ARTICLE pubs.acs.org/IECR
Selection of Liquefied Natural Gas (LNG) Contracts for Minimizing Procurement Cost Rajab Khalilpour and I. A. Karimi* Department of Chemical & Biomolecular Engineeering, National University of Singapore, 4 Engineering Drive 4, Singapore 117576 ABSTRACT: Recent increases in energy prices, the rise in natural gas demand due to the concerns over CO2 emissions and a possible carbon tax, the development of a low-cost and high-capacity liquefied natural gas (LNG) value chain, the emergence of new suppliers with large gas reserves, the flow of uncommitted LNG capacity to the market, and the disappearance of conventional clauses such as destination are stimulating global LNG trade. Moreover, natural gas liberalization is resulting in the emergence of new buyers with variable demands, which is increasing the competitiveness and dynamicity of the LNG market. The LNG contracts are thus diversifying in price formulations, flexibility, duration, quality, quantity, commitment, discount, and other terms and conditions. Finding a combination of contracts and suppliers, which trades off various cost factors in an optimal manner, is becoming more and more challenging, where systematic optimization-based approaches can be very useful. In this study, we address contract selection from the perspective of an LNG buyer company. We develop a mixed-integer linear programming formalism that helps the buyer select the best combination of suppliers and contracts in an integrated manner that addresses various aspects, such as contract timings and lengths, demands, price formulations, volume discounts, delivery terms, shipment costs, purchase commitments, etc. We minimize the sum of purchase and transport costs, and we illustrate our approach using three examples with diverse and realistic features.
1. INTRODUCTION The world’s primary energy demand is increasing at an alarming rate. This has motivated extensive research on finding and developing new energy sources. Although unconventional energy sources such as renewables will help in gradually shaking the world’s reliance on fossil fuels, other energy sources such as oil, gas, and coal will continue to dominate the energy scene for at least a few decades. Currently, they account for more than 85% of the total energy needs of the world.1 Of these, natural gas (NG) is the cleanest. The lower C/H ratio (and, therefore, lower carbon emissions, compared to oil and coal), along with reduced emissions of oxides (nitrogen and sulfur) and particulates make NG environmentally very attractive. More importantly, the cost of processes based on NG (such as power generation) is much lower than those of oil.2 The economic advantage of NG is growing, as policies and/or mechanisms for carbon tax/credit/ penalty are being discussed. All these are leading to a rapid growth of NG exploration, processing, and consumption. The current energy demand growth, along with the global concerns for and treaties about climate protection, will continue to foster NG demand. Although NG is the most favored fossil-fuel resource, its transportation to the demand sites poses a challenge, because of its gaseous state. As a result, NG trade has largely been through pipelines between limited supply countries and their neighbors. This has prevented the NG market from becoming fully developed like crude oil, and NG is not yet a globally traded commodity. As Figure 1 shows, only ∼27% of the world’s total NG consumption of 106.5 trillion cubic feet (tcf) was traded in 2008, and the rest (73%) was consumed locally. The transport of liquefied natural gas (LNG), as an alternative to pipelines, began in the 1960s, mainly as a result of increasing r 2011 American Chemical Society
Figure 1. Natural gas (NG) trade and liquefied natural gas (LNG) share of the market. (Source: BP, 2009.1)
energy demand in countries (e.g., Japan) located remotely from NG resources.2 In such cases, a pipeline was either technologically impossible or economically infeasible. The 600-fold volume reduction by liquefaction made it economical to ship NG to such remote countries using dedicated LNG vessels. Thus, LNG became an alternative to crude oil, which can be shipped using dedicated vessels. Apart from LNG, NG utilization alternatives such as gas-toliquids (GTL), gas-to-chemicals (GTC), compressed natural gas (CNG), gas-to-solids (GTS), and gas-to-wire (GTW) are under discussion and evaluation.3 All have the objective of reducing the NG volume to make its transport practical for export over long distances and reduce transport costs. While each of these technologies has its own niche threshold and sweet spot, none of them is Received: February 8, 2011 Accepted: August 2, 2011 Revised: July 1, 2011 Published: August 02, 2011 10298
dx.doi.org/10.1021/ie200275m | Ind. Eng. Chem. Res. 2011, 50, 10298–10312
Industrial & Engineering Chemistry Research
ARTICLE
Figure 2. Schematic of flows in the current global LNG trade.
Table 1. Some Current LNG Price Formulasa price formula, PLNGb
index type fixed cost
a
crude oil S-curve crude oil
a + bPcrude a þ bPcrude þ c P2P2Pcrude P1
a þ bPcrude a þ bPcrude
if P1 e Pcrude e P2
if P2 e Pcrude e P3 P3 if P3 e Pcrude e P4 þ c Pcrude P4 P3
gas index at hub
a + bPgas,hub
coal
a + bPcoal
fuel oil
a + bPfuel oil Pbase oil þ aðPgas oil P0gas oil Þ þ bðPfuel oil P0fuel oil Þ þ cðPcoal P0coal Þ þ d, where a þ b þ c þ d ¼ 1
mixed fuel
a Data taken from refs 12, 39, and 40. b Crude oil and its derivative prices are is given in units of $/bbl, the coal price is given in units of $/tonne, and the LNG price is given in units of $/mmBtu. Parameters a, b, c, and d are constants.
considered as a serious competitor to LNG in the medium term. For example, GTW is suitable largely for nearby markets, because of expensive subsea cables. CNG faces the problem of expensive CNG carriers. GTC is criticized for the threat of product market saturation. GTL seems to have a promising future for NG monetization, but its technology is not well-proven, in comparison to that of LNG.4 GTS seems to be economical for small gas reserves.5 In other words, LNG will keep its position, at least in the medium term, as the best alternative to pipelines for transporting NG to remote markets. The LNG trade has grown steadily, along with its production technology, over the last five decades. Today, it accounts for ∼27.8% of the world’s NG market (recall Figure 1), while the remainder (72.2%) is traded by pipeline.1 Figure 2 shows the flow of the current international LNG trade. It is projected that the LNG trade will help move the NG market from its current position as a scattered, local, monopolized market to a global, oligopolistic market. This can be easily inferred from the number of LNG carriers ordered annually. While a total of 116 vessels had been built by 2000,2 this number nearly tripled to 337 by 2010 and is estimated to grow to 371 by the end of 2013.6 Accordingly,
the size of the vessels has increased over the years from the original 34 000 m3 to the currently ordered 250 000 m3. In addition, the LNG production plants are improving with lower capital and operating costs. While the production capacity of an LNG train was
