GPA Europe, Technical Conference

“GTL & LNG in Europe”, Amsterdam

23rd – 25th February, 2005

Challenges of Small Import Terminals

David Haynes and Paul Martin

Advantica Ltd
Ashby Road
Loughborough
Leicestershire
LE11 3GR
England

ABSTRACT

Investment costs to justify developing infrastructure to transport gas to market necessitate a

large, usually well developed market, for example western Europe.

The benefits of natural gas compared to other fossil fuels are well known. Indeed, increasing
environmental awareness means that policy makers are looking to supply natural gas, often
for power generation projects, to serve smaller centers of demand such as some of the larger
islands in the Mediterranean.

This paper looks at some of the challenges of developing small liquefied natural gas import
terminals. It considers the most significant barriers to overcome which are:

• Disproportionate economies of scale

o Securing supply of ‘small’ quantities of liquefied natural gas
o Capital requirement (per unit volume)
o Operational flexibility
• Price of alternative fuels
• Component interactions within the import terminal
o Storage/shipping/jetty trade off
• Fixed versus variable costs

The paper also draws on a strategic study that Advantica has recently completed for
supplying natural gas to the island of Crete for the power generation market, and considers
the option of compressed natural gas importation.

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INTRODUCTION
The benefits of natural gas compared to other fossil fuels, or fossil fuel derivatives, are well
known. Gas reserves close to major markets have been developed and, in many instances,
such as the United Kingdom Continental Shelf, have peaked in production and can no longer
serve the demand of the local market. Consequently, the shortfall in gas demand is
increasingly being met by sources remote from that market.

Investment costs to justify developing infrastructure, whether pipelines or LNG, to transport

gas to market necessitate a large, usually well developed, market like the UK or other western
European countries such as Spain, France, Italy and Germany.

Increasing environmental awareness means that policy makers are looking to supply natural
gas, often for power generation projects, to serve smaller centres of demand such as some of
the larger islands in the Mediterranean and Caribbean. One such potential project is the
supply of natural gas to Crete, for which Advantica has recently completed a strategic study
for the Regulatory Authority for Energy of the Hellenic Republic to assess the technical and
economic feasibility of supplying natural gas for power generation.

This paper looks at some of the challenges of developing small natural gas import terminals,
of the order of 1 million tonnes per annum (or less) of liquefied natural gas (LNG), and draws
on Advantica’s experience of the Crete scenario.

BARRIERS TO SMALL IMPORT TERMINALS

The most significant barriers to establishing small scale import terminals are:
• Disproportionate economies of scale
o Securing supply of ‘small’ quantities of LNG
o Capital requirement (per unit volume)
o Operational flexibility
• Price of alternative fuels
• Component interactions within the import terminal
o Storage/shipping/jetty trade off
• Fixed versus variable costs
Small LNG import terminals exist in Puerto Rico and the Dominican Republic, where LNG is
imported at a relatively small scale, specifically for power generation in combined cycle gas
turbine plants. The challenge of making small terminals a reality in the European market is
to address and overcome the barriers which would otherwise adversely impact on any
project’s success.

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SUPPLY

A small LNG project is likely to make comparatively small returns as a result of its scale. It
must, nevertheless, compete with larger projects to attract a supply of LNG and credible
project sponsor(s). The oil and gas Majors and Supermajors are likely to be interested in
larger LNG schemes and potentially more lucrative markets such as mainland Europe or the
US. A small project, thus, must consider either a second tier of participants or provide other
attractions to the market.

There are a number of existing and emerging mainstream European gas buyers who have
contracted a portfolio of long term supplies of LNG directly from producers. Generally, this
type of ‘portfolio’ player is active in managing its supply contracts and downstream
marketing position, and has the flexibility to divert cargoes to supply new markets and small
buyers. Furthermore, now that the European Union has outlawed destination clauses in gas
supply contracts as anti-competitive, the emergence of LNG portfolio suppliers could provide
an alternative and more flexible option for a small scale buyer to contract for guaranteed non-
source specific LNG.

An attractiveness of a small island buyer to a portfolio supplier is the fact that demand for gas
for power generations is likely to peak in the summer, part driven by tourism / air
conditioning requirements. Thus, a summer weighted profile can help an LNG portfolio
supplier to diversify from traditional base load winter premium markets.

