The economics of LNG
Published:Sunday | September 30, 2012 | 12:00 AM
Avia Collinder, Business Writer
Energy consultant Winston Hay says that while plans for use of LNG for power generation in Jamaica are in principle sound, the uncertainty around the cost of that fuel should not be ignored.
LNG is now selling at record prices in Asia where Japan as a top consumption market reportedly pays the highest price.
Hay, who was once the head of the Office of Utilities Regulation (OUR), said that application of relatively new technology - fracking - in the United States has led to greater extraction of "shale gas" at greater depths than had previously been exploited.
And it has dramatically decreased the price of natural gas in that country.
But the stability of those prices is uncertain and the Henry Hub price reports have already begun to show a significant upward trend, he said.
Production doesn't affect price
Importantly, he adds, the price of LNG does not vary directly with natural gas production costs.
Flammable gasses trapped in the earth and consisting primarily of methane are found in many areas of the world - the Middle East, Russia, Nigeria, Australia, Nigeria and North America, for instance.
LNG has been used for decades as a source of heat for industrial processes, cooking, household heating, and other uses, but only in relatively small quantities for electricity generation until about the late 1960s, with development of the combined-cycle technology.
"The aggregate costs of delivering the gas to the liquefaction facility, the liquefaction process itself, transport by specially constructed vessels to the FSRU, operational costs of the FSRU and Jamaica Gas Trust, delivery by pipeline (yet to be constructed) to the end-users, etc, will all increase the price of gas from LNG significantly above that of the gas extracted from the earth," Hay said.
Further, he notes, commodity prices are not necessarily determined by production costs.
"The demand-supply ratio is often more significant. The indications are that the demand for LNG internationally will steadily increase and therefore apply upward pressure on the prices of that commodity," he said.
Several worldwide developments, he said, are likely to push LNG prices higher:
- Britain will be closing all of its steam coal-fired generating stations as well as its current nuclear generators in less than 10 years;
- Germany will also be closing its steam and nuclear generating facilities;
- Japan not only urgently needs to be able to increase its generating capacity to satisfy current power demand following the recent tsunami disaster, but will also phase out all nuclear generators;
- China and India are both seeking increased LNG supplies; and
- The capacity of LNG receiving facilities now under construction internationally exceeds that of planned LNG production units.
Hay points to the disparity between natural gas prices in the US and LNG prices in Asia, an issue also commented on in the spring 2012 issue of LNG Industry magazine.
"As US natural gas prices plunged below their lowest levels in over a decade, LNG held firm near record levels in Asia, creating probably the greatest arbitrage trading opportunity in the history of any major commodity, but no one is taking advantage of being able to ship North American natural gas to Asia, which continues to pay between US$15 to US$20 per million BTU," said the article 'A Tale of Two Gas Markets'.
Comparatively, LNG futures are currently trading on US exchanges at about US$3 per MBTU.
The US Federal Energy Regulatory Commission forecast landed LNG prices in October at US$13.80 per MBTU for Japan and Korea, US$13.40 for China and US$12.10 to US$13.50 for Brazil.
FERC's forecast prices for two US markets were US$2.48 and US$2.77, and Mexico US$2.97.
Natural gas prices down
Hay adds that in the US, weak demand, insufficient storage capacity and record production, primarily from shale, have driven natural gas prices down by a third from 2010.
"These trends are expected to continue through the rest of 2012 and even beyond," he told Sunday Business.
"But in Asia, consuming countries cannot get enough supply from a handful of maxed-out regional producers, ensuring natural gas and LNG prices remain at or near current high levels."
Hay said the "prolonged weakness" in North American gas prices has created a powerful long-term barrier, not an incentive, that large industrial consumers such as power companies are opposed to exports that will raise the cost of their feedstock.
Hay points out that the Jamaican Government has never stated the LNG price on which its calculations of the economics of electricity generation are based, neither has it recently stated the likely source of LNG supply.
"It is not Trinidad, which currently has no spare capacity for sale but which for the immediate future will remain the only producer of LNG on this side of the Atlantic," Hay said, dismissing what has long been touted as a potential source market for gas.
The Government projects that the cost of public electricity supplies would be reduced by 30-40 per cent if LNG is added to the fuel mix.
But: "The calculations on which these conclusions are based have never been subjected to public review and are questionable," said Hay.
"The projected reduction in electricity prices to consumers would require LNG to be sourced at about US$8 per million BTU, which seems to be an optimistic figure in view of the fact that the LNG will probably have to be imported from suppliers on the eastern side of the Atlantic."