ABCs of LNG

• Current debates over LNG export often ignore its primary benefits, such as enabling gas to be produced for sale to markets beyond the realistic reach of pipelines.
• It also allows gas to compete with petroleum liquids where energy density is important, such as in powering ships, trains and land vehicles.  

The international reaction to Russia's annexation of Ukraine's Crimean peninsula has put a spotlight on liquefied natural gas (LNG), which was already under debate in the US as a mechanism for exporting increasingly abundant shale gas. Meanwhile, LNG is emerging as a fuel in its own right, rather than just a means of transporting gas from source to market. What links these trends is LNG's capability to enable natural gas to approach the convenience and energy density of petroleum.

The big driver for this is economic: UK Brent crude is currently over $100 per barrel, while natural gas in the US Gulf Coast trades at the energy equivalent of around $25 per barrel. That creates a significant incentive to build LNG plants, despite the recent escalation in their cost. Even after adding the equivalent of $20-30/bbl in expenses for liquefaction, shipping, and regasification to convert the LNG back into pipeline gas at its destination, the opportunity is significant. In Asia, where LNG sells for $14 or $15 per million BTUs, that's still less than $90 per equivalent barrel. And because gas can only be produced if it can be connected to a market, LNG enables more gas to compete in more markets, while providing customers a cleaner and cheaper fuel.

This is not a new technology. Early demonstrations in the 1940s and '50s were followed by commercial-scale plants built to export LNG from Alaska, Algeria and Indonesia, establishing what has since become a global industry. Every LNG plant is designed to take advantage of the fact that at atmospheric pressure natural gas becomes a liquid at -259 °F ( -161 °C)--about 60°F warmer than liquid nitrogen--shrinking by a factor of 600:1 in the process. As long as it is kept below that temperature, it can be stored and transported as a liquid.

That has important advantages over the alternative of compressing natural gas to create a denser fuel. For example, a gallon of LNG has around 2.2 times as much energy (based on lower heating values) as the same volume of compressed natural gas (CNG) at 3,000-3,600 pounds per square inch (psi). A gallon of LNG also has 98% of the energy of ethanol, and 64% that of gasoline. This makes LNG dense enough to transport economically over long distances, unlike CNG.

These differences have a practical impact on the gradual penetration of the transportation fuel market by natural gas. While most natural gas passenger cars are based on the simpler CNG approach, LNG is gaining a foothold in trucking, particularly where the combination of low emissions and denser fuel--yielding longer range--is important.

LNG is also emerging as an option for transportation modes that have had few viable alternative to oil-based fuels, such as in shipping and even rail where electrification is impractical. Replacing ships' bunker fuel with LNG could be a key strategy for responding to increasingly strict international regulations on sulfur and nitrogen oxide pollution from ocean-going vessels.

The environmental benefits of LNG can be significant, when it replaces higher-emitting fuels like coal and fuel oil. Even after accounting for the energy consumed in the liquefaction process-- equivalent to 8% or less of the gas input to a new LNG plant--and in storage and transportation, lifecycle emissions from LNG in power generation are 40-60% lower than those from coal. Its advantage in marine engines is smaller, but still positive at around 8%, while reducing local pollution significantly.

LNG isn't without drawbacks, including "boil-off", the gradual tendency of LNG in storage to evaporate due to heating from the environment outside the insulated tank. In stationary facilities the resulting gas can either be re-liquefied or delivered to meet local gas demand. In vehicles, it is vented after a specified holding time of around a week or more. That makes it more suitable for vehicles that are used frequently, rather than sitting idle for extended periods.

It's worth noting that while LNG is increasingly linked to shale gas in North America, nearly all the LNG currently marketed around the world is produced from conventional gas reservoirs, such as the supergiant North Field in Qatar, or the gas fields of Australia's North West Shelf. That would also be the case for a new LNG plant based on Alaskan North Slope gas, as described in a post here in 2012.

