The Role of LNG in the Energy Mix

Sunday, November 04, 2018

Natural gas production in the United States has boomed in recent years, contributing to a supply glut and reduced prices, while regulatory changes have paved the way for expanded U.S. exports. At the same time, technological innovations have provided new options for transporting liquefied natural gas (LNG), giving countries more flexibility to import this fuel seasonally or on a small scale. For some countries in Latin America and the Caribbean—especially those that currently burn fuel oil or coal to generate electricity—such factors could help change the calculus about the role of LNG in the energy mix.

Natural gas is often considered a transition fuel—a bridge to clean renewable energy. Although it is extracted from the ground in gas form and typically transported by pipeline, natural gas can be cooled and liquefied, transported by ship over long distances, and then converted back to gas for use as a fuel.

Despite some downsides—including methane emissions during the production process, a problem acknowledged by many leaders in the industry—natural gas has some clear pluses. Mainly, it can provide reliable baseload power that is cleaner to burn than other types of fossil fuels such as fuel oil.

“There’s been a big shift away from fuel oil because it’s highly polluting and also very expensive,” explained Lisa Viscidi, Energy, Climate Change & Extractive Industries Program Director at the Inter-American Dialogue. Mexico and some Caribbean countries are among those making natural gas a bigger part of the energy matrix, Viscidi said.

According to a report she co-authored—LNG in the Americas: How Commercial, Technological and Policy Trends are Shaping Regional Trade —Jamaica is one country where LNG has made important inroads. In 2015, petroleum accounted for 90 percent of the fuel used to generate electricity in Jamaica, but by 2016, that number had dropped to 58 percent, and natural gas accounted for 27 percent of the energy mix. Wind, small hydro, and solar made up the remaining 15 percent.

Puerto Rico’s electric grid has also become less dependent on petroleum, the report said; by 2016, natural gas represented more than one third of the fuel used to generate electricity on the island. As Puerto Rico continues to assess its electricity grid in the wake of Hurricane Maria, it could end up relying even more on natural gas, according to the report, which was published in April by the Inter-American Dialogue.

Meanwhile, in August of this year the energy company AES inaugurated the first natural gas-fired power plant in Panama, along with a regasification terminal, near the Caribbean entrance to the Panama Canal. The 381 MW combined-cycle plant will run on LNG imported from the United States. The company already has a similar power generation facility and LNG terminal in the Dominican Republic.

“We expect that the entry of low-cost, U.S. LNG will transform the Central American energy sector, much as it has in the Dominican Republic,” AES President and CEO Andrés Gluski said in a press release announcing the opening of the plant, AES Colón. The company said that the facility will also include the largest LNG tank in the Caribbean, which will be able to supply gas to nearby countries beginning in the second half of 2019.

Mexico, for its part, has increased the use of natural gas in power generation, and it imports LNG from several countries, including Peru, Nigeria, Qatar, and the United States—although it imports much more U.S.-produced gas via pipelines. Mexico produces natural gas itself, of course, but it uses imports to cover needs in parts of the country far removed from its oil and gas production, Viscidi said in an interview. Most of Mexico’s LNG imports arrive at the Manzanillo terminal, on the Pacific coast.

Several South American countries—Argentina, Brazil, Chile, and Colombia—also rely on imported LNG to some extent, and consumption in the region could grow as countries look for alternatives to hydropower.

As the Inter-American Dialogue report put it, “Latin America is dependent on large-scale hydropower for about half of all power generation. But there is little appetite for building new dams because of the social and environmental costs, including deforestation and the need to relocate entire communities.” Hydropower is also becoming less reliable in some countries because of changing rainfall patterns due to climate change, the report noted.

At the same time, electricity consumption is on the rise in Latin America and the Caribbean. The Inter-American Development Bank (IDB) has estimated that the demand for electricity could grow by more than 70 percent from 2016 through 2030. While countries are expanding their use of renewable sources, so far wind, solar, geothermal, and biomass together represent only about 10 percent of the region’s electricity matrix, the Inter-American Dialogue report said.

All that leaves plenty of room for natural gas growth for electricity generation. And, of course, natural gas is also used in transportation and in certain industries—including in oil production and steel manufacturing.

Transitional Opportunities

Natural gas is an “opportunistic” or “transitional” source of energy, said Fernando Cubillos, who heads the energy team at IDB Invest, the arm of the IDB Group that finances private sector projects. While the broad, long-term trend points toward renewable energy, he said, natural gas will play a role in the meantime.

