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P R O D U C T I O N O P E R AT I O N S
FLNG technology shows promise
for stranded gas fields
Producing from an FPSO type vessel
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mall stranded offshore gas fields
have been considered uneconomic
due to geographic limitations such
as distance from shore and deepwa-
ter. Monetization of such fields tradi-
tionally involves a costly fixed pipeline to a
land based liquefaction plant or third party
owned transportation and processing infra-
structure.
Placing floating liquefied natural gas
(FLNG) facilities directly over such off-
shore gas fields has the potential to offer
a commercially attractive and environmen-
tally sensitive approach to unlock significant
stranded natural gas reserves. FLNG also
offers a solution for oil fields with signifi-
cant associated gas which would otherwise
require re-injection into the reservoir (im-
pacting optimum recovery of reserves), or
The number of planned FLNG projects and related
spending is expected to increase as rising energy
demand encourages companies to develop smaller
gas reserves in areas that are more remote.
flaring (raising environmental concerns), or
gas fields in remote onshore locations near
a coastline.
FLNG technology has not yet been imple-
mented commercially.
Primary challenges
Inherent project risks such as reservoir
risk, performance risk, counterparty risk,
LNG market risk, and other downstream risks
relating to regasification, storage, transporta-
tion, and marketing of natural gas exist. FLNG
projects may be structured several ways with
a range of contracts to allow the participants to
allocate project risk, align interests, and maxi-
mize value.
FLNG involves the production of LNG
directly at an offshore field using an FPSO
type vessel. While FLNG presents new tech-
nical issues, there are many common issues
between oil FPSOs and FLNGs. Parallels
78 Offshore November 2009 www.offshore-mag.com
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John White
Hannah Longley
Baker Botts (UK) LLP
include hull design, mooring systems, tank
sloshing, marinization of equipment, ship-to-
ship transfers of liquids, and maintenance in
offshore conditions. The LNG industry may
further draw upon the oil industrys experi-
ence with FPSOs by analyzing operational
parallels in similar environments and com-
parable legal structures.
Conventional LNG projects have an essen-
tial interdependency between each compo-
nent of the value chain, from gas production,
liquefaction, and storage to LNG shipping,
LNG regasification, and storage and gas mar-
keting. Although each participant may have a
discrete set of objectives, alignment of opera-
tional activities, financial incentives, and legal
responsibilities are key to project success.
FLNG projects likely follow the conven-
tional value chain model but may have a dif-
ferent business model, particularly for small
stranded gas fields. An FLNG may develop
small pockets of reserves (1 to 3 tcf), then
redeploy elsewhere once the gas is depleted.
The concept of design one, build many is
a strategy for construction cost efficiencies.
In practice, cost efficiencies need to balance
the technical requirements for specific field
use and operational costs. However, by de-
linking the facilities from exploitation oppor-
tunities, a conventional approach to the ap-
praisal of recoverable reserves may not be
necessary, and upstream participants could
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find themselves managing a global fleet of
FLNG vessels.
Technical issues
While FLNG technology is not yet been
implemented successfully on a commercial
scale, FLNG technology appears to be with-
in reach.
Topsides: The topsides involve the integra-
tion of processing equipment with the use of
major liquefaction technologies adapted to
a FLNG vessel. Dry gas processing is more
straight forward than wet gas (requiring
separation of natural gas liquids). The feed
gas process design should be as flexible as
possible but depending upon the extent of
upstream processing must accommodate
the specific field processing requirements.
Participants should select an optimum re-
frigeration process and an appropriate con-
tainment system, considering the constantly
changing volumes within the tanks and re-
lated sloshing issues, to find the best fit for
the FLNG project. Successful marinization,
reliability, availability of topside design, and
processes and strategies to minimize main-
tenance and to reduce downtime are key to
improved FLNG economics.
Hull: Design and integration of the topside
processing equipment with the hull relies on
a deck layout that meets all operational and
safety requirements for optimum perfor-
mance. A number of hull sizing alternatives
are available. Shipyard capability and avail-
ability combined with cost and efficiency
will impact selection.
Mooring and offloading: Mooring and of-
floading present more technical challenge
than the mooring of LNG carriers and ship-
to-ship offloading of LNG, particularly in dy-
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namic conditions. Evaluation of side-by-side
and other mooring alternatives together
with techniques such as the use of cryogen-
ic hoses and piping to conduct offshore LNG
transfer on FLNG scale are being developed
to ensure safety and reliability.
Operational issues
The primary operational objective is safe
and efficient production and supply of LNG
to meet all contractual and legal obligations
at minimum cost. A good relationship with
local and national governments in a stable
political environment helps ensure success.
Technology: Participants must address
technology issues and design gaps to miti-
gate risks associated with new developments
and technology including containment, of-
floading and reliability, and availability risks.
Detailed policies, guidelines and strategies
are vital to successful FLNG project imple-
mentation. Safety is paramount.
Logistics: Key challenges likely include re-
mote location with limited support infrastruc-
ture. Logistical issues may include the supply,
delivery, and storage of equipment and materi-
als, provision of tug services, and regular off-
shore maintenance (i.e. without dry-docking).
A nearby support base, whether onshore or
offshore, and transfer of crew, whether by
boat or to a nearby base by plane or helicopter,
impacts staffing for vessel operation.
