The world is going big on small-scale end-use LNG projects
LNG (Liquid Natural Gas) prices have dropped dramatically as market demand has failed to keep up with large scale developments in Australia, Papua New Guinea and a surge of US shale gas. Supplies of LNG are on course to increase by 50 percent between 2014 and 2021 putting further downward pressure on prices which are currently around $3.21 per MMBtu (million British Thermal Units) compared with $16 MMBtu in 10 December 2014.
LNG developments in Qatar, Australia and Nigeria are typically mega-sized, reliant on economies of scale, and long-term supply contracts. For example, Nigeria’s 22 million metric tonnes (MMT) per year, Bonny Bay Island Liquefaction export plant, supplies national gas networks in Portugal, Turkey, France and elsewhere. Likewise, LNG importing markets, South Korea and Japan, take large quantities under long-term fixed price contracts. Traditionally, size is everything in LNG production and purchase. For example, the UK imports LNG into its gas grid via the LNG regasification facilities each with annual capacity of 15 MMT at the Isle of Grain and South Hook.
By contrast, small-scale LNG refers to the direct use of LNG in its liquid form rather than in the traditional format of regasification and later delivery into the gas transmission grid of a country. Small-scale receiving liquefaction facilities have a processing capacity of less than 500,000 MMT per year, enough to service a small number of large customers beyond existing gas pipeline supplies such as remote factories or off-grid power plants, or those requiring liquid fuel for their ships, barges, trains and buses.
Major energy companies, Shell, Engie, ENI, Gasum and Gazprom, are pioneering use of small-scale LNG in an effort to increase market penetration and generate company growth. The investments are part of a wider dash for gas by “big oil” including ExxonMobil, BP, Total and Chevron, to fight climate change and air pollution by squeezing out coal and provide a hedge against the threat of electric vehicles, eroding demand for oil. Electricity generation, industrial, chemicals and transport sectors offer the greatest potential growth markets for LNG.
Market
Global LNG demand of 262.38 million metric tonnes was worth $25.7 billion in 2016 and is projected, by TechResearch to more than double to $51.9billion by 2026 largely due to anticipated rising demand from marine shipping, heavy-duty vehicles and electric power generation. “Heavy transport by ships, trucks and buses can’t be electrified and the lowest carbon alternative is for them to use LNG“ states Mr Wetselaar, head of Shell’s gas business.
To facilitate increased market penetration in marine shipping, Shell is investing in gas infrastructure at ports including Rotterdam and Singapore and has established LNG vessel bunkering services for ships and barges along the Rhine from Rotterdam to the heart of industrial Germany. Since early 2017, the Engie Zeebrugge has delivered small quantities of LNG from the Zeebrugge LNG terminal to offshore shipping. For heavy road transport, companies like Shell, Engie, Total and Russia’s Gazprom have ongoing plans to expand their networks of LNG fuelling stations in North America, Europe and Asia.
Power deficient islands such as Bali and Malta, remote centres of demand in Québec and New England or mines in Yukon are also set to benefit from the flexibility of delivery and low distribution costs of small-scale off-grid power generation. For example, Shell recently signed a contract with the Gibraltar electricity authority to deliver LNG to a new €100m gas power plant and Spain’s Enagás is planning to supply small quantities of LNG to power plants being developed in the Canary Islands, Corsica, and Sardinia. Examples of pairing small-scale LNG pairing with other energy projects can be found across the Atlantic and further afield. In parts of the United States, new small-scale LNG plants use flared gas from oil wells to supply road vehicles and boost local power. In Australia and Chile, small-scale LNG is linked to hybrid power plants to ensure stability of energy supplies for islands and mines in remote locations.
In July 2017, Steve Hill, Shell’s executive vice president for gas and energy marketing speaking at the World Petroleum Congress in Istanbul predicted that, “in the foreseeable future, over half of demand won’t come from electricity but from heavy-duty transport – trucking for roads and marine – and use in chemicals.”
Drivers
Gas is cleaner than both coal and oil. Gas emits half as much as carbon dioxide as coal when burned to produce electricity and at least 75 percent less nitrogen oxide and other health-damaging particles. This makes gas a useful bridging fuel towards the transition to a lower carbon world and an ally in the fight against climate change and air pollution. Therefore LNG, as a replacement for heavy fuel oil in marine shipping and diesel in power generation, rail and heavy road vehicles, can secure future growth for “Big Oil”.
In the case of shipping, the International Maritime Organisation’s (IMO) increasingly stringent regulations on ship emissions make LNG an attractive fuel. Carnival, the cruise line operator, has ordered seven LNG-powered ships and Finnish-owned car ferry Viking Queen and the American container ship MV Isla Bella are wholly LNG-fuelled. The marketing of dual-fuelled engines can only increase use of LNG in shipping. The cost of a LNG bunkering facility of 15,000 cubic metre capacity is now around €60 million, report analysts, PWC (Price Waterhouse Cooper), a sum within the budget of a medium-sized port.
For heavy-duty road and railway operators, LNG not only reduces air pollution in urban areas, but also offers significant fuel and operational cost- savings, whilst a LNG refuelling station costs around €600,000, according to PWC. Already, LNG fuelled freight locomotives are serving Russia’s Gazprom-owned Obskaya – Bovanenkovo railroad in Arctic Siberia and the US Florida East Coast railway network.
In the medium term, the gradual introduction of new electric cars and buses is likely to create the need for new generating capacity in many locations beyond the gas grid, which, at a cost of around €200,000 for an average installation, is affordable, notes PWC.
The ongoing glut in LNG supply and its lower price has itself created new market demand .The number of countries importing LNG has almost doubled in the last ten years to 35, facilitated by relatively low cost floating storage and regasification units, which can receive LNG and convert it back into gas. Equally, important, small-scale projects are scalable, meaning that investors can add extra capacity in line with growth in demand. This makes small-scale LNG ideal for new markets and those experiencing short-term fluctuations in demand or power deficits.
Challenges
For widespread adoption, small-scale LNG projects need the economies derived from standardisation and modularisation, to bring down their price. In the near future, 3D or adaptive manufacturing could transform the economics of small-scale LNG provision and distribution; reduce regulatory obstacles and public opposition to liquefaction plants.
There is a positive aspect in the current LNG supply glut. This market, long dominated by long-term contracts between a small number of suppliers and an equally small number of buyers has been disrupted by US shale gas and burgeoning supply from Australia. It is now a buyer’s market. LNG buyers are becoming more demanding and are requiring shorter and more flexible contracts. A decade ago, more than 95% of LNG contracts were for 10 years or more. Today it is around 60%. This should also boost small-scale LNG.
Future
It is clear that the business of developing small-scale LNG receiving stations and creation of new market demand for LNG from shipping and land transport brings greater opportunities for “Big Oil”. However, demand for LNG from the power sector, chemicals and mining is threatened by the rapid growth in renewable power and advances in battery technology, which could allow the world to leap-frog gas straight to renewables, perhaps as rapidly as mobile phones have supplanted landline telecommunications in Africa?
