Navigant Research Blog

Rail Looks to Move the LNG Market

— September 13, 2016

Pipeline (2)The natural gas market in North America continues to have oversupply issues and a much lower price than other regional markets. Natural gas producers in Canada, Alaska, and other parts of the United States that are looking for new outlets for gas deposits may soon see new sales thanks to an old form of transportation—rail.

For the first time in decades, liquefied natural gas (LNG) is being used to power locomotives in the United States, and trains will soon begin delivering LNG by tanker for the first time. In June, the Florida East Coast Railway (FECR) began the first line in nearly 20 years to operate an LNG-diesel duel fuel train in the United States. The train runs between Jacksonville and Miami, and the company intends on converting all of its locomotives to dual-fuel setups.

Displacing Diesel

FECR is currently sourcing its engines from General Electric. Also offering LNG conversion kits to railway operators are manufacturers Energy Conversion, Inc. and EMD. Railroad operator BNSF is also testing LNG locomotives. The use of LNG in locomotives first began in the 1980s by Burlington Northern Railroad, but after several trials, engine conversion efforts lost steam, until efforts to put them back online returned just a few years ago.

The potential market for LNG as a rail fuel is considerable as diesel fuel consumed in the top 7 major freight railroads was about 7% (3.6 billion gallons) of the U.S. total diesel fuel consumption in 2012, according to the US Energy Information Administration (EIA). Supplying engines with LNG fuel while in operation requires the addition or modification of an LNG tender car. LNG tender manufacturers in North America include Westport Innovations of British Columbia and Chart Industries. The EIA expects that switching to cheaper LNG will more than repay the cost of converting the engine and tender car that holds the fuel.

Alternative to Pipelines

Rail is also being proposed as an alternative distribution mechanism to sometimes-contentious gas pipelines. The Alaska Railroad Corp. (ARRC) became the first rail agency to obtain approval from the Federal Railroad Authority (FRA) to transport LNG by rail tanker in October 2015. Transportation of LNG from where it is produced to interior markets in Alaska is likely to begin soon, and Union Pacific Railroad has similarly applied for permission to transport LNG in the lower 48. Specially designed LNG tanker cars are needed to store the fuel during transport, and new designs are currently in use in Japan and in Europe, where companies VTG and Chart Industries are collaborating.

LNG and oil pipelines continue to face opposition for their potential to endanger the environment that they pass through, so transporting LNG by rail could be a less objectionable method of distribution. Switching from diesel to natural gas also has environmental benefits. According to the EIA, natural gas produces 27.4% less CO2 than diesel when being burned.

Utilizing the railways for both delivery and consumption of LNG has inherent synergies, especially if the refueling depots and processing plants can be located near rail terminals. Until this market matures, some natural gas producers in Canada struggling to find options for exporting the abundance of natural gas are moving into the United States and Mexico in order to maintain growth.

 

Is Natural Gas a Key Solution to China’s Air Pollution Problem?

— January 12, 2016

The recent air quality Red Alert issued by Beijing on December 8, 2015 has again drawn everyone’s attention to China’s notorious air pollution caused mainly by burning coal. As a cleaner alternative to coal, natural gas has become a focus of China’s energy reform. In 2014, the Chinese State Council  announced an ambitious target of increasing natural gas consumption from around 6% to above 10% of the total energy mix by 2020. Despite China’s determination, the road to a natural gas boom will likely be bumpy due to the risk of timely supply development and the challenge of forming a competitive market.

Supply Development

To support the projected growth of natural gas consumption, China is counting on its unconventional shale gas resource. China has the largest shale gas resource in the world (almost twice the size of shale resources in the United States), but development has been slower than expected. By the end of 2015, the production capacity of Fuling shale gas—the only shale gas field under commercial development in China—had just reached 0.48 bcf/d (billion cubic feet per day), less than 3% of the country’s total natural gas consumption. China also lowered its 2020 shale production target by half to 2.9 bcf/d. Even with a lower target, to increase the shale gas production sixfold in 5 years will require tremendous investment and innovation that will need to equal or exceed the shale gas revolution in the United States. Whether shale gas will become the main driver for natural gas consumption in China is still uncertain.

In addition to domestic production, China also needs natural gas imports through pipelines and liquefied natural gas (LNG). China currently operates two pipelines that import natural gas from Central Asia and Myanmar. The China-Myanmar gas pipeline has been severely underutilized since it began operation in 2013. The Central Asia Gas pipeline has also experienced frequent winter supply disruptions. Although a new pipeline from Russia will increase the import capacity, the lack of stable pipeline import will likely persist due to the geopolitical uncertainty. On the LNG side, since the regional LNG price is currently linked to oil prices, high price volatility will be a constant challenge to Chinese buyers. The current low LNG prices also pose challenges for LNG suppliers looking at serving the Chinese market. In general, cost and supply reliability are the two major factors that serve to place a cap on future levels of natural gas imports in China.

