ExxonMobil Plans World's Biggest FLNG Facility

SYDNEY - ExxonMobil Corp. laid out plans for a development using the world's biggest floating natural gas processing plant, in a technically challenging move that underscores its bullish view on Asian demand for the fuel.

Exxon and partner BHP Billiton Ltd. want to anchor a vessel extending 495 meters--the equivalent of around five football pitches--at sea to tap into the remote Scarborough natural gas field offshore Western Australia. They're seeking government approval for the multibillion dollar project, and targeting first production as early as 2020.

Floating liquefied natural gas technology, known as FLNG, is untried but has captured the attention of some of the world's biggest energy companies seeking to access gas fields that are too small or remote to develop using pipelines and onshore facilities. Royal Dutch Shell PLC is a leading proponent of FLNG vessels, which it plans to deploy in Australia and possibly elsewhere.

The relative calm of the waters off Australia's northeastern coastline make the country a strong candidate to accommodate the world's first FLNG vessels. Its stable political environment and proximity to Asian markets that have a growing appetite for fuels that are cleaner than coal when burnt are also drawcards. According to the International Energy Agency, China's natural gas demand alone will more than quadruple to 545 billion cubic meters between 2011 and 2035.

However, companies like Exxon need to ensure their vessels can withstand stormy seas. One main concern is that the forces generated by liquefied gas sloshing in partially filled containers can damage the storage system. That issue is being addressed with containers designed to minimize sloshing and with elaborate anchoring systems that limit the movement of vessels in the water.

Exxon's proposed facility would produce between 6 million and 7 million metric tons of liquefied natural gas, or LNG, a year for several decades. The Scarborough resource was discovered in 1979 and is estimated to hold up to 10 trillion cubic feet of gas--equal to more than a third of the U.S.'s annual gas consumption.

Early design work would begin next year, ahead of a final investment decision in 2014-15, Exxon said in a filing to the federal government's environment department. A Melbourne-based spokeswoman for Exxon said FLNG has "the capacity to reduce our capital costs by removing the need for infrastructure" and has a smaller environmental footprint.

With close to a dozen natural-gas export terminals planned for its coastline, Australia is poised to leapfrog Qatar as the world's top exporter of LNG by the end of the decade. LNG is natural gas chilled to a liquid so that it can be shipped by tanker.

The industry, however, is facing increasing cost headwinds driven by a strong local currency and a shortage of skilled labor. Underscoring these challenges, Chevron Corp. and smaller joint venture partners including Exxon and Shell said in December the cost of building their giant Gorgon LNG project on the Western Australian coast had blown out by a fifth to 52 billion Australian dollars (US$54.4 billion).

The budget overruns come as Australia becomes increasingly likely to face rising competition from emerging gas-export industries in North America and Africa, which could make it tougher to secure customers.

FLNG is often touted by company executives as a means of mitigating cost pressures because much of the construction process occurs offshore in countries with cheaper sources of labor. Companies also don't have to pay for acquiring and clearing land.

"For some of the more economically challenged gas resources out there, floating LNG is going to take on a much higher profile," said Andrew Williams, a Melbourne-based energy analyst at RBC Capital Markets.

In 2011, Shell committed to use a FLNG vessel to process natural gas from its Prelude field in the Browse Basin offshore northwestern Australia. The vessel is due to begin producing 3.6 million tons of LNG each year from 2017.

Shell estimated that its project would cost between US$3 billion and US$3.5 billion for every 1 million tons of production capacity, or between US$10.8 billion and US$12.6 billion.

In its filing Tuesday, Exxon didn't estimate a cost for its Scarborough development.

Copyright (c) 2012 Dow Jones & Company, Inc.

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