Look out for “market ingenuity” from stressed LNG project developers

On Wednesday, March 18, 2015, a sobering LNG market analysis article from RBN Energy, LLC titled A Whole New World-Big Changes Coming to LNG Market concluded with the following prediction.

Several industry forecasts suggest that, despite 2014’s pause in demand growth, LNG demand will rise at a healthy annual pace of 4 to 5% over the next few years—China and India’s demand (now at 20 and 15 MTPA, respectively) are each seen doubling by the early 2020s. That growth, combined with a little market ingenuity, suggest that this whole new world may work out after all.

With the hundreds of billions of dollars at stake around the world in LNG infrastructure projects, nuclear professionals need to pay close attention to the fact that “market ingenuity” for LNG producers can include efforts to force nuclear plants to shut down. The shutdowns might be temporary and extended by creative (or destructive) abuse of the regulatory environment or they may turn into permanent shutdowns under extreme pressure from front groups masquerading as environmentalists.

Market ingenuity for LNG producers can include efforts to force nuclear plants to shut down.

Actually, that is not completely fair. There are many sincere environmentalists who have drunk deeply from the antinuclear Kool-Aide they have been fed for the past four decades. While still under the influence of that propaganda effort, they truly believe they are working to make the planet a cleaner and safer place. They’re misguided, but need gentle, persistent reeducation vice condemnation.

It does not take much effort to figure out that closed nuclear plants inevitably leads to substantial increases in demand for fossil fuel, with spot market LNG being one of the quickest and easiest ways to fill in the gaps.

Most developed nations that operate nuclear plants have a large installed base of gas burning power plants that generally operate at low capacity factors. Because their fuel is relatively expensive compared to nuclear fuel, they are only operated during high demand periods. They are not intended to run at high capacity factors, but they have the ability to do so if needed.

Of course, the use of market ingenuity by some LNG interests will not be open and transparent; that would be less effective than using surrogates, propaganda, and backroom political power. Since the big LNG projects are operated by either governments that own entire media networks (RT, Al Jazeera) or enormous multinational petroleum companies with big ad budgets, it is easy for them to produce and distribute materials that increase fears of radiation, doubts about the ability of nuclear plants to operate safely, and uncertainties about the long term viability of the technology.

We have all heard comments like the following, “No one has figured out what to do with the waste. We shouldn’t produce more until we have solved that problem.” (In fact, only those who cover their eyes and ears believe there aren’t effective options available including reuse and recycling in addition to more efficient fuel designs. We must stop covering our mouths and repeatedly remind people about the technological truths.)

The motivation from LNG interests (shipyards, construction companies, pipeline companies, pipeline investing utilities, drilling companies, sand suppliers, water carriers, pipe fitters, welders, royalty collecting landowners, tax collecting governments, etc.) to shut down existing nuclear plants and to delay or halt construction of new nuclear plants is enormous. Regulatory regimes around the world give them plenty of means and the public perceptions created by skillful use of commercial media gives them opportunity.

We can appeal to their good will; we can give up without a fight; or we can expose their motivation and tactics widely enough to gain the support of people who have no interest in moving our energy system to a greater dependence on liquified natural gas shipments.

How bad is this new supply/demand mismatch, and what is it doing to LNG prices? Well, by the end of 2017, worldwide LNG production capacity is expected to rise by roughly 20%–from about 38 Bcf/d in 2014 to 46 Bcf/d 33 months from now. And, with the 2014 slump in Asian demand, there’s already an LNG glut, so you can imagine what that’s done to LNG spot prices. (By one measure—Platts’ Japan/Korea Marker, or JKM—spot prices dropped by two-thirds in the 12 months ended February 2015: from more than $20/MMBTU to less than $7, and they’re expected to stay below $10/MMBTU for the next year or two.) But wait, there’s more. The slump in Asian LNG prices has made Western Europe a more profitable destination for spot-market cargoes of LNG for the first time in several years. As we said in our blog title, a whole new world.

If you are a developer of one of the U.S. LNG projects on the drawing boards, all of this may sound a bit depressing, and in some ways it is. It’s certainly much more challenging to make money in a market like this. But the genius of markets is their responsiveness.

The capital investment requirements for LNG projects are enormous and start in the several billions of dollars. They cannot be viable with rapidly fluctuating prices any more than large nuclear projects. They need long term contracts that have been encouraged by an analysis indicating few alternatives in the foreseeable future.

That fall in Asian LNG demand can be largely credited to South Korean nuclear plant restarts. Those plants had been shut down for repairs and safety evaluations after discovery (or was it purposeful exposure) of some irregularities in quality assurance records for wiring and components and a certain level of corruption on the part of some government officials.

Though natural gas is an excellent fuel source and valuable raw material, there are legitimate questions that should be answered regarding the environmental impacts of a growing LNG infrastructure and the safety of a continuing growth in LNG shipping.

Liquefaction facilities on the coast require steady supply volumes. One of the few export terminals that has been approved in the US is the former reception terminal at Cove Point in Maryland. That facility is next door to the Calvert Cliffs Nuclear Power plant. One of the largest resources in the US is the Marcellus/Utica Shale formation, which is on the opposite side of the Appalachian Mountains from Maryland. There are at least two proposed pipeline projects — Mountain Valley Pipeline and Atlantic Coast Pipeline — near my central Virginia home that are at least partially motivated by the desire to connect the Marcellus to lucrative east coast markets, including that export terminal.

Both of those pipelines are attracting well motivated opponents that have a strong desire to protect some of the most beautiful land in the eastern US. One of the pipes is planning to pass well to the north of my home and one will pass well to the south, but this picture from the land in between those pipelines is reasonably representative of what they will have to pass through while going from West Virginia to eastern markets.

Forest, VA Summer 2013

Forest, VA Summer 2013

LNG shipping has the potential for serious consequences. Though each shipment carries a low probability of an accident, the ships must pass close to large population centers. The more shipments, the higher the chance that there will be a major event with a significant loss of life.

Even if natural gas burns more cleanly than coal, the energy inputs required to liquify and ship it reduce the advantage considerably. The capital invested into LNG projects is too specialized to be generally useful to the economy, and the basic raw material cost of energy from burning LNG is frightfully high compared to coal or nuclear energy.

Just because there are strong vested interests that like LNG does not mean that an increased dependence on LNG and larger world markets for that product are good for most people on the planet.

Nukes need some market ingenuity of our own. We have a reliable, safe, environmentally friendly product. We’ve lost cost and schedule control, but we have the power to make substantial improvements in those areas. Now we need to learn to tell our story better than we’ve done in the past.

PS: I highly recommend that any energy professional that is deeply interested in learning more about oil and gas subscribe to the RBN Energy Blog. Your education will come in easily digested snippets, and you will probably find yourself digging through the post archives to learn more. Get to know your competition by reading their intelligence reports.

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