Ed Crooks BG Group and Petrobras go for floating LNG in Brazil

BG Group and Petrobras have announced they plan to set up a joint venture to produce liquefied natural gas from a floating LNG plant, putting themselves at the forefront of this emerging technology.

The plan is to use the associated gas that is present in the giant oil fields of the deep-water Santos basin, off the south coast of Brazil.

If the technology can be made to work – and it is still early days – this could be a strategic coup, opening up significant new reserves of gas, and helping Petrobras with its delicate political difficulties at home.

Floating LNG plants, bigger than aircraft carriers, are being designed by Royal Dutch Shell, following a plan the company set out in March, and are also being looked at by GDF Suez of France, in both cases for use off the coast of Australia.

The technology offers the opportunity, as with offshore oil production and storage facilities, of loading up for export to world markets without bringing the product on shore. That makes it ideal projects in deep water far from the coast, where the cost of a pipeline would be prohibitive. Opening up that option for gas, as it already exists for oil, would unlock large resources that are at present inaccessible, such as Brazil’s offshore gas.

Exploiting that gas for the domestic market is likely to be particularly attractive for Petrobras, which is a government-controlled but formally independent and listed on the stock market. The company has suffered a rather fractious relationship with its political masters of late, but it now has a chance to show it is delivering tangible benefits to the people of Brazil by bringing them new sources of gas supply.

Using floating LNG – an idea suggested by José Gabrielli, the Petrbras CEO, at the annual conference of the World Liquid Petroleum Gas Association, in Rio de Janeiro in October – can mean more gas for industrial use, creating jobs, for residential use and for power generation, which would bolster Brazil’s creaking electricity infrastructure.

At a moment when regulatory uncertainty is worrying Petrobras, that declaration of intent to deliver real social benefits is particularly timely.

BG, meanwhile, gets to share in an attractive revenue stream, with total production potentially of 5bn cubic metres of gas per year. It is looking to benefit again from pushing back the frontiers of the industry, as it did by pioneering the flexible trade in LNG cargoes that could be diverted to where returns were highest, and as it is attempting in Australia with its plan to convert coal bed methane into LNG.

Frank Harris of Wood Mackenzie commented:

Brazil has the potential to become a significant LNG supplier and this puts BG in the prize seats from the off.

Given the variable and uncertain nature of Brazil’s requirement for LNG (because of its significant use of hydro power), LNG from this development could become quite valuable if linked in with BG’s wider LNG portfolio.

Successful development of this project will establish BG as a credible player in large scale floating LNG and open up additional opportunities

BG is also the 60 per cent owner of Brazil’s biggest gas distributor, so is well-placed to benefit from the growth in the market. The company’s knack of being in the right place at the right time is almost uncanny.