Summary of Working Paper No. 77-1997

III.07.4: Northern Gas Fields and NGH Technology - A Feasibility Study to Develop Natural Gas Hydrate Technology for the International Gas Markets.

By Trond Ragnvald Ramsland, Erik F. Loy and Sturle Døsen, Foundation for Research in Economic & Business Administration (SNF), Bergen, Norway.

In this study two different natural gas fields have been studied for three different technological solutions, using two different economic theories. The goal of the analysis was to examine whether a new technology for transporting natural gas, Natural Gas Hydrates (NGH), can compete with the existing technologies pipeline and Liquefied Natural Gas (LNG).

Natural gas is today an important source of energy world-wide. However, natural gas can rarely be used immediately after production, and natural gas supply systems can be divided into four interrelated parts:

1. Exploration

2. Development & production

3. Transportation

4. Distribution

In this study the emphasis is on costs of production and transportation. Exploration is considered already carried out and thus viewed as sunk cost. Distribution from the landing point to the consumers is not part of the study. Production can take place either onshore or offshore, and the natural gas can be transported to the market either by pipeline or ship. The transportation costs are becoming more and more important as a consequence of increasing distances from the fields to the markets.

Natural gas projects have notoriously long lead times and large capital requirements. Therefore, new supplies will only materialise if there is confidence that demand for the gas exists, and at a price which supports a suitable return on investments. This also implies that natural gas is generally sold on long-term contracts.

The conclusion drawn is that economies of scale exist. The report also supports the theories in that pipeline is the superior technology for high volumes. All else equal, pipeline can not compete for smaller volumes. Until present, the LNG technology has been the best alternative for transportation of such smaller volumes, but the report concludes that NGH fully competes.

However, it is not only volume that is important when choosing transportation mode. The distance to the market where the natural gas is to be transported is also crucial. Pipeline technology is sensitive to changes in distance with costs increasing almost proportionally, while the shipping modes are not. This implies that the shipping modes, all else equal, are superior for long transportation distances. This conclusion is not fully supported by the figure above, due to the fact that the economics of scale more than neutralise the disadvantages of Shtockmanovskaya being further from the market and further offshore. NGH is superior tpo LNG also with regards to distance.

Despite the fact that the two economic models used for the evaluation has provided very different absolute project values, they have provided the same conclusion about the ranking of the different technologies. On this basis then there is a clear indication that if NGH technology is developed further into a reliable and feasible alternative, LNG technology will practically always be inferior, while pipeline technology still remains very competitive, especially for large projects.

Unfortunately, the study has indicated that despite the superiority of NGH, marginal fields like Snøhvit are still unlikely to be developed under the present market conditions.