LNG has been a history of ever larger liquefaction trains. It all culminated in the construction of the Qatari super-trains. One of those monsters is able to satisfy the needs of more than the entire gas consumption of a small country such as Austria. But do they make economic sense?
On the face of things, it’s easy. The larger you build, the better are your economies of scale. The rationale behind is simple. Larger installations allow for more efficient processes and the sharing of common facilities bringing the eventual cost of service down. But does this really hold true?
More than 80 years ago Henry Ford had established the fundamental principles of mass production. The rationale was simple.
The most expensive piece is item number one. This one item carried the costs of all R&D plus the risks inherent in the technological development. In mass production, you built one or more prototypes, apply testing, apply engineering, apply testing again, then again the engineers and so on and on until the device works well enough and serious technological risk has been eliminated. Once that was accomplished, an assembly line was established and mass-produced items were cranked out in high numbers. The higher the count, the cheaper the individual item became. That also allows to keep maintenance costs and cost for repair manageable.
This established the fundamentals of our mass consumption society thrives on.
How on earth have we forgotten them in LNG? Why should LNG be the big exception?
There is a size for ideal economic performance for almost anything that can be produced. Those limits change as time progresses, but that does not make them any less real. Let’s take a computer hard drive for example. At a certain size, you get the best deal when it comes to comparing the storage space you get for the money you pay. Buy bigger, and you pay the technology premium. Buy smaller, and you pay more than you have to for your storage capacity. It’s the price you pay per unit of storage space that matters, not the price for the device.
For what reason should the same rationale not hold true for LNG liquefaction equipment? It’s not how big you can build but rather how efficiently can you crank out many standardized trains.
When have you bought your last new built car? Have you fallen for the newest model of a brand new series or have you picked the model of a tried and tested series? You know what the issue is. Buy the latest gizmo and you will be exposed to the teething problems of the latest thang. Take the existing series and you will have something tried and tested, albeit a bit less flashy, on your hands.
I have been a lifelong buyer of “just a bit after latest glitz” stuff. Keeps prices a bit lower and someone else bears the brunt of the first failures (remember antenna gate with the iPhone).
Back to LNG. Every time someone commissions a new “big train” its Groundhog day again and again. As there is no mass production there is no standardization. It would be much cheaper to build standardized smaller trains and stack them.
But why hasn’t it happened this way? Let’s look at what has happened in the computer industry in the seventies. Huge mainframe computers have dominated the landscape and people have used terminals to access them. From today’s point of view, this was incredibly complex, difficult and clunky as you had to reserve terminal time in advance, those monsters were slow and you had to brainstorm off the circuit. That was still better than the punch cards that were used before. But at the time there was no choice as the technology for desktop computers was not ready yet. They were just about being spawned by some computer startups such as Apple and Microsoft.
Distributing computing power out to the users did not only bring costs down. It enabled the rise of the internet as suddenly there were not only a couple of huge mainframes to connect. Suddenly it was thousands, soon millions of machines that chugged on in their own little bubble. The internet pierced the bubbles open.
From the point of view of a main-framer, this was an incredible waste of computing power and hence resources. I remember the battles between those saying that computing power is too precious to be wasted on stupid consumers behind desktops. And seen what a single bit of computing power had cost a the time, they had a point.
But they failed to see one important development. That the economics of industrial mass production brought the value of computing power down so significantly that it became as cheap as industrially produced milk. Suddenly computing power was no more important than, let’s say paper clips or air-conditioned capacity. Important, but hardly the thing one worries about. That busted the mainframes as it eroded their competitive advantage.
The comparison might seem a bit crass but then again, look at where we are today. But with cheap computing, it did not matter anymore if the computer was operated in flawless baseload mode. Nobody wastes time to think if the computer is exploited in a perfect 24-hour loop. It’s just sitting there on the desk, waiting for the next task. Having it idle for a week would not cause anyone stomach pain.
Liquefaction is the most expensive piece of the chain today (not counting for some really exotic feed gas) so everything molds around its operational inflex and the last couple of FID’s have done nothing to crush that reality. That is expensive and not really a recipe for helping the emergence of flexible LNG markets. To this day, nobody dares to discuss this seeming immutable fact – liquefaction is the way it is. Full stop.
But what happened to computers in the seventies now comes to pass in LNG liquefaction. Mid-scale standardized liquefaction trains are the PCs of the LNG world. Big mega-trains just exist in a couple of flavors. At mid-scale (somewhere between 0,2 and 1 mtpa capacity) the Single Mixed Refrigerant process develops its full flavors (I am just watching the barbecue championships) and there is a wild array of flavors and competing technologies. It can be mounted on a skid, assembled in the workshop, pre-tested and delivered to plug and play.
That’s probably a little over the top (plug and play) but remember that the first PC’s were also “plug and pray”. It took time to make the pray a rightful play. Same thing for LNG.
What will that do? Big baseload trains today are pieces of art. It’s a bit like reinventing the wheel every time you want to build a car. No wonder those beasts are so horribly expensive.
The 5 mtpa (example size) beast is so big that you would have to transport custom-made pieces to wherever the train would have to operate and assemble it there. And in terms of cost, nothing beats a good old assembly line instead of open desert, jungle or eternal ice.
Then comes commissioning. The same problem, you are where you are with the big train. The small trains can be pre-tested in the workshop under ideal conditions. And, once you have a tried and tested design for the smaller train, you crank exact copies out in high numbers. The likelihood that something goes wrong at commissioning goes down with the numbers.
It’s like Henry Ford. Item number one is much more expensive per capacity than the big train but with the mass production effect, the eventual price comes way below the cost of the big train.
And now comes the best. With a stack of 10 smaller trains, you can adapt to changes in demand and flow much easier. Instead of the big decision to switch a monster on or off, you switch batteries of trains one train at a time if you like. That also makes maintenance easier as you would not have to run down the whole plant but only switch off one train at a time. The larger portion of your plant always is ready for action.
But let’s spin it a little further. With large trains, the economics of LNG have only worked out when there s a certain volume of gas. Now you can put liquefiers on much smaller gas sources. And as financing cost comes down, more and more financial institutions are able to join the ranks of LNG lenders. It’s just not billions anymore which has a democratizing effect on LNG. And it diversifies the picture.
But hey, you will say. One of those small trains alone cannot fill my 145,000m3 tanker. fair point. But that’s another story so stay tuned.