All posts by Anne Keller

What “Global” LPG Looks Like

45 kg LPG Cylinders

Loading LPG Cylinders into a truck in Trinidad

Good morning USA! For those who want to have a better understanding of what the "global" LPG market looks like, here's a great glimpse from Trinidad. Points to note - these are 100# (45 kg to the rest of the world) cylinders, and they ARE energy for many households across the world. Clean burning, portable fuel that beats gathering and burning wood or the fumes from kerosene by a mile. Another point this article makes is that prices for this essential good are often subsidized by the government. So when you're trying to forecast supply and demand for the global market, remember that consumer prices are kept from fluctuating as much as the producer prices that we see posted everyday at Mont Belvieu.

The low prices of the past few years of shale surplus have supported a number of projects to expand the use of LPG at the consumer level by justifying investments in import facilities, storage, and bottling and distribution assets. All this has boosted global demand and gone a long way to balance the market. Now, we're sitting on the edge of our seats hoping supply has moved up enough to keep US inventories off the bottom this winter.

LNG ry rail PA to MA Routes

LNG by Rail – Are we Ready Yet?

Clifton Linton, editor of Energy Transport Insider, provided the rail information for this post.

In this post we'll look at an energy transportation option that many would never have considered before - LNG by rail.   The recent announcement that Dominion Energy (NYSE:D) and Duke Energy (NYSE:DUK) have canceled their Atlantic Coast Pipeline project due to increasing costs and delays due to regulatory uncertainty has market observers wondering whether the region's potential as a global gas supplier will ever be realized.

Western Pennsylvania in particular could be a key source of LNG-by-rail cargoes.  The initial destination most often mentioned is New England. That region is seeing growing natural gas demand as consumers shift away from heating oil for home heating. The area, however, faces supply crunches during the peak demand of the winter months and sometimes in the hottest summer months. That's when pipeline capacity maxes out and local natural gas prices spike.  Regional prices are high enough that trucks are already used to fill the supply gap during these peak demand periods, along with imported LNG in the winter.

Plans to add more pipeline capacity to expand deliveries to Massachusetts have run into strong objections from local residents and governments. That’s led to a growing clamor to use rail to deliver more gas. Rail is more efficient than trucks in moving large volumes of LNG, and the region already has LNG storage at key peaking fuel destinations.   If gas producers could ship LNG by rail, would they?

That’s no longer a rhetorical question following the June 19 ruling by the Pipeline and Hazardous Materials Safety Administration (PHMSA) and Department of Transportation which authorized the bulk transportation of LNG by rail. The ruling complies with the April 2019 Presidential Executive Order “Promoting Energy Infrastructure and Economic Growth.”

The Federal Railroad Administration and PHMSA did allow some LNG by rail shipments prior to the ruling for pilot projects.  One pilot program is in Alaska, where LNG is being railed to Fairbanks to improve air quality. And the government is allowing LNG to be hauled by the Florida East Coast Railway in what are known as ISO containers. These are intermodal cryogenic tank containers that are loaded on top of a flatbed rail car.  The containers can be transferred to trucks for the final move to the end user site.

In December 2019, the Feds also granted a special permit to Energy Transport Solutions to ship unit trains (100-car trains) of LNG from a New Fortress Energy natural gas plant under construction near Wyalusing, PA to an export dock at Gibbstown, N.J., the Wyoming County Press Examiner reported, at the time.

But the challenges are formidable.   As a energy transport mode, rail cars typically find themselves ranking lower in cost than trucking, but still much higher than pipelines.   An LNG tank car likely will have a capacity of 30,680 gallons of LNG. A truck can carry about 10,000 gallons.  Very similar to the volume moved by propane trucks and railcars, but the cost per Btu of energy delivered is somewhat higher since a gallon of propane has about 11% more energy value LNG.

You also can’t use an ordinary tank car for LNG. They are not designed to carry cryogenic cargoes. Natural gas liquefies when chilled to -260 degrees Fahrenheit. If it warms above that temperature, the gas will vaporize, expand and vent out of the tank car’s pressure relief valve. If that continues, the tank car will arrive at its destination, but it'll be empty.

There’s a special class of tank cars designed to carry cryogenic cargoes - the DOT-113. This tank car is a big rolling thermos. It is a tank within a tank. Between the two is a vacuum used to keep the LNG cold. PHMSA’s rule specified that LNG must be transported in DOT-113C120W9 tank cars. The rule includes new safety requirements such as a thicker carbon-steel outer tank. The problem, there are maybe a handful of these cars.

