Eyes wide open – realities of a continuing LNG success story

"Your Royal Highness, Ladies and Gentlemen, I am honoured to be part of this GasTech opening ceremony. GasTech is one of the most important events in the gas industry’s calendar. Thank you. Natural gas is one of the most exciting areas to work in at the moment. This is because of gas’s contribution to meeting the world’s energy needs today; and because of the developments that are taking place – including technology developments – which are aimed at securing future supplies."

Your Royal Highness, Ladies and Gentlemen, I am honoured to be part of this GasTech opening ceremony. GasTech is one of the most important events in the gas industry’s calendar. Thank you.

Natural gas is one of the most exciting areas to work in at the moment. This is  because of gas’s contribution to meeting the world’s energy needs today; and because of the developments that are taking place – including technology developments – which are aimed at securing future supplies. Virtually all the  independent forecasts agree that natural gas will play an increasingly important role in the future of world energy. Shell agrees with these forecasters. So this morning I would like to draw your attention to two key ingredients for the ongoing success of liquefied natural gas (LNG): increased capacity, and partnerships.

And this morning I am pleased to be able to talk about two new technologies. Both technologies are related to the future of liquefied natural gas. Both technologies illustrate how much technology development can contribute in this sector. And both technologies reinforce the importance of sustained commitment to invest in technology.

The Energy Challenge
To place these remarks in context, let’s remind ourselves of the scale of the global
energy challenge that we now face. Energy demand is accelerating. By 2030, it could be more than 50 percent higher than in 2005. In the first half of this century, demand is expected to double. Despite much that is said and written, fossil fuels will remain the major contributor to the energy mix for many years to come. According to the IEA, fossil fuels will still account for more than 80 percent of world energy demand in 2030. Oil’s share of the total is expected to slip slightly between now and then (from 35 to 32 percent) but the share of gas and coal, meanwhile, will increase. However, the future of our industry is far from ‘business as usual’. The days of the socalled ‘easy’ oil and gas are numbered – although, as we all know, it has never actually been easy! Increasingly, we will need to access fossil fuel resources in more distant remote locations; in more challenging environments; and in new forms, the so-called ‘unconventionals’ – oil shales, tar sands, coal bed methane and other sources. I will talk about an LNG-related solution for some of these new situations in a few minutes.

First, let me sketch why solutions of this nature are needed … and vitally needed. LNG’s pivotal role LNG growth remains strong. Very strong. Last year, LNG accounted for about 7 percent of global gas consumption. Currently, LNG demand is growing at around 8 to 10 percent per annum – four times the global annual growth rate of natural gas overall. There are good reasons for LNG’s rapid growth. Five advantages of LNG immediately stand out to me... First, like other forms of natural gas, LNG  offers cleaner energy than oil or coal, and this in a world increasingly concerned about environmental and health issues. Second, mainly thanks to advancing technology, LNG is now cost competitive with other forms of gas delivery. Offshore, LNG beats pipeline gas over distances longer than 1,500 kilometres. In straightforward onshore terrain, LNG competes  favourably with pipeline natural gas over distances greater than 1,800 kilometres. Beyond 4,000 kilometres, whatever the terrain, LNG is the better-cost choice.

LNG’s third advantage is its commendable track record of reliability and safety.  This track record, spanning over 40 years, underpins the crucial role of LNG for security of supply in the future. In 2007, average reliability of Shell’s LNG joint ventures was more than 97 percent and we know that our customers like this reliability. Consider Brunei LNG – BLNG – now in its 36th year of production. BLNG has never missed a contractual cargo obligation; this must be a source of great pride for Yang Berhormat Pehin Yahya, Brunei’s Energy Minister, here with us this morning, and for his colleagues. Over the years, BLNG have sustainably produced around 140 percent of its original design capacity. Currently, BLNG is undergoing a second rejuvenation and refurbishment project, which will extend its life to beyond 60 years.

Another outstanding performance record is held by Malaysia’s MLNG. On the 29th of January this year, MLNG celebrated the 25th anniversary of its first shipment to Japan, from the Bintulu plant in Sarawak. Since then, more than 5,000 cargoes have been safely delivered from Bintulu. Reliability underpins the success of LNG, both in the past and for the future. This is why one of the new technologies I will talk about this morning is so timely – because it focuses on increasing plant reliability still further.

The fourth advantage I want to highlight is the flexibility of LNG. Unlike pipeline gas, buyers are able to source LNG from a number of supply points. Finally, we have the fifth advantage of divertibility. If a sensible approach is adopted, clauses within long-term contracts allow partners to divert volumes to a third party when demand fluctuates unexpectedly. Divertibility provides greater liquidity, and rebalances the market to more accurately match supplies to demand. Everyone wins: the resource holder, the originally intended customer, the new customer, and the company operating the diversion. Current reality, future requirements. It is no wonder LNG demand is growing so rapidly. And, in the past two years, we have seen prices rise – to levels even higher than those seen at the beginning of this decade. This is partly due to the current short supply situation, and to delays in bringing LNG supply projects on stream. Another change is the simplification of pricing formulae for LNG deals. This enables more transparency in buyer-seller relationships, which can only be good. We need to move still further away from the old industry model of s-curves, kink-points, applicable ranges and “meet and discuss” clauses.