Only a few years ago, government and industry forecasts were unanimous in projecting a large and growing US LNG import requirement, as domestic gas production declined. The number of US LNG import facilities expanded to meet this new demand, but the combination of the recession and the shale gas revolution has resulted in imports shrinking substantially since 2007. The Energy Information Administration now expects the US to become a net exporter of LNG in 2016, including exports from repurposed import facilities. They will join a market that now supplies around 10% of global natural gas consumption and accounts for a third of global gas trade.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

Pickens Plan, the Sequel

How can you not love T. Boone Pickens? Here's someone who made his fortune in oil, and now he's advising us to switch major parts of the US economy to wind and natural gas. And unlike some of the other concepts for taking a big bite out of our oil consumption, his current idea actually stands a chance of making a significant difference on a timescale of years, rather than decades. At the same time, however, Mr. Pickens has sometimes been a tad bit less than accurate with the numbers he uses to make his points. Remember those ads about the $700 billion per year we were sending overseas to buy oil? Even at its absolute peak in July 2008, reality was more like $500 billion, and the total for 2008 ended up around $385 billion, based on net imports and the average refiner acquisition cost for the year. That's hardly peanuts, but it's roughly half his cited figure. So let's take a look at the key numbers behind his proposal to convert long-distance trucking to natural gas. It's a great idea, though not quite as much of an economic slam-dunk as it might seem when he describes it.

I just finished reading the interview with Mr. Pickens in The American Spectator, published yesterday. The big shift in the Pickens Plan since the first time I examined it in detail is that he has switched his emphasis from using wind to free up natural gas to replace gasoline in cars, to using the abundant natural gas from our enormous shale gas reserves, which are already transforming the US gas and power markets, to replace diesel fuel in big-rig trucks. He is also in the process of lining up the legislative support to nudge this along much faster than market forces alone would. But does it make as much sense as he suggests when he talks about using $4.50 worth of natural gas to replace 7 gallons of diesel fuel at $3 per gallon?

Strictly in energy terms, that 7 gallons might even be a bit low. A million BTUs of gas (roughly 1,000 cubic feet or one MCF) would deliver as much energy to a truck as 7.8 gallons of diesel. And fundamentally, he's right that the recent price relationship between natural gas and crude oil makes gas a tremendous bargain, BTU for BTU. However, the prices he mentions in the Spectator interview constitute an apples vs. oranges comparison from both sides. Even if natural gas remained at a steady $4.50/MCF at the wellhead for the next 20 years, which seems unlikely despite the bounties of shale, that's not what you'd pay at the natural gas pump.

Start with the fact that it costs something to transport gas from the wellhead, wherever that might be, to market. Based on current pricing relationships, if gas starts out at $4.50, then by the time it's sold to a commercial account, which is probably how filling stations would be classified, it could cost as much as $9. And someone has to invest in the equipment to compress it to 3,000 or 3,600 psi and pump it into an 18-wheeler's tanks. Even with tax credits to help, a station owner will need to make a return on that investment, and some profit, too. Add another buck an MCF to cover that, and we're up to $10/MCF, which equates to $1.28/gal. of diesel. For a reality check on this, I took a look at cngprices.com, which shows the locations and pricing for stations selling compressed natural gas (CNG) for vehicles around the country, expressed in dollars per gasoline-equivalent-gallon (GGE). Prices range from roughly $1.25 to around $2, with a few outliers over $3. Since a GGE contains about 10% less energy than a gallon of diesel, you'd have to bump these prices up by about 10% to get the equivalent for a fair comparison.

