Oil market trend analysis: an oil price surge…
In 2017, the United States became a net exporter of natural gas as its dependency on importing gas from other countries declined due to the ever-increasing production of gas.
Increased domestic supply, coupled with lower oil prices, has driven the price of gas down, allowing for financial benefits that coincide with the environmental rewards of utilizing a cleaner fuel alternative. As operating models continue to shift towards decentralization, small-scale LNG could offer a viable solution to fuel the United States.
Relative to the consumption of petroleum, coal, nuclear, and other renewable fuel options, the EIA predicts the largest increase in consumption of energy fuels to be that of natural gas. Sia Partners believes that this shift in the energy landscape is largely driven by technological and societal trends that are disrupting the Energy industry at a very rapid pace.
The largest account for the increase of natural gas consumption is accounted for by the increased demand of gas in the industrial sector, with expanding use in the chemical sector – both for industrial power & heat generation, along with the production of liquefied natural gas. With renewable tax credits expiring in the mid-2020s, there is also room for growth in natural gas consumption in the power sector.
With a combination of reducing technology costs and implementing policies that encourage the use of clean fuels at both the state and federal levels, the cost of using clean fuels (such as LNG) will decrease, largely increasing its demand. The consumption will also continue to increase because natural gas prices remain relatively stable and low in comparison to other fuel alternatives. As technological efficiencies improve due to the digital revolution and other technological advancements, companies such as Kinder Morgan, Shell, ExxonMobil, Chevron, and Total are continuing to invest in the further development of natural gas infrastructure in the United States in areas such as pipelines, storage capacities, and terminals. This growth also lead to an increase of innovative applications of natural gas usage along with cheaper methods of increasing the supply.
Why Small-Scale LNG?
The International Gas Union (IGU) defines an LNG facility as a Small-Scale LNG (ssLNG) facility if it produces less than 1 million tons per year. In the US, in 2015 the ssLNG capacity reached 1.5 million gal/day, an additional 750,000 gal/day capacity is expected to be added in 2018, reaching a total of 2.3 million gal/day.
ssLNG now exceeds mega-LNG projects
Accessibility and Flexibility
Small-scale LNG can provide access to markets unavailable to large terminals and large carriers that still require energy. In addition, small-scale facilities can be sized to meet specific and increasingly diversifying demands.
Less Regulatory Roadblocks
The development time for a ssLNG project in the US has benefited from a simpler US government process compared to export projects for large scale LNG projects. The simplification of governmental approval is attributed to the fact that large-scale terminals have to be approved by the US Federal Energy Regulatory Commission (FERC) and the approval of commodity export by the US Department of Energy Office of Fossil Energy (DOE). However, FERC has determined that facilities used solely for the purpose of liquefying natural gas to an end product for sale are not under its jurisdiction, as long as the LNG is not introduced to a pipeline or does not cross state lines.
Less Risk to Investors (Competitive Cost/Price)
ssLNG facilities can be built in a must faster in cheaper manner than that of large-scale facilities. It was found that the largest cost of LNG projects are: Storage Tanks, Jetties, Marine Facilities, Boiloff gas handling units, LNG vaporization, and Infrastructure. ssLNG can use pre-fabricated, modular units that can reduce these costs. In addition, many organizations are entering partnership agreements in which the inherent risk of investment is being distributed amongst many different parties displayed in the following section detailing a typical Operating Model.
Transforming Operating Models
In an effort to reduce the risk of end users, many energy companies are shifting their business models toward greater integration of market players, offering end-to-end solutions from the wellhead to the dispenser. As the demand for smaller cargoes increases due to the ease of financing and the option of the buyer to diversify its supply, this minimize the exposure risk of the LNG provider.
By further allowing integration of the complete downstream supply chain, all the way to powering residential and industrial end-users and LNG fueling stations, small-scale LNG allows risks and rewards to be decentralized and distributed to all parties throughout the entire chain, relieving the risk of the LNG supplier. Companies that have begun to move this model include Shell, BP, and Total.
In the United States, ssLNG facilities are currently being used to supply fuel for both the Transportation and Power Generation Sectors.
The Transportation Sector accounts for approximately 55% of total liquid fuels demand. The percentage of transportation vehicles driven by natural gas is expected to largely increase due to economic, environmental, and technological reasons. Specifically, natural gas is expected to be priced less than oil in the long term, natural gas offers the lowest emissions of all fossil fuels and policies have been created to improve air quality, and advancements in natural gas engines have continued to develop, closing the gap to diesel performance.
In the past 3 years, a sample of key events signal an increase in LNG as a transport fuel across the United States.
Power Generation Sector
The use of natural gas in the power generation sector is expected to increase due to the price of natural gas. The cost of natural gas has historically been below that of petroleum liquid and coal. In most cases, it is predicted that the cost of natural gas used for power generation to slightly decrease, increasing the market share of power generation.
Our View of Opportunities of ssLNG Market Growth
In recent history, natural gas has been increasingly seen as a fuel choice for transportation fuel for light, medium, and heavy-duty vehicles. However, the largest driver for future growth in the combined Compressed Natural Gas (CNG) and LNG as a transport fuel is heavy-duty vehicles.
