5.3

LIQUEFIED NATURAL GAS

Natural gas can be converted into a liquid at standard atmospheric pressures by lowering its temperature to –260°F. This reduces the volume of natural gas to 1/610th of its gaseous volume. Being more compact allows liquid natural gas to be stored or transported when regular storage facilities and pipelines are not available. Although small-scale transportation is still not cost-effective, cargo ships can transfer enough fuel at a low enough cost that LNG is becoming an economical alternative to domestic production of hard to extract natural gas.

In the early 2000s, the driving force behind LNG was the expectation that the U.S. and European markets would soon require natural gas imports. The United States and Europe consume a large portion of the world’s natural gas but were believed to contain only a small percent of the world’s proven natural gas reserves. Sooner or later, the thinking was that it would become cheaper for those regions to import natural gas from other parts of the world than to extract gas from domestic reserves. By 2015, the expansion of natural gas fracking in the United States led to a sudden influx of cheap natural gas. This has led to LNG terminals that were once expected to be regasification terminals being converted into liquefaction units to export gas.

Natural gas producers benefit from being able to transport their natural gas overseas. Historically, the only real markets for LNG were the Asian markets of Japan, South Korea, and Taiwan. Unless natural gas could be shipped to those markets, a natural gas well without a pipeline connecting it to a major consuming region was stranded. The natural gas couldn’t be sold. Even if the gas could be liquefied, there were only a few markets that could accept delivery of the liquefied gas. However, opening the North American and European markets to LNG changes that dynamic. Shipments can enter the North American and European markets from almost anywhere and feed into their transcontinental pipeline systems.

For natural gas producers, the LNG market allows them to monetize their investment. They can build an LNG liquefaction terminal and then sign long-term agreements to sell their product overseas. Instead of sitting on a natural gas field that might or might not ever be worth something in the future, producers can build a pipeline to the nearest LNG terminal and ship their product as a liquid into a major consumer market. This gets low cost producers access to the best consumer markets and provides them with money to search for new supplies.

There are three main steps in the LNG process—liquefaction, transportation, and regasification.

•   Liquefaction and Exporting. Liquefaction plants are located near regions where natural gas is produced. Short-range pipelines transfer the gas from wells to the liquefaction plant. The liquefaction plant cools the natural gas down to –260°F, and then loads it into storage containers for transfer to specially designed tanker ships.

Bringing natural gas to –260°F is an extremely energy-intensive process. A considerable amount of energy is consumed during the liquefaction and subsequent reheating processes. From a climate perspective, the CO₂ emissions resulting from this processing have to be included in the greenhouse gas emissions of LNG as a fuel source.

•   Transportation. LNG tankers have to be specifically designed to handle extremely cold liquids and keep them insulated. Even then, some of the liquid methane will convert back into a gas. A small percentage of the natural gas will be lost in transportation for this reason. Faster journeys and cryogenic systems to refreeze the boiled-off gas can reduce these losses.

•   Regasification and Importing. Once LNG is transported, it must usually be turned back into a gas before it is delivered to customers. This is typically done at a regasification plant. This plant transfers the LNG from the tanker ships and stores it in specially designed containers that can keep the LNG at low temperature until it is ready to be warmed up. After it is warmed up, the LNG can be placed into a pipeline for delivery to customers.

Concerns

The safety of LNG storage and regasification facilities is the source of major controversy. It is one of the primary reasons for the limited number of LNG terminals worldwide and a continuing reason why politicians block new facilities. LNG facilities contain a tremendous amount of fuel in a confined space. The concern is that these facilities could cause catastrophic damage in the event of a disaster.

Proponents of LNG claim a strong safety record. Like all natural gas, LNG is primarily composed of methane. Methane is an odorless, nontoxic gas that we breathe every day. It won’t poison the environment or kill wildlife in the event of a spill. Unless it is in a contained environment, LNG is also not explosive. Although it can burn, it doesn’t transition rapidly enough from liquid phase to gas phase to form the overpressure necessary to create an explosion. In the event of a leak, like normal natural gas, LNG only combusts when it exists at the right ratio of methane to air.

Trading Example—Peak Shaving Unit

Small-scale LNG storage facilities can provide a way to buy natural gas at periods of low demand for use during heavy demand periods.

1. The Opportunity. A company owns natural gas peaking generators and is looking to lock in a fuel supply. They are considering investing in a small-scale LNG-based storage facility. To reduce the amount of energy consumed by liquefaction and reheating, this facility is partially powered by a thermal solar facility. The solar installation heats rock salt around 600° F, liquefies it, and then stores it in an insulated container so that the melted salt can be used to convert LNG into gas when needed.

2. The Intuition. This is a combination of two technologies—a thermal solar installation and a small-scale LNG facility. Both facilities need insulated storage. Liquefying and heating natural gas requires a tremendous amount of energy. However, most of those energy requirements can be met by the thermal solar installation. The size of the solar facility determines how much heating and cooling can be done.

3. The Strategy. This facility will operate similar to any other storage facility. However, instead of being located in an underground rock formation, the natural gas will be stored in insulated containers. Since this does not require a lot of room, it is easier to locate this facility close to an electrical consuming region that often experiences congestion. The combination of being able to buy fuel at low cost, use solar power to handle the ongoing energy requirements, and then resell the electricity at the highest possible price makes this an interesting investment.

4. Valuation. This valuation incorporates elements of several other types of models. The ability to sell power makes this installation look a lot like a tolling agreement. However, the LNG storage allows a time shifting of the natural gas purchase from low cost to high cost periods.