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How can
small-scale
LNG help grow
the European
gas market?
As use of fossil fuels declines,
where will the growth in gas
demand come from?
A large new market for natural gas is under
rapid development whilst also reducing
emissions. LNG is reaching markets
previously inaccessible to pipeline gas; as a
fuel for transport and for communities remote
from the gas grid. A significant development
is the use of LNG in marine transport, which
currently uses heavy fuel oils.
LNG has significant emission related in scrubbing technology which has yet to be
advantages in comparison to petroleum developed) whilst rising prices and potential
products: any traces of sulphur will have penalties may increase the cost.
been removed in advance of liquefaction,
On a global basis, the amount of maritime
and nitrogen levels are cut by 90%[1] . The use
fuel consumed every year is equivalent to 171
of LNG results in a 10-15% reduction in CO2
million tonnes of oil[2]. This is comparable to the
emissions per unit of converted energy, and
annual natural gas consumption of the whole
there are practically no particulate emissions.
of the EU-27 in all applications. Around 68%
Disadvantages of LNG, however, include is burned on dry bulk, cargo and container
the requirement for a different engine and routes; 29% during transport of chemicals and
storage technology for the user, and for fuel liquids; and 3% on passenger ferries.
supply companies it is more expensive to
Marine transport continues to play an
supply both in terms of capital and operating
important role in international trade, so there
cost. In addition, the infrastructure required
is further scope for growth, even beyond
to provide LNG as a wide scale alternative It is expected that retrofitting of ships to
the replacement of existing shipping, as a
for maritime use has yet to be developed, so run on LNG rather than oil products will not
consequence of rising populations and the
the supply network is limited. On the other be economically possible given current oil
growing importance of developing economies
hand, continued use of petroleum products and gas prices. The market share of LNG
in Asia and Africa.
will require significant new investments (e.g. will thus be largely restricted to new builds.
What is Liquified Natural Gas (LNG)? LNG is natural gas How can LNG be provided to ports and small-scale users?
cooled to -161C - the temperature at which methane, its 1. Local liquefaction if the location has access to pipeline gas then this is
main component, changes state into liquid. Impurities a way of ensuring continuous supply, but loses out on economies of scale.
are reduced in the cooling process. It is an odourless, Further distribution by ship or truck can mean a reasonably large facility.
colourless liquid that is stored and transported at
2. Truck loading at large-scale terminals this has the benefit of being
atmospheric pressure as a boiling liquid.
relatively easy to establish, but has a relatively limited range.
As a liquid, it is 1/600th the volume of natural gas, giving it 3. Ship loading at large-scale terminal this provides a bigger range, due
a high energy density for transport and storage. to larger tanks than on trucks, but would still be a regional business.
2
Difficulties in penetrating other Stationary energy
potential segments
Small, but well established markets already
Developments in replacing oil for land transport exist in Japan, China, the U.S. and the Nordics
or for remote industry or communities may for local LNG-based gas consumption. LNG
prove more difficult to penetrate, as follows: is used where total demand is insufficient for
pipeline transmission to be economical, but
Inland transport
still offers cost and environmental benefits
LNG is well suited to large vehicles and several in comparison to oil. There are opportunities
manufacturers are actively developing and to use it as a spear head to develop
testing LNG engines for trucks. The U.S. is the customers and markets that can later be
front runner due to established long distance supplied by pipeline as they reach critical size.
trucking routes and cheaper gas, but LNG filling This is a mature and well proven technology,
station infrastructure is also being developed in but the economics may be challenging.
Europe. The technical solutions are proven, but
the market is still at an early stage.
3
Why are we seeing
the growth now?
Emission Control Areas sulphur heavy fuel oils used for bunkers. In Sweden too, the use of small-scale LNG
In 1997, the International Maritime However, in the future only the lighter (and is growing. The first receiving terminal, in
Organisation, a UN agency tasked with cleaner) marine petroleum products such Nynshamn, south of Stockholm, was recently
maritime safety and security and preventing as marine diesel oil (MDO) and gas oil will be commissioned and caters to the needs of
pollution at sea, introduced the concept of permitted. Currently, the price differentials local industry, domestic gas supply in the
special protection-worthy Emission Control between LNG and these are much narrower, Stockholm area and an emerging demand
Areas (ECAs), within which special limitations so that a wide scale shift is both economically from ferries crossing the Baltic Sea. More
apply concerning fuel use. These areas and technically conceivable and as well as terminals are being planned on the west coast
currently include the Baltic Sea, North Sea the being desirable from an environmental point and north of Stockholm. On the other side of
East and West coasts of the U.S. and Canada of view. the Baltic Sea, a race is on for the construction
and the US Caribbean coast, and further of a medium scale LNG import terminal.
