2
The Need for a LNG receiving terminal in hong
kong
Since 1996 with the commissioning of the
Black Point Power Station (BPPS), natural gas has been an important component
of CAPCO's fuel supply. Use of natural
gas has delivered significant environmental benefits as well as added diversity
to the fuel mix used for electricity generation, thereby enhancing the security
of electricity generation.
It is estimated that the existing source
of CAPCO’s gas supply, the Yacheng field off Hainan Island in the South China
Sea, will be ([1])
depleted early in the next
decade, depending upon the rate of offtake and actual reserve levels. As analysed in Section 2.8 below, other
Natural gas is generally delivered to
markets in two ways. One is to transport
the gas through pipelines directly connecting a gas field to end users, as is
now the case for CAPCO. The other
alternative is to liquefy the gas and transport it by ship in its liquid state,
to receiving terminals where it is then converted back to gas form for use.
2.2
Fuel Diversity –
Balancing Reliability, Cost and Environmental Benefits
Over the past decade, the fuel used for
electricity generation in Hong Kong has evolved from being primarily coal to a
diverse mix that is roughly 30% gas, 30% nuclear, and 40% coal ([2]).
Due partly to the
introduction of nuclear power and natural gas into the fuel mix, CLP’s air emissions
from power generation have significantly improved, with nitrogen oxides (NOx
down 77%, sulphur oxides (SOx
) down 44% and particulates down 70% over the period between 1990 and
2005 ([3]). Fuel diversity has enabled these improvements to be achieved
while maintaining competitive tariffs and world-class electricity supply
reliability in the supply of electricity.
Often taken for granted, these factors are key
contributors to
2.3
Benefits of
Natural Gas as a Fuel
There
are a number of benefits to utilising natural gas as a fuel in power
generation, including:
Proven
Use in Power Generation:
Natural gas has been employed around the world for electricity
generation for over 30 years ([4]) and is used in the Combined
Cycle Gas Turbines (CCGT) at BPPS BPPS uses advanced technology in terms of
equipment and operating systems. CCGTs
have higher thermal efficiency than conventional fossil fuel fired power
stations with the same generating capacity ([5]).
Adequate
Reserves Available:
The increasingly wider use of LNG indicates that more of the world’s gas
reserves are available to consumers in locations remote from existing
sources. In 2005 there were 13 countries
producing LNG and 15 importing LNG, with total consumption of 141.5 MTA
(million tonnes per annum). According to
the International Energy Agency (IEA), worldwide LNG production capability is
expected to grow to approximately 500 MTA in 2030, representing a 5% annual
growth rate ([6]).
Environmental
Benefits: Natural gas is one of the cleanest and most
efficient forms of energy available. Natural gas from LNG is clean burning, producing
virtually no particulates, and less NOx and carbon dioxide (CO2
) than other fossil fuels. Since
sulphur is almost entirely removed as part of the liquefaction process,
combustion of regasified LNG emits negligible amounts of sulphur dioxide (SO2 ([7]) ).
The
Government’s environmental policy includes the control of emissions from the
existing power stations in
“61. To
fully achieve the emissions reduction targets in 2010, we have asked the power
companies to … use natural gas for power generation as much as possible.
As
a consequence, natural gas is positioned to play an increasingly important role
in the generation of electricity.
Maintaining a cost-effective, diverse, reliable and adequate supply of
fuel will continue to be a priority.
LNG is the liquid form of natural gas, the
main component of which is methane. In
the liquefied form, at atmospheric pressure, LNG occupies only 1/600th
of its volume at gaseous state under normal temperature and atmospheric
pressure and is therefore more economical to store and transport over long
distances in contrast to the traditional pipeline delivery of natural gas.
LNG is produced by cooling natural gas to
-162 °C (-260 °F) through a liquefaction process. Prior to cooling and condensing the natural
gas into LNG, impurities such as carbon dioxide, water and sulphur are
removed. The end result of this process
is an odourless, colourless fuel consisting mostly of methane (approximate
range 85% to 99%) with small amounts of ethane, propane, butane and
pentane.
There are a number of environmental and
safety benefits ([9]) to using LNG, including the following:
·
Regasified
LNG is clean burning, producing virtually no particulates and less NOx and CO2
than
other fossil fuels. Since sulphur is almost entirely removed as part of the
liquefaction process, combustion of regasified LNG emits negligible amounts of
sulphur dioxide.
·
LNG is
stored at near atmospheric pressure, reducing the storage hazard compared with
pressurised fuels
·
LNG,
when released to the atmosphere at normal temperatures, will evaporate and
disperse quickly, leaving no residue behind and therefore requiring no environmental
cleanup.
