Monday, July 26, 2004

Finessing NIMBY
For a variety of reasons, the US supply of natural gas is not able to keep pace with demand.  This pushes us towards imports, with the largest potential for incremental imports coming from liquefied natural gas, or LNG.  But that requires large regasification facilities, which have generated a great deal of local opposition, as I've discussed in previous blogs.  Last Friday's Wall Street Journal highlights a different approach, based on an LNG tanker that regasifies its own cargo while still offshore, feeding it into a pipeline for delivery onshore.  This "Energy Bridge" could bypass much of the current opposition to LNG imports.

This approach has several advantages, including the avoidance of expensive onshore regasification facilities.  LNG terminals with this kind of equipment cost around a half billion dollars, while a simplified terminal with an offshore receiving point and some onshore storage tanks should cost a great deal less.  This strategy also puts the portion of the process that opponents see as most hazardous well away from the facility's neighbors.  And by reducing the onshore fixed costs, it might allow more receiving facilities to be built, enabling a more flexible supply network with tankers calling where their cargoes are in greatest demand, not just at a few locations, as now. 

Despite its advantages, the economics may not be quite as attractive as the intial impression suggests, due to the structure of the LNG business.  Because of the scale of investment required, LNG projects are developed only when the entire value chain is economical and the output of a new plant can be committed on long-term contracts.  A traditional chain consists of the liquefaction plant, a fleet of tankers, and several regasification facilities (often owned by the customer, not the producer.)  A value chain built around the EP Energy Bridge technology would require the same front end, a less expensive back end, but a larger and costlier tanker fleet. 

It is an old maxim of the shipping business that ships make money when they are moving, not when they are sitting still.  When a ship is idle in port, because of delays in loading or unloading, the ship owner collects demurrage from the cargo owner.  The longer the ship sits in port, the more demurrage you run up, and the more tankers you will need to deliver the contracted annual quantity.  Thus the economics of the Energy Bridge approach are a function of how much more these special tankers cost to build and operate than conventional LNG tankers, and how much time is added to each voyage to allow for regasification at the delivery point.   Furthermore, if these ships are not dedicated to fulfilling a long-term contract, but are casting about for spot cargoes, the situation looks much worse, and the return to the owner (or the lessee) will be much lower.   

On balance, it's a nifty idea that could help fill in some crucial gaps in our natural gas supply, but I doubt it will entirely displace the need for at either more LNG terminals with their own regasification capability, or a major new gas pipeline from Alaska or northern Canada.

No comments: