1. LNG
Understanding:
Liquefied Natural Gas
[LNG REPORT 2012]

2. (LNG) - Report 2012
Market Trends and Opportunities
in the Philippines
1

3. a. Summary
Key facts:
LNG (Liquefied Natural Gas) is used mainly for
heating, cooking and electricity generation; it also has  Liquefied natural gas is produced
other industrial uses. by freezing methane to -260°F.
 Being able to turn methane into a
LNG facilities convert methane from gas into a liquid is creating global market for
liquid that takes up much less volume. This allows the natural gas (methane) to replace
the isolated markets that have
transport of LNG through ships to be more economical. historically defined the natural gas
Consequently, LNG technology is closely associated with market.
a global market for natural gas. There are few trading  As liquefaction and gasification
opportunities specifically related to liquefied natural gas, technologies become more energy
efficient, LNG becomes more
LNG has a substantial effect on the structure of the gas efficient and more economical.
market. On a smaller scale, LNG storage provides an
alternative to traditional natural gas storage facilities.
There has been active LNG trade in the Pacific region for many years. However, the opening up
of LNG regasification plants in the North American and European markets have provided a much larger
consumer base for LNG producers. This increased customer base allows aggressive investment into
better liquefaction technology, in turn, spurring more demand. As a result, LNG is rapidly becoming a
major factor in natural gas trading after several decades of relative obscurity.
2

4. b. Liquefied Natural Gas (LNG)
Natural gas reserves are found in reservoirs deep beneath the surface of the earth. These
reservoirs are trapped or stranded in porous rock formations (i.e. sandstones, marine shales, etc.) and
forms pockets of gas over crude oil deposits. They contain mainly carbon and hydrogen components
from the remains of plants and animals that build up over million years ago at the bottom of the ocean.
After a very long time of being buried deep beneath the earth, layers and layers of other sediments pile
up and build up high pressure from these sediments and along with the heat from the core of the earth
turns these organic materials forming reservoirs of crude oil and natural gas. These fossil fuels are then
extracted from marine shales in which they were deposited and from there they go into porous
sedimentary rocks. 1
In its purest form, natural gas is colorless, odorless, tasteless, shapeless, and lighter than air
type of fossil fuel. It is gaseous at any temperature over -161C and for safety purposes a chemical
odorant, Mercaptan is mixed to it so that it can be smelled if there is a leak. 2
Natural gas is deemed to be an environmental friendly clean fuel, presenting significant
environmental benefits when compared to other fossil fuels. The finer environmental qualities of
natural gas over coal or oil are that it is neither corrosive nor toxic. Commercialized natural gas is
sulphur free, it doesn’t produce sulphur dioxide (SO2). Aside from this the level of nitrous oxide and
carbon dioxide emissions of natural gas is also lower compared to the other fossil fuels. According to
Eurogas emissions of natural gas are “40-50% less than coal and 25-30% less than oil.” 3 This helps to
lessen problems of ozone layer, acid rain and greenhouse gases. In addition, its specific gravity of 0.60
which is lower than air makes it very safe because it can dissipate or rise when there is a leak. Natural
gas is also a harmless source of energy when it is transported, stored and used.
There are two forms of natural gas; one of these is liquefied natural gas (LNG), which is a form of
natural gas when it is cooled to a temperature of approximately -260F at atmospheric pressure. It
weighs less than one half that of water and is odorless, colorless, non-corrosive, and non-toxic. When
mixed with air it burns only in concentrations of 5%-15%, hence neither LNG nor its vapor can detonate
in an unconfined environment. Given that LNG has less volume and weight it’s easier to be stored and
transported. 4 Aside from LNG the other form of natural gas is compressed natural gas (CNG) which is
natural gas that is compressed to less than 1% of its volume at standard atmospheric pressure. Its
energy density is approximately 42% of that of LNG.
Natural gas is converted to liquid at standard atmospheric pressures by lowering its
temperature to -260°F. The process of liquefaction reduces the volume of the gas to 1/600th of its
gaseous form. This allows liquid natural gas (or liquefied natural gas) to be more compact and allows
easy storage and transportation when regular pipeline and storage facilities are not available. Due to the
1
"Natural Gas." UNCTAD website. http://www.unctad.org/infocomm/anglais/gas/characteristics.htm (accessed
September 10, 2011).
2
"Overview of Natural Gas." NaturalGas.org website. http://www.naturalgas.org/overview/background.asp
(accessed September 14, 2011).
3
"Natural Gas." UNCTAD website. http://www.unctad.org/infocomm/anglais/gas/characteristics.htm (accessed
September 10, 2011).
4
"What is LNG? : LNG." Hazira LNG and Port website. http://www.haziralngandport.com/whatislng.htm (accessed
September 15, 2011).
3

