Liquefied natural gas

members, any suggestion of cartel activity is likely to cause concern amongst parties
seeking to develop LNG projects or those relying on LNG imports.

4. LNG value chain

4.1 Introduction
The LNG value chain is a process continuum by which natural gas is produced,
transformed into LNG, transported from where it is produced to where it is needed
and consumed once it has been restored into its gaseous state as regasified LNG. The
value chain lends itself to divisions between the upstream (being natural gas
production, transportation and liquefaction), the midstream (being LNG sales and
shipping) and the downstream (being LNG regasification and regasified LNG
storage and downstream transportation). The following diagram illustrates the LNG
value chain.

Upstream Midstream Downstream

Storage &
Natural Gas Natural Gas Natural Gas LNG LNG
LNG Sales Downstream
production transportation Liquefaction Shipping Regasification
Transportation

4.2 Natural gas production

A party may hold an entitlement to develop natural gas reserves in a variety of ways.
It may hold its entitlement through a bilateral contract between the host government
(commonly known as a production sharing contract, concession or licence), or under
a statute (eg, in Australia). Regardless of the form which the entitlement takes, it will
usually contain a risk-sharing mechanism whereby the private sector contractor bears
the upfront risk associated with exploration and development of the field in return
for a potential profit-share from production once it commences. In addition to the
risk-sharing mechanism, many production sharing contracts and concessions contain
a requirement for the contractor to remit a portion of its production to the domestic
market. Whilst much has been made of uncertain domestic requirements in emerging
markets, notably Indonesia and Nigeria, contractors in more mature markets such as
Australia must also grapple with requirements to make a share of production available
domestically at below-market prices.
In order to monetise natural gas reserves, the field or block must be developed.
Development of a field with a view to producing LNG is no different from
developing a standard natural gas field. Wells are drilled and appraised, water and
other impurities removed and processed natural gas is then transported by pipeline
to a nearby liquefaction plant.
In an unintegrated LNG project which is not based on a tolling model, the LNG
project company will need to enter into one or more natural gas sales agreements
with natural gas suppliers in order to procure the supply of natural gas to the LNG

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