Many Caribbean countries, for example, could benefit from today’s LNG market because their electricity networks tend to be inefficient and rely on expensive petroleum, Cubillos said. Cruise ships present another market opportunity for LNG, he added; new regulations enter into force in 2020 limiting the use of dirty bunker fuel, and natural gas is a competitive option for the shipping industry. That will create a need for refueling infrastructure in Caribbean ports.

Caribbean countries could lower the cost of overall LNG infrastructure if multiple countries adopt it as a fuel source for electricity, Cubillos said in an interview. “To be competitive, LNG needs the electricity market, because without it there’s not a critical mass,” he said.

Expanding the use of LNG would require technological investments in the electric grid as well as changes in the regulatory framework, according to Cubillos. But, he said, some Caribbean countries are analyzing the possibility of moving to 100 percent renewables—such as solar power systems with battery storage—and avoiding the natural gas transition altogether.

“That solution will be commercially available in the future, but it is very difficult to predict the time frame in which that could happen,” Cubillos said, adding that another consideration for Caribbean countries is to have diverse, resilient electric grids that can withstand climate events like hurricanes.

While the pace of further advancements in renewable energy technology is unknown, natural gas facilities can still be a viable investment over a 20-year period, as they are typically tied to power purchase agreements that guarantee a revenue stream, according to Cubillos. Earlier this year, IDB Invest provided nearly $290 million in financing to help build an LNG-fired power plant in northeastern Brazil. The $1.8 billion, 1,500 MW Sergipe project—slated to be the largest thermal power station in South America—will contribute to the country’s technological diversity and displace some of its coal-fired energy when thermal generation is needed, according to Cubillos.

Market Shifts and Technological Innovations

One of the major factors driving changes in the LNG market worldwide is the boom in shale gas production in the southwestern United States in the past decade. “It’s contributing to a big glut, because not only is the U.S. exporting gas now, but years ago it was expected to be a major importer,” Lisa Viscidi said.

U.S. exports are still modest—in 2017, the country became a net natural gas exporter for the first time in at least 60 years—but companies have been building new export terminals to accommodate ramped-up production.

The growth in U.S. gas production has also spurred domestic policy changes in recent years, with global repercussions. Some longstanding policies that had been crafted with U.S. energy security in mind—most notably, a ban on crude oil exports—were eliminated under the Obama administration. “There was a growing lobby saying this just doesn’t make any sense. We’re a producer now. We should get rid of these types of restrictions,” Viscidi said.

U.S. exporters also excluded “destination clauses” in their sales contracts, common among other exporting countries, that had required buyers to use the gas in the country of purchase, Viscidi said. That practice would not have allowed for “hub-and-spoke” distribution models like the new facility in Panama, which intends to import U.S.-produced LNG on a large scale then resell it in smaller quantities.

Pricing models for natural gas have also become less rigid in recent years, and the technology for delivering LNG has become more flexible. For example, Viscidi said, small-scale delivery is now possible using conventional shipping infrastructure and vessels, thanks to the development of tank containers that meet requirements established by the International Standards Organization (ISO).

In another example of technological innovation, floating storage and regasification units (FSRUs)—large vessels that can dock in a port and link to existing infrastructure—can provide a way for a country to meet increased demand temporarily, without building major permanent facilities. Brazil and Argentina have leased FSRUs to supplement seasonal demand. (Both countries also have the potential to increase domestic natural gas production.)

Looking at the big picture, Viscidi said, if countries are to stem global temperature rises and meet the goals they have set under the Paris Agreement, they need to be cautious about how they think about natural gas as an energy source in the long term.

“I think the concern about talking about it as a bridge fuel is that you’re building infrastructure that will last for a long time,” she said. “You need to make sure you can transition away from that infrastructure in time to reach the goals of net zero carbon.”

In the case of Latin America, which already has relatively clean power generation, it may make sense to use some natural gas as a firm energy source to back up renewables—especially if the gas is replacing higher-carbon fuel sources, Viscidi said.

“In my opinion,” she said, “if a country is making the switch from fuel oil to gas, they’re improving things in the short term, they have a tiny carbon footprint globally anyway, and you’re helping to use gas in order to make renewables like wind and solar more viable, I think it’s a net positive.”