·
LNG
vaporises when warmed and the resulting natural gas is lighter than air and
therefore rises when released.
·
LNG
is non-corrosive and non-toxic.
2.5
The LNG Value
Chain Requires Long Term Planning
The LNG industry can be described by an
LNG value chain consisting of 5 key elements :
1.
Exploration,
development and production of gas,
2.
Liquefaction,
3.
Shipping,
4.
Storage
and Regasification,
5.
End
use (e.g. power generation).
Each of these elements has its own technological
and investment requirements, but they share a common characteristic. They all require long project lead time and
significant resources and investment commitment. Each element of the chain must be carefully
planned and integrated with other elements; hence the supply chain requires
long term sales and purchase relationships between each participant.
2.6
Depletion of the
Existing Gas Reserves at Yacheng 13-1
In the early 1990s, CAPCO examined
potential sources of natural gas for
A map illustrating the location of the
Yacheng 13-1 field and the pipeline connecting to Black Point Power Station is
presented in Figure 2.1.
Figure 2.1 Location of Yacheng 13-1 Gas Field and
Existing Export Pipeline to BPPS
Under the contract for the supply of gas
to CAPCO, the entire Yacheng 13-1 resource is dedicated to CAPCO, except for a
small volume which is delivered to neighbouring
Given the geological and technical
uncertainties of gas production, it is industry practice for reserves to be
periodically re-determined. CAPCO’s
estimates ([12])
indicate that the Yacheng
field will be depleted early in the next decade based on the projected gas
offtake rate and actual reserve levels.
2.7
Gas Supply Critical for
Electricity Reliability
As explained above, electricity
reliability plays a key role in
Given Hong Kong’s total dependence on
imported fuel and the importance of a quality and reliable replacement gas
supply, CAPCO can only reasonably consider gas supplies that will not
compromise
1.
Certainty of timely availability: Given
the expected depletion of the Yacheng field early next decade, CAPCO must have
absolute certainty that the replacement gas will be available on time. As the gas infrastructure and supply chain
typically take 7 - 8 years to put in place ([14]), only alternatives that have already
achieved significant engineering and approval milestones together with proven
gas reserves and operating track record can provide this certainty.
2.
Supply security for Hong Kong:
Gas is expected to represent up to 50% of CAPCO/CLP’s fuel mix by early
next decade, and security of gas supply is essential to maintain high levels of
electricity reliability in
a.
Priority
for CAPCO’s gas requirements,
b.
Diversification
of supply from at least two sources.
Disruptions to fuel supply can occur, as evident with recent gas supply
disruptions in Ukraine ([15])
(which left the country short
of gas for a period during winter), Singapore ([16]) (which resulted in blackouts in many parts of the island state in the
summer of 2004), and closer to home with offshore oil production facilities ([17])
in the South China Sea which
were damaged by Typhoon Pearl and inoperational for a prolonged period. Given the
increased share of gas in the fuel mix, it is not prudent to depend on only one
gas supply source.
c.
Gas
supply chain managed by companies with proven track records for operating in
line with industry best practices.
3.
Adequate volume and flexibility:
CAPCO’s LNG requirement for its current gas-fired generation facilities
is about 2.6 million tonnes per annum (MTA) of LNG, which represents roughly
75% of
a. Meet gas demand growth in future years as a
result of Government’s environmental initiatives and
b. Provide the flexibility for CAPCO to meet
seasonal demand patterns and the power plants’ operational requirements, and
c. Enable a smooth transition from Yacheng gas.
4.
Competitive supply:
CAPCO is competing with numerous other buyers for limited supplies of
LNG. Suppliers are focusing their
efforts on buyers with strong markets for the gas, in addition to having
existing terminal infrastructure or comprehensive and advanced plans for
developing such terminals. For CAPCO to
attract suppliers and achieve the best possible terms on behalf of its
electricity consumers, the procurement process must be structured efficiently
so as to demonstrate the strengths of CAPCO as a buyer able to undertake long
term commitments and demonstrate
5. High environmental and safety standards: CAPCO is committed to responsible
environmental management and safe operations.
The replacement supply source and its suppliers must perform to
internationally acceptable environmental and safety standards.
2.8
Replacement Gas
Supply Alternatives
Given the importance of the availability
of replacement gas to
1.
Import
gas via pipeline from a nearby gas field;
2.
Import
Natural Gas via the Guangdong Dapeng LNG terminal (GDLNG) located in Shenzhen;
3.
