May 1, 2012 12:00 PM, By Rick Weber
AGL Resources wants to grow natural gas demand by pricing LNG on a cost-plus basis and use existing idle LNG capacity to seed nodes of demand.
AGL Resources is one of the pioneers of downstream LNG fuel markets, acquiring a network of liquefaction plants, most recently the Trussville Utilities District peakshaver in Alabama.
In “Perspectives on LNG as a Transport Fuel,” David Schultz, vice-president of asset development for AGL Resources, laid out plans for establishing LNG fuel markets. Schultz delivered his presentation earlier this year in Houston, Texas, during World LNG Fuels 2012, which was hosted by Zeus Intelligence.
He said AGL has been operating LNG liquefaction facilities since the 1970s and is the largest operator of liquefaction in the United States. AGL established Pivotal LNG to build, own, operate, and sell LNG.
Pivotal LNG acquired the Trussville LNG facility and its 60,000-gallons-per-day capacity, which brings the company's total capability to 540,000 gallons per day.
“We're basically converting 45,000 MCF (one MCF equals 1,000 cubic feet) of natural gas into liquid,” he said. “A large portion of that still is used to serve peaking operations, but liquefiers themselves have been on a relatively low duty cycle, which means there are a lot of days in the year they don't operate, and liquefiers could supply LNG for a substitute-fuel marketplace. We've been successful in breaking the regulatory bind. We have between 50,000 and 60,000 gallons a day available from the Chattanooga facility and another 60,000 gallons a day out of Trussville. So that's 120,000 a day. Within Georgia, you might have three more plants that have 60,000-gallons-a-day capability.
“Even if you could convert every LNG liquefier in the United States today, and all of that gas went into the substitute fuel marketplace, that's still only 1%-2% of total diesel demand that those plants could substitute. So peakers are not the solution in the long run. They may be the solution for supply in the short run if we could break the regulatory paradigm, but not in the long run as a large-scale, viable alternative to diesel fuel.”
He said the company also owns and operates eight LNG tankers to facilitate deliveries, but Pivotal LNG was set up primarily to build, own, and operate liquefaction and to sell out of its facilities.
Where is LNG going to be in the future?
“Today, all of us are thinking about the LNG/diesel spread, and it's an LNG/diesel competition in the marketplace, and so there's a lot of spread of between LNG and diesel, especially at the point of consumption,” Schultz said. “Tomorrow, if the traction we all want actually emerges, it will be an LNG-to-LNG competitive world. So in order to really stimulate getting to an LNG-to-LNG world, we believe in pricing LNG as if we were in that world today.
“It's a reasonable place to be and gives us adequate return on new plant investment. And if we can get all of that from our existing plant, it gives us a huge return, because it is older and already depreciated. That sends the proper price signal to the end-use marketplace — truckers and those who can use LNG as a substitute fuel — that they ought to be buying that fuel. If you're pricing it at an index-diesel-minus kind of perspective, it slows down the end-use marketplace from capturing the best value and retards growth of the marketplace.”
He encouraged use of existing idle LNG capacity to seed nodes of demand.
“We've been very successful in seeding the Haynesville (Louisiana/Texas gas shale) to build demand in that area,” he said. “Given adequate long-term demand in that area, we can build a plant and because the transportation cost is higher than the return on capital we actually need from the new plant, we may be actually able to lower the cost of LNG in the market by building a plant there.”
Tapping the market
He said he believes high-horsepower/large users will be the early adopters. “Trucking's demand for LNG will be slowed by factors such as supply and deliverability from a market point,” he said. “If Clean Energy is successful with planting service stations, that really will stimulate the market. But they all have to be supplied with LNG. To start that process, you need at least 20 trucks per filling station, and an average LNG demand of 100 gallons per truck a day. It's not a lot of LNG, so how do you build momentum behind each station to get an adequate load?”
Schultz said that the transportation market's gasoline consumption in 2009 — 134 billion gallons — would be the equivalent of 17 TCF, and diesel would add another 5 TCF.
“The sum of those two says that if you're able to convert all of that to natural gas today, you would double the amount of natural gas the US consumes today, which is about 24 TCF a year,” he said. “Well, that's not going to happen anytime soon. However, what portion of that is accessible to the natural gas industry and how much of that is likely to go over time is dependent on a number of issues, primarily how big the spread is and how sustainable it is. In some instances, equally important are environmental restrictions that will be placed on natural gas, and particularly on gasoline and diesel.
“And I think if we get traction in this ground and are able to get natural gas into the substitute-fuel sector, that will begin setting environmental standards and environmental emissions limits based on natural gas. And if the spread in the future does clash, it will be that much harder for them to go back to petroleum-based fuels because environmental regulations set on natural gas will be so much higher and that much more difficult for gasoline and diesel to meet.
“We all know trucking is the Holy Grail of all of this, and if we can get trucking to convert in any large numbers, that will be a big stimulus for natural gas. But other sectors are still two-thirds of the demand, and because there's such density of use in the 1,500-hp engine on a drilling rig or a corn-drying operation or poultry operation, converting those as an anchor for LNG supplier production helps them to stimulate secondary and tertiary markets around that point of production, and that will be the transportation fuel market. We think that's how it will evolve over time, and we think there is enormous opportunity in size of scale to capture that marketplace.”
He said the LNG opportunity is 41 billion gallons, including 25.5 billion from the trucking sector. Fourteen states have diesel and propane demand of over one billion gallons per year in six market segments.
Schultz showed a chart measuring the adoption rate of various innovative technologies. Although most had a fairly sharp increase after introduction, he said nobody could predict how the curve would take shape or what the paradigm would be after that.
“It's a struggle we have right now,” he said. “Who's going to be in what business? How are those businesses going to manifest themselves? Is it going to be bundled service? Fragmented service?”
He said all of those are open questions in this industry, so he layers it into three basic segments: supply, logistics, and demand.
“Supply is what I want to do: I want to build plants,” he said. “Logistics is what Southeast LNG does: picks it up at plant and gets it to point of dispensing, whether as liquid fuel in a vehicle or revaporizing it potentially into stationary use or other uses. Demand: All of them require capital deployment. Each one is dependent on the other one for efficient capital deployment, so we all have to move together up this supply curve. They all have to have the same curve or somebody's going to have stranded capital. Displacement of that capital is going to hurt one of those segments. It's incumbent on the industry not to have too much of it, because it will sour segments if it's not working well together.”
Who's going be there to build the necessary facilities? He said that according to his company's calculations, 300 plants — at a cost of $40-$50 million each — would have to be built to get 10% of the diesel market converted to LNG.
“So there's a huge opportunity for investment and growth, but if you're bottlenecked in the supply chain with that kind of capital on the ground, it's going to retard growth,” he said. “And you can't have one of those segments being able to deliver and the other ones not.
“Today, AGL is in the unique position to capture the durability and sustainability of that spread, and if the industry can't keep themselves together to do that, we'll never have the opportunity to go up the adoption curve and make it a true value proposition for not only our industry, but for all other things it brings to North America and the United States — better emissions and better balance of trade, because a bigger part of our industry and fuel supply is coming from domestic, abundant, and clean resources.”
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