Daily GPI / NGI The Weekly Gas Market Report / NGI All News Access / Liquefied Natural Gas (LNG)

North America's Small-Scale LNG on Lookout for Demand

Even though the favorable natural gas price differential with oil should hold, growth of small-scale liquefied natural gas (LNG) markets may be delayed until demand catches up with supply, according to consultancy Pace Global.

In a webinar Tuesday by the Siemens unit, Pace Vice President Todd Thurlow said the long-term viability of small-scale LNG projects is good, but the immediate growth picture was more problematic. He cited a decision by a U.S. unit of Royal Dutch Shell plc, one of the biggest LNG developers in the world, to pull back on plans to build LNG production facilities in North America. Shell, however, has retreated from many North American projects to recalibrate its budget.

Still, there are positive signs. Spokane, WA-based Avista Corp. announced on Tuesday that it has formed subsidiary Salix Inc. to explore domestic markets for LNG in the wholesale and business-to-business sectors. Thirty-year Avista energy supply executive Robert Lafferty has been named as the president. A spokeswoman told NGI there are details still to be worked out by the new business unit.

Salix representatives already are in discussions with industry players throughout North America with a focus on what domestic markets could be served with LNG, concentrating on the West and Pacific Northwest regions, the spokesperson said. These options include both the production and transport of LNG.

Potential markets cut across the industrial and wholesale spectrum, including transportation, industrial processes and power generation.

"The increase in natural gas production and sustained lower costs make it possible to serve new markets, especially those markets where environmental issues and long-term economics are key drivers," said Lafferty. Salix intends to look for natural gas markets that go well beyond the traditional pipeline-supplied gas markets.

During the one-hour webinar, Thurlow re-examined the drivers for small LNG projects, the supply side of North American gas sector, and what end-user markets look like today, compared with last year when Pace hosted a similar program.

"The fundamental driver for using natural gas as a nontraditional transportation fuel is the price spread between diesel and natural gas," he said. The spread likely will remain through 2025, with gas under $6.00/Mcf in North America. The differential began a few years ago on the advent of the domestic natural gas boom.

"We're still seeing in current prices a robust spread between the fuels, and we're maintaining a spread that is sufficient to drive the conversion of diesel into LNG products." He said the U.S. Energy Information Administration projection is for a widening spread in prices and "follows our view that the spread is stable and it is going to be durable long-term."

Emission reduction regulations, such as the rules the U.S. Environmental Protection Agency has proposed for greenhouse gas (see Daily GPI, Sept. 23, 2013), provide strong incentives for LNG, particularly in the marine sector, which is subject to increasingly stringent controls covering a 200-mile zone along the nation's coastal waters.

"LNG and ultra-low sulfur diesel are the two primary fuels capable of meeting the most stringent sulfur reduction standards," Thurlow said. "Noncompliance is not an option for ship owners; they are evaluating fuel-switching and other options. LNG conversion in many cases has the strongest and best economics."

The other two drivers -- the supply side and end-use markets -- offer a mixture of opportunities and challenges that Thurlow said suggest a "collective pause" is under way in the small-scale LNG sector as they evolve to bring more balance.

There are 5.5 million gallons/day of proposed liquefaction capacity in the U.S. small-scale LNG sector, but only two of those projects currently are under construction, which would add up to 132,000 gallons/day capacity. Of the 35 existing small LNG production facilities capable of serving the transportation market with about 2 million gallons/day of capacity, most are peak-shaving plants owned by local utilities, Thurlow said.

Thurlow said there also should be a certain amount of uncontracted capacity at the proposed LNG export facilities that eventually get built, mostly along the Gulf Coast. These facilities will be able to serve regional markets with proximity to their locations, he said.

Ultimately, for more new domestic U.S. LNG supply sources to develop there will need to be a combination of increased demand created and a lowering of merchant risk for the small-scale LNG production plant developers, Thurlow said. In most cases, developers do not have the luxury of signing long-term take-or-pay contracts and then using those long-term deals to line up favorable financing.

"Developers have to get comfortable with the fact that in most cases they are not going to have 75% of a new facility's capacity locked up under contract," Thurlow said. That is why larger-scale projects are not being started; instead, incremental phased projects are what get developed.

ISSN © 2577-9877 | ISSN © 1532-1231 | ISSN © 1532-1266

Recent Articles by Richard Nemec

Comments powered by Disqus