Import
Natural Gas via a new terminal outside
4.
Import
LNG via a new terminal in
5.
No
action or defer decision.
2.8.1
Import Gas via Pipeline from a Nearby Gas
Field
The South China Sea contains only limited discovered
reserves of natural gas, with the majority of these gas reserves being
exploited ([18]).
These gas discoveries are significantly smaller than Yacheng, are of
varying qualities and therefore less suitable for use as fuel for power generation,
and have been committed to identified customers (aside from the Yacheng Y-13
gas field, other reserves include the Dongfang and Ledong fields which are
committed to Hainan ([19])
and the Panyu and Huizhou
fields which have been targeted for users in Zhuhai ([20])).
Given the above, importing gas from any of the proven South China Sea
fields is not feasible because there is insufficient supply available to meet
CAPCO’s and
In 2006, there are reports ([21])
of what could be a
significant deep water gas discovery in the
Table 2.1 Indicative
Timing for Deepwater Development
|
Step |
Activity |
Duration (months) |
|
1 |
Discovery |
0 |
|
2 |
Project
owner review |
3 - 6 |
|
3 |
3-D
seismic acquisition and interpretation |
20 - 48 |
|
4 |
Appraisal
well drilling, reserves certification |
13 - 30 |
|
5 |
Final
assessment and Overall Development Plan (ODP) formulation (Marketing) |
6 - 12 |
|
6 |
ODP
approval |
3 – 6 |
|
7 |
Drilling,
facility design and construction |
48 – 63 |
|
8 |
First
Gas |
0 |
|
|
Total Time Required (years) |
8 - 14 |
In view of
2.8.2
Import Natural Gas via the
The GDLNG terminal in
Even if a large portion of GDLNG’s
expansion capacity were available to CAPCO, there would still be environmental
considerations, as a new pipeline would need to be installed to Black Point
Power Station. An offshore route would
be approximately 150 - 160 km in length, approximately four times the length of
a pipeline from
An overland route would be approximately
85 km in length of which approximately 55 km would traverse the densely
populated city of Shenzhen as well as several populated areas of The New
Territories in Hong Kong, including Sheung Shui and Yuen Lung ([26]). Key issues related to this option
include:
·
Acquisition
and permitting of a technically viable route through several densely populated
areas in Shenzhen and
·
Environmental
and safety risk impact associated with routing the pipeline away from developed
areas through rugged terrain.
·
Satisfying
the approvals process in two jurisdictions with a risk that permits may be
denied in one or both jurisdictions.
From a regional supply security
perspective, it would be unwise to have all of Hong Kong and
Another consideration is that with
2.8.3
Import Natural Gas via Proposed LNG
Terminal in mainland China
Development of a LNG terminal requires
considerable time for planning, permitting, construction, and to achieve
satisfactory commercial arrangements among all parties involved. As a reference, the Guangdong Dapeng LNG
terminal took around 10 years from project planning to terminal commissioning
in 2006 and the CAPCO project is estimated to take 8 years from start of
planning in 2003 until commissioning in 2011 (Table 2.2). Two LNG
terminals are proposed in the Zhuhai area, one to serve Zhuhai as part of
Table 2.2 Timing
for
|
Step |
Activity |
Timing |
|
1 |
Project Planning |
2003 – 2004 |
|
2 |
Environmental Impact Assessment, Permitting and
Preliminary Engineering |
2004 – 2007 |
|
3 |
Engineering, Procurement, Contracting and Construction |
2007 – 2011 |
|
4 |
First Gas |
2011 |
Import via a Proposed Mainland LNG
Terminal
The Zhuhai terminal, with a planned
capacity of 3 MTA, is intended to supply gas to the west Pearl River
Delta. It is one of nine terminals
planned for coastal cities in
Import via a Proposed
The Macau Terminal proposal is also in the
early stages of development with the recent introduction of its conceptual
proposal, which was the stage that the
CAPCO commissioned the Construction
Advisory Services group of Deloitte Financial Advisory Services LLP (“Deloitte
FAS”) to analyse the proposed Macau LNG Terminal project and advise on whether
it could rely on the proposed project to meet CAPCO’s gas requirements. Deloitte used industry-standard procedures to
take account of uncertainties in the project’s approval, development and
construction processes and in its confidential report (1) provided
the following recommendation to CAPCO:
“Deloitte recommends that CAPCO should not rely on the proposed Macau LNG terminal for supply of LNG in 2011.
