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ENERGY Caribbean newsletter (April 2014 • Issue no. 72)

The final edition of the ENERGY Caribbean newsletter

CARIBBEAN NATURAL GAS

CARIBBEAN NATURAL GAS MARKET CARIBBEAN NATURAL GAS MARKET CARIBBEAN NATUR The IDB’s natural gas study Inter-American Development Bank experts Jed Bailey and Nils Janson have produced the most comprehensive analysis so far of the Caribbean natural gas trade – “A Pre-Feasibility Study of the Potential Market for Natural Gas as a Fuel for Power Generation in the Caribbean”. This formed the reference document for a meeting of Caribbean energy ministers held under the Bank’s auspices in Washington in early December 2013. The study focuses on 13 possible recipients of natural gas, including the Dominican Republic but excluding the French Caribbean territories of Martinique and Guadeloupe, which are expected to buy natural gas for the power turbines they are installing, probably from the small LNG plant the UK’s Gasfin Development intends to build at La Brea in Trinidad. The strengths and weaknesses of the three methods of gas delivery are outlined in the study. CNG can’t compete with LNG Shipping costs make all the difference The IDB study has bad news for the UK’s Centrica Energy, which has been trying to put together a deal to export its gas from blocks 22 and NCMA 4 in Trinidad and Tobago to Puerto Rico in compressed natural gas (CNG) form, and for other promoters thinking along similar lines for other Caribbean markets. It rules out marine CNG as a commercial proposition for the region. “Seaborne CNG does not appear to provide a large enough cost reduction [compared with fuel oil] to justify the added risk of using an unproven technology,” it says firmly. Since the whole point of Caribbean utilities switching to natural gas is to dramatically lower their fuel costs, this conclusion seems to make sense. For example, the final delivered price of CNG from Trinidad and Tobago to Barbados, as calculated by the study’s authors, is expected to be US$8.71 per mmbtu, while that for LNG is US$8.65. The disparity is even greater in the case of gas supplied to Antigua (US$11.48 per mmbtu for CNG, US$9.06 for LNG). The difference in price, for the same fuel costing the same at the point of export but delivered by different methods, seems to lie in the cost of shipping. The IDB study concludes that “shipping CNG is likely to be much more expensive. CNG ships are essentially floating platforms for high pressure pipelines which require thick, high-grade steel that is heavy and expensive ... each CNG ship will likely cost more than a typical LNG ship, particularly the first generation of ships, and will be able to carry much less natural gas.” Because of the transportation cost, “shipping distance has a large impact on the final delivered cost.” CNG shipping costs will “likely come down as the technology matures, but much additional investment and development is required before seaborne CNG will be as readily available as LNG.” Examples of round-trip shipping costs for CNG and LNG vessels out of Point Fortin in Trinidad (in US$ per mmbtu) are: CNG LNG Grenada 6.90 0.19 Dominica 11.70 0.39 St Vincent 7.21 0.21 Part of the higher CNG cost is attributed to unloading times in port. “Indeed, loading and unloading each shipment accounts for more days than the actual shipping transit in almost all cases considered.” The bottom line, according to the IDB, is that long-run marginal cost savings by Caribbean power utilities from adopting gas delivered as CNG from Point Fortin would be a minuscule 5% in Grenada and 4% in St Vincent. All CNG deliveries from Trinidad and Tobago would realise some savings, though very small for some recipients, while “smaller markets and those further away would see a substantial cost increase if they were to switch to CNG – some by more than 50%” in the case of deliveries from other sources. Pipeline gas even costlier Though extra clients could bring prices down Probably to the surprise of many, the IDB study says a pipeline would be the most expensive way of getting gas to Barbados from Tobago, as the Eastern Caribbean Gas Pipeline Company (ECGPC) is attempting to do. It puts the cost at US$11.42 per mmbtu for the 30 million mmcfd that is initially expected to be piped there, compared with US$8.65 for LNG US$8.71 for CNG. Most of the pipeline cost is incu in transportation, which would US$7.12 per mmbtu in Barbad case. This largely has to do with cost of building the undersea pipe which the IDB study calculate US$3 million a mile for a line w 10

