Online exclusive: Weak market sinks FLNG plans

Sarah Parker Musarra

When Exmar NV and Pacific Exploration and Production (PEP) agreed to terminate the liquefaction and storage agreement related to the Caribbean FLNG project, it became clear that the once-burgeoning FLNG market was becoming yet another victim of the prolonged industry downturn.

The agreement was originally executed in March 2012 for a term of 15 years from delivery of the floating liquefaction unit, which Exmar says has capacity of approximately 0.5 mtpa of LNG and a storage volume of 16,100 cu m (568,566 cu ft). The so-named Caribbean FLNG (CFLNG) vessel was slated to serve northern Colombia’s La Creciente field while operating off the country’s Caribbean coast. La Creciente is operated by PEP-subsidiary Pacific Stratus Energy Colombia Corp.

Since the agreement was signed for the vessel, “the domestic natural gas market in Colombia and international LNG market have changed substantially, making the liquefaction of LNG in Colombia no longer economic for PEP,” Exmar said in a statement.

The settlement agreement reached between the two companies on March 3 stipulates a termination fee payable by PEP to Exmar in monthly installments from March 2016 until June 2017.

Lower crude prices have had deleterious effects on the LNG market, and by extension, large-scale LNG projects. As the International Energy Agency noted in its 2015 Gas Medium-Term Market report, “through its direct and indirect linkages to oil, [gas] is not immune to the tremors shaking the oil industry.”

Troubles at PEP

Formerly Pacific Rubiales, PEP had already delayed the start-up of the CFLNG at least once due to “unfavorable market conditions,” according to Exmar’s provisional 2014 results report.

“Pacific Rubiales, however, confirmed that it will take delivery of the Caribbean FLNG in the course of 2H 2015. They remain committed to the project and are evaluating different alternatives, including the relocation of the Caribbean FLNG barge to a different site,” Exmar noted in the report.

The deferral was likely due to PEP’s overall financial difficulties. Suffering from the weak market, PEP has made multiple announcements throughout 4Q 2015 and into 2016 that it was “actively working” with its noteholders, lenders, and legal and financial advisors to restructure and extend repayments.

A January 2015 article by the Wall Street Journal noted that PEP’s share price has fallen 98% since 2011, citing the company’s expired lease on its prolific Rubiales field as a major source of its trouble.

In December 2014, PEP signed a heads of agreement with Gazprom Marketing & Trading Ltd. to supply around 0.5 mtpa of LNG for four years from the La Creciente field. However, Gazprom canceled the deal in December 2015, Reuters reported.

Weakening market

Exmar confirmed that CFLNG will be delivered in 2Q 2016 from the Wison shipyard in Nantong, China. With its PEP agreement terminated, the Belgian builder said it is actively negotiating new employment of the floating liquefaction plant with “several counterparts.” However, unfortunately for Exmar, the FLNG market has not fared well as of late: CFLNG is just one of a number of projects that have fallen through in recent months, another effect of the overall market downturn.

Earlier this year, The Business Times and other news organizations said that established FLNG player Petronas was deferring the delivery of its planned PFLNG 2 unit as part of a RM50 billion (more than $12 billion) budget cut.

The Malaysian national oil company made its final investment decision on PFLNG 2 in February 2014, at which time it announced  the award of the unit’s engineering procurement, construction, installation, commissioning (EPCIC) contract to a consortium comprising JGC Corp., Samsung Heavy Industries Company Ltd. (SHI), JGC  Sdn Bhd (Malaysia) and SHI (Malaysia) Sdn Bhd.

Höegh LNG Holdings Ltd. announced in February that it will hold all FLNG activities in favor of allocating all resources and capital to its core business of floating storage and regasification units (FSRU).  

In its statement, Höegh announced that its decision “is a consequence of the oversupplied LNG market and deteriorating energy and financial markets, which means that investment decisions for new LNG production facilities, including the FLNG segment, will continue to be challenging for the foreseeable future.” 

In contrast, Höegh said it believed market conditions for FSRUs to continue to be favorable, driven by the strong growth in new LNG supplies at what it called very competitive prices.

“The company sees a high level of project activity for new FSRU projects, promoted by both LNG producers as well as LNG importers and downstream gas consumers,” Höegh continued.

Weeks later, the Oslo-based firm secured financing amounting to $223 million for its seventh FSRU, slated for a 1Q 2017 delivery.

Not all FLNG plans are scrapped, however. Looking to use floating liquefaction technology to monetize stranded, marginal, or remote fields, Petronas still plans to debut its other FLNG unit, which it says will be the world’s first, offshore Sarawak in the Kanowit gas field later this year. The newly renamed, DSME-constructed PFLNG SATU is expected to be ready for sail away in 2Q 2016.  

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