to the final consumers.

As a rule of thumb, the production and logistics costs of the LNG chain (liquefaction, transport, and regasification) are at least twice as much as the costs of transporting natural gas via pipeline, for the same volumes of gas produced and transported.

Nowadays, Japan and South-Korea are the world’s biggest LNG consumers and Qatar largest producer and exporter of LNG.