CROSSTALK

BY ANDREW M c BARNET

Fitting LNG into the energy transition puzzle

In the discussion of pathways to a more sustainable, low carbon world, the value of the LNG (Liquid Natural Gas) business rarely gets a mention. Quite possibly people are probably unaware given the low profile role it plays in the overall energy mix, and the fact that a mere three countries - Qatar, USA and Australia – dominate the global export market.

Yet it was rapidly sourced international LNG supplies that rescued Europe last winter when gas pipeline imports from Russia were drastically cut in the fall-out over the invasion of Ukraine. This was mentioned quite a bit at LNG 2023, a four yearly international event for anyone who is anyone in this niche industry. Yet the prestige meeting, attracting 10,000 or so delegates, went largely unnoticed in Vancouver, which hosted at short notice when the original venue of St Petersburg was cancelled for obvious reasons. Even environmental activists only put up a token show of protest at this major fossil fuel gathering, surprising for such a normally vociferous ‘green’ city.

Europe’s escape from energy catastrophe was of course a little more complicated. Luck, in the form of a mild 2022 winter not only in Europe but in Asia and especially China, a big LNG consumer, had a lot to do with it. China was still in recovery mode from Covid with a depressed economy from which it is only now showing signs of full recovery. It also turned to burning more coal during this period. In addition the spiking spot price caused substantially less LNG (18%) to be imported by India, Pakistan and Bangladesh.

Bottom line: there was actually no sudden surge in new gas production miraculously becoming available. As reported by the International Energy Agency (IEA), the utilisation rate of global liquefaction capacity averaged 84% in 2022, unchanged from 2021 levels and slightly above the 2017- 2021 average of 83%. Even so 2022, global trade in liquefied natural gas (LNG) set a record high, averaging 51.7 billion cubic feet per day (Bcf/d), a 5% increase compared with 2021, according to the US Energy Information Administration.

What happened was a whole lot of ‘re-routing’ of available output, including a sharp surge in gross LNG imports into Europe (up 66 bcm). This was balanced by the steep decline in the rest of the world, particularly in Asia. It was the US that supplied approximately two thirds (43 bcm) of the increased LNG inflows into Europe. The country is in fact destined to become with Qatar the biggest long-term supplier of LNG worldwide thanks to abundant supplies of gas (legacy of shale revolution), pipeline facilities to export facilities, and cheaper transport costs to the European market than rivals such as Qatar and Australia.

Other ‘swing suppliers’ in 2022 were also able to redirect significant flexible volumes to the European market, with Qatar (5 bcm), Egypt (5 bcm), Norway (3 bcm), Angola (2 bcm), Trinidad and Tobago (2 bcm) and even Russia (2 bcm) providing the bulk of the remaining third.

Which brings us to the virtues of LNG and its importance in delivering energy transition as well as providing a safety net for energy security. Definition first: LNG is a clear, odourless, noncorrosive, nontoxic liquid that is formed when natural gas is cooled to around -260 F. This shrinks the volume by about 600 times, making the resource easier to store and transport through marine shipments. LNG is not stored under pressure and is not explosive or flammable in its liquid state. Hence it is touted as a an extremely safe hydrocarbons resource to ship around the world.

Most LNG is transported by tankers in large, onboard, super-cooled (cryogenic) tanks, also in smaller ISO-compliant containers that can be placed on ships and trucks (this latter not always popular with local communities). At import terminals, LNG is stored in cryogenic storage tanks before it is returned to its gaseous state or regasified to be transported by natural gas pipelines to natural gas-fired power plants, industrial facilities, and residential and commercial customers.

Ironically in June 2022 at the height of the scramble for gas, LNG’s enviable safety record was tarnished by an explosion at the Freeport, South Texas plant, the second largest in the US. The resultant drop in supply to the global market caused a discernible spike in LNG price, already sky high.

A major environmental benefit is that natural gas/LNG emits around 40-50% less CO2 than coal and 30% less than oil. This immediately makes a case for LNG imports to help replace coal worldwide in accordance with the calls for phase-out of coal by numerous international organisations, notably the EU and recently the G7 countries. The year 2021-22 highlighted LNG’s flexibility in times of crisis as well as being a significant, and relatively clean, import for energy needy countries like Japan and China, the world’s two biggest users.

