Arbitrage in Liquified Natural Gas Assignment

Arbitrage in Liquified Natural Gas Assignment Words: 1704

Now It Is a common replacement for crude OLL and a major source of energy for many nations. Natural gas comprises 22% of worldwide energy demand (Morgan Stanley Research, March, 2011). Mantas consumption is forecast to double by 2030. It is the fastest growing energy source in the world and the most flexible of all primary fossil fuels. Its uses include power generation. Home heating/cooling. Fertilizer and Is also convertible to diesel fuel for automobiles. It is also colorless, odorless and burns cleaner than other fossil fuels.

Unlike oil and coal, natural gas cannot simply be loaded on a ship or train for transportation from its source to the consumer. Historically, gas required expensive pipelines which were uneconomic over large distances. The other option was using complicated conversion systems to cool the gas into liquid form or modify its chemical composition to allow conversion to other products. Technology advances and declining costs have finally allowed gas to overcome these economic challenges. Introduction In the united States energy Independence has been a hot topic since the oil embargo implemented by OPEC in 1973.

Don’t waste your time!
Order your assignment!

order now

At the time, the embargo awakened an awareness let travel, muscle cars and air conditioned homes scared the country into an energy policy to expand production and adopt conservation strategies. In this context the oil industry experienced a domestic boom. The boom to produce was reinforced as West Texas Intermediate crude skyrocketed between 1970 and 1980 from under $4 per barrel to $50. Naturally, expanded drilling created an environment for enterprising companies to build fortunes. Money was flowing for raw materials, land, engineering, pipe, drill bits, drilling mud and rough necks who could hit the pay ones deep in the ground.

A frenzy for black gold built industries that hadn’t existed before. Fast forward to the early sass when diplomacy between the US Reagan Administration and Saudi Arabia resulted in a rapid increase in Saudi production to drive down the price. By 1985 the price per barrel (BP) was down to $12. This achieved the desired result of starving the former Soviet Union of petrol dollars and also killed the industry in the states that had flourished over the last decade. The producers at the margins shut down and wells were plugged and abandoned. Enter he sass’s and America was headed for a mild recession.

By the end of July, 1990 oil was trading at $21 BP. On August 2, 1990 Sudan Hussein’s Iraqi Army invaded Kuwait and annexed it as the 19th Iraqi province. By Gauge 6 oil had climbed to $28 BP and by October the price had risen to $46 BP. Again, America was reminded of their dependence on imported oil. In response, the crumbled industry of old entered a period of growth that has continued to this day. The growth has been challenged by prices that rise and fall during economic cycles, but improved technologies have overcome thinning margins when prices drop.

Specifically, advances in seismology, directional drilling, expandable tubes and “franking” or fracturing rock formations with high pressure water to release hydrocarbons have enabled producers to get to the more challenging oil that wasn’t viable in the past. These advances coupled with higher prices over the past decade have strengthened the industry and fostered continued research and development on drilling techniques. Currently the industry is so strong that domestic production is expected to average 10. Million barrels per day (bad) by the end of the year. This is anticipated to rise to 11. Million bad next year and could keep climbing through 2020 (Fay, The Big Story). This growth will lessen our dependence on oil imports, but still fall short of the 18. 7 million bad Americans use. On the other hand, natural gas production is expanding faster than it is consumed by domestic users. Therefore, some opportunities to export natural gas will be possible if the costs of production and transportation can be offset with prices in other markets around the globe.

This is where my analysis of natural gas and arbitrage opportunities begins. Appendices 1 – 7 show export volumes, prices ND H (Henry Hub) spot prices. LONG becomes a viable arbitrage opportunity when the H prices are at least $4 less than market prices at the receiving terminals in Europe and Asia. Background As a result of new technology and expanded domestic production, the United States is flush with vast amounts of natural gas. The estimated domestic reserves continue to climb in spite of rising production. See table below.

However, over the next few years this challenge could easily be reversed due to the expansion of LONG (liquefied natural gas) exports. Ironically, the low cost gas which is hurting the producers’ margin today is going to open the doors to incredible arbitrage opportunities to sell US gas around the globe tomorrow. There are a number of reasons why global gas prices are several multiples higher than the spot price for US gas at Henry Hub, but the short answer is how gas is priced in Europe and Asia compared to how it is priced in the US.