5. difficulty in domestic production because of the “hard-to-extract” nature of natural gas, LNG is
becoming an economical alternative wherein cargo ships are able to transfer enough fuel at low costs as
compared to small-scale transportation to meet domestic and international energy demand.
The natural gas industry is divided into the upstream and downstream section. The upstream
section is responsible for exploration and production of natural gas. To be more specific it includes the
exploration for potential underground or underwater gas fields, the drilling of exploratory wells and
afterwards operating the wells that would retrieve and bring the raw natural gas to the surface. In the
Philippines, the only currently operating upstream plant is the Malampaya gas field in Batangas.
Malampaya natural gas field extends up to Tabangao, Batangas wherein the raw natural gas or the wet
sour gas from the wells is being processed. Here the impurities of the raw natural gas are being removed
such as water, condensates, hydrocarbons, as well as other solid particles.
On the other hand, the downstream section consists of the selling and distribution of natural
gas. It includes the different power stations such as the Ilijan, Sta. Rita, and San Lorenzo power plants
that are responsible for the distribution of the natural gas industry to be used as energy for different
purposes of electricity, transportation, household use, etc.
The LNG market allows natural gas producers to monetize their investment. They can build an
LNG liquefaction terminal, and then sign a long-term agreements and contracts to sell their product
overseas. Instead of sitting on a natural gas field that might or might not ever be worth something in the
future, producers can build a pipeline to the nearest LNG terminal and ship their product as a liquid into
a major consumer market. This gets low cost producers access to the best consumer markets, and it
provides them with money to search for new suppliers.
4

6. i. LNG Composition Varies
LNG Composition
a.) Lean LNG (e.g., Atlantic LNG, Trinidad)
Nitrogen
Composition:
Methane
Nitrogen (0%) Ethane
Methane (96.8%) Propane
Ethane (2.7%) Butane+
Propane (0.3%)
Butane+ (0.1%)
b.) Rich LNG (e.g., Oman LNG)
Composition:
Nitrogen (0.4%)
Methane (87.9%)
Nitrogen
Ethane (7.3%)
Propane (2.9%) Methane
Butane+ (1.6%) Ethane
Propane
Butane+
5

7. c. LNG Process
There are three main steps in the LNG process: liquefaction, transportation, and regasification.
i. Liquefaction and Exporting. Liquefaction plants are located near regions where
natural gas is produced. Short-range pipelines transfer the gas from wells to the
liquefaction plant. The liquefaction plant cools natural gas down to -260°F, then loads it
into storage containers for transfer to a specially designed tanker ships.
Bringing natural gas to -260°F is an extremely energy intensive process. A considerable
amount of energy is consumed during the liquefaction and subsequent reheating
processes. From a climate perspective, the CO² emissions resulting from this processing
has to be included in the greenhouse gas emissions of LNG as a fuel source.
ii. Transportation. LNG tankers have to be specifically designed to handle extremely cold
liquids and keep them installed. Even then, some of the liquid methane will convert back
into gas. A small percentage of the natural gas will be lost in transportation for this
reason. Faster journeys and cryogenic systems to refreeze the boiled-off gas can reduce
these losses.
iii. Regasification and Importing. Once LNG is transported, it must be turned back into
gas before it is delivered to customer. This is usually done at a regasification plant. This
plant transfers the liquefied natural gas from the tanker ships and stores it in specially
designed containers to keep the LNG at low temperature until it is ready to be warmed
up. After it is warmed up, it can be placed into a pipeline for delivery to customers.
6