Where is it happening?
areas are under evaluation (see Figure 1). Poland already has one under development
Developments so far have been restricted to
From 2015, within these areas the already low (due to open in 2014), and Lithuania, Latvia,
existing ECA areas and by availability of small-
SOx (sulphur) emissions limits will be reduced Estonia and Finland also have plans for their
scale LNG, specifically, the Nordics, Baltics
to just 10% of current limits. It will therefore own import facilities.
and the East Coast of the United States.
only be permitted to use fuels resulting in
However, as the ECA areas are expanded, Other North West Europe
very low or negligible emissions of SOx, NOx
the scope for LNG as a bunker fuel will grow
(nitrogen) and particulates. By 2020 even the In the wider European context, LNG import
significantly.
areas not currently within ECAs will have limits terminals are an important part of the
of half of those currently in operation within Nordics / Baltics gas infrastructure. Existing facilities are
the ECAs. already being equipped for bulk breaking
In Norway, a small-scale LNG industry has
(i.e. to reload LNG onto smaller vessels for
These very strict limitations imply that ships been thriving for about a decade: two small-
subsequent distribution to other terminals,
will need to have expensive scrubbers scale LNG-producing facilities have been
or onto road tankers to distribute to smaller
installed to capture the SOx and NOx supplying LNG to the shipping sector along
ports). Investments are being made at
emissions from the funnel or convert to very the Norwegian coastline and additionally to
terminals in Rotterdam and Zeebrugge within
highly refined grades of diesel oil and gas local industry. At the time of writing, there
the ECA and Montoir on the west coast of
oil. As these will be in short supply, prices are already about 35 ships in operation and
France. Beyond the sea ports, plans are also
are expected to increase. LNG, which another 35 on order, including cruise ships,
being developed to convert barges on the
has considerably better environmental product tankers and barges. This has been
major waterways of Europe. For example,
characteristics than petroleum products, has facilitated by the Norwegian state providing
Shell has ordered barges to operate on the
so far been uncompetitive against the high subsidies and imposing emission restrictions.
Rhine and Gazprom has signed an MOU with
FIGURE 1: WHERE IS IT HAPPENING? Gasunie to promote the use of infrastructure
for small-scale LNG and LNG as a bunkering
fuel for marine and river transport.
The Mediterranean
The Americas
6
In the hands of traditional gas producers (economies of scale)
Complemented by close-to-source producers
Production Large-scale producers are not investing downstream, as it is not core business
Concerns about the cost competitiveness of LNG
compared with alternative fuels are unfounded, in that:
In TSO ownership or by independent operators, depending on regulation
Import Separated from supplies in deregulated markets, provided on a booked capacity basis existing fuels place an effective cap on LNG, even in
terminals /
hub operatiors the long term
technological development will increase the cost
Optimal supply routes key factors for success, and is also one key challenge to be overcome competitiveness of LNG even further over time
Limited number of attractive locations for depots implies a positioning race
Reloading / Late arrivers to pay for significant entry barriers and potential high risk on capital investments. global progress will be rapid.
shipping Key investors expected to include traditional energy and petroleum product suppliers
Interested parties should consider their business cases
Remain in the hands of current players
quickly to capture the most attractive positions.
Squeezed between large shipping and energy suppliers, this segment will remain in the
Bunkering hands of established professionals
Current bunker business must adapt to maintain volumes / market shares / margins
7
COPYRIGHTPYRY
Will LNG pricing be
competitive?
LNG PRICING the North American market, which since
As with other marine fuels, LNG is likely to be the incredible growth in shale gas
supplied on a short-term basis for maritime production in the last 5 years has had an
purposes ( i.e. there will be no long-term oversupply and very low prices;
take-or-pay contracts, as in the domestic the Far East, much of which is solely reliant
gas markets). This means that the need to on imported LNG and which is mostly
maintain fuel cost competitiveness is even supplied on long-term contracts linked to
more important: to safeguard market share oil; and
and the ability to recover capital costs. It can Europe, where LNG competes with pipeline
therefore be safely assumed that alternative gas from a mixture of sources, some of
fuels such as MDO and gas oil will place an which are on long-term oil-indexed
effective price cap on LNG (see figure 2). contracts and some of which are
uncontracted or on contracts related to the
On the other hand, demand from the marine
traded gas prices in the market hubs.
market is likely to grow gradually from a low
Market prices are therefore based on the
basis, and suppliers of LNG will always have
supply/demand balance and the cost of
the regular, large-scale spot markets as an
supply subject to many contractual and
alternative offtake point. Spot markets for
physical constraints.