The US produces gas and stores it underground for later consumption. Prices tend to fluctuate based on the capacity of pipelines because the amount available from storage always exceeds the immediate demand even during the hottest days of summer or coldest nights of “inter. The Lower 48 working natural gas inventories as of October 31, 2012 were at an end-of-season record of 3,923 billion cubic feet (Bcc), based off an interpolation of the levels reported in the last two Weekly Natural Gas Storage Reports (which estimated stock levels for October 26 and November 2). This reflects a 3. Percent [ear-over-year increase over inventories in 2011, and is 6. 8 percent above the five- {ear average storage levels on October 31 for 2007-2011. The United States is swimming in gas. The rest of the world isn’t so lucky. They also pay a lot more for their consumption because prices are not based on pipeline capacity from what amounts to an endless source, but are more closely tied to equivalent Btu(s) of crude Oil and the market price of crude. A barrel of oil contains approximately 5. 8 million TU(s). Therefore, the math for a million Btu(s) of oil is relatively simple.

The LONG plant will be the largest floating structure ever built, six times as large as a Intuit-class aircraft carrier. Floating liquefaction plants have some advantages over the traditional land-based facilities. First, smaller and more remote fields can be developed where a land-based facility would be too expensive. Second, floating terminals avoid many of the environmental objections that block onshore terminals from gaining government approval. Third, they should be cheaper and more flexible than the custom-built onshore facilities.

Finally, floating LONG receiving terminals, which turn the liquefied cargoes back into gas for consumers to use, can be installed in months. Floating terminals in Dubbed and Kuwait started in 2010. This trend is expected to grow as more floating terminals are proven successful. Definitions Liquefaction refers to the physical transformation of gas into liquid. In the oil and gas industry this liquefaction of gas may be processed Just by compression, Just by refrigeration, or both in combination depending on the gas. LONG Liquefied natural gas (mainly methane and ethane) compressed at iterate pressure and cooled to -OFF to remain liquid.

The volume of natural gas as liquid is 1/60th of its volume as gas. LONG is stored and transported in insulated pressure containers. Log Train An LONG train is a liquefied natural gas plant’s liquefaction and purification facilities. In order to make it practical and commercially viable to transport natural gas from one country to another, its volume has to be greatly reduced. To obtain maximum volume reduction, the gas has to be liquefied through the application of refrigeration technology which makes it possible to cool the gas down to approximately -160 co.

This process also requires very strict safety measures and precautions during all liquefaction stages, due to the highly vulnerable and flammable nature of the gas involved. Since the numerous impurities that are naturally found in the raw gas freeze at low temperatures, and would thus block the cryogenic section of the plant, the gas has to be purified before it can be cooled down to cryogenic temperatures. Each LONG plant consists of one or more trains to compress natural gas into liquefied natural gas. A typical train consists of a compression area, propane condenser area, methane, and ethane areas.

Peak-shaving produce LONG from pipeline gas during off-season months to be stored and then re-vaporized for consumption during peak demand winter and summer months. To be returned into its gaseous state. Ere Process Flow Liquefied Natural Gas Chain Ere LONG process is more complex than pipeline transportation. The LONG chain or "log Chain” consists of upstream, midstream liquefaction plant, shipping, rectification, and finally, gas distribution. The upstream and midstream sections of the LONG chain are identical to traditional gas systems, with identical gas wells, wellheads, and field processing facilities.

Liquefaction Although there is no typical or standard LONG plant, the major elements that are found in most LONG plants include: feed gas handling and treating section liquefaction section refrigerant section fractionation section LONG storage section marine and LONG loading section utility and offset section During the first phase of liquefaction sulfur compounds, carbon dioxide and water are removed in stages. The gas is then chilled using propane and mixed refrigeration processes. The heavy hydrocarbons are separated out and fractionated into Liquefied Petroleum Gas (LAP) and plant condensate.

The cryogenic main heat exchanger in each train then cools the gas to about minus 150 degrees Celsius liquefying it in the process. Finally as the pressure is reduced to almost zero the temperature then decreases to minus 162 degrees Celsius. Nitrogen is removed and LONG is then transferred to one of the storage tanks prior to being loaded into ships. Transportation LONG is usually transported to the gas consumer by specially designed refrigerated ships. The ships operate at low atmospheric pressure (unlike LAP carriers, which operate at much higher pressures), transporting the LONG in individual insulated inks.