FACHRURRAZI MY121060

1. Discuss how the LNG medium contract terms could give advantage to the buyer and seller in LNG operations?

Although the term medium/short or spot trade" is frequently used, it has a different connotation in the LNG markets. Normally, medium/short or spot trading refers to a sale and immediate delivery of a commodity, without restriction on subsequent sales. In most markets, medium/short or spot sales are the dominant commercial transactions. However, because of the planning required, the lack of globally liquid market with transparent prices, and the limited number and scale of the assets in the industry, arrangement of immediate delivery of an LNG cargo is rare. Furthermore, medium/short or spot LNG trades often refer to the delivery of multiple cargoes over an extended period, including cargoes delivered or redirected under long-term contract provisions. Accordingly, the terms spot and "medium/short-term" are often used interchangeably. Why has there been such a focus on medium/short or spot trades? Because of the economic nature of the business, with high fixed costs, marginal volumes (which generally manifest as medium/short or spot trades) represent virtually pure profit to be allocated among the participants in these trades.

The advantages a. Optimize the Wedge Volume Wedge volume is capacity created when a new liquefaction train is brought on line and LNG is available for sale before buyers achieve their long term contract volume off-takes. A liquefaction train requires very little buildup time before reaching full capacity, whereas SPAs very often include a buildup period-sometimes lasting for years-before the contract plateau level is reached. This is designed to allow the buyers time to build market demand that usually materializes at a more modest pace. LNG contracts also usually factor in extra time between the start of the plant and the start of firm contractual deliveries, to provide a

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buffer in the event of construction delay. During this period, the buyers are rarely obliged to take these early volumes. The dramatic increase in train sizes and output, along with improved EPC execution which has seen early delivery of liquefaction plants, lengthened the duration of the ramp-up period, leaving significant excess capacity available for spot sales. b. Optimize the Expiration of long-term contracts. Historically, before a long-term contract ended, the original buyer and seller renegotiated the terms and extended and often expanded the volumes under contract; maintain the volume flow without interruption. This is no longer always the case. The increased number of buyers and sellers regulatory changes, declining reserves and production behind liquefaction plants, and evolving corporate strategies result in the reduction-or nonrenewal-of volumes under term contracts. c. Solution for over commitment buyer. Projecting long-term supply needs is not exact science, and buyers may over contract for supplies because of both conservative and aggressive tactics. A buyer who has contracts far exceeding demand and adequate storage inventories will seek to sell contracted LNG volumes elsewhere. d. Maximize conservative liquefaction plant design. A focus on the reliability of deliveries versus project costs led to the overdesign of liquefaction trains; with the result that actual plant capacity is often well above design capacity (as much as 40% in some early LNG projects). Debottlenecking efforts that improve plant production also create extra volumes. The surplus volumes can be made available for spot trades. e. Contract and operational flexibility. Spot capacity can arise when a buyer in a long-term contract exercises whatever volume flexibility is permitted under the terms of these contracts. Even though this flexibility may be limited to 5% or less, they nevertheless represent a source of spot volumes. Spot volumes will also arise as LNG suppliers offer seasonal deliveries to temperature-sensitive markets, as has been the case in recent term purchases by Korea's Kogas. The off-peak volumes can be marketed elsewhere. Liquefaction plants can often ramp up

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production for short term durations for a variety of reasons. For example the ALNG plant, in Trinidad, can increase production by as much as 5% during rainy periods! f. Contract failure. In some cases, unforeseen circumstances will lead to the failure and early termination of an SPA. In one well-known example, India's Dabhol project, which was never completed because of a pricing dispute, reneged on its SPAs with Oman and Qatar, leaving these suppliers to find new markets. However, in contrast to Sonatrach in the 1980s, which was left with a surplus of gas when deals with the United States fell through the sellers were able to sell into the spot market while looking for long-term buvers.

2. Propose a cost reduction options along the LNG chain from exploration, liquefaction, shipping, storage and regasification terminals?

LNG facility costs are estimated to have dropped 30%-50% across the LNG chain between the early l980s and 2003. All stages have contributed to this - exploration and production, liquefaction, shipping, and regasification. The last five to ten years have seen some major reductions in LNG supply costs. These have come largely from increases in train size, improved fuel efficiency in liquefaction and regasification (mainly from high efficiency gas turbines in on-site co-generation facilities), improved equipment design, the elimination of gold-plating and better utilisation of available capacity, and more use of competitive bidding procedures. From 1990 to 2000, liquefaction costs have fallen typically by 25% to 35% and shipping costs by 20% to 30%. The cost of regasification has fallen less than costs for the other parts of the LNG chain since the 1960s. Technology and productivity gains have been largely offset by higher storage costs, the largest single cost component.

