The tide rises for LNG

Mar 14, 2002 01:00 AM

Now that the majority of new power plants in the United States are gas-based, and supplies from traditional sources like Canada may be waning, the liquid natural gas (LNG) ship could be coming into port right on schedule. In Hapan, where limited natural resources and an inability to import natural gas vis existing pipelines forces the alternative, LNG is a staple fuel.

According to the Gas Technology Institute (GTI), Japan has a total of 23 import facilities, almost eight times the number of any other country with import facilities. Most current demand for LNG in the States, on the other hand, is for supplying additional energy during peak-demand periods. According to GTI, there are 62 US peak-shaving liquefaction facilities.
Still, not since the energy crisis of the 1970s have LNG imports to the United States looked so promising. Higher natural gas prices, the discovery of new natural gas sources overseas, and lower costs for producing and shipping LNG have contributed to the Energy Information Agency's (EIA) Annual Energy Outlook 2002.

Overall US natural gas demand is expected to grow by almost 20 % between 2000 and 2020-according to EIA, natural gas consumption will grow from 22.83 tcf in 2000 to 33.78 tcf in 2020. While the demand for natural gas will increase in all sectors, most of it will come from electricity generation.
Neither domestic production nor Canadian imports are likely to meet the increased demand, industry analysts say. Domestic production will probably be able to supply only about 28 tcf in 2020, according to EIA projections. And gas-hungry electricity generators are expected to triple their demands by 2020, growing faster than any other sector.
Where will all this natural gas come from, then? Gas-rich countries such as Trinidad, Algeria, Nigeria, and Australia may be part of the answer. And at present, the only economically feasible option for importing natural gas from overseas is by liquefaction -- liquids are denser than gases -- and shipping it via large, specialized LNG tankers.

The significant amount of domestic natural gas drilling activity in late 2000 and early 2001 resulted in only a minimum increase of gas deliverability. Ronald Barone, managing director of UBS Warburg's research department, points out, "The fact is, we are going to have to get gas from somewhere, and I think increased imports of LNG are most likely." Barone adds that the increased need for LNG will begin "probably as soon as the United States comes out of the recession it is currently in."
Even if new North American gas reserves are discovered, they likely will be unable to meet demand. Most of the reserves in the three most promising frontier areas in the United States -- Alaska, Rocky Mountains, and the offshore Gulf-can't be touched because they are on federal lands.
In the Rocky Mountains alone, a recent Department of Energy analysis found that nearly 68 % of the area's technically recoverable natural gas resource is either closed to development or under significant access restrictions. Granting access could yield as much as 79 tcf of natural gas.

Still, even if these areas were opened, they would have little impact on LNG imports, says Phyllis Martin, an energy analyst at EIA. As gas supplies increase, prices will fall; and as prices fall, consumption will increase. "With the terminals already in place, they will keep on bringing [LNG] in to meet the increased demand," says Martin.
To develop resources in the Gulf, new technologies for deep offshore drilling also will be needed. "Reserves in all three areas would be expensive to develop," says Keith Meyer, CMS Energy's vice president of marketing. "It might be cheaper for us to import LNG than to develop these reserves," he speculates.
And even if legislation to open places like the Alaska National Wildlife Refuge was passed, users probably would not see that gas for several years, due to political gridlock and the need for new pipelines to transport the gas.

Canada, which contributes about 94 % of all US gas imports, will probably be unable to boost its exports enough to keep up with increasing US demand, according to the Canadian Gas Potential Committee.
Production in Alberta, which accounts for 85 % of the country's gas output, is expected to peak in 2003 and then decline by 2 % annually from 2005 to the end of this decade. Further, Alberta is expected to consume more of its own gas to develop the province's huge oil-sands deposits, leaving less gas available for export. In addition, Canada's "near frontier" areas, once thought to contain gas reserves so vast they could eventually replace western Canada's, now account for only 15 % of the country's remaining marketable gas. LNG stands ready to pick up the slack.