PRICE

The price of gas leaving the terminal, or the power generated by that gas, must be cost
competitive with fuel or power delivered by market alternatives for the particular market
under consideration. Increasingly, under European Union competition directives, there is
also an expectation, although not a requirement, that gas (LNG) / power prices will be similar
to mainland values thereby allowing a similar regulatory regime.

OPERATIONAL FLEXIBILITY Operational flexibility required for a small

import terminal supplying a power station
LNG import facilities in Europe tend
to operate at base load and contribute
to a larger diverse infrastructure
which is likely to cover indigenous
production and / or import from
pipelines; demand swings can, thus,
be satisfied by the use of
complementary supply systems.
However, small isolated import
facilities, such as one servicing a

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large island community or a dedicated power plant, may have to achieve a wide range of
operational conditions. Consequently, technical specification, equipment selection and turn
down are critical issues, and it is arguable that small terminals servicing such markets should
have a higher level of operational flexibility; flexibility equates to additional costs.

CAPITAL DRIVEN SPECIFICATION

The capital requirements of an LNG import terminal tend to be dominated by the costs of
marine facilities and the cryogenic storage facilities for LNG. Site preparation, however,
may also be substantial.

The costs of marine facilities, and also site preparation, are essentially independent of the
terminal size (at a given site). The cost contribution of the project will, however, be many
times more for a smaller throughput terminal; small terminals, therefore, require careful site
selection.

The costs of the marine facilities are a function of three elements; the length of the jetty
required to reach an adequate water depth, the ship size range that needs to be accommodated
(which also influences the former) and the need or otherwise for artificial protection against
metocean / weather conditions. These three elements are not independent and have an
interrelationship; for example, consideration of smaller ships may result in specification of a
shorter jetty (and less dredging), but smaller ships are more susceptible to weather effects,
and are more likely to require a breakwater.

The basic specification for many terminals generally requires that every LNG ship ever made
should be able to dock at the jetty. For a small terminal the range of ships has to be carefully
considered. The main decision is whether small/medium capacity LNG vessels only will
supply the terminal or whether the terminal will be designed to receive ‘standard’ worldscale
138,000m3 vessels. It appears attractive for a small import project to use small ships as the
onshore storage capacity required (itself a high cost item) can be reduced. However, the vast
majority of the LNG shipping fleet are 125,000m3+ capacity vessels. Furthermore, unless a
dedicated new build small ship is commissioned (itself an expensive option), the majority of
small ships within the industry (‘Medmax’, sub-60,000m3 capacity) are ageing and have
limited lives and uncertain futures (potentially decommissioning) once their current contracts
expire.

The LNG exporters perspective on small ships is also interesting. A small ship takes almost
as long to load as a 138,000m3 carrier while the value of the product loaded is less than a
half. Accrued costs (tugs, pilots, etc) are similar to the larger ship while simultaneously using
one berthing slot. The ability, therefore, to accept a 138,000m3 ship may therefore be crucial
to the success of a small LNG terminal.

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The above arguments bring the subject nicely onto LNG storage tanks, the second high price
fixed project element. The storage tank size and number is therefore the other key variable in
project design; a one tank solution is almost a necessity for a viable small terminal. Storage
tank capacity and margins are key issues and depend not only on cargo sizes but on
commercial / contractual rules, metocean / weather conditions and political considerations.
Nevertheless, there must be sufficient storage available to:

• Receive the whole of the cargo designated for the terminal without unnecessarily
holding up the LNG carrier.

• Retain sufficient quantity of LNG so not to unnecessarily impact on the downstream

market prior to the next delivery of LNG (i.e. to allow a reasonable buffer between
ship deliveries in the event of late delivery).

Contractual rules and allowances for metocean conditions generally have industry norms so
the emphasis must be on specifying a strategic reserve appropriate to the application under
consideration. The exact value of the strategic reserve often appears to be selected by non
project staff, usually politicians, and to be relatively arbitrary, although over specification is
the more likely. However the impact of political values on a project should not be
underestimated as they are often crucially important in the regulatory process.

