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.

Environmental Groups Gear Up to Stop US LNG Exports

• The Sierra Club and other groups are taking on US LNG exports just when LNG is gaining support as a key response to Russia's aggressive behavior in Ukraine.

• The science behind their claims does not withstand scrutiny, and their timing couldn't be worse, geopolitically.

A collection of environmental groups, including the Sierra Club, Friends of the Earth and 350.org recently wrote to President Obama, urging him to require a Keystone-XL-style environmental review--presumably entailing similar delays--for the proposed Cove Point, Maryland liquefied natural gas (LNG) export terminal. Given the President’s explicit support for wider natural gas use and the administration's new commitment to our European allies to enable LNG exports, the hyperbole-laden letter seems likelier to rev up the groups’ activist bases than to influence the administration’s policies.

Either way, its timing could hardly be coincidental, coming just as opinion leaders across the political spectrum have seized on LNG exports as a concrete strategy for countering Russian energy leverage over Europe in the aftermath of President Putin’s seizure of Crimea. If, as the Washington Post and energy blogger Robert Rapier have suggested, the Keystone XL pipeline is the wrong battle for environmentalists, taking on LNG exports now is an even more misguided fight, at least on its merits.

Referring to unspecified ”emerging and credible analysis”, the letter evokes the thoroughly discredited argument that shale gas, pejoratively referred to here as “fracked gas”, is as bad or worse for the environment as coal. In fact, in a similar letter sent to Mr. Obama one year ago, some of the same groups cited a 2007 paper in Environmental Science & Technology that clearly showed that, even when converted into LNG, the greenhouse gas (GHG) emissions of natural gas in electricity generation are still significantly lower than those of coal, despite the extra emissions of the liquefaction and regasification processes.

The current letter also implies that emissions from shale gas are higher than those for conventional gas, a notion convincingly dispelled by last year’s University of Texas study, sponsored by the Environmental Defense Fund, that measured actual, rather than estimated or modeled, emissions from hundreds of gas wells at dozens of sites in the US.

It’s also surprising that the letter’s authors would choose to cite the International Energy Agency’s 2011 scenario report on a potential “Golden Age of Gas” in support of their claims. That’s because the IEA’s analysis found that the expanded use of gas foreseen in that scenario would reduce global emissions by 160 million CO2-equivalent tons annually by 2035, mainly through competition with coal in power generation in developing countries, addressing the principal source of global greenhouse gas emissions growth today.

The groups take another wrong turn in suggesting that President Obama increase support for wind and solar power instead of supporting gas. The contribution of new renewables to the US energy mix has grown rapidly, thanks to significant federal and state support, but it remains small. Despite record US wind turbine and solar power additions, shale gas and shale oil added more than 20 times as much energy output on an equivalent basis in 2012, and last year’s gains look similarly disproportional. Simply put, the US isn’t enjoying a return to energy security or becoming a major energy exporter because of renewables. It is counterproductive for renewables to pit them against gas as they have done here.

Experts disagree on how much and how quickly US LNG exports can influence gas markets in Europe and elsewhere. Yet while none of the currently permitted or proposed LNG facilities will be ready to ship cargoes until at least late next year, the knowledge that they are coming will inevitably have an impact on traders and contracts, including contracts for Russian gas in the EU. Whether or not US natural gas molecules ever reach Europe, they can serve a useful role in the necessary response to Russia’s aggression in Ukraine. Attempting to block this for spurious reasons puts opponents in jeopardy of becoming what Mr. Putin in his previous career might have called “useful idiots.”

It’s tempting to speculate on what this new campaign says about the participating groups’ perceptions of how the Keystone XL fight is going. Win or lose, they might soon need a new cause, or face the dispersal of the protesters and financial contributors it has galvanized. Blocking LNG may look conveniently similar--even if similarly mistaken--but I can’t help feeling these groups would gain more traction with their fellow citizens by focusing on what they are for, rather than expending so much energy in opposition.

A different version of this posting was previously published on Energy Trends Insider.

How Can US Natural Gas Reduce Europe's Dependence on Russia?

• The EU's dependence on Russian natural gas is directly linked to its own gas production, which has fallen faster than EU member countries' demand for gas.
• While US LNG exports aren't an immediate remedy, due to permitting and construction time lags, the prospect of their availability is already affecting the gas market.

