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.

Atomic Show #235 – Energy and Empire by George Gonzales

Energy and Empire cover

Dr. George Gonzales is an associate professor of political science at the University of Miami. In 2012, he published a book titled Energy and Empire: The Politics of Nuclear and Solar Power in the United States. In his book, Professor Gonzales recognizes that the development of nuclear energy poses an obvious threat to the continued […]

Read more »

Senator Clinton Anderson on fossil fuel opposition to atomic energy

Senator Clinton Anderson (D-NM) was a long time member and sometimes Chairman of the Joint Committee on Atomic Energy. As part of my energy history research, I’ve been reading Outsider in the Senate: Senator Clinton Anderson’s Memoirs. There are several passages in that book worthy of note. While the three services competed with one another […]

Read more »

TV series marathon – Men Who Built America

I took advantage of circumstances and technology last night to indulge in a TV series marathon consisting of watching the entire season of the 2012 History Channel series titled The Men Who Built America. Though originally aired in 19 episodes, Netflix is showing series as four 80-90 minute segments. One of the most eye-opening things […]

Read more »

Building a powerful pro-nuclear coalition

The nuclear energy enterprise is not healthy in North America and Europe, the places that discovered the science and invented the technologies. That situation needs to change with due haste into sustainable progress that is not artificially restricted by annoying, delaying, costly opposition from people who either do not understand or do not value the […]

Read more »

Rod Adams and Alex Epstein on Power Hour

On Atomic Show #230, I talked with Alex Epstein, the author of The Moral Case for Fossil Fuels. Some of the things I told Alex during that show intrigued him enough to ask me to be a guest on his Power Hour show. That show has now been published as Power Hour: Rod Adams on […]

Read more »

Atomic Show #231 – Grandparents for nuclear energy

For Sunday December 21, 2014, I sent out a standard invite to my list of the usual suspects for an Atomic Show round table. As the responses came in, I realized that random chance had ensured that every one of the people on the call was a grandparent. It seemed kind of appropriate to talk […]

Read more »

Putting excitement back into nuclear technology development

Josh Freed, Third Way‘s clean energy vice president, has published a thoughtful, graphically enticing Brookings Essay titled Back to the Future: Advanced Nuclear Energy and the Battle Against Climate Change. It focuses on Leslie Dewan and Mark Massie of Transatomic Power, but it also makes it abundantly clear that those two visionary entrepreneurs are examples […]

Read more »

Atomic Show #230 – Alex Epstein, The Moral Case for Fossil Fuels

Alex Epstein, the founder of the Center for Industrial Progress, recently published The Moral Case for Fossil Fuels. Trained as a philosopher, Alex describes himself as anti-pollution but pro-development. He believes that the standard of value for any development or technology should be its impact for human beings and that the green standard of non-impact […]

Read more »

60 Minutes on coal ash – muted outrage, lots of smiles and nods

On December 7, 2014, 60 Minutes, the venerable investigative reporting television show that has been on the air since 1968, aired a segment about Duke Energy’s Dan River coal ash spill, which occurred on February 2, 2014. That large release of coal waste was a big topic in local newspapers and television shows in my […]

Read more »

Australia’s blinkered vision in China’s commitment to reduce global warming

By Robert Parker President, Australian Nuclear Association Two of the most powerful nations on earth have concluded an agreement to cut greenhouse gas emissions. Included in that agreement is reference to nuclear power being used to limit those emissions. Yet in Australia even discussion of nuclear power is taboo. We continue to frame the control […]

Read more »

Oil investors should learn about atomic energy opportunities

On December 2, 2014, Bloomberg published an article titled Oil Investors May Be Running Off a Cliff They Can’t See in the Personal Finance section of their online publication. The article focuses on the risks associated with investing in companies that specialize in developing or financing fossil fuel resources in an era where there is […]

Read more »