“There is virtually no fleet,” said Richard Kloster, president of Integrity Rail Partners, Inc., a rail industry consulting firm.   The cars cost an estimated $200,000 each to build, or $20 million for a 100 car unit train sized fleet.   In addition, facilities for liquefaction, loading, and offloading at the delivery location would need to be built to create the rest of the value chain.    A one unit train sized operation would be able to move about .25 bcf of gas equivalent in terms of heating value, but the trip would take anywhere from 10 to 30 days depending on the route.

According to a PHMSA study ("Risk Assessment of Surface Transport of Liquid Natural Gas") , the total estimated 2019 transportation cost for an LNG move from Pennsylvania to Massachusetts by rail was $5.16/Mmbtu, only $.21/Mmbtu lower than the cost to move LNG by truck in an ISO container.  This includes the cost to liquefy, transport, store, and regasify the LNG, but not the cost of the gas itself.   The reason there is so little difference in the 2 modes is that rail movements would still require trucking to move the LNG to an end destination not directly connected to the railroad.

In spite of all this, use of rail would triple the volume of domestic LNG that could be delivered during peak demand periods compared to trucking, at a lower cost.   The New England region, with Boston as the biggest market, imports LNG from Canada and overseas producers through 3 LNG terminals.   With the average January-February gas price averaging $12.70/Mmbtu at the Algonquin Citygate in 2014-2018, it seems the opportunity still exists to displace some of these imports.

Whether this opportunity is good enough to justify the capital needed to capture it for a primarily seasonal market remains to be seen.   It seems more likely that would be LNG rail shippers will need to follow New Fortress Energy's example to seek year round business via export to other regions.   But with this new development, and the challenging outlook for new pipelines, it could be time for producers to take another look at the "virtual pipeline" option.

LPG Storage tanks

Associated gas & NGLS – much ado about nothing much for winter?

We’ve just completed an analysis we do a deep dive into a balance of 2020 forecast for gas and NGL supply in key oil producing regions that reflects the steep cuts occurring in response to current crude oil market conditions.  Our analysis indicates that even if the 30-40% May oil production cuts that have already been reported in North Dakota and the Permian Basin aren’t as high in June and July, the potential impact on NGL supply in key markets from pre pandemic levels will be significant, particularly for propane.   This is due to the high NGL content in gas coming from so called “associated gas” wells that primarily produce crude oil.

By contrast, the supply impact on “dry” gas coming into the market from these wells will likely not have the major impact on gas markets that some forecasters are hoping for.   This is because oil wells produce less gas per barrel than wells that produce mostly gas and gas condensate, and because demand for exported LNG has slowed significantly.   There’s also time to increase winter gas supply via incremental drilling in the “dry” gas plays if needed to boost winter storage.   But this gas doesn’t contain enough NGL to offset the loss of associated gas, which has implications for exports and winter heating markets.      This forecast uses a base case for oil production that tapers supply in Q2 to a level about 25% lower than December 2019, recovering in fall and winter 2020 to an exit rate for 2020 of 16% lower than 2019.    For reference, the estimated decline rate for shale oil production is between 50-60% in the first year without replacement drilling. For information on getting an excerpt of the study, please see our page.

Strategy – learning from the “preppers”

Although the production and price forecasts in our January presentation to the Gulf Coast Gas Measurement Society may look unreal in April, the year isn’t over yet.  There a lot of similarities to the Covid-19 situation here.

By then we were seeing warning signs in both the E&P industry and the world of public health of a “disturbance in the force” of business as usual.   Southeast Asia used lessons learned from past pandemics to prepare to handle the next one, and several of those countries were able to minimize the damage to their economies and their citizens.

The US shale industry cut costs and improved productivity after its own version of the business flu when oil prices crashed in 2015-2016.   But once prices stabilized, attention returned to the wellbore.  Boosting cash flow and minimizing logistics costs weren’t top of mind.

Clients and our own business experience have taught us that scenario planning needs to include situations we’d rather not deal with, or run numbers for.  A “that will never happen” dismissal of a case undercuts risk management and puts us at a disadvantage to other players who know if they can think it up, it could happen even if the odds may be low.

Business “prepping” for possible downside scenarios is an investment – in developing options that can set us up for opportunities we couldn’t have imagined last year.

During these scary times when markets rise and fall almost daily, we know having cash on hand can buy both opportunity and peace of mind for our families.   For a business, prepping with cash reserves, hedges, and strong commercial relationships can create optionality and even be a company maker at times like these.

If you’re prepping your business to be able to pivot to a world that’s looking for execution excellence and sustainable cash flow more than ever, contact us.  Let’s create commercial and operating strategies to survive and thrive in challenging times.