8. iv. Three Main Business Variants of Liquefaction Plants
Same participants throughout the supply chain
– Avoids need to negotiate transfer price and gas qualities
Qatar Gas, Rasgas, Sonatrach, NWS Australia, Darwin LNG
– Qatari plants have taken this to complete integrated projects including
import terminals in selected markets.
UPSTREAM
SHAREHOLDERS
DARWIN LNG
ConocoPhillips 56.72%
ENI Australia 12.04%
INPEX 10.52%
Santos 10.64% LIQUEFACTION
Tokyo Electric 6.72% DARWIN LNG
Tokyo Gas 3.36%
SHIPPING FOB
Physical Supply Chain LNG
Tokyo Electric Tokyo Gas
Corporate Relationships SALES
AGREEMENT
Shareholdings
BUYERS
Tokyo Tokyo
Electric Gas
G
7

9. Liquefaction plant a separate profit company
– Flexibility of ownership
– Negotiated feedgas price
– Main cost is purchase price of feedgas which is sometimes fixed as %age of LNG
price
Oman LNG, Atlantic LNG 1, Nigeria LNG, Malaysia LNG, etc
Malaysia LNG (Dua)
PRODUCTION UPSTREAM
SHARING
Petronas/ Sarawak Petronas: Owner
Shell Sarawak Shell: Operator
GAS SALES
AGREEMENT
Petronas 60%
Liquefaction &
Shell 15% Trading
Mitsubishi 15% MNLG 2
Sarawak 10%
LNG SALES
AGREEMENT
Petronas 62.44% Charter SHIPPING
Government 12.98% Parties MNLG 2
Foreign Investors 15.64%
(MISC)
Public 8.95%
Physical Supply Chain
Corporate Relationships BUYERS
Shareholdings
Kansai Toho Gas Tohoku
Shizuoka Gas CPS Sendai Kogas
Liquefaction plant as a cost center owned by theNOC or by producers
– Tolling type model covers OPEX of plant, plus small margin
8

10. – Flexibility of ownership
Indonesian plants, Atlantic LNG 2 ,3 & 4, Egyptian LNG , etc
Atlantic LNG 2 & 3
UPSTREAM PRODUCTION
BP, ECMA JV NCMA JV
QUASI REPSOL BG 45.9%
BG 50% Eni 17.3%
TOLLING
AGREEMENT CVX 50% Veba 17.3%
Petrotrin 16.9%
LNG PLANT
BP 42.5% BG 32.5%
Repsol 25% Physical Supply Chain
LNG
Corporate Relationships
SALES
FOB
BUYERS
Gas Natural Distrigas Gas de Euskadi BG Repsol Tractebel
Source: Gas Strategies
9

11. v. More and New Global LNG Players
- All have different (and changing) positioning in the global LNG business
NOCs
- Algeria, Egypt
- Qatar, Oman,
Adgas
IOCs - Indonesia, Malaysia
- Total - Nigeria Atlantic Gas Players
- Shell - Gazprom - BG
- BP
- GDF / Suez
- ENI, Statoil - Distrigas
- Exxon, Chevron - Stream
- ConocoPhillips (GN/Repsol)
- Botas
GLOBAL
LNG
MARKET
Utilities
- EDF Asian Gas Players
- Union Fenosa - Tepco, Tokyo Gas
- Chubu, Osaka Gas,…
- Iberdrola
- Kogas
- Endesa
- Essent - CPC (Taiwan)
- EON - CNOOC (Mainland)
- Centrica - Petronet, Hazira (India)
New Players
- Cheniere, Sempra
- Vitol
- Goldman Sachs
- Merril Lynch
- Japanese Shoshas
10