But the future of LNG imports depends also on the price of natural gas. "Gas prices will have to be consistent and high enough to make LNG imports profitable to its producers," says Mary Menino, manager of North American natural gas at Energy Security Analysis.
Shipping costs,which vary with distance, add to the cost of LNG. Tankers must offload their cargo within a certain period of time, since a percentage of the extremely cold liquid burns off each day, making long hauls at sea unprofitable. That usually means LNG imports from Trinidad-which is 2,200 miles away from the same US terminal-are more attractive than imports from Algeria-3,800 miles away.

A single long-term contract is fuelling the expansion of CMS's Lake Charles facility. In 2005, daily send-out capacity will reach 1.2 bn cf. In 2000, 44 % of US LNG imports came from Trinidad, according to EIA. Qatar and Algeria supplied an additional 41 %. Nigeria, Oman, Australia, Indonesia, and the United Arab Emirates together supplied the remainder. The costs of liquefaction, shipping, and regasification push the cost of LNG to between $ 2.75 and $ 4.00 per mm BTUs, according to Cheniere Energy, an oil and gas company in Houston.
That means that LNG importers have to be able to sell their LNG for around $ 3.00 per mm BTUS on the East Coast and around $ 3.50 on the West Coast to make a profit, according to Barone.

Sometimes LNG can be cheaper than domestic gas. For example, importing LNG is more attractive economically than piping gas from Texas to New England. Also, LNG often sells low on the spot market. Tankers that are carrying a fuel prone to dissipation the longer they stay at sea sometimes find themselves willing to sell LNG on the spot market for bargain prices.
Although terminal reopenings signal renewed interest in LNG, the number of existing US terminals demonstrates a challenge facing the LNG import industry-insufficient, and expensive, infrastructure. As of last spring, the United States had only two active LNG terminals, one in Everett, MA, and one in Lake Charles, LA.
The Everett terminal, operated by Tractebel's subsidiary Distrigas, includes two LNG storage tanks with a combined capacity of 3.5 bn cf, and meets between 15 % and 20 % of New England's gas demand each year. The company is expandingthe terminal with four new vaporizers, capable of delivering another.6 bn cfpd (which will fuel a nearby 1,550- MW natural gas-fired, combined cycle plant).

Another receiving terminal in Elba Island, GA, which had been dormant since the early 1980s, reopened at the end of 2001; and a fourth terminal at Cove Point, MD, was preparing to open this year. But besides reopening or expanding terminals, there are other indications of growth in the industry. Since LNG has primarily been used as a peaking fuel, terminals have typically operated on a spot-shipment basis. The only long-term contracts in place were with Trinidad and Tobago.
That is changing, however, according to John Barnett, spokesman for CMS Energy, which owns the Lake Charles terminal. As recently as last year, the industry has seen a significant move toward long- term contracts. According to Barnett, CMS received more than 20 expressions of interest in long-term deals during its 2001 open season. CMS is now expanding its facility to meet the terms of a contract that it signed with BG LNG last spring, says CMS' vice president of marketing, Keith Meyer.
Long-term contracts are also making it easier for investors to swallow the initial costs of building needed LNG facilities. These long-term supply purchase agreements-and their accompanying revenue predictability and stability-are making multi-billion dollar investments possible that previously would have been unthinkable to project sponsors, according to Standard & Poor's Peter Rigby.

The large, upfront capital investments required to begin importing LNG can make the imported fuel less competitive than domestic natural gas. The highest price tags of an LNG project are the liquefaction facility and tankers -- among the most expensive merchant ships ever built because of their double hulls and special linings. Technological \improvements have lowered costs for the tankers, however, by 50 % over the past decade, says Rigby. As a result, in 2001, a record 48 tankers were ordered, according to Lloyd's List.
The receiving terminal, including a jetty and unloading facilities, storage tanks, regasification facilities, and connections to pipelines, are all part of the necessary LNG infrastructure. Recent activities to build new LNG import facilities and purchase new tankers, though, are proving that companies in the business feel that demand for LNG will rise high enough to pay off the expenses of building the infrastructure.