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Cost reduction in the LNG chain

Exploration and Production Upstream exploration and production costs have decrease substantially over recent years owing to the increasingly widespread use of three-dimensional seismic, horizontal drilling, and subsea completion technologies. Development can be successfully completed at far greater reservoir depths-and in the case of offshore development, far greater water depths-than was the case 20 years earlier. Unit costs for gas development can range between an effective rate of zero, when liquids can cover the entire upstream investment, up to $l.00/MMBtu in more complex reservoirs.

Liquefaction The unit cost of a liquefaction plant decreased by about a third over the last 30 years of the 20th century because of increased scale, design efficiencies, improved project management, and increasing competition between engineering, procurement, and construction (Epc) contractor. As an example, the three-train 6 6 MMt/y Malaysia LNG Satu plant was built in l983. Capital costs were about $433/tpa of LNG capacity. By contrast, the two-train 6.6 MMt/y liquefaction plant at Oman was built in the year 2000. At the time of construction, the two 3.3 MMt/y trains were the largest in commercial

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operation. Capital cost of the Oman LNC facility works out to about $273/tpa that is, a unit cost reduction of more than one-third. Liquefaction plants typically consist of one or two processing trains. The standard economic size of each train is now about 3 to 3.5 million tonnes (Mt). Adding a second train once a plant is built can reduce the unit cost of a liquefaction train by 20-30%. A single-train plant normally costs around $1 billion, although actual costs vary geographically according to land costs, environmental and safety regulations, labor costs and other local market conditions. Technological progress over the past four decades has led to a sharp decrease in investment and operating costs of liquefaction plants. The average unit investment for a liquefaction plant dropped from some $550 a ton a year of capacity in the 1960s, to approximately $350 in the 1970s and 1980s, and $250 in the late 1990s. For projects starting operation today, the price is slightly under $200 (all in current dollars).

Shipping The cost of ships has varied considerably over time. Poten & Partners has estimated that shipyard prices for LNG vessels have declined by as much as $100 million over the past l0-15 years. During the l980s, prices reached $260 million for 125,000-131,000 m3 tankers. However, Korea's Daewoo Marine Engineering and Shipbuilding agreed in March 2000 to build a 138,000 m3 tanker for Belgian shipping company Exmar at their Okpo shipyard for a price of under $l45 million. Admittedly this price represented an all-time record low for a large LNG new building; ship prices have moderated and rebounded since then. Poten & Partners estimated that in 2006, yard prices for a large (138,000145,000 m3) LNG tanker were approximately $200-$210 million. Nevertheless, today's yard prices represent a significant savings compared to the asking price l0 years ago for an LNG tanker that had a smaller cargo capacity, slower speed and higher boil-off rates.

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Transport costs are largely a function of the distance between the liquefaction and regasification terminals. Using a larger number of smaller carriers offers more flexibility and reduced storage requirements but raises unit shipping costs. The largest LNG carriers today have a maximum capacity of 135,000-140,000 cm. They cost around $160-170 million to build. Substantial reductions in cost have been achieved over recent decades thanks to economies of scale. Tanker sizes have increased from some 40,000 cm for the first generation to 140,000 cm nowadays. Costs for LNG tankers dropped significantly in the wake of the Asian crisis in 1998.

Regasification Terminals The costs of terminals varies considerably, depending on the local construction costs, the cost of land, the regasification technology and capacity, and the total amount of storage installed, which varies from 35,000 to over 2,000,000 cubic meters. The terminal owner decides on the required storage, base load, and peak vaporization capacity, depending on the seasonality of the market and the degree of security of supply required. A conventional onshore terminal with 200,000-300,000 cubic meters of storage now typically costs at least $500 million, not including land and downstream pipeline costs. Operating, maintenance insurance, and security costs are typically on the order of 3%-4% of capital costs. A major variable between terminals arises from the choice of vaporization technologies. Most Far East terminals deploy open-rack vaporizers (ORVs), which use seawater as their heat transfer medium and only fuel gas for backup vaporization. By contrast, most US terminals use gas-fired vaporizers since U.S environmental regulations make the use of ORVs impossible. While gas-fired vaporizers have a significantly lower cost and a smaller size than the ORVs, they also about 1.5% of the terminal's LNG throughput for fuel, making this the single-largest expense in operating these facilities. U.S terminals, especially in the Gulf of Mexico, are now experimenting with heat exchangers using ambient air for vaporization. Given these variables, terminal costs, including capital recovery have a range that can vary between $0.35/MMBtu and $1/MMBtu.