12. d. Products and Services
Natural gas can be used as both a fuel and as a raw material in manufacturing chemicals. As a
common fuel, used in households it may be burned in furnaces, used in water heaters, cooking stoves,
and clothes dryers. On the other hand as an industry fuel, it is burned in kilns (special furnaces) which
are used in order to manufacture bricks and ceramic tiles. It may also function as a steam generator for
water boilers and a source of heat for glass and food production. Basically natural gas serves as a primer
for petrochemical engineering which are chemicals that are extracted from natural gas or petroleum.
Petrochemicals are also used as a base in producing fertilizers, detergents, pharmaceuticals, plastics and
the like.
In the Philippines natural gas is mostly used for power generation. Several power plants in the
country such as the San Lorenzo Power Plant, Sta. Rita Power Plant, and the Ilijan Power Plant utilizes
this type of energy which gets its supply of natural gas from the Malampaya natural gas field. Aside from
this, the transportation sector in the country is also using this type of energy. Its use is being promoted
in the transportation sector for environmental purposes and to reduce the country's dependence on
imported oil thereby protecting the country from increasing oil prices around the world. Compressed
Natural Gas fuelled buses in particular is an example of a public utility vehicle that runs on natural gas
and a total of 41 Compressed Natural Gas buses are already operating in the country which run from
Batangas-Manila. 5 This bus program is known as “Natural Gas Vehicle Program for Public Transport”.
For more information on the uses of Natural Gas, refer to Appendix Section 4.
e. LNG Supply and Value Chain
i. LNG Imports vs. LNG local use
There are three major sorts of LNG activities:
1. International gas supply: method of transporting natural gas large distances around the globe
for bulk gas supply.
2. Local onshore use: natural gas transported in liquid form around a country usually in special
road tankers for local gas distribution or use as vehicle fuel.
3. Seaborne fuel: new market developing.
ii. LNG Supply Chain:
5
Jacob, Don. Interview by author. Personal interview. Department of Energy , August 10, 2011.
11

13. The Supply Chain normally consists of 4 links:
1. Upstream: field development, production, processing and transportation to the coast
2. Liquefaction (& export): the natural gas is cooled to its liquid state (LNG) and stored
3. Shipping: LNG shipping tanker transportation to market in another country
4. (import &) Regasification: the LNG is stored and then the liquid gas is returned to its gaseous
form.
iii. Conventional Feedgas
12

14. iv. Key Project Decisions and Variables
Four key project decisions that have to be considered:
a.) Markets: geographically, where?
b.) Customers: who?
c.) LNG Price: how much?
d.) Contact Strategy: risk profile?
Some key variables at stake:
a.) Liquefaction plant:
- How big?
- Process selection?
- How many trains?
b.) Ships:
- Ownership or chartered?
- How many?
- What size?
c.) Storage tanks:
- How many?
- How big?
v. LNG Project: Terminologies
Feasibility: initial investigations and considerations
Pre-FEED: more detailed considerations and calculations
FEED: exhaustive Front End Engineering Design study
FID: Final Investment Decision (to proceed with project or not)
EPC: Engineering, Procurement and Construction contract (main build contract)
Commissioning: first LNG from liquefaction or through import regasification
De-Bottlenecking: enhancing performance of existing, operational plant after several
years of operation.
vi. LNG Projects – Typical Timeline for an LNG Project in the U.S.A.
Source: http://www.oregonlng.com/pro_timeline.php
13

15. vii. Liquefaction Plants – Basic commercial models
Gas Ownership Model
(take price risk but not volume risk)
Service Model
(provide service and charge tolling fee)
14

