|
|
MLPs
|
|
||
The Growing Domestic Market for LNGYou’re as Cold as Ice—The Growing Domestic Market for LNGpublished by Housley Carr on Thu, 08/28/2014 - 20:00 Say “LNG” and the first thing that comes to mind for most of us is the potential for liquefied natural gas exports to Asia and other overseas markets. One of the hottest LNG markets right now, though, is domestic, and involves super-cooling natural gas into LNG and using it to power drilling rigs and hydraulic fracturing pumps, as well as ships, locomotives, and long-haul trucks. A number of small liquefaction plants have been operating for years in the US – most connected to peak shaving generation facilities but projects with capacity totaling more than 2 million gallons/day are under construction or being planned. Today we begin a new series examining the increasing use of LNG as a cheaper, cleaner alternative to diesel and shipping fuel, and the LNG production capacity being developed to keep pace with rising demand. The fuel costs associated with oil and gas drilling and fracking operations are a big deal. On average, a drilling rig uses about 1,750 gallons/day (g/d) of diesel that costs as much as $3/gallon (off-road diesel does not incur the same federal and state taxes as on-road). The pump-related fuel costs for a typical fracking job, meanwhile, can average $125,000 or more. As we will get to, running the engines that power drilling rigs and fracking pumps on a 30/70 blend of diesel and gas from LNG can reduce fuel costs by 30% or more, and running the engines on 100% gas from LNG can save even more. The cost of fuel also is paramount in the transportation sector. A Great Lakes bulk carrier can burn 2 million gallons of marine distillate or marine residual oil (also known as bunker fuel) per year, while a diesel locomotive hauling 3,000 tons of freight 500 miles might burn 3,200 gallons of diesel. (CSX’s locomotives alone used 482 million gallons of diesel in 2013.) A long-haul 18-wheeler, meanwhile, might consume 12,000 gallons of diesel annually (and there are three million 18-wheelers in the US). All could realize substantial fuel-cost savings by switching to all gas or a blend of gas and oil-based liquid fuel. There are many reasons to believe that LNG’s day in the sun as a replacement for conventional, crude oil-based liquids like diesel and bunker fuel has finally arrived. After all, natural gas is plentiful, the per-BTU cost spread between oil and gas remains high, exploration and production companies want to minimize their energy costs (so do shipping, railroad and trucking companies), and the energy and transportation sectors are under increasing pressure to reduce emissions. For some time, however, talk of shifting to LNG was just that—talk—largely because the infrastructure to support the shift was not in place, and questions remained about whether reworking engines to allow them to burn either a diesel/natural gas blend or only natural gas could be justified. The question now is, have we reached the turning point? Is the economic rationale for switching strong and certain? And is the LNG production and delivery infrastructure up to the task? LNG-fueled drilling rig; Source: Prometheus Energy (Click to Enlarge) Diesel, which is produced through the distillation of crude oil, for decades has been the go-to fuel for a range of heavy-duty uses, including locomotive and truck engines, and “off-road” engines that power drilling rigs and fracking pumps. Not only is diesel widely available, it packs a higher BTU/gallon content than gasoline, and its engines are simpler (no spark plugs!) and more durable than their gasoline counterparts (partly because gasoline units burn hotter than diesel). But diesel prices, like those for gasoline, are largely set by international crude prices that are far higher than US natural gas prices. The current crude to gas ratio (West Texas intermediate (WTI) crude priced at Cushing, OK divided by natural gas priced at Henry Hub, LA) is about 24 – not as high as it was in 2012, but still four times the approximate six-to-one BTU energy ratio of crude to gas (see the RBN Spotcheck Charts on our website for a daily chart of the crude to gas ratio). Not only is natural gas far cheaper on a BTUs/dollar basis than crude, LNG and compressed natural gas (CNG – see Fuel For the City)—another gas-based diesel alternative—are cheaper on a BTUs/dollar basis than diesel, even with the added costs of liquefying or compressing gas and of “re-gasifying” right before the gas is combusted. There is also an important environmental angle to this. Drillers are facing ever-tightening emissions rules, and shifting from diesel to either natural gas or a diesel/natural gas (DNG) blend is a silver bullet for compliance. That has gotten everyone from oil and gas drillers to railroads to trucking companies asking, “Why not at least look into making a switch from diesel?” The same is true for shipping companies, whose vessels’ engines typically run on either marine distillate or bunker fuel. They too are facing much tougher emission standards (see Yo-Ho-Ho and a Cargo of Bunkers). LNG truck-fueling station; Source: Cars of Change (Click to Enlarge) Before we get into the factors that drive decisions on whether to switch from diesel for shipping fuel, let us take a quick look at the LNG vs. CNG issue. (A hint: This will allow us to concentrate the rest of our discussion on LNG alone.) First, it is important to point out that an engine configured to run on natural gas or a blend of gas and diesel (or shipping fuel) does not care if the gas is stored as LNG or as CNG. In either case, the liquid LNG or CNG is re-gasified before it is combusted in the engine. Natural gas is converted into CNG by compression, and into LNG by cryogenic super-cooling (to minus 260 degrees Fahrenheit) at atmospheric (or normal) pressure. CNG is stored at high pressure (more than 3,000 psi) and, on a BTU basis, it takes up 3.7 times as much volume as diesel, and more than twice as much as LNG. CNG has some definite plusses: it is less expensive to produce and store than LNG, and a CNG canister does not vent or lose any of its energy content over time. (An LNG canister, in contrast, will gradually vent its contents if the LNG is not consumed.) But CNG takes up a lot of space (and adds a lot of weight). It also takes far longer to refuel with CNG than with LNG, which can be added to a tank as quickly as diesel. The bottom line is that CNG is considered to be an ideal fuel for lighter-duty engines such as buses and garbage trucks, but LNG is generally viewed as being best for heavier-duty, higher-horsepower engines like those used for drilling rigs, fracking pumps, ships, locomotives and long-haul trucks. (There are exceptions. As we will get to in a later episode, Cabot Oil & Gas uses either CNG or line gas to power a few of its drilling rigs in the Marcellus.) We also should address one other question you may be asking: What about using field gas—the unprocessed gas being produced at the well—to run the engines? That may be a possibility in isolated cases, but most field gas has associated liquids and/or impurities that would need to be removed before the gas is fed into the engines. So, we have established the significance of fuel costs for drillers and others that consume a lot of diesel, and laid out (in general terms at least) the potential for major cost savings by switching to either a blend of diesel and natural gas from LNG or to all gas from LNG. But no one in his or her right mind would switch from something as readily available as diesel to another fuel without first examining in full all of the up-front and other costs involved. Similarly, no one would commit to make the switch without total confidence that the required LNG infrastructure is in place to support that move. In our next episode, we will dig a little deeper into the economics of switching from diesel to DNG or to all gas. (A teaser: We will have a few calculators to help on number crunching.) Then we will provide a comprehensive list of the LNG production plants being developed to meet the rising demand. That will enable us toassess how quickly the LNG infrastructure is ramping up to speed. |
return to message board, top of board |