Russia's annexation of Ukraine's Crimean Peninsula has drawn new attention to Europe's reliance on energy supplies from Russia, particularly for natural gas. Lacking the means to force Russia's president to back down, US politicians and leading newspapers have latched onto the idea of exporting shale gas to reduce the EU's vulnerability to an accidental or intentional disruption of these supplies.  The efficacy of this strategy depends on more than the logistics and timing of US liquefied natural gas (LNG) projects.

The European Union is expected to import 15.5 billion cubic feet (BCF) per day of natural gas from Russia this year, roughly half of which would normally be transported by pipelines passing through Ukraine. Worries about the security of these supplies in the current crisis are compounded by Europe's increasing reliance on gas imports from all sources.

While EU gas consumption, based on the union's 28 current member countries, has been essentially flat over the last decade, its production has declined by more than a third, as shown in the chart below. As of the end of 2012, EU self-sufficiency in gas stood at just 35%. The widening of the gap between EU gas demand and production bears a close resemblance to the situation in which the US found itself with regard to crude oil prior to the shale revolution, and it is the main source of Europe's vulnerability in natural gas.

After Russia, the EU's main gas suppliers are Norway and Algeria, primarily by pipeline, followed by LNG sourced from Qatar, Nigeria and other countries.  Russia's leading role in supplying Europe's gas is consistent with its status as the world's second-largest gas producer and largest gas exporter, its proximity to the EU, and its pipeline network developed over multiple decades. Europe's gas supply mix includes ample political risk, but none of the EU's other suppliers are geopolitical rivals like Russia.

The EU has three main options for reducing its dependence on gas imports from Russia. It could shrink natural gas consumption, which is already happening to a modest degree as pricey gas-fired power generation is being squeezed out between subsidized wind and solar power and cheaper coal power, in a mirror image of US trends of the last several years.  This seems inconsistent with the EU's long-term emission goals and its need for gas to back up intermittent renewable electricity generation, so the further scope for this option appears limited, at least for the next decade.

EU countries could also attempt to revive domestic gas production. Europe's conventional gas fields may be in decline, other than in non-EU Norway, but its shale gas potential was estimated at 470 trillion cubic feet (TCF) in the US Energy Information Administration's global shale assessment last year. That's about 40% bigger than Europe's reserves and technically recoverable resources of conventional gas. Uncertainties on this estimate are still large, but it's in the same ballpark with the Marcellus shale in the eastern US, which currently produces over 14 BCF/day.

Unfortunately, initial efforts in Poland's shale have been disappointing, while Germany, France, and other countries have imposed explicit or implicit moratoria on shale gas development. Unless these policies are reversed in the aftermath of the Ukraine crisis, the EU will be unable to grow its way out of its dependence on Russia.

That leaves import diversification as the likeliest path for weaning Europe off Russian gas. This process is underway incrementally, hastened by previous Russian gas brinksmanship. Interest in US gas is understandable on many levels, not least because even after increasing production by around 17 BCF/day since 2006, US shale resources are expected to add another 13 BCF/day by 2020.

Energy experts have been quick to point out that the first US LNG exports won't be available for at least several years, and that companies, rather than governments, are the main parties involved in gas contracts. Customers in Europe will have to compete for US and other LNG supplies with customers elsewhere, especially in Asia, where China's gas demand is growing and Japan's post-Fukushima nuclear shutdowns have dramatically increased LNG imports.

These constraints are real. However, they ignore the ways in which changing the market's expectations about future LNG supplies--and potentially prices--could affect the calculations of Europe's gas buyers today and limit the political leverage that Russia's dominant gas export position conveys. Anecdotal reports suggest that US LNG is already a factor in contract renegotiations in Eastern Europe. As Amy Myers Jaffe of UC Davis and formerly the Baker Institute tweeted a few weeks ago, "it isn't about physical LNG cargo to Europe; it is about US exports promoting market liberalization (and) greater liquidity." 

 A decision by the US government to streamline the permitting and development of LNG facilities wouldn't enable US exports to displace Russian gas in Europe this year or next, but it would put Russia on notice that in the future it must compete in a market in which gas customers in Europe and elsewhere will have much greater choice. That would certainly complicate President Putin's plans.

