There’s one topic that’s playing on my mind and like the Baader Meinhof phenomenon, it seems to be catching my eye everywhere I look – energy forums, twitter feeds, latest news updates – you name it, they’ve got it: LNG.
Being in a role that entails talking / writing about rigs, platforms and pipelines in an engaging way, I just had to know more than the basic or ‘barely there’ knowledge I came with. But between the myriad terms and technical abbreviations, I chose to pick up and learn more about the innocuous subject LNG and in this I found that its world, with its multitude of layers was far more exciting and intriguing than I had imagined.
The basics were simple: Liquefied natural gas (LNG) is natural gas (predominantly methane, with some mixture of ethane and traces of higher hydrocarbons) that has been converted to liquid form for ease and safety of non-pressurized storage or transport. The liquefaction process involves removal of certain components, such as dust, acid gases, helium, water, and heavy hydrocarbons, which could cause difficulty downstream.
Natural gas is mainly converted in to LNG to achieve the economy for natural gas transport over the seas where laying pipelines is not feasible technically and economically. So it is more cost efficient in marine transport over long distances, typically in excess of ~1000kms. Add to it the fact that it takes up about 1/600th the volume of natural gas in the gaseous state, providing larger energy density per unit volume to make for efficient transportation. It is odorless, colorless, non-toxic and non-corrosive, and you have a strong case for LNG as a convenient and environmentally viable option.
But it gets more interesting here. Historically, with its relatively high cost of production and the need to store it in expensive cryogenic tanks and the requirement for suppliers to obtain long term purchase commitments from the buyers to underpin financing of LNG projects, its adoption had not been as high as other energy sources. In the early 2000s, prices for constructing LNG plants, receiving terminals and vessels fell as new technologies emerged and more players invested in liquefaction and regasification. This combined with emergence of US and Australia as large LNG supply sources has led to increased spot LNG supply driven by flexible contracts due to increased supply side competition as developers seek arbitrage between existing liquid gas markets and LNG markets. This has tended to make LNG more competitive as a means of energy distribution but increasing material costs and demand for construction contractors have put upward pressure on prices in the last few years. When Korean and Chinese shipyards entered the race, increased competition reduced profit margins and improved efficiency—reducing costs by 60%. Despite the volatility that these factors bring in, on energy basis LNG production is expected to hit 10% of the global crude production by 2020.
As an offshoot, strong demand for LNG spot cargoes amid the limited availability of vessels is pushing up charter rates in both the Asia Pacific and Atlantic regions, providing a boost to the long depressed shipping market. LNG carriers are after all the pipelines of the sea. The global LNG carrier fleet has witnessed a fivefold increase in the past two decades.
If one goes through the latest BP Energy Outlook edition, the trend is very clear: as energy demand grows, the fuel mix continues to diversify. Countries like China are combining industrial and environmental policies in a way that is more radical than most others. In its “2+26 cities” program in its northern provinces, the state-directed economy has moved from coal fired heating to gas fired heating. When giants like China take such radical steps, the impact is more vast and wide-spread. But the country’s demand is far outstripping its domestic supply and with their heavy dependence on imports, there is an upward spike in LNG prices in the Asia-Pacific region.
Similarly in India, the good news is that the country plans to electrify millions of households that still burn wood for light, heat and cooking. India is among the fastest-growing large energy consumers in the world. According to the IEA, India’s share of primary energy demand accounted for about 5.7% of the global total in 2013, and with its energy demand set to increase by 30%, India’s share of the global total could be nearly 7% by 2020. Like China, it also plans to reduce its heavy reliance on thermal coal, a bigger polluter than gas.
As per the BP Energy Outlook 2018 edition, India’s gas demand is expected to go up from 5Bcf/d to 14Bcf/d by 2020. As domestic production is expected to be able to cater to only 5Bcf/d of the total demand, this would leave a delta of 9Bcf/d which will need to be fulfilled by imported gas / LNG.
Compared with burning coal or oil, burning natural gas releases significantly lower greenhouse gas emissions per unit of energy (provided that methane leakage from natural gas production and delivery is limited). Natural gas power plants also produce lower levels of pollutants harmful to human health, compared with coal-fired power plants—this is particularly important given India’s high urban air pollution levels.
Which translates into the country requiring a huge increase in its imports via both pipelines and tankers or doubling the share of natural gas in its energy mix to 15% by 2022 with the construction of more LNG terminals.
Unfortunately, India suffers from a deficiency of infrastructure for domestic deployment of natural gas. India has delayed constructing LNG infrastructure to receive supplies from abroad, and new builds are ongoing. Though key regasification facilities (that convert LNG to pipeline gas) at the ports of Dahej, Hazira, Dabhol, and Kochi are operational, they can handle only about 20 mmtpa (million metric tonnes)/year at the moment, which represents about 30% of current gas consumption.
Moreover, once LNG is received in Indian ports, it still needs to be transported to major demand centers that can be far away. In general, gas transport is more challenging than oil transport, and pipelines are the best solution for moving large quantities of gas across country as large as India. Southern and eastern India are poorly served by pipelines. Critical projects such as the Kochi-Mangalore-Bangalore pipeline have been delayed owing to land acquisition issues. And infrastructure (e.g. filling stations) for Compressed Natural Gas (CNG) for transportation and city gas for domestic use is limited and could be expanded to many more Indian cities.
With timely intervention if these issues can be resolved, the rising demand for LNG can be met as the market is ripe for LNG. Should we call it a deal then?
The views expressed here are personal and those of the author.