The challenge for suppliers will be to continue bringing on new capacity when the market needs it in a world where the costs of new production capacity are rising relentlessly. LNG also needs to stay price competitive, which, for the record, I believe it is today. LNG is a long-term business. It requires developers and operators to make long-term investments and commitments. The sector’s tradition of long-term partnerships of trust and “sanctity of contract” has led to its strength today. Maintaining this tradition is vital to LNG’s continuing success. We urgently need new infrastructure and new production capacity to help address potential long-term supply/demand imbalances. Through further investment LNG suppliers can contribute more to the energy security that will underpin global and regional economic growth.

Investing in technology excellence
Investing in technology excellence is a key part of this equation. We need to develop and we need to have the courage to deploy technologies that will enable us to unlock new resources and ensure continued reliability and efficiency in existing and planned LNG operations. That is why I am pleased to inform you today about a new technology that specifically targets reliability. The technology is called “Shell Automated Cool-down”. It is a new, patented solution to the problem LNG sites sometimes experience: bundle tube leaks in Main Cryogenic Heat Exchangers. Such leaks can and do cause unexpected unit shutdowns. Shell  Automated Cool-down reduces the risk of leaks by automatically cooling down in a controlled way and at the most efficient average rate. It leads to rapid start-up and less flaring with no operations outside the design envelope. You can think of this technology as a kind of ‘autopilot’. It gives operators better control over the cool-down procedure. It takes over the manual action, allowing operators to concentrate on overall cool-down and ramp up. The net result is greater reliability, better safety, and an overall improvement in operational performance. Successful implementation is already under way at an LNG facility in which Shell has an interest. You can find out more about the Automated Cool-down at our stand in the Exhibition Hall. Several Shell staff will be there to provide more details.

The second technology I am pleased to tell you about this morning addresses the important point I made earlier: that is, the reality that so-called ‘easy’ gas is becoming a thing of the past. Shell has been seriously studying the technology of Floating LNG or FLNG for some time. We have devoted substantive engineering hours to FLNG and we now believe that the time for FLNG has come – the market circumstances and the environmental circumstances lead us to believe this is the case. FLNG offers a route to greater flexibility, and increased access to natural gas resources far from shore. FLNG also enhances our ability to operate responsibly in environmentally sensitive areas. Overall, this technology increases the rate at which we can expect to get LNG into the world’s energy-hungry markets. We have decided to adopt a generic approach with this technology: a “design-one-build-many” approach. The design we have come to a landing-on after extensive evaluation and testing has no technical showstoppers – and this design is cyclone tolerant. Key dimensions are a 3.5 million tons per annum LNG facility, with additional hydrocarbon liquids capacity, 450 meters long by 75 meters wide – a good par 5 you might say. Within four months, we intend to issue an international tender to selected consortia, formed from shipyards in Japan and Korea and international EPC contractors.

These two technologies, Shell Automated Cool-down and generic FLNG, are exciting. Investing in these developments can open up new horizons in LNG. But anyone with a vested interest in meeting energy  needs must also recognise the investment needed to maintain ongoing operational excellence. Continued investment in project management and project execution allows us to achieve results like the successful completion of Nigeria LNG’s Train 6. Only nine days elapsed from the start of commissioning to first production of LNG. NLNG 6 repeated the success of Qalhat LNG. Shell, as NLNG’s Technical Adviser, supported NLNG’s management of the contractor to deliver the project on time. This was achieved despite the well-publicised difficulties of operating in the Niger Delta and the cost pressure on resources, both human and material.

Large integrated gas projects like this must come to fruition. We currently have 5 LNG trains under construction around the world and several others in various stages of business development. In this region this includes our participation in the massive Gorgon project where we continue to support progress towards a Final Investment Decision. Shell is committed to Gorgon’s successful and timely execution. We want to see this massive undertaking proceed. I would like to stress here the strong link between well-designed, well-managed plant and reducing CO2 emissions – a key concern for those in the gas business. By investing in this area, we are able to offer technology positioned at the cutting edge.

One result is that Qalhat LNG is the most energy efficient plant in tropical conditions, with all that implies in terms of CO2. Sakhalin LNG is headed towards being a similar benchmark, a benchmark in cold climates. All these investments add up. And no provider can responsibly make investments on the scale we’re talking about without knowing they have an off-taker for the LNG that will be produced. That’s why long-term partnerships are so important in LNG. Here in Asia Pacific especially, long-term agreements have yielded the security of supply and security of demand that provide the foundation for future success and stability. Spot trading in LNG has grown at the fringes in recent years, and is – in my view – most unlikely to constitute a material proportion of LNG sales in the Asia Pacific arena. Both buyers and sellers much prefer “maximum security with a degree of flexibility” as compared to “maximum flexibility with a degree of security”. Both buyers and sellers understand how dependable long-term agreements contribute more to sustained economic and social stability.

The current tight LNG markets are at least partly the result of lower investment levels up to a decade ago, caused by a slump in LNG prices. As we move forward from this point, I’d like, in closing, to suggest we focus more on three things in particular:

• Given the expected increase in demand for clean, reliable and lexible energy supplies, continued investment in the LNG industry is crucial;
• Nurturing the long-term partnerships that have underpinned the development of the LNG industry to date;
• We must continue to make timely investments in technology excellence - like the two technologies I have mentioned today – Shell Automated Cool- Down and generic Floating LNG.

And we can ensure that LNG plays its full and its deserved role in meeting the energy challenge. Your Royal Highness, ladies and gentlemen, thank you for your time and for your consideration.

Eyes wide open - realities of a continuing LNG success story