Both El Paso's Elba Island and CMS Energy's Lake Charles terminals are gearing up for an LNG rush by adding new storage and vaporizer facilities. With the stated aim of becoming a "leading worldwide LNG merchant," El Paso has announced plans to open three terminals, all of which will be operational in 2005, according to Aaron Woods, company spokesman. In the Bahamas, El Paso is establishing a terminal with a send-out capacity of about.5 bn cfpd of gas and a pipeline connection to Florida.
South of the border, the company is developing (with Shell Gas and Power), a terminal in Altamira, Mexico, with a potential capacity of 1.3 bn cfpd. In the United States, El Paso is building a terminal on Radio Island, NC, with a send-out capacity of around 3 bn cfpd, and is proposing a pipeline to connect the terminal with industrial markets and power generation facilities in eastern North Carolina.

Both El Paso's Elba Island and CMS Energy's Lake Charles terminals are gearing up for an LNG rush by adding new storage and vaporizer facilities. But El Paso is just one of the many companies that are in the process of establishing new receiving and gasification LNG terminals.
Before their merger, Chevron and Texaco had each made plans to open new LNG terminals. Chevron had announced that it was evaluating several locations for the construction of a terminal with a capacity of 500,000 cfpd that would serve the US West Coast as early as 2005, and Texaco had announced plans to develop a new LNG terminal in the US Gulf of Mexico, with a potential capacity of up to 2 bn cfpd.
Cheniere Energy also has acquired options to buy three sites on the Texas Gulf Coast for the purpose of building LNG receiving terminals. Each of the terminals will have an average annual capacity of 365 bn cf of gas per year. According to Charif Souki, Cheniere president and CEO, "We believe that LNG will become a critical component of gas supply within the next decade."

Other companies taking the LNG plunge include Sempra Energy, CMS Energy, and Dynegy, which announced last July that it planned to build a new terminal in Hackberry, LA, that could be capable of receiving and processing 1.5 bn cfpd.
Internationally, Australia, Portugal, Spain, Italy, and some areas in South America are expanding or building new LNG import, export, and production facilities. China and India, to some extent, are positioning themselves to become key importers of LNG into Asia, according to EIA.
In January 2000, the Chinese government approved its first plan to import LNG to its southern region of Guangdong. India,on the other hand, continues to work out its LNG import policies, although expectations there for rapid growth in consumption are high.
The Coast Guard ranks LNG as less hazardous than other fuels; still, for about two months after September 11, the Guard banned LNG tankers from entering Boston Harbour.

The safety of LNG has been controversial since the first LNG peaking plant was built in 1939 in West Virginia. This controversy intensified (as it generally did for every explosive fuel) after September 11, 2001. Outside Boston, the US Coast Guard banned tankers delivering LNG to the Everett terminal. City officials expressed fears that a terrorist attack on an LNG tanker could result in a catastrophic explosion or fire that would endanger city residents living near the Boston Harbour.
A Federal Energy Regulatory Commission (FERC) decision to pull back approval of the reactivation of Cove Point last November also resulted from terrorism fears. There especially were concerns that the Cove Point facility was within three miles of the Calvert Cliffs nuclear power plant, and that an attack on an LNG tanker passing near the plant could cause a nuclear meltdown. Not much later, however, FERC approved Williams' plan to reactivate the terminal. The favourable final decision issued in December last year could set a precedent for similar future decisions.

Industry experts say that fears about the safety of LNG are largely unwarranted. "LNG is just another form of energy," says Jeff Beale, president of CH-IV International, an LNG technology consulting firm. "If we're going to get excited about LNG, we've got to get excited about every other dangerous product carried over the seas as well." Beale points out that the Coast Guard ranks LNG as much less hazardous than gases such as ammonia, butane, and propane.
BP's Daren Beaudo agrees that LNG's characteristics "constitute far fewer risks than the myriad of other hydrocarbons, chemicals, and fuels that are transported in far greater concentrations over public roadways and waterways every day." "LNG is a preferred hydrocarbon because of its physical composition and its safety track record," Beaudo goes on to say. LNG will explode only when ignited in a closed environment, for example. It will not explode in the open air. "We have to demonstrate credibility and reliability to the public every day. And I think we- and other LNG shippers-have done that since 1964 when LNG first began shipping commercially," he says.