Scheduling: Optimizing the schedule of gas
receipt, processing, and liquefaction to meet
LNG delivery obligations, and the scheduling
of LNG tanker arrivals and liquid cargo trans-
fers relies on a willingness by all players to
manage and to share operational risk. Issues
such as reduced gas to send-out ratio, stor-
age capacity, berthing capability and late ar-
rival of LNG vessels may result in significant
liabilities (i.e. operational failure at any stage
of the process may cause contracted delivery
obligations to be breached, a shut-down of
the FLNG vessel, and a shut-in of the field).
Commercial issues
The economic viability of an FLNG proj-
ect for a small stranded offshore gas field
depends on a range of factors such as avail-
ability and price of more accessible gas and
other fuels (such as oil), cost of developing
and operating upstream assets for an inte-
grated project, cost of procuring and oper-
ating an FLNG vessel, demand, and market
price for LNG.
FLNG projects have a shorter build period
(an estimated three years) compared with
conventional onshore LNG projects. This
means small stranded gas fields may capital-
ize on the advantages of a fast track develop-
ment. In addition, recent project cost com-
parisons indicate that FLNG project costs
may be in the region of $550 to $700 per
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P R O D U C T I O N O P E R AT I O N S
metric ton of annual capacity versus $1,200
to $1,500 for current onshore projects.
The commercial feasibility of an FLNG
project relies heavily upon a detailed analy-
sis of the risks such as use of new technol-
ogy, reservoir performance, contractual
terms for gas sales and LNG sales, project
delivery, the legal framework, and the regu-
latory and political environment.
Legal issues
To successfully develop stranded gas
resources, responsibility and legal risk for
each operation in the FLNG process must
be properly allocated on a sustainable basis.
Potential project structures: Under an in-
tegrated model, the upstream participants
share of production is set out in the respec-
tive granting instrument (i.e. the production
sharing contract or license and, as between
the parties, the joint operating agreement)
and the upstream participants build all nec-
essary infrastructure to produce, liquefy,
and market the natural gas. In the context of
FLNG, the upstream legal regime, applicable
fiscal terms, and local laws likely impact the
choice of structure. It is possible that the
costs to acquire and operate a FLNG vessel
will be recoverable under the terms of the
granting instrument, but may result in po-
tential rights of the State or third parties to
the project infrastructure. Key issues include
ownership of the gas, its quality specifica-
tion, its processing requirements, whether or
not the gas reserves will be dedicated to the
FLNG project, and where title to the gas will
pass. There may be specific requirements in-
cluding terms and pricing for marketing and
supply of LNG to the local market.
In a project company model, the project
company that owns the liquefaction facility
purchases feed gas from the upstream par-
ticipants, processes and liquefies the gas into
LNG, and sells the LNG to buyers for its own
account. This provides flexibility for upstream
participants, contractors, and buyers to take
an equity interest in the project company.
Under a tolling model, the owner/operator
of the liquefaction facility does not take title
to the gas or LNG as it is processed, lique-
fied, and stored. Instead, the tolling company
receives a fee for providing the tolling servic-
es. Tolling arrangements may be beneficial
where the upstream participants prefer not to
take FLNG construction and operating risk.
Construction and operation
Typical construction risks such as deliv-
ery on time and within budget and compli-
ance with all contractual and class require-
ments in accordance with the design and
performance criteria apply. Ideally the pur-
chaser will seek a performance wrap from
the primary contractor, either by entering
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into a single construction contract or by hav-
ing two separate contracts for the hull and
the topsides with an additional umbrella
contract allocating primary responsibility
for overall FLNG vessel performance.
Extensive commissioning may be re-
quired due to the implementation of new
technology and integration issues. Likely an
engineering, procurement, construction, in-
tegration, and commissioning (EPCIC) con-
tract will be agreed to ensure performance
obligations are met over an agreed commis-
sioning period. An operations contract also
may be required to ensure the safe, efficient
performance of the FLNG vessel over a lon-
ger period of time, together with detailed
provisions for operational handover and a
technology license for ongoing operations.
The FLNG vessel may be chartered as op-
posed to owned which typically means that
the owner will bear operational and perfor-
mance risk in return for a hire payment.
Charter terms need to be aligned with the
construction contract regarding delivery
and performance, in particular, the gas re-
ceiving capacity, production and send-out
rates, fuel consumption, and ship-to-ship
offloading capability (in addition to typical
LNG vessel performance requirements).
Contractual structure
Value chain interfaces demand that ma-
terial legal provisions and key terms be
aligned across the suite of project agree-
ments (including contract duration, force
majeure relief, and termination rights) to en-
sure the rights and obligations are allocated
to mitigate risk and to align participants in-
terests. Robust contracts addressing project
specific issues are key to ensuring that risks
are managed appropriately and effectively.
Conclusion
FLNG presents an opportunity to develop
stranded gas reserves. Due to the challenges
of implementing new technology, the first
FLNG project is likely to occur somewhere
with favorable sea conditions and a stable
fiscal and political environment. Market sup-
plies of LNG combined with the economic
downturn could slow progress of FLNG proj-
ects in the short term. Banks may be less
willing to finance riskier projects and buyers
may prefer more conventional projects as
they seek security of supply.
However, the number of planned FLNG proj-
ects and related spending is expected to increase
as rising energy demand encourages companies
to develop smaller gas reserves in areas that are
more remote. Provided development, imple-
mentation, operation, and legal challenges are
managed successfully, FLNG might offer a fast-
track, flexible, and cheaper alternative than con-
ventional onshore LNG terminal.
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