CNG – Looking For That First Deal

Ross McCracken, Editor, Platts Energy Economist

Small stranded gas assets may be about to find a savior in Compressed Natural Gas. A number of competing transportation technologies have been developed and CNG is increasingly being considered by developers as a means of bringing gas to market. A first deal is proving elusive, but when it comes, many believe the floodgates will open to a new market every bit as dynamic as liquefied natural gas.

LIKE LNG, COMPRESSED NATURAL GAS IS A technology that emerged far ahead of its time. Both the first LNG plant and the first CNG ship were commissioned in 1965, the former at Arzew in Algeria, the latter, the Sigalpha, in New York Harbor. But LNG did not take off until Asian countries with limited energy resources adopted the technology. It may now be the turn of CNG to be resuscitated and improved.

The Sigalpha faced two problems. The technical standards demanded pushed the cost of steel pressure vessels too high and the price of natural gas was too low and trending downward. However, new approaches to gas handling and containment have reduced the cost and weight of CNG storage, increasing the volume that a ship or barge can carry. In addition, gas prices are higher and expected to remain strong into the future. Moreover, the bulk of investment in a CNG supply chain is in the vessels and onboard transportation system. This means that a CNG supply chain can be scaled to fit the gas resource and can move to a new field when the first one is exhausted.

Vice-president, technology, for TransOcean Gas, Steven Campbell, says CNG compares favorably against LNG because it costs about a tenth as much to compress as it does to liquefy the same volume of gas. In addition, where LNG takes up to 35% of the cargoliquefaction can use 15%, boil-off over a ten-day voyage another 15% and regasification another 5%CNG only needs about 2-3% of the gas for the same journey, Campbell says.

CNG tankers will also be able to move faster than LNG vessels, reducing the number needed. They have a smaller draught and will be able to use standard offshore mooring buoys. Moreover, the contractual chain is much simpler too, says Campbell. Apart from anything else, the lower project cost enables reliance on short-term contracts since the pay-back time is much shorter than for a liquefaction terminal and associated vessels.

However, many CNG developers are not focused on the big reserves, which they see as likely to be developed as LNG projects, if only because LNG is an established technology. But this leaves them with stranded assets from 3 Tcf down to as little as 50-100 Bcf. EnerSea Managing Director Paul Britton says most CNG projects are based on resources of less than 2 Tcf and the first one to get off the ground could easily be of the order of 50-100 Bcf, most likely in Southeast Asia. EnerSea targets stranded gas projects with production ranges of less than 20 MMcfd to 700 MMcfd based on a seaborne trip of between 100 and 5,000 kilometers.

Angus Campbell, head of TransCNG International's gas strategy business unit, estimates that there are 4,500 Tcf of stranded gas assets worldwide, the vast majority in fields too small to justify LNG development. TransCNG International is a partnership between TransCanada CNG Technologies and the Overseas Shipholding Group.

Bulk CNG transportation started in Canada on land and was used to supply gas to remote parts of the country. It involves a station that compresses the gas to 3000 psi, a loading station and then a decompression plant. Both the compressor and decompression stations can be moved once available reserves have been used. The technology is being scaled up from lorries to ships and TransCNG International has established the first marine CNG training facility in Winnipeg, Canada.

TransCNG International's gas transport module has a 20-year life and is an 80ft steel pipe, which contains a glass fiber coating. The pipe is 40% lighter than an all-steel pressure vessel of the same rating. Reducing the weight of the pressure vessel is critical to CNG as the weight largely determines how much gas can be carried by ship. The pipes are loaded individually on racks on specially adapted container ships. No refrigeration is required as the gas is kept at ambient temperature. TransOcean Gas has also focused on the materials used to carry the CNG in order to reduce their weight and enable transportation at ambient temperatures, developing patented fiber reinforced plastic pressure vessels, which the company believes provides the optimal solution for CNG transportation.

However, EnerSea has taken a different approach involving large diameter pipes held within insulated structures carried on specially designed ships or barges. Volumes that can be shipped economically on one ship range from 1 Bcf of gas per ship down to as little as 20 MMcf per barge. EnerSea offers a vessel fleet, loading and offloading terminals and facilities, as well as gas storage facilities, if required.