To minimise costs a single tank solution is preferred; currently the ‘standard’ industry size
LNG storage tank is 160,000m3, though a larger tank size is feasible (a 180,000m3 tank is in
service in Japan). A 160,000m3 working volume tank provides a maximum buffer volume of
22,000m3 of LNG if supplied by 138,000m3 ships, which represents a few days supply for a
typical power plant. Seismic considerations may limit storage tanks to smaller volumes
(140,000m3 or less) – requiring either a two storage tank solution or small cargo deliveries.

Maxium buffer volume and

storage tank size

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VAPORISATION EQUIPMENT

As well as the storage tanks, LNG vaporisers are the other key equipment item requiring
careful selection. The vaporiser of choice for most locations where warm water is present,
including the Mediterranean, is a sea water based system. The traditional offering being the
open rack vaporiser but shell and tube units are becoming more common and, arguably, the
technology of choice if the LNG terminal is co-sited with a power plant. There has been little
negative evidence of environmental damage provided water velocities are low and return
temperature differences are minimised: current best practice in this area is about 7°C. The
principal operating cost is the power required for the pumping of the seawater. For small
terminals, however, the cost of providing the infrastructure for a sea water system may be
prohibitive as both the concrete intake and the need to locate the outfall some distance away
make a considerable cost contribution.

As a result the submerged combustion vaporiser, which predominates in colder climes, may
need to be considered. These units, which are significantly less capital intensive than open
rack units, however, need to burn gas (often 1.5% of throughput) which leads to higher
operating costs and emissions to the air.

Large scale air vaporisers would be ideal for small terminals but do not yet have sufficient
track record within the industry to allow their installation without a conventional alternative
provided as a back-up or to handle seasonal load variations. These vaporisers also require a
considerable land area for installation.

Typical Equipment Selection for a Small LNG Terminal

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ARE THERE ANY SHORT CUTS?

For LNG terminals providing fuel to power plants, there is opportunity to save considerable
cost, and also improve performance, by integrating the design of the LNG terminal and the
power station, and sharing common items; the integration of vaporisation and power
generation are particular cases.

Again with power plants there is the potential to use an alternative fuel for power generation
which can allow the LNG terminal to be simplified by reducing the need for high storage
margins, flexibility and high reliability. Gas oil storage, for example, is much cheaper on a
volumetric basis than LNG. Oil backup, however, reduces many of the environmental
benefits of the power project and can lead to increased maintenance of the gas turbines.
More land area is required for the oil storage and environmental protection measures will also
be required.

One major impact is more subtle. Where oil is delivered direct to the terminal by ship, the
volumes of oil required are likely to be delivered in tankers considerably smaller than the
LNG carriers: the size of these vessels makes them much more susceptible to weather
impacts which may, in turn, require mitigation by an expensive breakwater.

WHAT ABOUT FLOATING OFFSHORE SOLUTIONS?

The key issues here are storage margins and LNG packet size. The chief decision is whether
to purchase a new build Floating Storage and Regasification Unit (FSRU) or to convert an
existing LNG carrier.

An LNG conversion appears very attractive. The vessel is likely to have paid off its capital
and therefore be available at a relatively low price. The vessel, however, will be of similar
size, or probably smaller, than most of the current LNG fleet that is likely to deliver to it. To
receive a new LNG cargo, the FSRU will have to have essentially emptied its tanks. Weather
or contractual delays would then have a major impact on the downstream operation which
would almost certainly require an alternative fuel supply, with associated jetty and storage
tanks: all the items and costs that going offshore was trying to eliminate.

A new build ship could be designed for any storage capacity and not therefore have these
limitations. The downside now is capital cost. Recent construction prices for a 138,000m3
LNG carrier have been of the order of US$175 million, or $1270/m3. A 160,000m3 full
containment storage tank (before the current escalation in steel prices) would cost in the
region of $40-50 million or $300/m3. The price differential allows $100 million in marine
facilities. No contest, the LNG industry will keep its feet dry!

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The above analysis does not mean that offshore LNG is uneconomic just that it is less
attractive than most onshore options. Going offshore therefore works only when there are
clear impediments to an onshore project such as environmental impacts, public unease or
other regulatory issues.

