Navigant Research Blog

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.


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.”


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.


Oil Price ‘Deniers’ Affecting the Case for Alternatives

— May 2, 2014

Predicting the price of petroleum products in coming years is as difficult as predicting the Oscar winners before the movies are even made (unless you’re talking Meryl Streep).  The global price of crude oil and gasoline is contingent on many factors that have nothing to do with the actual costs of extracting it from the ground, such as geopolitical stability, global and regional economic growth (and its impact on fuel consumption), and the availability of competitive alternatives.

As of April 16, the global price for crude oil is near $105 per barrel.  Yet, some financial institutions such as Citibank are now predicting that price of crude oil will actually start to decline and fall to $75 per barrel in 2017.

However, historical data suggests that prices will continue to climb.  The price of crude oil per barrel has grown by a substantial average of 12.9% annually since 1998 (when it was less than $11 per barrel), while correspondingly, in the United States, the retail price of gasoline has grown from $1.51 per gallon to $3.53 per gallon, or 5.8% annually.

Demand for gasoline for transportation is expected to go down in the United States in future years, thanks to the gains in vehicle fuel efficiency, which, in theory, could reduce the price at the pump.  However, globally, demand for oil will increase by 12.2% between 2015 and 2025, according to OPEC.  Since crude oil is sold on the global market, this will likely increase the price of gasoline in the United States.  Also, while there are new reserves of crude in North America, much of it from the oil sands, the higher cost of extraction indicates that prices won’t likely be going down.

As the chart below illustrates, Navigant Research’s latest Electric Vehicle Market Forecast report estimates that the price of gasoline in the United States will go up by 2.9% per year through 2022.  If the historical trend from the preceding 16 years is carried forward, by 2022, gas would be $6.18 per gallon.  The World Bank (PDF) is predicting that despite increasing global demand (and the lessons of history), the price of crude oil will be going down.

Gasoline and Crude Oil Spot Market Prices, United States: 2014-2022

(Sources: Navigant Research, The World Bank)

If you ignore history and assume that the price of gasoline will go down or stay the same, then you may be significantly underestimating the potential market for alternative fuel vehicles such as electric vehicles (EVs) or natural gas vehicles (NGVs).   While some consumers select EVs for other benefits (excellent performance, reduced emissions, etc.), most want the fuel savings to provide a positive return on investment.  If gasoline permanently goes above $4 or $5 per gallon, then the case for investing in EVs or NGVs gets correspondingly stronger.  Based on Navigant Research’s assumption of slow but steady increases in the cost of petroleum fuel, Navigant Research’s Electric Vehicle Batteries report forecasts that U.S. plug-in vehicle sales will surpass 470,000 annually by 2022.

Those who are steadfastly against EVs, or who deny that petroleum-based fuel is likely to become more expensive, have a distorted view of the future of transportation that hinders businesses developing alternatives to a petroleum-dependent world.


As Gas Wells Multiply, So Do Fracking Studies

— March 22, 2013

Ernest Moniz, President Obama’s nominee to become Secretary of Energy, encountered a minor tempest this week when environmentalists unearthed a 2011 MIT study on natural gas production and fracking, which Moniz led as the head of MIT’s Energy Institute.  The study, which concluded that the potential environmental damage from fracking is “challenging, but manageable,” was conducted by a team that included two researchers with ties to the oil and gas industry.  The White House quickly defended Moniz as an independent scientist, and the controversy is unlikely to keep Moniz from succeeding Stephen Chu atop the Energy Department.

Independent or not, the MIT report now rests on a shelf that groans under the weight of fracking studies and reports that multiply almost as fast as the natural gas wells themselves.  The latest version, which heavily favors the natural gas rush, comes from the University of Southern California and the Communications Institute, an L.A. think tank, and was “funded in part by a grant from the Western States Petroleum Assn.,” reports The Los Angeles Times.

There are plenty of examples of counter-studies detailing the horrors of fracking.  The granddaddy of anti-fracking reports was produced by Robert Howarth of Cornell in 2011, and concluded that over the long term, “shale gas is worse than conventional gas and is, in fact, worse than coal and worse than oil.”

Howarth’s gloomy findings have been disputed by studies from “the Environmental Defense Fund, the National Resources Defense Council, the Council on Foreign Relations, the Energy Department and numerous independent university teams, including a Carnegie Mellon study partly financed by the Sierra Club,” noted Forbes contributor Jon Entine.

Another 5 Years

In New York, a highly touted report from the Geisinger Health System is “likely years away,” the project’s leader acknowledged recently.  New York lawmakers and Governor Andrew Cuomo are in a struggle over limitations – or an outright ban – on fracking in the state, which overlies parts of the vast Marcellus Shale formation, which some geologists believe holds enough shale gas to provide U.S. electricity needs for a century or more.  New York’s review of the social and environmental effects of fracking is now in its fifth year, with no end in sight.

