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Cheap gas fuels big dreams Using natural gas to power transportation sector has sputtered and backfired, held back by capital costs, still-evolving technology Gary Park For Petroleum News
The prospect of using abundant supplies of natural gas as a transportation fuel has attracted a swarm of admirers and eager promoters over several decades. But progress toward their big dreams has been marked by fits and starts.
Companies such as Shell, Chesapeake, Encana and South Africa’s Sasol have made a forceful case that the time is right to invest in using gas to power vehicles, exciting market observes such as Citigroup and the International Energy Agency.
The IEA said last year that the alternative fuel is a potential “game-changer,” while offering a cautious suggestion that change is only “likely to occur in stages.”
Citigroup has predicted that global demand for natural gas in transportation will increase to 10.2 billion cubic feet per day by 2020 from the current 4.3 bcf per day, and double again by 2030, displacing nearly 3.4 million barrels of oil.
A Canadian government study has projected that one of every 10 new medium- and heavy-duty vehicles sold in Canada over the next decade will be powered by natural gas, reducing carbon emissions by 0.2 percent from present levels.
Alicia Milner, president of the Canadian Natural Gas Vehicle Alliance, said there is growing urgency “to move natural gas into transportation because we need new markets for this resource,” especially as Canada’s gas exports to the United States go into sharp decline.
Lack of fueling infrastructure But J.P. Morgan points to one of the key barriers to the adoption of long-haul LNG trucks in North America - the lack of fueling infrastructure.
The plodding progress was noted by David Bradley, chief executive officer of the Canadian Trucking Alliance, who estimated that a mere 10 of its 4,500 member companies are experimenting with natural gas vehicles.
“I don’t think anybody should feel that natural gas has the potential to displace diesel fuel,” he told the Financial Post. “It’s just not in the cards at this point.”
Natural gas heavyweight Encana was once one of the driving forces behind the use of compressed natural gas by converting 10 percent of its North American fleet of 1,400 vehicles to run on natural gas and by gradually building a network of fueling stations.
But it has also collided with the reality that the cost of converting vehicles to natural gas is substantial and the volatile history of natural gas prices remains a deterrent.
Randy Eresman, the former Encana chief executive officer, was an enthusiastic champion of the “huge potential” for gas in the transportation industry.
“Our vast North American supply of natural gas truly represents a domestic energy solution and a way to strengthen the economies of both Canada and the United States,” he said, shortly before stepping down from his post at Encana.
Shell suspends development For all of the strongly held belief that the shale gas revolution could provide the greatest impetus yet to the uptake for natural gas vehicles, those who could play a leading role in bringing about change seem to remain unsure, if not downright skeptical.
That prevailing view will have been reinforced in July when Shell announced it was suspending development of a liquefaction unit at the company’s Jumping Pound facility west of Calgary.
A company spokesman told Reuters that the use of LNG in transport is a “considerable opportunity for Shell, but it is an emerging market and we must have a balanced approach to its development.”
Shell, as the major owner of the Jumping Pound complex, which has processed 300 million cubic feet per day of gas over more than 60 years, said it will continue working with the Canadian Green Corridor project and the retail program with Shell Flying J in Canada.
But Deutsche Bank said in a note that the pullback is another sign that Shell’s new Chief Executive Officer Ben van Beurden “is applying a greater degree of discipline in allocating capital than was previously the case and is actively streamlining the ‘options’ in the portfolio which are to be pursued.”
Shell conceded that high development costs, regardless of the drag shale gas production has had on gas prices, “means making tough choices around the projects we develop in order to redeploy our resources, focus our efforts and our capital to create the greatest value for our business.”
Retrofitting costs high Adding to the argument against LNG in the transportation sector, ship broker ACM said that “retrofitting a vessel’s engine to burn LNG produces a payback period longer than a vessel’s asset life,” while the availability of LNG and methanol as a bunker fuel “remains scarce and the infrastructure simply isn’t in place yet for bulk trades.”
All of which points to the need for even greater patience among those who want gas to achieve a substantial shift in transportation, not least President Barack Obama, whose latest speech on climate change was backed by a White House document that pledged to partner with industry “to develop post-2018 fuel economy standards for heavy-duty vehicles to further reduce fuel consumption through the application of advanced cost-effective technologies.”
Handful of undertakings For a number of years, Sasol has generated some of the biggest hopes of advancing gas-to-liquids technology in North America as it has grappled with the complexities and challenges of building a US$21 billion GTL and petrochemical complex on the U.S. Gulf Coast and its slow-moving plans for a C$9 billion-C$11 billion GTL plant in British Columbia.
Shell, meanwhile, has spent US$19 billion on a facility in Qatar - where Sasol has a plant - that is designed to yield 100,000 barrels per day of fuel and a Chevron project in Nigeria using Sasol technology is starting this year.
What this handful of undertakings has demonstrated is how notoriously expensive the ventures are, with Chris Cox, an analyst with Calgary-based AltaCorp Capital noting the “incredibly capital intensive” projects are equivalent to building a full-scale refinery. “I would be hard-pressed to see how that would make a lot of sense,” he said.
“Shell is so far ahead technically,” said Ed Osterwald, an advisor to companies and governments on GTL and a partner with consultants Competition Economists Group. “It is hard to see how another company is going to replicate that.”
Guy de Kort, a Shell vice president, told a London conference in July that his company will “continue our investment into technology development and product development to increase the value of our future GTL projects. We are pursuing other opportunities as well. But the economics have to be convincing enough to put our money there.”
Some Shell investors are far from sold on the idea, given that the cost of the Qatar operation soared from an initial US$5 billion, warning the company against making investments that “depend on a moving price spread.”
Osterwald concedes that GTL is a “very expensive business and there are a lot of risks, but handled in the right way it can be very successful.” Observers and prospective investors are likely to keep a close eye on how the Qatar project performs before rolling their own dice.
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