LNG Infrastructure
Small Scale LNG Infrastructure:
Are we Ready for the Big Game?
By Margaret Kaigh Doyle
T
his February, the eyes of America
will be focused on Houston, one
of the country’s energy hubs, as
two NFL teams aim to try and elevate
their play to match the world’s biggest
stage. While the rest of the country is
looking to their bets in Houston, those
who are betting on the energy segment
will be keeping a close eye on the West
Coast, where the next evolution in LNG
will be looking to raise itself to a stage
of its own.
Back in October, at the 2016 High
Horsepower (HHP) Summit in Chicago,
while liquefied natural gas (LNG)
soothsayers plugged Jacksonville,
Florida as an up and coming LNG hub,
any discussion of US West Coast LNG
projects seemed to be little more than
a postscript. Informal consensus on
the exhibition floor appeared to be
that increasing takeaway volumes to
the south (Mexico) via newly opened
terminals on the Gulf Coast had not
exactly helped projects like the Jordan
Cove LNG export project in Coos Bay,
Oregon move forward.
A clear picture of LNG supplydemand balance surrounding the left
coast has yet to show itself but there are
small champions that remain bullish
that LNG infrastructure will start to
reside in places like California, Oregon
and Washington. That infrastructure
will be developed in support of efforts
in the marine, rail, road or small-scale
power generation sectors. Now that
2017 is here, almost everyone seems
to agree that the natural gas supplydemand picture will be quite different
by the end of 2020, not to mention
over the next decade. Over the next ten
years, changes in the drivers behind the
natural gas market will unswervingly
affect the LNG market.
Where will the demand for LNG
come from to support these West
Coast infrastructure projects? Entities
The CME funding model enables
the ship owner to use the future
fuel savings to pay for the upfront
retrofit capital cost.
such as the Consumer Energy Alliance
continue to support large scale West
Coast export projects by backing
members, such as the Colorado based
Western Slope gas producers, but the
reality is that the window for the big
LNG exports is at least 10 years out.
On October 28, 2016, just a
few short weeks after the last HHP
exhibitor had packed up and left the
Windy City, the International Maritime
Organization (IMO), confirmed that
the implementation date for the 0.5%
global sulfur cap would not be extended
to 2025, but would remain January 1,
2020. In 2008, the IMO unanimously
adopted the global sulfur cap requiring
all ships to use fuels with a maximum
0.5% sulfur, and ruled that the industry
would have 12 years to figure out how
to do so.
In preparation for the 2020 deadline
the maritime industry is faced with
many critical decisions that that involve
Margaret Kaigh Doyle is the Senior Manager, Business
Development, Marine for Eagle LNG Partners and serves as an
appointed member US Coast Guard Chemical Transportation
Advisory Committee (CTAC) chairing its LNG Fuels
Subcommittee. She is a graduate of the US Merchant Marine
Academy and holds advanced degrees in engineering from The
George Washington and Pennsylvania State Universities.
34 Pacific Maritime • February 2017 • www.pacmar.com
substantial cost and financial risks. As
of New Year’s Day 2020, using heavy
fuel oil (HFO) without exhaust cleaning
is a “no go” for everyone. Shipowners
now have less than three years to
decide which solutions for meeting
the new emission regulations work for
their ship type, size and trading activity.
The top three alternatives to meet the
regulations are; use low sulfur marine
gas oil (MGO) full time, continue to use
HFO in combination with an exhaust
gas cleaning system, more commonly
known as a scrubber, or use LNG as a
fuel. LNG, or dual fuel vessels, calling on
US West Coast ports will need fueling
solutions readily available.
Small Scale LNG (SSLNG) will have
to fill the demand gap that will result
as the implementation of the 2020
global sulfur cap looms. SSLNG projects
are also being developed to meet the
needs of a range of conventional fuelconsuming markets, besides marine.
These include truck, rail, mining and
localized and remote power generation
applications.
With Super Bowl 51 just around
the corner, what’s the over-under on
SSLNG filling the gap before the big
investors pull the trigger on larger scale
export projects? Will the big investors
pull the trigger on larger scale export
projects in Canada for supply? Who
are the players willing to wager that
investment in LNG infrastructure
will generate an ROI before the end
of the next decade? A number of ship
owners, including Pasha Hawaii, have
committed to building LNG powered
ships that will serve the Ports of Los
Angeles, Oakland and Honolulu.