For some time LNG has also had obvious application when stored to fill in the electricity generation gaps due to the weather susceptibility of renewables such as wind and solar. In addition, LNG plays a key role in powering shipping. Despite high prices for LNG fuel last year, DNV stated that the orders for LNG-powered vessels in 2022 were close to the record 240 orders in 2021. LNG-powered container vessels and car carriers constituted nearly two thirds or 74% of the ship orders during the last year. DNV’s platform shows that 355 LNG-powered ships are already in operation while owners have placed orders for 521 more.

So far unresolved methane emission issues in shipping are just one of the caveats to the benefits of LNG. As a hydrocarbons fuel it is of course still very much an atmosphere pollutant, at a time when buyers are increasingly looking for the least greenhouse emissions, so called responsibly sourced gas. Electrical drive trains to drive compressors in the production of LNG, rather than gas, is an attractive option for plant builders particularly if the electrical capacity is available (often problematic) and better yet if it can be from renewables (still problematic).

CCS is another option. According to a Wood Mackenzie assessment, LNG players are well placed to lead the CCS charge, with strong balance sheets, operational capability and reservoir expertise. One approach involves capturing reservoir CO2, which is seen to have significant cost advantages over post-combustion capture. Reservoir CCS can reduce the overall intensity of LNG projects by 25%, and in some cases up to 50%. Post-combustion CCS involves capturing CO2 from the LNG flue gas stream. This is not necessarily more expensive if incorporated into a new-build LNG facility, owing to design and location synergies, Wood Mackenzie says. Tax credits or other policy incentives may also help to improve the economics of post-combustion CCS. This could be particularly relevant for US LNG developers after the incentives included in the Inflation Reduction Act. A number of major operators have already announced plans to incorporate CCS into their plants.

So, ability to reduce the emission intensity of LNG could prove a drag on future trade expansion in the decarbonisation era. More crucially LNG’s role as a bridge fuel in the energy transition process poses a dilemma on both the supply and demand side. Pricing against other fuel options is extremely volatile, e.g., the spike in 2022 has largely settled down, Chinese demand is not as yet pressuring the market and Europe has done a good job in building its reserves for the coming winter although as some wag at LNG2023 noted, ‘praying for a warm winter still does not count as an energy policy’.

Uncertainty leaves selling in the spot market (so successful during the recent crisis) vulnerable to over-supply. There has been an understandable move where possible to long-term contracts. That poses a problem for those buyers reluctant to commit too far ahead when uncertain of how much gas will be needed in the future, dependent among other things on the pace of energy transition and the cost of competing fuel options.

The same applies to investors in new LNG plant, especially as inflation and the rising cost of materials are making an impact on construction costs. Modular incremental construction of facilities and floating LNG platforms for production, storage and offloading are being adopted in some cases to improve the economics.

Not just as a gesture towards the host country, LNG2023 participants were unfailingly complimentary about the late entry into the LNG export market of Canada despite being the fifth-largest gas producer in the world. Its first 14 million tonnes per year LNG terminal at Kitimat on the west coast of British Columbia is being developed by LNG Canada and is due on stream in 2025 with a second stream in the planning. The lowest carbon emission profile in the world is being claimed for this and three smaller projects Woodfibre, Cedar and Ksi Lisims at varying stages of being built or approved. A distinctive feature has been the close liaison and ownership deals negotiated with local indigenous communities.

Meantime, a report from Reuters in March painted a potentially ugly picture suggesting a flood of LNG export projects due online worldwide in mid-decade will vie against lower-cost renewable energy and a revived nuclear power sector. Proposed and approved new plants would boost LNG supply by 67% to 636 million tonnes per annum (mtpa) by 2030 from 2021 levels, potentially saturating the gas market. In Qatar, a massive LNG expansion project will add 49 mtpa by 2027. US projects could add 125 mtpa of capacity by late 2027, according to data compiled by BTU Analytics.

No such alarm was manifest at last month’s meeting in Vancouver.