Thursday, February 15, 2007

Low-Key LNG

It's been some time since I've posted on the subject of liquefied natural gas (LNG), and some interesting developments have occurred in the interim. A couple of new US LNG receiving facilities have recently been approved, including one off Gloucester, MA that connects to tankers 13 miles offshore and relies on re-gasification facilities on the delivering vessel, rather than onshore. That significantly reduces the investment in the LNG terminal, while also lowering the handling risks that form the basis of local environmental and citizens' group opposition to traditional LNG terminal projects. I'm not sure this is the ultimate solution to our growing, long-term gas supply crunch, but it looks like an important component in the transition from North American gas self-sufficiency to year-round LNG imports. In between, there will probably be many years in which LNG imports will be seasonal and opportunistic, and this kind of infrastructure is ideally suited to that situation. It's also very helpful in the development of a global LNG spot market.

Despite its unpopularity in some quarters, LNG offers significant environmental and energy security benefits. While its life cycle of production, transportation and end-use emits more greenhouse gases than domestic pipeline gas, the net emissions are still lower than for coal. And although it represents additional energy imports, it contributes to energy security via diversification. Even if it didn't get us a more reliable group of suppliers than we have for oil, it creates a different supplier mix, and as long as that is not perfectly correlated to the oil side, it diversifies the risk of our overall energy supply portfolio.

The company behind the Gloucester terminal, Excelerate, also operates a fleet of the special tankers necessary to deliver into this kind of minimalist terminal. They own a second terminal on the Gulf Coast that uses the same design, and which entered service two years ago. Another facility in the UK using this technology has just received its first cargo. This design is well-suited to seasonal or occasional use, because it costs much less than a standard onshore re-gasification terminal: under $100 million, versus $ 0.5-1 B for the standard variety. No one can't afford to sink a billion dollars in a terminal that will only be used a few times a year, but a tenth of that cost might make sense, particularly if it contributes to creating a "network effect" for a more flexible LNG market.

There's no free lunch, of course, and the downside of this approach is the higher cost of the special ships that are needed for this trade. As volumes through the Excelerate facilities go up, it's not clear that total shipping and throughput costs would ever be quite as low as those associated with the more traditional arrangement of a simple LNG tanker discharging into an onshore re-gas terminal. But in a country that has not yet come to grips with the true extent of its natural gas problem, and that regards LNG as something alien and scary, this low-profile value chain probably has an edge. By comparison, Shell's Broadwater project proposed for the middle of Long Island Sound remains mired in controversy. Like it or not, the US is going to need more LNG, and Excelerate's approach makes more sense than building the terminals in Mexico and sneaking the gas across the border when no one is watching.

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