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Cost of natural gas & LNG logistics


Published on March 19, 2017

Kenneth Engblom Follow


551 32 150
Director, Sales & Marketing at Wartsila Finland Oy

Thetechnologyofconvertinggastoliquid(LNG),andtherebyreducethevolumeto
1/600:thhasopenedupgreatopportunitiestotransportanduseourcleanestfossilfuel
forpowerproduction,transportationandheatingbasicallyanywhereintheworld.

ThepurposeofthisarticleistogiveanoverviewoftheeffectoftheLNGlogisticson
theenduserpriceofLNG.

1.Cost Adders along the logistics chain

ThefinalcostofLNGatitseventualdestinationwilllargelybedependentonthelength
ofthelogisticalchain.Themaininfluencingparametersinthisarethesourcecostofthe
LNG,thelocationoftheLNGliquefactionplantversusthefinaldestination,thesize
androuteoftheLNGcarrier,thesizeandlocationofthereceivingterminal(s),the
utilisationofBOGintheusersprocesses,andtheirrequirementsregardingthe
availabilityofgas.

Figure1.TypicalvaluesforthecostcontributorsoraddoncostsintheLNG
logisticschain.

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LetustaketheexampleinFigure1above.ThestartingcostistheHenryHubindex,
whichisthepricingpointfornaturalgasfuturescontractstradedontheNewYork
MercantileExchange(NYMEX)andtheOTCswapstradedontheIntercontinental
Exchange(ICE).AssumingtheHenryHubpricetobe3.0USD/MMBTU,ourexample
looksatwhathappenstothispricewhendeliveredfromtheSouthernUSgasnetworkto
aconsumeronanislandsomewhereinAsia.

Tomakethispossiblethereareafewsteps,allofwhichaffecttheprice,alongtheway.

Firstofall,thegasneedstobepurchasedandsenttoaliquefactionplantintheUSA.
Thecostforliquefyingthegasdependsonthecostoftransferringthegasfromthe
HenryHubpricedpipelinetotheliquefactionplant.Tothismustbeaddedthe
investmentandrunningcostsoftheliquefactionplant,plusstoringtheLNGpriortoan
LNGcarriercomingtoloadit.Thecombinedaddoncostforallofthiscouldbein
the+2.6USD/MMBTUrange.

Additionally,whileloadingtheLNGcarriertherewillbesomeportfeesandintransit,
potentialcanalfeesaswell.PassingthroughthePanamacanalwitha173,000m3vessel
willcostaround380,000USD,whichwouldadd0,1USD/MMBTUtothecostofthe
LNG.However,themajorshippingcostswillcomefromthefuelusedduringthe
journey,plusthedailyshipcharterrate.Thetotalshippingrelatedcostswillnaturally
dependontheshipssizeandthelengthofthevoyage.Inthisexamplewehave
assumedanaddoncostof+1.1USD/MMBTUtocoveralltheshippingrelatedfactors.

Uponreachingthedestination,theLNGisunloadedfromthecarriertothereceiving
terminal.Theinvestmentandoperatingcostsforareceivingterminal,plustheharbour
feescanaddafurther+0.8USD/MMBTUtotheLNGscost.Tothatwecanassumean
approximateadditionof0.1USD/MMBTUforregasificationandanother0.2
USD/MMBTUforthepipelinefee.Thiswillthenalladduptoagaspriceofabout7.8
USD/MMBTUfortheconsumerattheendofthegaspipeline.

IftheenduserneedssmalleramountsofLNGthanthelargeLNGterminaliswillingor
abletosell,hewillneedtopurchaseviamediumscaleoperators.Inthatcasehewould

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beabletobuyLNGfor7.5USD/MMBTUfromthelargeterminal,towhichwouldbe
addedthemidscalelogisticalcosts.Thefinalpriceforthemidscaleconsumerwould
thenbeintherangeof10,0USD/MMBTU.

Finally,forsmallscaleusers,therewouldbeanothersmallerstoragewiththeLNG
beingshippedeitherwithasmallsizecarrier,oranLNGtruck/ISOContainer.Thefinal
priceheremightbeasmuchas12.8USD/MMBTU.

Thus,inthistheoreticalexample,forthesmallgasuseronanislandsomewhereinAsia,
theoriginalHenryHubpriceof3.0USD/MMBTUwillendupbeing12.8
USD/MMBTUathisfinaldestination.Asacomparison,LNGsoldinISOcontainers
FOBMiamiisrangingfrom1016USD/MMBTU.

2. Optimising the Logistics Chain

Sincethemajorcostofproducingelectricityisthefuel,thereisahugedifferenceifthe
costoffuelis3USD/MMBTUinsteadof12,8USD/MMBTU.Itis,therefore,inthe
endusersinterestthatthisvaluechainisascostefficientaspossible.Thereareseveral
meansofoptimisingtheLNGlogisticschaininordertoreducethecostofLNGorgas
atthefinaldestination.Thelogisticschain,whichincorporatesthelarge,medium,and
smallscalechainscanbeverycomplex.Tobeabletooptimisethiscomplexchainwith
lotsofvariables,WrtsilhasdevelopedanLNGValueChainoptimisationtool.This
toolestimates,throughaniterativeprocess,thecostofLNGatitsfinaldestination(s).
Thetoolrequiresvariousinputs,suchas:

Thetoolworksinsuchawaythatfirstonedefinestheconsumers,thelocations,and
theanticipatedconsumptionprofile.Basedonthisthelogisticsareanalysedinorderto
decidewheretogettheLNG,andwherethereceivinglocation(s)shouldbe.Therecan
beseveraldifferentendterminalsandconsumerlocations.Dependingontheexporting
terminalscompliancewithsmallerships,itcanalsobedecidedifalargebreakbulk
intermediateterminalisneeded.Then,basedonthenumberofterminalsandtheirsizes,
thesizeofshipsandtheroutingscanbeproposed.

Thus,withallthebasicparametersinplaceandthebasicsetupprepared,the
optimisation/iterationstartswherebytheparameters,includingtheLNGpurchaseprice,
theterminalEPCcost,andthecharterratesaresimulatedtoarriveattheoptimal

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