The EnerSea system retains all carbon steel pipes, but refrigerates the gas so that the pressure within the pipe is lower, which means that the steel pipe casing can be thinner. This allows the same volume of gas to be carried in a 42-inch pipe, but using half the steel, which is a major cost saving as well as making the overall load carried by the ship lighter. EnerSea's Britton says that the cost of fabrication of fiberglass and composite pipes is more expensive than steel and that fiberglass fabrication is limited to a pipe length of 80ft, in comparison with 120ft or more for steel. Refrigeration uses up energy on top of that used to compress the gas, but Britton says that the gains made from reducing the size and weight of the pipes more than makes up for the additional energy input.

A second key area in which EnerSea believes it has an advantage is in its gas handling system. To get the gas back out of the containers, once transported, EnerSea has developed a liquid displacement system that flushes the gas out. Other systems employ a 'blow down' system in which compression needs to be used as the pressure in the containers equalizes with the pressure in the receiving terminal. Without additional compression, which uses energy, up to 15% 'heel' gas can be left in the system, Britton says. EnerSea's system reduces heel gas to just 1%.

EnerSea sees tariffs for the complete compression and transportation process in a range of about $1.50-$4.00 MMBtu, depending on the project, with the primary considerations being volume and distance. This is based on first project economics. In a separate estimate, made in 2006 and based on data prepared by EnerSea, Knutson, Zeus Developments, Worley International Inc and Michael Economides, the delivery cost of marine CNG was estimated at between $1.00-$2.50 MMBtu, based on a total investment of between $1.0-$1.5 billion, using four vessels.

1. Cost Comparisons for CNG and LNG, $ Million. Source: Wood Mackenzie, October 2006

While a figure is often given of 5,000 kilometers as the maximum reach of CNG, it really depends on the volume and what the alternatives are in the local market being supplied. Small markets dependent on fuel oil or diesel could benefit from CNG, highlighting that CNG is not just a production alternative for smaller stranded gas assets, but a supply option for small 'stranded markets.'

A recent report by FACTS Global Energy Group found that if CNG could be shipped to Hawaii from Alaska, the state could reduce its dependence on fuel oil for power generation. Hawaii has no domestic gas resources to speak of and relies on oil for 88.8% of its import needs. The state also has limited space for an onshore LNG terminal and would have to upgrade its port facilities to take LNG tankers. The report concluded that the cost of a CNG project was competitive, offering savings of $1 to $2/MMBtu over what the Hawaiian Electric Company pays now for energy. FACTS found that CNG could be transported to the islands for about $4/MMBtu, which would mean a gas price in Alaska at about $7/MMBtu or below.

But supplying power plants and gas grids for electricity generation and residential use are not the only markets for CNG technology. It has an alternative market in growing demand for CNG as a transport fuel. According to the US Department of Energy, there are over 150,000 natural gas vehicles in the US and over 5 million worldwide. Clean burning CNG is of particular advantage in urban areas where air quality is a concern. About one in every five new transit buses in the US is powered by natural gas, according to the DoE.

In May, Thailand waived import duty on CNG-powered motor engines and is considering cutting taxes on cars built to run on the fuel, as part of a plan to intensify the use of natural gas in its automotive sector. The exemption of a 10% import tax is applied to new CNG-powered engines, while used CNG engines will receive the tax waiver only for the next two years.

Thai tax authorities also agreed in principle to reduce excise taxes on vehicles built to run on CNG and with engines smaller than 2,000 cc to 20% from the existing 30% rate. Major car assemblers in Thailand, including Toyota, Honda, Ford, and General Motors, are keen to churn out CNG-driven cars if the tax issue is settled as they have advocated.

The tax waiver on CNG engines and duty reduction in CNG-fueled vehicles are expected significantly to increase the use of natural gas as automotive fuel in Thailand. At present, state energy group PTT estimates that there are about 12,000 vehicles in Thailand driven on CNG, 6,200 of which are taxis. As a result, CNG offers not just a transportation option for small stranded markets trying to reduce oil dependency in the power sector, but also by extension into the transport sector a means of reducing expensive fuel import bills.

The number of projects in which CNG is being considered as a potential option is growing. India's GAIL has looked at CNG as a possibility for transporting gas from Myanmar, while other projects in Tanzania, Papua New Guinea, and Oman made gradual progress in 2006.

However, so far no-one has made a firm commitment, owing to the commercial and technological risks of what would be a first-of-a-kind project, which is why companies like EnerSea expect the first CNG deal to be relatively small scale. And without that initial commitment, no company has so far been willing to invest in the construction or conversion of a ship to transport CNG.

Nevertheless, there is little doubt, based on the projections of bodies like the International Energy Agency, that both gas demand and suitable reserves are there. Once the first deals are done, CNG could prove every bit as dynamic a market as LNG.