Chinese Market Development

The lack of a competitive market is perhaps the biggest challenge to China’s natural gas industry. Unlike in the United States, where natural gas prices are determined by the market, Chinese natural gas prices are determined by the national government. Since the natural gas prices do not promptly reflect market dynamics, natural gas sellers often have to operate at a loss while natural gas consumers sometimes prefer cheaper alternative fuels. In addition, China also needs a robust natural gas transportation system that can distribute natural gas in a timely and efficient way across its vast area. Currently due to the limited access to pipeline gas and lack of storage facilities, gas shortages are common. The recent gas supply crisis in Beijing highlights the vulnerability of the natural gas system. Whether China can boost gas consumption will depend on infrastructure development and market maturation.

2015 marked China’s slowest growth rate of natural gas demand in more than a decade, casting further questions on the prospect of achieving the country’s national target by 2020. Unless immediate actions are taken to address the challenges on both the supply and demand side of the Chinese market, the role of natural gas to fight air pollution might yet prove some ways off in the future.

 

As Demand Soars, Construction of LNG Terminals Booms

— November 24, 2014

International marine construction companies are seeing a bonanza of new projects as countries around the world approve massive new terminals for liquefied natural gas (LNG) – for imports in most cases, and for exports from North America, Australia, and some Southeast Asian countries.  Altogether, this frenzy of port building could amount to hundreds of billions of dollars over the next decade as seaborne trade in LNG climbs to meet spiraling demand, particularly in the energy-hungry countries of China, India, and other Asian nations.

Total deliveries of LNG were flat in 2013 compared to 2012, according to the BG Group, but this masks pent-up demand, as producers in the United States are ramping up export capacity and importing countries are scrambling to build import terminals.  BG Group forecasts that worldwide LNG demand is expected to increase at a rate of 5% annually through 2025, with much higher rates in the developing countries of Asia.

North America

In September, the U.S. Federal Energy Regulatory Commission (FERC) gave final approval to the Cove Point LNG facility, overruling the objections of environmental groups and bringing to four the number of U.S. export terminals officially approved and under construction.  All told, 14 terminals are seeking approval by federal regulators in the United States, on the Gulf Coast, the East Coast, and the Pacific Northwest.  The Northwest facilities, in particular, face fierce opposition from environmentalists opposed to the increased fracking that large quantities of U.S. exports will entail.  With big potential markets waiting not only across the Pacific, but also in Europe, U.S. oil & gas companies and their representatives in Washington, D.C. are eager for more export capacity to come online.  There are also at least a dozen LNG terminals proposed along the coast of British Columbia.

Europe

With unrest in Ukraine giving rise to fears of disruptions of natural gas supplies from Russia, which provides 30% of Europe’s natural gas, European governments and companies are scrambling to build new import facilities.  Paradoxically, with international supplies limited and with Japan, which relies more heavily on imported natural gas for its energy supply than any other country, soaking up much of the available supply at inflated prices, imports to Europe have declined in the last couple of years.  The Gate terminal on the North Sea coast near Rotterdam was built with the support of the Dutch government to maintain the Netherlands’ status as a regional gas hub.  It is now running at 10% of capacity, according to The Economist.

Nevertheless, imports from the United States are sure to increase, and the European Union sees the construction of new import terminals as a critical matter of regional energy security.  Lithuania, for example, is due to open a massive new floating terminal this year or in early 2015.  New terminals are especially important along Europe’s vulnerable southeastern coast, as currently countries in the area are essentially captive customers to Russia’s Gazprom.

Amos Hochstein, the acting U.S. special envoy and coordinator for international energy affairs, testified recently before the Senate Foreign Relations Committee, saying that “[there is a] critical need for Europe to improve its energy infrastructure by constructing new pipelines, upgrading interconnectors to allow bidirectional flow, and building new LNG terminals to diversify fuel sources … We support proposals to build LNG terminals at critical points on European coasts, from Poland to Croatia to the Baltics.”

Asia

The biggest building boom is underway in China, where three import new terminals came online in 2013 and at least two more are expected begin operation before the end of this year.  Already, half of the world’s capacity for regasification (the conversion of LNG to conventional natural gas, for transport by pipeline) is located in Asia.

“China’s imports of liquefied natural gas (LNG) are growing at a record pace,” reported Reuters earlier this year, “as it aims to use cleaner fuels to cut smog in big cities, creating a powerful new source of demand that has the potential to reshape the market for the super-chilled gas.”  China’s LNG imports grew 35% in the first quarter of this year compared to the same period in 2013.

Meanwhile, new production is emerging from Southeast Asia, particularly in Indonesia and Papua New Guinea.  Also, Singapore, which sits at the mouth of the Strait of Malacca, through which passes more than half of the world’s seaborne LNG, has formed ambitious plans to be the LNG trading hub for Southeast and East Asia.

These LNG terminals tend to cost around $10 billion apiece.  It’s a good time to be in the business of building them.

 

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