Dar & Company

 Floating Energy Systems:  A Nascent Sub-industry
(First published on www.SeekingAlpha.com on January 29, 2010)

The global energy supply industry continues to innovate. Given the scale, multiplicity, complexity and variability of the world’s energy supply system, innovation (both adaptive and transforming) is an essential characteristic of the industry. Floating energy systems, in commercial application and size, represent a nascent sub industry that has the potential to expand rapidly in several parts of the world.

These developments are occurring in the natural gas and nuclear industries. World resources and reserves of natural gas are quite often remote from major markets. This remoteness means that unless the fields are very large they cannot be commercially useful. Such reserves are referred to as stranded. There are also some import markets that are difficult to serve because of onerous siting issues on land within the importing country. These are stranded or underserved markets. Monetizing stranded reserves and underserved markets provides the incentive to innovate.

Industry estimates are that there are almost 2,500 small to fairly large gas fields that are currently stranded with reserves ranging from as little as 0.1 trillion cubic feet (Tcf) to as much as 5 Tcf. Floating LNG (FLNG) plants are conceived to monetize these stranded markets and fields. These are several fields in the Asia Pacific region, Brazil and West Africa that can justify large FLNG plants. These plants should not be confused with floating LNG ports, which are offshore import and regassification terminals. The first floating LNG port has already been constructed. It is anchored offshore Italy.

Floating, small scale, nuclear power plants are conceived to monetize electricity intensive, high economic value added opportunities that are either at the far periphery of the grid or remote from the grid. These opportunities may be rather transient or long lived. Maneuverability and the ability to site offshore, away from population centers, are attractive features of floating nuclear power plants.

It is generally held within the industry that Royal Dutch Shell is the leader in floating LNG technology. The company will, supposedly, order three FLNG plants at $5 billion each to monetize stranded reserves. Technip and Samsung Heavy Industries are designated builders. Flex LNG Ltd of Norway has already commissioned four smaller FLNG plants from Samsung. First deployment by Flex Energy may be in the Timor Sea by end 2013. The field under development has reserves of 1.2 Tcf, far too small for a conventional LNG facility but quite adequate for an FLNG vessel. Another Norwegian company, Hoegh LNG is also considering an FLNG vessel, with Daewoo Shipbuilding undertaking the design. Santos Ltd and GDF Suez are reportedly studying FLNG for a small project in Australia’s Bonaparte basin. Brazil’s Petrobras may use FLNG vessels for a project in the Tupi field. The pre-salt natural gas resources of the Tupi field may support about a dozen FLNG vessels.

Shell is using a design that can process 3.5 million metric tons (mmt) of LNG per year. Industry speculation is that Shell may deploy as many as 10 of these large FLNG vessels. The Norwegian companies are planning smaller vessels that can process up to 2 mmt at a cost of $2 billion each. Shell is likely to deploy its vessels first in Australia and then expand its geographic horizon. The vessels, of course, can be moved from field to field, basin to basin and continent to continent.

If Shell succeeds, FLNG will attract other majors as well as mini majors and independents to this emerging sub-industry. The industry will be driven by the propositions that there are no fixed assets that can be held hostage by governments, the vessels are easy to locate, there are significant cost benefits since all the vessels can be built in Asian shipyards, flaring is dramatically reduced, siting is much easier and FLNG projects can be deployed far more quickly than onshore, traditional, LNG projects.

The world’s first floating nuclear plant (called the Akademik Lomonosov) is scheduled to become operational by the end of 2012, off Russia’s eastern coast. It will be used to power the city of Viluchinsk on the Kamchatka peninsula. The city is a base for Russia’s nuclear submarines. The floating plant is being built for Concern Energatom at the Baltiysky Zavod shipyard in St. Petersburg by United Industrial Corporation. The construction contract is estimated at $315 million. The plant is scheduled for completion at the shipyard in 2011 and be ready for transportation by mid 2012 with delivery to Energatom planned for late 2012.

The plant looks like a ship. It is expected to be 472 feet long and 98 feet long. It will house two 35 MW KLT-40S reactors, similar to those used by Russia’s nuclear powered icebreakers, and two generators. The construction of a second plant may start in late 2010 to be deployed in the city of Pevek in Siberia. Several other cities in Siberia seem to have the potential to house such plants.

Gazprom is reportedly considering buying and deploying half a dozen of these floating nuclear plants to develop oil and gas fields near the Kola and Yamal peninsulas. Russia has offered Indonesia a 40 MW  floating  nuclear power plant for deployment in 5 to 7 years that can be moved from island to island to address acute electricity shortages. The Russians believe that there is a market for dozens of such plants worldwide, with  oil and gas E&P  and mining companies, interested in developing remote resources, providing a prime opportunity.

The rapid growth of the global gas and nuclear industries will be major energy investment themes in the first half of this century, with anticipated growth rates substantially higher than global coal and much higher than global oil. As the demand for fossil energy and electricity increases swiftly in the Global South, natural gas and nuclear power will be the favored sources of energy even as coal consumption in the steel, cement and power generation industries expands notably. Floating natural gas and nuclear systems may well prove attractive and competitive in several applications in scores of locations and floating energy systems could make the transition from novel proposal to respectable niche to important sub industry rather quickly.

There is another, much longer term, strategic significance to the successful commercial deployment of floating energy systems. This, of course, is the very large scale, global, development of ocean energy resources (beyond oil and gas, including the staggeringly vast amounts of energy trapped in methane hydrates). The movement of water, the flow of air above the surface of the oceans and the thermal gradients (temperature differences) among the various levels of the ocean moving from the warm  surface to the cold lower levels are tremendous, inexhaustible and highly reliable sources of energy for humanity. The technologies, legal structures and business models to develop these three ocean energy resources are nascent, at best. It will be another 20 to 25 years before large, commercial, ocean energy projects become profitable realities and another 30 to 40 years before the global ocean energy industry (assuming it comes into existence) attains a rapid growth trajectory. The floating energy systems being planned and imagined today, however, will be important bridges to this possible new energy industry. The natural gas and nuclear industries may well deploy scores of such systems. The ocean energy industry will need thousands.