Under $2 is still pretty cheap, but you shouldn't compare that to the $2.90/gal average retail price of diesel this week. The latter includes federal excise tax of $0.244/gal. and state excise and sales taxes that range from $0.08-0.49/gal. and average $0.281/gal. As best I can tell, CNG is taxed at the federal gasoline rate of $0.183/gal., while states seem to tax it to a much lesser extent than gasoline and diesel, as for example the $0.085/gal rate in Utah, compared to their state fuels tax of $0.245/gal. However, this is only viable as long as demand for CNG is tiny, relative to other fuels. If Mr. Pickens succeeds in displacing large quantities of diesel with CNG, then it will either need to carry a similar tax burden, or the lost revenues must be collected in some other fashion. If you strip out the taxes to get to an apples-to-apples price to compare diesel to CNG, it works out to around $2.50, give or take a dime or two, depending on location. So while CNG is still clearly cheaper than diesel, it's rarely $1/gal. cheaper on a truly comparable basis. This, together with conversion costs as high as the $65,000 per truck that Mr. Pickens cited, might explain why market forces alone haven't led to a rapid switch to CNG-fueled transport.

I've looked at the House bill containing the natural gas vehicle tax credits mentioned in the interview. It would cover as much as 80% of the incremental cost (over the diesel version) of a truck that can only burn CNG or LNG, up to $80,000, depending on weight. It would also extend the $0.50/GGE tax credit for CNG and LNG through 2027. These changes would drastically shorten the payout of an investment in a natural gas-powered truck, even if the per-gallon advantage of CNG appears to be somewhat less than Mr. Pickens suggests. That could move CNG into the truck-fuel market pretty quickly.

The remaining question is what the $7 billion investment Mr. Pickens wants the government to make in this proposition would buy us. He believes that converting the US heavy truck fleet to CNG would save 2.5 million bbl/day of diesel, or about two-thirds of the diesel and heating oil now sold in the US. That would have a much bigger impact on our oil imports than ethanol, although it's hardly an either/or proposition. I'm surprised that Mr. Pickens didn't go on to suggest that this benefit could be leveraged further by utilizing the resulting surplus diesel in diesel automobiles. Given their approximately 30% improvement in fuel economy vs. comparable gasoline vehicles, that could save an additional 750,000 bbl/day of gasoline, while reducing greenhouse gas emissions on those cars by about 20%. If you play all this out, then just under 5 trillion cubic feet per year of natural gas, or less than a quarter of current gas production, could save more than 3 million bbl/day of gasoline and diesel, or nearly a third of our net petroleum imports.

That sounds like a pretty good deal for $7 billion, though it could be made even better if the vehicle tax credits involved were converted into low-interest loans and loan guarantees, instead. If the main impediment to switching to gas is the up-front cost of natural gas conversions and the time involved in recouping that cost, then let's make it much easier for truckers to borrow the money for this purpose, and for banks to lend to them. Giving everyone taxpayer money to induce them to do what we want makes a lot more sense when the government has plenty of money to spend. With the US running large deficits and the private sector holding lots of cash earning next to nothing, we should use our tax dollars as efficiently as possible to achieve the same outcome. Otherwise, Mr. Pickens seems to be on to a sensible idea, and I wish him luck selling it.

Electric Cars and Natural Gas

Two items in the weekend Wall St. Journal caught my attention. The first concerned the mileage ratings of electric vehicles, with the EPA apparently reconsidering its initial methodology with an eye to making it better reflect reality. The second reported on a meeting of natural gas exporting nations, which seem to be backing away from notions of OPEC-style gas output cuts. While these stories appear entirely unrelated, at least in any cause-and-effect sense, they intersect in interesting ways. That's because natural gas has largely replaced fuel oil as the link between electricity markets and the world of hydrocarbons, while becoming a viable alternative vehicle fuel in its own right. Any shift away from oil-based transportation fuels toward either electric- or natural-gas-powered vehicles could be hindered, if gas prices started to behave like oil prices.

