The Buzz

Coming to the South China Sea: Asia’s Big Energy Mistake?

Editor's Note: Please see Stewart Taggart's previous articles: A Plan to Save the South China Sea from Disaster as well as A Plan to Save the East China Sea from Disaster.

Planned Floating Liquid Natural Gas(FLNG) projects in Asia raise hard questions about the technology’s suitability.These include unproven durability,  questionable efficiencies and
“Tragedy of the Commons” resource exploitation. Regionally-interconnected gas pipelines look like a much better long-term deal.

To date, the largest FLNG project planned for Asia is Shell’s US$12 billion Prelude project off Northwest Australia. Further north, Malaysia’s state-owned Petronas  has approved a two billion cubic meter per year FLNG project for the shallow waters off Malaysian Borneo. Australia’s Woodside Petroleum is studying FLNG for Northwest Australia’s offshore Browse Field. Japan’s Inpex is considering FLNG for its Abadi project in offshore Indonesia. China National Overseas Oil Company (CNOOC) is considering FLNG to develop gas supplies in disputed waters of the South China Sea.

The costs of offshore pipelines and FLNG can be compared by adjusting each for distance to market (in kilometers) and annual capacity (in billion cubic meters). The result is a pipeline or LNG project’s US dollar (US$) cost per billion cubic meters of capacity per year (bcm/yr) per kilometer (km) -- or US$/bcm/km/yr. This allows pipelines and LNG project costs to be compared on a common basis. It excludes inflation.

Shell’s $12 billion, 5 billon cubic meter per year Prelude project will export natural gas compressed into LNG to markets in Japan and South Korea 9,000 kilometers away. That results in an investment cost of roughly US$300,000 bcm/km/yr. By contrast, subsea sections of the proposed Trans-ASEAN Gas Pipeline (TAGP) network range from $100,000-$160,000 bcm/km/yr for the biggest capacity (18 bcm/year) segments of the network, according to the ASEAN Centre for Energy. Smaller capacity (1-3 bcm/year), shorter-distance (100-200 km) subsea segments of the TAGP range from $250,00-500,000 bcm/km/yr. This suggests powerful economies of scale,  a suggestion supported by costs of other gas pipeline projects.

The 2007 North Sea Langeled gas pipeline between Norway and the UK (1,200 kms, 25 bcm/yr) cost roughly $100,000 bcm/km/year while the 2011 Nordstream pipeline connecting Russia to Germany (1,200 kms, 54 bcm/yr) cost roughly $170,000 bcm/km/yr.

In addition to apparent cost advantages, pipeline networks also deliver gas to multiple destinations and can also handle multiple fuels. By contrast, FLNG can only carry natural gas between fixed locations using single-purpose infrastructure -- a huge technological rigidity.

This flexibility of pipelines will become increasingly apparent over time as Asia adopts policies to limit climate change, reduce geopolitical tension and enhance long-term economic growth through deepening regional market integration.

Opposition to FLNG is beginning to emerge. For instance, the use of FLNG to develop Northwest Australia’s offshore gas resources is being opposed by Western Australia Premier Colin Barnett. Barnett believes FLNG short-changes host regions by reducing land-based investment.

China’s CNOOC  is studying FLNG  for developing gas fields in the South China Sea’s disputed waters for just that reason. CNOOC says FLNG avoids any need for regional land-based facilities. Any move by China to deploy FLNG in disputed waters  is certain to raise geopolitical tension, particularly with  the Philippines and Vietnam. These two countries also claim areas of the South China Sea likely to be targeted CNOOC.

The result is that FLNG could create a “Tragedy of the Commons.”

This occurs when unsettled resource property rights lead to conflict because ambiguous property rights favor “first movers” who, in turn, have no incentive to develop the resource sustainably. Instead, “first movers” have every incentive to develop the resource rapaciously, since waiting may require sharing it.   

A first step in this direction occurred earlier this year when China placed an exploratory rig in waters claimed by Vietnam, a move that sparked violent anti-Chinese protests in Vietnam.