A heavy-duty vehicle is defined as an on-road vehicle with a gross weight equaling or exceeding 26,001 pounds. Between 2003 and 2015, a survey of EIA respondents stated that a total of 119,084 MMscf of LNG was consumed by a heavy-duty vehicle. The key drivers of shift towards LNG usage in heavy-duty vehicles include economic and environmental reasons. From an economic standpoint – due to the cost benefits of LNG for distance driving, LNG is more economical than CNG and other alternative fossil fuels, and from an environmental standpoint – natural gas is the cleanest burning fossil fuel.
Types of heavy-duty vehicles include transit buses, large delivery trucks, and refuse vehicles. Heavy-duty buses are the largest type of heavy-duty vehicles that have been historically powered by LNG, but there has also been an increase in heavy-duty truck usage throughout the timeframe in which the data shown below was collected. According to ExxonMobil, fuel savings for a heavy-duty truck conversion to LNG usage can be realized after 3 years.
Another key indicator of growth opportunity available in the transport for fuel sector, is the number of on-road LNG vehicle fueling stations. According to the Alternative Fuels Data Center in the US Department of Energy, within 98% confidence bands, the number of LNG on-road fueling stations is predicted to greatly increase in the near future due to the increase demand of LNG for on-road transportation.
Many of these fueling stations are located along or near major highways in states with clean fuel incentives. In addition, there are many in-land stations, in which ssLNG facilities can contribute greatly to.
Most planned stations are in-land and along the East Coast – also creating opportunities for ssLNG facilities.
There are currently 6 LNG-fueled ships in North America, with 10 more to be delivered in 2018 and another 16 to be delivered by 2022. The increase in LNG as a Marine transport fuel mainly due to environmental reasons.
In 2016, the International Maritime Organization (IMO), through MARPOL Annex VI, ordered a limitation in sulfur emissions from ships in specific Sulfur Emission Control Areas (SECA). Ship owners now have four alternative solutions to deal with these restrictions: Scrubbers to reduce Sox emissions, more expensive marine gasoline oil (MGO), shifting to an LNG-powered motor fuel which is a cheaper fuel but a costly investment on the ship, and the use of hybrid fuels which can contain a maximum of 0.10% m/m Sulfur.
LNG has a central position as an alternative fuel thanks to its low operating cost (despite the latest fall in oil prices) and its ability to meet the strictest requirements on emissions. Some players are already committed in the LNG sector, in order to prepare for the upcoming regulations, especially the Global Sulfur Cap in 2010. LNG is a viable solution because it is the least polluting existing solution regarding both greenhouse gases and local pollutants, the low cost of LNG allows to offset substantial incremental costs in particular for new vessels, and the deployment of LNG will require the installation of specific infrastructures in most ports. Please note the calculations below estimate for a ferry passing 100% of its time in SECA zones according to the fuel price of October 2014 in Antwerp.
In addition, the cost of natural gas priced in the Henry Hub has a cost benefit compared to other fuels, both now and in the future.
As with on-road transport fuel, another key indicator of growth in the LNG for marine fuel market is the future bunkering infrastructure, in which there are currently five planned LNG Bunker Ports.
Railways – Freight Locomotives
Unlike on-road transportation and marine fuel, there is not currently a significant market for LNG as a railway fuel. However, we believe that LNG will play an increasing role in powering freight locomotives due to the growth in domestic natural gas production and substantially lower natural gas prices, in comparison to crude oil prices, along with environmental programs.
LNG offers the potential for significant fuel cost savings, resulting in reduced operating costs for locomotive organizations. In 2015, the major US freight railroads consumed 7% of all diesel fuel consumed in the United States, totaling 3.6 billion gallons of diesel and costing $11 billion in 2012, which accounts for 23% of total operating costs for a locomotive company. According to the EIA, if locomotives were to switch to LNG, the cost-benefit is expected to offset approximately $1 million in the cost associated with an LNG locomotive.
In addition to economic benefit, we expect emission reduction policies from locomotives to eventually drive action resulting in environmental benefits. For instance, in 2015 the EPA began a three-part program to reduce emissions from diesel locomotives of all types.
Power Generation Sector
Peak shaving allows for the ability to meet seasonal and peak hour demands by storing gas until times of peak demand, where the LNG can quickly become re-gasified for use in electricity production. This application could be used in the United States in cases of severe weather extremes and the yearly fluctuations in power generation shown in the graph below.
Other examples where ssLNG could supply gas for peak shaving in the United States are high demand sporting events, such as the 2028 Summer Olympics in Los Angeles and the 2026 FIFA World Cup.
In addition to the environmental economic benefits previously described with using LNG, reliability of the power grid could greatly improve by applying peak shaving. This improved reliability could be achieved with ssLNG due to the security of natural gas supply, the ability to quickly start and ramp liquefaction, the ability to quickly respond to operator driven changes, the ability to prevent black outs, the ability to store natural gas in abundance, and the ability to locate ssLNG close to the source of demand. Coupling the benefit of improved reliability, an economic benefit exists as well since peak shaving allows for storing gas when prices are low and regasifying when gas prices are higher, generally when demand exceeds supply to the power grid.
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