So proliferative is the research on fracking that the industry is in danger of being “entombed” by endless “iterative studies,” wrote a commenter on The Motley Fool, a stock-trading website.  Some supporters have had enough: University of Oklahoma professor David Deming, who has a rich history of provocative statements dismissing the concepts of peak oil and renewable energy, declared recently in a Wall Street Journal editorial that the oil and gas industry needs to man up and emulate the NRA by forcefully confronting its critics and “seizing the moral high ground.”

“The fossil-fuel industry—which could be the most powerful lobby in Washington—is hopelessly ineffective and self-defeating,” Deming moaned.

No Stopping

That is manifestly false – Steve Coll’s book on Exxon Mobil, Private Empire, provides 600 pages of evidence that the oil majors are among the most powerful entities on earth, often functioning as quasi-governments, for both good and ill, in the countries in which they operate.

At any rate, the thousands of pages of research on the effects of fracking scatter, for now, like confetti on the tracks as the locomotive of the natural gas boom thunders past.  That train is not slowing down soon.  Rather than taking an adversarial stance to regulators and environmental groups, natural gas producers could reduce their costs and risks by cooperating with regulators, being transparent about the chemicals they inject underground, and sharing infrastructure in areas with multiple producers.  Those are the conclusions of, you guessed it, a study by Accenture.

There are efforts afoot to do just that.  The Pittsburgh-based Center for Sustainable Shale Development is working on a new set of standards for the industry that would include a certification process to verify that producers are operating in environmentally safe and socially responsible ways.  As my colleague Dave Hurst reports, the Center has been set up by a group of organizations across the energy spectrum, including Chevron, Shell, the Clean Air Task Force, Consol Energy, the Environmental Defense Fund, Group Against Smog and Pollution, Heinz Endowments, and the William Penn Foundation. Lawrence Livermore National Laboratory is helping to develop the technical standards.  Such cooperation offers a much more productive approach than burying your opponents in a blizzard of conflicting studies.


Coalition Attempts to Set Fracking Standards

— March 22, 2013

On March 20th, a group led by major natural gas drilling companies Chevron, CONSOL Energy, EQT Corporation, and Shell announced that they have negotiated a set of voluntary environmental standards for shale gas hydraulic fracturing.  The new coalition includes five environmental groups and two foundations that have environmental interests.  The new Center for Sustainable Shale Development (CSSD) certification will include 15 performance standards for fracking operations.

This effort is encouraging because, until now, the arguments about fracking have been largely based solely on two voices: the drillers claiming that the technology is absolutely safe and the environmentalists claiming it is irreparably flawed.  While the truth is grayer than these positions, the bottom line has been that America’s thirst for energy has trumped any environmental concerns, until politicians get an earful from constituents and ban fracking altogether.  The CSSD standards have been compared to the LEED certification for certifying construction of environmental buildings and are likely to help relieve some of the tension surrounding fracking.

Mostly Marcellus

The CSSD standards are a good first step, but I see a few flaws that are likely to undermine some of their effectiveness.  For the most part, these new standards cover groundwater, the water used for fracking, the flaring of natural gas, and the type of diesel fuel that can be used at drilling sites.  The standards do not seem to make any effort to address the air pollution associated with drilling or the land use.  Most of the time, the air pollution surrounding fracking operations is substantially worse than other areas.  What’s more, the CSSD standards ignore the pollution impact of all the motors running on a drilling site.

Drill motors are almost always considered non-road diesel engines by the U.S. Environmental Protection Agency, and therefore, have different requirements than the diesel trucks that are used on the road.  Natural gas-fueled motors for drilling operations are starting to come into play, but these remain few and far between and the CSSD standards are unlikely to push that front.

Another challenge with the CSSD standards is one of geography: these standards (so far) only apply to the Appalachian area and the Marcellus shale gas region.  Whether they’ll be accepted by drillers in Wyoming and western states remains an open question, though it should be noted that Chevron and Shell both drill in those areas as well.  This geographic limit is likely driven by the number and location of environmental partners in the CSSD, but it gives the impression of more political posturing.

Still, the fact that drillers and environmentalists came together to put together some standards that appear to help reduce the impact of fracking is huge.  So, the billion dollar question is: will voluntary CSSD standards be enough to quell the fracking concerns and stave off additional legislative regulations?  Don’t bet on it.  The Sierra Club has already blasted the voluntary nature of the standards, and the Environmental Defense Fund has come out saying that these should complement, not replace, regulations.  Ultimately the success of these new standards will rest in the court of public opinion, and the public, right now, shows little inclination to limit the natural gas bonanza.


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