Several LNG technological advances have made the fuel less of a human and environmental hazard. The most significant came about as a result of the race to the moon in the 1960s, which led to a better understanding of cryogenics and cryogenic storage with the expanded use of liquid hydrogen (-23 degrees F) and liquid oxygen (-296 degrees F). "Floating terminals"-located offshore-are another advancement that is still in the early stages of development. Both Shell and Texaco are considering implementing the technology, which, according to Lloyd's List, is both economically and environmentally viable.
LNG also is subject to numerous regulatory requirements. In addition to FERC and the Coast Guard, the National Marine Fisheries Service and the US Department of the Interior Fish and Wildlife Service, as well as numerous state and local agencies, have additional requirements.

Still, the bottom line appears to be that LNG has an excellent safety record, both at facilities and on tankers, as pointed out by Beale. Only three accidents have occurred at LNG facilities:
The first (and worst) one occurred in 1944 at East Ohio Gas Company when a new tank failed as it was being placed in service, causing its contents to spill into the street and storm sewer system. (The tank had been built with a low-nickel content, which resulted in the spill.) A disastrous fire resulted, killing 128 people. LNG tanks today are constructed of stainless steel alloys, which were in rare supply in the 1940s as a result of World War II.
A second incident involving LNG occurred in 1973 when the roof of an empty LNG tank at the Staten Island Texas Eastern Transmission Corporation collapsed after the tank's polyurethane insulation foam was accidentally ignited, killing 37 construction workers working inside.
However, the accident was clearly related to construction and not to LNG. The last incident happened in 1979, when gas seeped into an electrical substation and ignited at the Cove Point terminal in Maryland. The ensuing explosion killed one operator in the building and seriously injured a second.

The history of the maritime transportation of LNG also has been without major incident. According to FERC's environmental assessment of the Cove Point facility in 2001, only five significant incidents involving LNG ships have taken place since the beginning of LNG maritime transportation in the United States-two in 1979, two in 1980, and one in 1989. None of these incidents resulted in spills due to rupturing of the cargo tanks.
But could a terrorist act ruin this safety record? Beale doesn't think so, even if terrorists were able to bring a boat loaded with explosives alongside an LNG ship, as they did with the USS Cole. "An LNG tanker is not like a crude oil tanker," Beale says. "An LNG tanker is a double-hulled ship, and it has separate storage tanks for LNG. A terrorist would have to penetrate three surfaces. Even after penetrating the third surface, he would be penetrating only 20 % of the cargo."
Beale admits that an attacked LNG ship would cause a large fire immediately adjacent to the ship, but he asserted that the fire itself would not endanger people on shore. "You would not want to be on a ship during a terrorist attack," he says, "but any distance away from the ship the public would be safe."

Numbers tell the story best: The first shipment of LNG arrived in 1968 as a result of the natural gas shortage caused primarily by inadequate pipeline and storage capacity. The amount of imported LNG then rose almost every year until it peaked at 253 bn cf in 1979. After the LNG boom ended in the early 1980s, imports declined precipitously until 1986, when no LNG was reported coming into the country at all.

But almost as quickly as the tide went out, it has rushed back in again: Since the late 1980s, imports have edged back up to a level of about 1.2 % of US natural gas consumption in 2000, according to Energy Security Analysis' Menino. In 2000, imports skyrocketed to 233 bn cf, just shy of the record-setting amount imported in 1979. Over the next 20 years, that trend will continue, according to EIA: LNG imports will increase by 8 % per year on average, reaching 810 bn cf in 2020.
At a minimum, we are already witnessing an LNG import and export comeback at both a national and international level. The sustainability of this growth remains to be seen. But as long as natural gas continues to be the fuel of choice for electricity generators, no new domestic natural gas resources are found, and no major accidents involving LNG occur that could increase public opposition to the fuel, it may be a while before the LNG tide goes out. Wanda Avila is a business writer based in Washington, DC.

Source: Edison Electric Institute
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