CAPCO’s customers are highly reliant on a secure supply of electricity. Given the importance of LNG availability in 2011 to ensure that there are no supply disruptions and to enable achievement of emissions targets, CAPCO needs to have a very high level of confidence (P90) that its source of gas for Black Point Power Station would be ready to supply gas in 2011.
Based on Deloitte FAS’s global experience (including China) of analysing similar major infrastructure projects, Deloitte FAS advises CAPCO that CAPCO should not rely on the proposed Macau LNG Terminal project as it does not provide the required confidence level (P90).
The basis of Deloitte FAS’s advice is set out in our report”.
Project Timing
Execution and timing for these projects
are uncertain.
Considering the early stages of
development of the proposed projects, neither is likely to meet CAPCO’s timing
requirement as the development process is subject to negotiations of complex
commercial, offtake and regulatory framework arrangements among various
stakeholders, as well as compliance with local permitting and regulations in
multiple jurisdictions. One such example
is the submarine pipeline required to transport the gas from a new terminal to
Black Point Power Station which would require rigorous approvals not only in
Hong Kong but also in
The other option, of utilising
the existing Yacheng pipeline presents both commercial and technical challenges
([34]), which could not be resolved
within the timeframe for the replacement gas supply. For example, the pipeline is not owned by
CAPCO and its access would entail complex commercial negotiations. The
technical challenges include:
·
A pipeline will be required running between the new LNG terminal
and the tie-in point on the existing pipeline, this would entail similar
environmental disturbance to the base case pipeline route and involve a
permitting process in two jurisdictions;
·
An
extended interruption to the gas supply to BPPS would be necessary to allow the
insertion of a tie-in assembly in the existing pipeline ([35]);
·
The operation of connecting to the existing pipeline is extremely
complex and would involve a significant risk of additional delay as a result of
unforeseen events;
·
CAPCO’s
Consultant studies confirm that blending of Yacheng gas and regasified LNG in
the Yacheng pipeline would not be an appropriate solution due to the two types
of gases being outside the interchangeability limit of the hardware design in
BPPS. While blending the gases is
theoretically possible, operating flexibility would be severely restricted and
there would be potential for hardware modifications to be required several
times catering for the change in fuel ratios that would occur as Yacheng gas
supply is depleted. Accordingly,
following conversion of the generator units to burn regasified LNG, the use of
Yacheng gas would have to be curtailed ([36]).
LNG Supply
With a mainland terminal, CAPCO would be
only one of several customers with competing gas demand. Accordingly, CAPCO would not have a priority
right to access gas supply, which is essential to meeting
Given their early stages of project development,
the potential Mainland terminal projects may struggle to attract sellers,
particularly in the 2011 timeframe when LNG is in limited supply. LNG sellers face no shortage of interested
buyers during this period. CAPCO's experience is that with limited resources
and in a sellers’ market, sellers put their efforts into engaging with those
LNG buyers able to demonstrate a clear commercial structure, a comprehensive
implementation plan and a realistic and detailed schedule, both for the
terminal and other new end-user facilities such as power plants. The current CAPCO proposal meets all these
expectations whereas the potential Mainland projects do not. Also, as a general rule, the addition of a
third party terminal operator as a middleman in supply arrangements leads to
increased cost and commercial complexity.
Notwithstanding the concern of supply
security, for future purchases to meet demand growth, being limited to one
supply arrangement may place CAPCO at an economic disadvantage. For example, with regard to a terminal
outside Hong Kong, CAPCO may have no other option for gas supply, and without
influence over the LNG supply process, CAPCO and the
Environmental and Safety
Importing LNG via a proposed mainland
terminal would result in impacts both inside and outside of
The environmental impact assessment, risk
assessments and safety regulations would fall outside
2.8.4
Importing LNG via a New Terminal in
Project Timing
Constructing a LNG receiving terminal in
LNG Supply
A Hong Kong terminal would enable both gas
and electricity supply security and reliability for
A
With a
Environment and Safety
A Hong Kong terminal would be constructed
to meet
Moreover, the
2.8.5
No Action or Defer decision
As noted previously, with BPPS providing
about 25% of Hong Kong’s total electricity needs, having a reliable supply of
natural gas that fuels this power station is critical for maintaining
In summary, the absence or delay of a
replacement gas supply would not only entail an environmental impact, in the
form of incremental emissions of NOx, SOx and particulates,
but would also compromise
2.8.6
Summary Comparison of Alternatives against
The following Table 2.3 summaries the requirements of the replacement gas supply
and the assessment of the five potential alternatives in meeting those
requirements.
