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Liquefied Natural Gas sharpens financial and environmental outlooks

Last updated: 12:00 16 Nov 2015 AEDT, First published: 11:00 16 Nov 2015 AEDT

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Liquefied Natural Gas (ASX:LNG) has achieved substantial progress at its Magnolia LNG operation in the U.S. by securing a low-capital contracting deal and realising important environmental approval momentum. 

The company has highlighted the positive economic profile of with a new contractor arrangement reflecting a new low for capital costs among project on the U.S. Gulf Coast.

This milestone has coincided exactly with delivery of a final environmental impact statement from U.S. authorities finding limited adverse impacts for the project.

The lump sum turnkey (LSTK) engineering, procurement and construction (EPC) contract with the KBR-SKE&C joint venture covers four LNG production trains, two containment storage tanks, LNG marine and ship loading facilities, supporting infrastructure and all required post-FID approvals and licenses.

The total EPC capital cost in the range of US$495 to US$544 per tonne of LNG plant capacity (for the 8-million-tonnes-per-annum or greater plant) establishes a new low for U.S. Gulf Coast projects and is substantially lower compared with recent LNG projects around the world.

Contract highlights include:

- EPC contract LSTK cost of US$4.3 billion for four LNG trains and associated facilities
- EPC guaranteed production of 7.6 million tonnes per annum, or 800,000 tonnes per annum greater than previous guidance
- The EPC contract LSTK plant design utilises LNG’s patented OSMR technology
- Installed capacity cost per tonne range based on final design at FID
- LNG plant fuel gas consumption of 8%, or 92% feed gas production efficiency guaranteed
- EPC contract LSTK price is valid to April 30, 2016

The contract has been confirmed in parallel with environmental traction for both Magnolia and its associated Kinder Morgan Louisiana Pipeline (KMLP) Lake Charles expansion project.

The Federal Energy Regulatory Commission (FERC) has issued the Final Environmental Impact Statement (FEIS) for the projects after a comprehensive environmental, safety and security review analysing publicly available data, input from other federal and state agencies.

In the FEIS, FERC concludes that construction and operation of the proposed projects would result in limited adverse environmental impacts, but these impacts would be reduced to less-than-significant levels with the implementation of Magnolia’s and KMLP’s proposed mitigations and the additional measures recommended in the FEIS.

Magnolia will restore up to 300 acres of wetlands in southwest Louisiana, enhancing the region’s flood protection and restoring indigenous marsh habitat.

It will be sited on a 115-acre parcel, setting a new benchmark for the minimisation of land use for LNG projects in the U.S. and the world, while still fully satisfying the stringent U.S. safety and security regulations.


Recent progress

Earlier this year, LNG signed two additional key supplier alliance agreements with Siemens Energy Inc. and EthosEnergy Group for Magnolia and future projects.

This followed an agreement with Chart Industries, Inc. (NASDAQ:GTLS) and was central to the company’s strategy to produce standardised, repeatable designs and processes.

Siemens (XETRA:SIE) will provide Magnolia LNG with the main OSMR process compression equipment and drivers for the project.

This equipment includes the main mixed refrigerant compressors and their gas turbine drivers, the ammonia refrigerant compressors with their steam turbine drivers, and the motor driven process gas booster compressors. 

Altogether, a total of 20 process compressors plus their associated drivers are covered under the purchase agreement.

LNG is also continuing discussions with a number of other potential partners after securing a binding offtake agreement with Meridian LNG Holdings Corp for firm LNG production capacity of 1.7 million tonnes per annum.

The Meridian deal includes a possible further 300,000 tonnes per annum to be offered at LNG’s discretion.

Each of the offtake negotiations are for initial 20-year terms, with some taking the form of a liquefaction tolling agreement and some being LNG sale and purchase agreements.


Analysis

The contracting and environmental progress at Magnolia is extremely  encouraging and highlights a number of the project’s superlatives.

The low-cost nature of the EPC contract is exceptional and provides confidence as final engineering activities get underway and offtake negotiations continue.

The environmental nod bodes well for a FERC approval in the near future, which would be a major milestone in practical project development toward financial close.

Reaching an agreement with Siemens also ensures that LNG has now standardised the liquefaction process for Magnolia.

This de-risks delivery of its strategy to become the low cost leader in the LNG industry by establishing an easy replicable process.


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