The final offshore issue that needs to be considered is deliverability. The availability of an
LNG plant can be calculated and spare equipment specified to ensure gas supply in almost all
eventualities. The one uncertainty is the impact of weather on the unloading process.
Onshore these impacts can be addressed by storage margins, site selection or, if necessary, by
the use of breakwaters. Offshore, the issue is less certain and storage margins, the most
expensive mitigation, are the only fully proven option. Several companies are developing
LNG unloading systems for open water but none is yet in service. With the exception of the
‘Energy Bridge’ concept no one has yet had the confidence to sanction one of these systems
for commercial use.

The Energy Bridge concept is potentially robust, based on an oil system that has operated for
many years in the harsher parts of the Norwegian North Sea. However, for a continuous
LNG supply system Energy Bridge has to essentially tie up one ship as a storage facility.
Adding in the cost of this extra ship, the additional shipboard systems for vaporisation,
moorings and subsea pipelines, the overall result is a scheme of, at best, similar capital
investment to a conventional terminal.

IS THERE ANOTHER OPTION – CNG?

Compressed natural gas (CNG) has been developing as a potential bulk gas transport system
over the last 10 years. As yet it has not been commercialised but all 6 major developers, in
the public domain, report many ongoing developments suggesting that the first terminal may
not be that far away.

The CNG developers have largely reached an impasse. They have done most of the work,
agreed the calculation methods and taken preliminary soundings from the regulators. These
designs are impressive and in most cases well argued and thought through. But they are not
yet here. The way forward to commercial reality is now expensive. Prototypes must be built
and tested, detailed assessments funded and lengthy regulatory consents confirmed. To move
forward CNG needs a project or a venture capitalist to invest.

CNG’s problem has been LNG’s recent success. The LNG industry has worked hard over the
last decade to take costs out of the system. This has often been achieved by economies of
scale, the opposite of what we are discussing here. However, the image this has generated is
that LNG can do almost everything. A customer wants gas, and he wants his gas as LNG.

CNG has not generated this level of excitement and suffers from a relatively low energy
density in transport, around 200+:1 compared with 600:1 for LNG, and much smaller cargo

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capacity vessels compared to worldscale LNG ships: a CNG project can look too much like
running a low tech shipping company rather than a high tech gas project.

CNG has to become exciting and that means excellent economics, transparently presented
from supply source to demand. It must make a margin over LNG to overcome the market
entry risk. Once that first project happens, others will follow. But how long to that first
project?

CASE STUDY – GAS OR LNG TO CRETE

Advantica has recently completed a concept design for a small LNG terminal on the island of
Crete for the Greek regulatory authority, RAE. This gas import project, which included
assessing CNG, was to serve a power station which would, over the period of a decade,
develop up to a capacity of 900 MW.

The proposed terminal site, on the north coast of the island, is rocky, requiring significant site
preparation to accommodate an LNG terminal and power plant. In contrast, the site is
somewhat sheltered and has a short distance to deep water allowing a relatively low cost
marine facility. The LNG carrier size using the terminal was a crucial decision and was
based primarily on commercial considerations and also the desire to avoid a breakwater; the
use of worldscale 138,000m3 ships was ultimately selected.

Storage margins presented considerable difficulties given the high seismicity of the island
and the need to accommodate large LNG carriers. An onerus security of supply target was
initially set but which was relaxed after further study and consideration of mitigation
strategies. Two storage solutions were eventually proposed, a one tank terminal and a two
(smaller) tank terminal, with the ultimate selection dependent on more detailed seismic and
geotechnical studies.

The type of process and regasification equipment selection was conventional but the high
level of flexibility required led to the selection of, in the case of the high pressure send-out
pumps, two equipment sizes to cover all demand scenarios without exceeding turndown
limits.

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The LNG terminal had a relatively high capital cost, per unit basis, compared to those of
conventional base load size. However, the economics were sufficiently positive to be able to
compete against existing mainland gas and electricity prices.

Three CNG options were also developed but, at best, proved to be marginally less attractive
economically once allowances had been made for back up fuel storage, supply and loading
equipment and import infrastructure.

CONCLUSIONS

Small LNG terminals can be designed economically, particularly for power generation or
island markets. Key design decisions concern LNG ship sizes and storage volumes.

CNG continues to develop as a new gas transportation system but perceived advantages have
been offset by improvements in LNG economics over recent years.

A recent project for the island of Crete demonstrated the practical issues in designing a small
terminal but also confirms the potential economics.

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