16. f. Product Process
To locate deposits of natural gas, exploration geologists search for geologic regions containing
the ingredients necessary for the formation of natural gas: organic-rich source rock, burial conditions
sufficiently severe to generate natural gas from organic material, and rock formations that can trap
hydrocarbons.6
When a geologic formation that may hold natural gas is identified, usually but not always in a
sedimentary basin, wells are drilled into the formation. If a well goes into porous rock containing a
significant reserve of natural gas, pressure within the porous rock may force the natural gas up to the
surface. Typically, the pressure eventually declines until the natural gas must be pumped to the surface.7
Once natural gas has been extracted from the ground, it is usually transported by pipeline to a
refinery, where it is processed. Natural gas is processed in an extraction unit to remove the non-
hydrocarbon compounds, especially hydrogen sulfide and carbon dioxide. Two processes used for this
purpose are absorption and adsorption. 8
Absorption uses a liquid that absorbs the natural gas and impurities and disperses them
throughout its volume. In a process known as chemisorption, the impurities react with the absorbing
liquid. The natural gas can then be stripped from the absorbent, while the impurities remain in the
liquid. Common absorbing liquids are water, aqueous amine solutions, and sodium carbonate. 9
Adsorption is a process that concentrates the natural gas on the surface of a solid or a liquid in
order to remove impurities. A substance commonly used for this purpose is carbon, which has a large
surface area per unit mass. For example, sulfur compounds in natural gas collect on a carbon adsorbing
surface. The sulfur compounds are then combined with hydrogen and oxygen to form sulfuric acid
(H2SO4), which can be removed.10
When the impurities have been removed in the extraction unit, the natural gas is transported to
a processing plant, where compounds such as ethane, propane, butane, and other substances are
separated and removed for different uses.
After being processed it is then transported to the users thru pipelines which includes both onshore and
offshore, as a liquefied natural gas thru LNG vessels and LNG trucks, and lastly it is also transported as
compressed natural gas thru CNG vessels and multiple accumulator transport system. 11
6
NaturalGas.org." NaturalGas.org. http://www.naturalgas.org/naturalgas/processing_ng.asp (accessed July 24,
2011).
7
Ibid
8
Ibid
9
Ibid
10
Ibid
11
Ibid
15

17. Figure 1.Natural Gas Process
Source: Department of Energy
g. Producing LNG by Liquefaction
In order for liquefaction process to take place, the raw feed gas supply which comes from a
producing must first be clean and dry. The raw feed gas is scrubbed of dirt and hydrocarbon liquids
which are entrained, and then treated in order to eliminate trace amounts of two common natural gas
contaminants. These contaminants are hydrogen sulfide and carbon dioxide. The gas is then cooled to
permit the water to condense and then further dehydrated so as to get rid of the small amounts of
water vapor. The mercury must be removed at this stage if it is present in the feed gas. Next, the clean
and dry gas may be filtered before the process of liquefaction begins. To make sure that the liquefaction
is an efficient process, the gas must consist mostly of methane with only small amounts of light
hydrocarbons. 12
Liquefaction occurs via the cooling of gas using heat exchangers. In these vessels, gas flowing
through aluminum tube coils is exposed to a compressed hydrocarbon-nitrogen refrigerant. As the
refrigerant vaporizes, heat transfer is achieved, cooling the gas in the tubes before it is restored to the
compressor. The liquefied natural gas is pumped to a storage tank that is insulated where it remains
there until it can be loaded onto a tanker. 13
12
The Department of Energy. "Liquefied Natural Gas: Understanding the Basic Facts." Department of Energy.
http://www.fe.doe.gov/programs/oilgas/publications/lng/LNG_primerupd.pdf (accessed August 28,
2011).
13
Ibid
16

18. Liquefied Natural Gas molded in each train which has a temperature of about 260°F, is then
transferred to insulated tanks designed for storage at atmospheric pressure. Even if heat is added, the
temperature of boiling LNG at atmospheric pressure remains constant, providing that the gas vapour or
LNG steam is removed. The boil off gas, which is about 0.15 percent of the volume per day, fuels the
liquefaction facility, LNG transport ships and receiving terminals where the LNG is regasified. 14
At the liquefaction plant, LNG is transferred from storage tanks to the ship through pumps
which are specially constructed and jointed loading pipes devised to withstand the very low or cryogenic
temperatures necessary for liquefaction. Figure summarizes the process of LNG liquefaction.15
Figure 2.Components of an LNG Liquefaction Plant
Source: US Department of Energy
14
Ibid
15
Ibid
17

19. h. Preparing LNG for Use by Regasification
At a satellite installation or a marine terminal, pumps transfer LNG from storage tanks to
warming systems. In the warming systems, the liquid quickly returns to a vaporized state. 16
Ambient temperature systems utilize heat from surrounding air or from seawater in order to
vaporize the cryogenic liquid. On the other hand, above-ambient temperature systems add heat through
burning fuel in order to indirectly warm the LNG through intermediate fluid bath. The natural gas is then
set for delivery into the network of transmission and distribution of pipelines for usage by industries,
residential consumers or nearby power generation plants. 17
Figure 3.Components of Liquefied Natural Gas (LNG)
Source: US Department of Energy
16
Ibid
17
18