 

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

Energy Risks of the Ukraine Crisis

• Russia's intervention in the Crimean Peninsula poses few risks to Europe's energy supplies, but escalation or Western sanctions could change that assessment.
• If the crisis expanded to mainland Ukraine, the integrity of that country's pipelines and the natural gas they carry to EU members would be the most immediate energy concern.

Although Ukraine's energy assets don't appear to be a major focus of Russia's occupation of the Crimean peninsula, any escalation of the crisis could have serious energy consequences, regionally and globally. The initial reaction of energy markets has been cautious, with Monday's jump of around 2% for Brent crude and nearly 10% for European gas futures largely erased in Tuesday's trading. While some of Russia's oil exports to Europe transit through Ukraine, the latter's natural gas pipelines are the bigger worry, especially in light of Russia's past use of the "gas weapon."

It's always dicey commenting on an unfolding event of this magnitude, which various observers have nominated as the most serious geopolitical crisis in post-Cold War Europe. I've spent the last few days following developments, listening to conference calls, and speaking with a Russia expert of my acquaintance. Dismissing the current events as out of tune with the 21st century ignores the complex history of a region that has seen multiple episodes of great-power conflict, just as trying to impose a Western mindset on President Putin's intentions is likely to come up short.

His latest reported comments suggest that he may have achieved his initial goals, at least insofar as giving him, rather than the new government in Kiev, control over Russia's access to the strategic Black Sea naval installations. Any broader goals are unclear at this point, and as a military expert highlighted in a media call hosted by the Council on Foreign Relations, the current confrontation in Crimea runs the risk of "unintended escalation." Wars have started this way.

So what's at stake, in energy terms? An infographic from Business Insider puts the gas situation in perspective. Russia's share of Europe's gas supply has fallen to 22% as EU members diversified their sources of supply in the aftermath of past interruptions in Russian gas deliveries. Still, roughly two-thirds of Russian gas sent to the EU passes through Ukraine's territory, and the pipelines that transit Belarus and the Baltic Sea lack sufficient capacity to reroute the entire volume should Ukraine's pipelines be disrupted.

Whether that occurred as an intentional reaction by Russia to steps that the US and EU are considering in response to its intervention in Crimea, or as a result of armed conflict in mainland Ukraine, natural gas prices in Europe would spike, even with ample gas in storage after a relatively warm winter. That would adversely affect EU economies still recovering from recession and the EU's financial crisis.

European natural gas prices are already much higher than those in the US, and any further increase would ratchet up the pressure on the EU's manufacturing sector. Nor is there nearly as much LNG available globally to make up any shortfall as there will be in just a few years, once US exports gear up and several large Australian LNG projects come onstream. Ironically, Ukraine is building its own LNG import facility to diversity its supplies--luckily not sited in Crimea.

The threat to oil deliveries seems less acute, short of an embargo that would hurt Russia as much as its customers. In 2012 Russia exported around 6 million barrels per day of oil and condensate to European refineries by various routes, including the southern leg of the Druzhba pipeline that crosses Ukraine on its way to the Czech Republic, Hungary and Slovakia. While a disruption of this flow could force refiners in those countries to scramble for alternative supplies, Russian oil would probably still find its way to world markets via other routes, including to the Baltic ports. Ensuing world oil price increases would likelier reflect an overall risk premium than a more localized physical shortfall.

Even if the situation doesn't progress beyond its current state, longer-term energy impacts could still follow. These include a recognition of heightened political risk for investments in Russia and its "near abroad" neighbors, along with the results of any financial sanctions that might be imposed.

If Mr. Putin is satisfied to engineer greater Crimean autonomy or independence from a more EU-oriented government in Kiev, and if the EU/US response is limited to financial measures to prop up that government, then the consequences--similar to those for Russia's ongoing occupation of part of Georgia--could be minimal. The EU can't go any farther than Germany will support, and thanks to the Nordstream gas pipeline led by its former Chancellor, Germany has less at stake in Ukraine than some of its neighbors. It has already distanced itself from suggestions of evicting Russia from the G8 group of nations. In that context, the US administration seems unlikely to sustain a harder line than Brussels.