LNG will therefore provide an effective floor for
maritime LNG prices. Within this spectrum, At the time of writing, oil has a relatively
maritime LNG prices can be expected, over high price and demand in Asia is strong,
time, to move in line with other marine fuels. particularly since the switch from nuclear
generation to gas-fired generation following
Spot markets for LNG
the Fukushima accident in 2011. Due to the
Unlike the international markets for crude
large price differentials between the markets,
oil and petroleum products, there is not yet
LNG spot cargoes and cargoes destined for
a global natural gas market. Gas is traded in
Europe and America are often redirected
three distinct regional markets with very little
to Asian markets. Spot LNG therefore has
interconnection:
a relatively high price and European prices
would have to rise to match those prices to
attract cargoes.
LNG-related CAPEX
continue to be an important source of
energy on a global basis for decades. Even
LNG-related OPEX
if energy demand stagnates or decreases in
Economic rent available for pricing industrialised markets due to substitution
flexibility (local supply/demand or conservation measures, these effects
balances) are likely to be more than offset by demand
Cost of
bunker growth in developing economies. At the
LNG Distribution/bunkering same time, low cost sources of crude are
depleting, and new wells are increasingly
Terminal handling
more expensive to develop. Additionally, more
Cost of Reloading / shipping stringent emission restrictions place pressure
whole-
on refineries to provide cleaner grades of
sale LNG
Wholesale fuel, increasing refining costs. In the long
LNG (TTF,
HH, other) run, petroleum product prices, particularly
ultra-low sulphur fuels, can be expected to
Downstream
rise further.
8
COPYRIGHTPYRY PYRY POWERPOINT 2010 TEMPLATE 2
17 JANUARY 2012
With increasing supply of gas from figure 3
unconventional sources, and the potential for 25
large-scale liquefaction facilities in Australia, UK NBP prices US HH prices Spain LNG prices Japan LNG prices
East Africa, the East Mediterranean and
20
North America helping to rebalance the gas
Gas price ($/MMBtu)
Sep-09
Jan-10
Sep-10
Jan-11
Sep-11
Jan-12
Sep-12
Jan-13
May-09
May-10
May-11
May-12
May-13
market.
Source:ICISHeren,Reuters
9
COPYRIGHTPYRY PYRY POWERPOINT 2010 TEMPLATE 1
17 JANUARY 2012
Where are the
opportunities?
Where are the opportunities for The competitiveness of the LNG bunkering However, these relatively high costs also
investors in small-scale LNG? market depends on the ability of suppliers to mean limited room for the installation of
In this relatively new market area there are optimize logistics and make it cost effective parallel infrastructure. This makes it possible
significant investments to be made in the for customers to convert their existing fleet for suppliers to secure first mover advantage
supply chain, such as reloading facilities, to LNG. The capital-intensive infrastructure in local markets and those companies with
small-scale liquefaction facilities, local is much more expensive than that of similar sufficient investment capital who can wait a
terminals and depots, trucks and vessels value chains (e.g. oil) and as a result, number of years to recover their investments
for distribution, bunker barges, bunkering infrastructure costs constitute a large share could therefore gain in the long run. Investors
equipment, as well as special training for of the cost of energy compared to competing should be investigating the most attractive
operatives and safety personnel to deal with energy carriers. opportunities now to make sure they stay
cryogenic substances. ahead in the race.
Our unique combination of strong market expertise, shipping / LNG technology insight
and experience working with clients means were well positioned and excited to
support you in taking a deeper dive into the world of small-scale LNG opportunities.
[1] Energy demand and emissions of marine engines, Hans Otto Kristensen, Technical University of Denmark, 2012.
[2] EIA Statistics for 2010.
[3] LNG-fuelled deep sea shipping, Lloyds register, Aug 2012
[4] http://www.portoflosangeles.org/newsroom/2013_releases/news_031113_IAPH.asp
[5] Marinelog.com TOTE orders two LNG-fuelled container ships.
[6] http://www.clarksons.net/markets/feature_display.asp?section=&news_id=32938&title=Lengthy+Lead+Times+On+a+Downwards+Slope
10
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While Pyry considers that the information and opinions given in this publication are sound, all parties must rely
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This publication contains projections which are based on assumptions subjected to uncertainties and contingen-
cies. Because of the subjective judgements and inherent uncertainties of projections, and because events
frequently do not occur as expected, there can be no assurance that the projections contained herein will be
realised and actual results may be different from projected results. Hence the projections supplied are not to be
regarded as firm predictions of the future, but rather as illustrations of what might happen.
11
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