As the article on EV fuel economy reminds us, GM and Nissan made headlines last year with eye-popping mpg estimates for their Volt and Leaf electric vehicles, respectively. However, as I noted at the time, it is simply not realistic to apply a theoretical energy conversion equating the energy in a kilowatt-hour of electricity to the BTUs delivered by a gallon of gasoline without taking into account the means by which it was generated. According to the Journal, Nissan's 367 mpg claim was based on a calculation using 82 kWh/gal. That implies that it takes just 1,414 BTUs to generate each kWh of electricity used by the Leaf. Physics tells us that isn't possible, with 3,412 BTU/kWh as the theoretical minimum and real-world values much higher. Perhaps the earlier methodology reflected assumptions about the fraction of the time the Leaf might be expected to recharge on surplus wind or solar power, for which no fossil fuels are consumed. At this point any such assumptions look premature, at best.

Several years ago, the Pacific Northwest National Laboratory evaluated US power generating capacity to determine the level of EV market penetration that could be accommodated without building more power plants. Their conclusion that 84% of the cars on the road could be electrified without exceeding the capacity of existing power plants surprised a lot of people, and it has been cited many times since--usually without attribution--as evidence that EVs are a practical alternative to imported oil. The aspect of the study's findings that often gets ignored is that the unused capacity available to power EVs came mainly from gas turbines that are used to meet peak power demand and back up the intermittent output of renewables such as wind and solar power, and are thus idle for many hours a day. Yet while wind and solar have both grown substantially since the 2006 PNNL study, their contribution to actual US net generation has still only increased from 0.6% to 1.8% of the total--not enough to alter the conclusion that for the time being any incremental power consumed by EVs will come mainly from natural gas and other fossil fuels.

In that light, realistic fuel economy estimates for EVs must incorporate reasonable estimates of the amount of gas needed to generate each kWh used. Depending on the applicable gas turbine configuration, which would vary by time-of-day and market, that could range from 7,000 to 12,000 BTUs or more. Even if we used a conservative figure of 8,000 BTU/kWh, that means that the amount of natural gas equivalent to one gallon of gasoline (carrying 116,000 BTUs) would generate at most 14.5 kWh of power. If the previous 367 mpg estimate for the Leaf was truly based on an assumption of 82 kWh/gal., then its effective fuel economy might actually be no higher than about 65 mpg. That's still impressive, and it would save a lot of oil, but does it represent enough of an improvement over a Prius-type hybrid--or compared to the Chevrolet Volt, which the Journal cites as getting 50 mpg on its range-extending generator after the initial battery charge has been depleted--to justify the lifestyle constraints of a 100-mile range and recharging times measured in hours? More fundamentally, is this even the best use of the natural gas involved, compared with backing out coal-fired power generation and its high CO2 emissions, or using the gas directly as a vehicle fuel, particularly for trucks and delivery vehicles, as proposed by Mr. Pickens?

While the answer to the latter question is neither trivial nor obvious, all of these options hinge on natural gas being both plentiful and cheap, especially relative to crude oil. You've heard a lot about the impact of the shale gas revolution on gas supply and pricing in North America. Because the US now needs less imported gas to meet demand, and because domestic gas looks plentiful for decades to come, commodity gas on the Gulf Coast now trades for just 1/20th the price of crude oil. That means that the natural gas energy equivalent of a barrel of oil is selling for just $23.50. Even at the roughly $6/MCF indicated for December 2010 gas futures, that's still just $35/bbl. However, the more we rely on gas to generate electricity--to meet incremental demand, including from EVs, and to back out higher-emitting sources like coal--and the more gas we put directly into vehicles, the likelier it is that we'll need to import LNG to balance supply and demand. If the international gas market were controlled by an OPEC-like cartel that was able to constrain output to put pressure on prices, then eventually this would translate into higher gas prices here--closer to crude oil's--and that would make both natural gas vehicles and EVs running on gas-generated power less competitive with fuel-efficient gasoline and diesel cars. So for both EVs and NGVs, it's good news that the gas producers meeting in Algeria seem unlikely to be able to match OPEC's market power any time soon.