Investment type for SSLNG can be
very different from what has been used
for decades on the bigger scale projects.
The scale of investment in SSLNG is
very different than what is expected on
the bigger scale projects. Compared to
global LNG, where volume is millions of
LNG Infrastructure
tons per annum and cost is measured in billions of dollars,
SSLNG rounds to 0 mtpa and $0.0 billion dollars. SSLNG
projects – really distributed fuel production – are developed
as a collaborative partnership of stakeholders intended to
reduce the financial exposure to customer and producer.
Solutions providers, such as Clean Marine Energy (CME),
offer a funding mechanism that can help cover the capital
costs to convert to LNG. The agreement can be utilized to
finance the conversion of any type of vessel that meets certain
engine technology and minimum horsepower requirements.
The CME funding model enables the ship owner to use the
future fuel savings to pay for the upfront retrofit capital cost.
Small-scale LNG providers, such as Eagle LNG Partners,
are constructing smaller scale plants in response to the
growing market demand for LNG as both a cargo and a fuel.
As the LNG supplier for Crowley Maritime’s new LNG ships,
Eagle LNG is building a small-scale liquefaction plant in
Jacksonville, Florida that will provide a capacity of 200,000
gallons per day. The partnership between Crowley and Eagle
LNG is a greenfield effort to develop sufficient infrastructure
that will enable LNG powered vessels in Florida to operate
to their full capability.
The small scale LNG market on the US West Coast is still
in its infancy, but an increasing number of stakeholders are
taking an interest. A better understanding of the gas value
chain and increasing transparency in pricing options will
attract more “tire kickers”, but this takes time and effort.
Projects on both the supply and consumer side are trending
up. One of the largest unknowns to potential investors is
the pricing of SSLNG relative to the other alternative fuels
and to global LNG. Natural gas prices remain low, but it’s the
future price of gas that really matters when planning any
investment in LNG infrastructure. That is North America’s
advantage, with the cheapest gas in the world. It is also why
North America will become the bunkering continent over
time.
Puget Sound Energy (PSE), Washington’s oldest energy
utility, is currently constructing an LNG facility at the Port
of Tacoma. The aim of this project is to supply PSE’s natural
gas customers and an LNG fuel alternative for shipowners
beginning with TOTE. The plant will be able to produce
250,000 gallons of LNG a day. Ownership and management
for the LNG plant falls between the utility and the private
investor group that owns the plant. The project is expected
to be completed and fully operational by late 2019.
Eagle LNG utilizes the type of business models that
involve various ranges of risk sharing. One of the key
challenges in creating SSLNG infrastructure is the need for
harmonized investments and risk allocation throughout
the value chain. Potential SSLNG market participants and
investors are comfortable with the types of risks (pricing,
contracts) they are used to. Usually global LNG infrastructure
developers and suppliers favor long term contracts, but that
trend has been changing. A shipowner considering LNG or
dual fuel engines for an upcoming newbuild does not want
his fuel purchasing process to dramatically change. The LNG
supplier needs to ensure the fuel price is a transparent and
predictable price with a commitment term that suits the
needs of the customer. The Eagle LNG integrated business
model takes into account the entire gas value chain with the
risks being shared between partners. This approach is vital
in these early stages when existing infrastructure is scarce.
Companies like Harvey Gulf Marine, TOTE, Crowley,
Carnival and Pasha have gone ahead and officially committed
to LNG as their fuel of the future. These US operators will
kick start the demand for LNG on the West Coast, but 2020 is
looming for the Ports of California, Oregon and Washington,
which host thousands of vessels that don’t have the Stars and
Stripes on the stern.
Those bullish on SSLNG development are hedging
that retail LNG prices will come down as infrastructure
investments increase. Competition and market maturity
will also help increase demand for LNG within the transport
sectors. Increase in the demand for LNG in the truck, and rail
are also key to the LNG value chain.
“Super Bowl Squares” is one of the most popular ways to
bet on the Big Game. These 10 by 10 grid squares are offered
at a fixed price with each square assigned two numbers that
aim to match the score of the game at certain intervals of the
game with the big winner being the final score. As demand
and infrastructure gaps in SSLNG are filled, the big winners
are still emerging but this fan sees the over-under odds on
investment getting better with time.
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www.pacmar.com • February 2017 • Pacific Maritime 35