AL GAS MARKET CARIBBEAN NATURAL GAS MARKET CARIBBEAN NATURAL GAS MARKET Delivery: LNG “the best option” But which supplier would be most competitive? The IDB come downs unequivocally on the side of liquefied natural gas (LNG) as the preferred form of delivery. “We conclude that the best option for most Caribbean countries would be LNG”, says the study, partly because “it appears to be the safest technology for individual markets.” LNG’s appeal, according to the IDB, rests in part on the assumption that “LNG exports to the Caribbean will likely originate from Cheniere Energy’s Sabine Pass, Louisiana, supply point”, because of its ability to piggyback on the low US gas prices now prevailing as a result of the inrush of shale gas into the domestic US market. Other potential supply sources are seen as Trinidad and Tobago (Point Fortin), Colombia (Covenas), Venezuela (Guiria), Mexico (Altamira), Florida (West Palm Beach) and Peru. The authors netted back the Henry Hub gas cost to the six other locations in order to come up with a cost that could compete with deliveries from Sabine Pass. Venezuela, Mexico, West Palm Beach and Peru were ruled out as realistic candidates for any regional gas trade, reducing the competition to Sabine Pass, Trinidad and Tobago, and Colombia. Some prices suggested by the study for gas delivered to an LNG plant which would make Trinidad and Tobago and Colombia competitive with Sabine Pass (where the gas price was based on an average of US$4 per mmbtu): Trinidad and Tobago Colombia (Point Fortin) (Covenas) For delivery to Grenada US$4.66 US$4.40 For delivery to St Lucia US$4.62 US$4.38 For delivery to Antigua US$4.40 US$4.27 Gas supply being a matter for the producers, it will require some hard bargaining on the part of the liquefaction companies to achieve these or even lower prices. From the recipient countries’ point of view, of course, it is not the cost of gas to the liquefactor that is important but the cost of gas to them, after liquefaction, storage, regasification and transport are all taken into account. The IDB study takes a stab at ascertaining what “the final delivered price of gas” will be in selected markets: Trinidad and Tobago Colombia (Point Fortin) (Covenas) For delivery to Grenada US$9.99 US$9.99 For delivery to St Lucia US$9.29 US$9.29 For delivery to Antigua US$9.06 US$9.06 Trinidad and Tobago and Colombia are running neckand-neck in competitiveness, but neither matches Cheniere, whose gas would cost US$9.23 in Grenada, US$8.53 in St Lucia, and US$8.30 in Antigua. The silver lining, says the study, is that “countries that are able to reduce their upstream gas price can effectively compete with US Gulf Coast exporters.” And, by using Sabine Pass as the source point for Caribbean LNG, the IDB may have calculated the delivered LNG price too favourably. Cheniere itself said that it will use its second LNG facility, at Corpus Christi, Texas, for supplying any Caribbean market. The economics of liquefaction at Corpus Christi may be quite different from those at Sabine Pass. The IDB points out that “no single supplier enjoys an insurmountable advantage over the other. As a result, the supplier who is able to first reach the market and secure contracts would face limited pressure from competitors.” than LNG/CNG and rred be os’s the line, s at ith a capacity of 100 to 300 mmcfd. The ECGPC line is likely to have a capacity of 150 mmcfd and a length of 188 miles. Annual operating and maintenance costs, says IDB, can be calculated on the basis of “1.8% of the line’s total capital cost and annual fuel costs for pipeline operations (compression) equal to 2% of the total capital cost as a proxy for volume and distance.” The study calculates the pipeline tariff using “an assumed 80% load factor, 80/20 debt to equity ratio, 8% interest rate, 12% allowed rate of return on equity, 15-year depreciation and 35% tax rate, allowing the pipeline’s capital cost to be spread across an average tariff for the project’s 15-year economic life.” Multiple markets along the pipeline route would benefit from lower costs, the IDB says, “because the price may be less competitive at the end of the pipeline and it is desirable to attract as great a demand in the terminal market as possible, so regional pipelines may benefit from cost-sharing mechanisms that spread the cost more evenly across markets.” This suggests that Barbados could have lower gas costs if the pipeline continued to Martinique and Guadeloupe, with spurs to St Lucia and Dominica, as earlier envisaged. But with the two French territories in the sights of the Caribbean LNG project in Trinidad and Tobago, this does not now seem likely. The IDB also expresses concerns about supply vulnerability, demand fluctuation, and the capital cost disadvantage of longdistance pipelines. Energy Caribbean April 2014 11

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