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

The final edition of the ENERGY Caribbean newsletter

LNG DIGEST The shale gas

LNG DIGEST The shale gas threat retreats Pricing reform may well erode US competitiveness The popular thesis that shale gas from the United States will become invincible, dominating the global liquefied natural gas (LNG) trade, continues to be called into question, even as potential LNG exporters line up for approval by the US Department of Energy. It has been assumed that LNG from American shale gas will threaten Trinidad and Tobago’s ambitions for the small and medium LNG export business in the Caribbean archipelago. But this view is being increasingly debunked by experts, including Albert Nahas, vice president for international government affairs at Cheniere Energy, which is seen as the main rival for Trinidad and Tobago LNG in the region. The recent Inter-American Development Bank’s “Pre-Feasibility Study of the Potential Market for Natural Gas as a Fuel for Power Generation in the Caribbean” unequivocally plumps for the US as the probable main LNG supplier for Caribbean countries, specifically Sabine Pass, Louisiana, where Cheniere is building its first LNG export complex. But even Nahas does not go along with that. As he told ENERGY Caribbean last year: “Why shouldn’t Trinidad and Tobago be able to compete with us? After all, your LNG will still be cheaper than that in most of the rest of the world, except the US.” Dr Anthony Bryan, energy analyst specialising in Caribbean and Latin American energy matters, thinks that “the shale gas threat has been overblown.” He contends: “Trinidad and Tobago need not fear any immediate significant competition from US exporters for the LNG market in the Caribbean. Trinidad and Tobago is very capable of holding its own.” Pricing The same might well be true further afield, specifically in the Far East, where the world’s biggest LNG importers are located, headed by Japan. There, as in the European Union and elsewhere outside North America, gas pricing has tended to be linked to current oil pricing, on a barrel-of-oil equivalency basis. With oil prices relatively high in recent years, this linkage has kept the price of gas high, at least by comparison with North America. The system naturally suits gas exporters, and was reaffirmed at the Gas “Why shouldn’t Trinidad and Tobago be able to compete with us?” Exporting Countries’ Forum (GECF) in Moscow last year. Russia’s president Vladimir Putin, the conference host, observed: “The oil link is the fairest and most market-oriented way of pricing gas. Rejecting this would mean not only a blow for gas producers but also serious costs, and would undermine energy security even for consuming nations.” But Putin and the GECF may be waging a losing battle. More LNG will be coming onto the international market in the years ahead, led by Australian exports, which are set to rise 156% between 2013 and 2018. Angola has ironed out its export problems, and Tanzania and Mozambique will also be joining the queue. Russia itself, mainly known for pipeline gas (state-owned Gazprom is the largest gas company in the world), is elbowing its way further into LNG. Its Yamal LNG plant is expected to come on stream in 2016-7, with three trains and a capacity of 16.5 million tonnes (more than Trinidad and Tobago’s Atlantic complex). The project is being funded by the country’s largest independent gas producer, Novatek, reflecting President Putin’s desire to bring private investors into LNG to take full advantage of the growing international LNG trade. Broken link The flood of new gas will put pressure on prices, and the whole principle of relating gas prices to oil is likely to be modified, if not to collapse altogether. Japan, which pays some of the highest prices for LNG, is among those clamouring for a more market-based LNG system, which would have the effect of slashing prices. After the accident at its Fukushima nuclear reactor in 2012, Japan shut down virtually all its 48 nuclear plants and was forced to import much more LNG to plug the gap, costing the country US$40 billion according to one estimate. With new LNG contracts coming up for renewal, Japan seems determined to bargain hard for lower gas prices. “Oillinked pricing is no longer rational,” an executive of Tokyo Gas has insisted. Thus, by the time they arrive in the Far East or elsewhere, US LNG exports “Oil-linked pricing is no longer rational” based on shale gas may no longer be as competitive as expected. Price convergence will, in effect, lop off the US advantage, to the point where US companies may no longer find exporting gas attractive at all. 14

RENEWABLE ENERGY IDB: RE can’t match gas for power generation Wind and water power won’t cut it without subsidy, though waste, solar and geothermal could be viable Perhaps the most influential voice so far has entered the debate on whether unsubsidised renewable energy (RE) can ever be competitive with natural gas in Caribbean power generation. And the bad news from the Washington-based Inter-American Development Bank (IDB) is that several RE sources will never be able to match gas in price. The IDB is not totally negative about RE competitiveness. It concedes that geothermal energy, waste-based technologies and solar photovoltaics, for example, “could all be viable.” But it rules out major technologies such as wind and hydro power for electricity generation. Other recent observers of the Caribbean energy scene have cast doubt on the competitiveness of RE in the electricity sector (see ENERGY Caribbean 71, February 2014), including efficiency specialist Andre Escalante. Ramona Ramdial, minister of state in Trinidad and Tobago’s ministry of the environment and water resources, believes all fossil fuels, not just gas, are likely to remain preferable to utilities on the basis of cost. Yet the 15 countries of Caricom are pledged to promote the adoption of RE as quickly as practicable. It is an essential ingredient of the Caricom Energy Policy (CEP), which envisages that 20% of the electricity generated in Caricom should be from RE by 2017, 28% by 2022, and 47% – almost half – by 2027. Reaching these goals may now force regional governments to subsidise RE to make it attractive to generators – and Ms Ramdial notes that “even subsidies do not always ensure that RE is competitive.” No sense Joseph Williams, former programme manager for energy at the Caricom Secretariat in Guyana (who has moved temporarily to the Caribbean Development Bank in Barbados as an energy adviser) has rejected Ms Ramdial’s assessment. But it may be “Even subsidies do not always ensure that RE is competitive” more difficult to debunk the IDB’s conclusions in its exhaustive “Pre- Feasibility Study of the Potential Market for Natural Gas as a Fuel for Power Generation in the Caribbean”, the reference document for the IDBsponsored conference of Caribbean energy ministers in Washington last December. The Bank’s view is that “introducing natural gas [into the Caribbean energy matrix] would affect which RE technologies are economically and commercially viable.” Assuming a natural gas fuel price of 5.64 to 9.64 US cents per kwh (kilowatt hour), and the long-run marginal cost (LRMC) of a natural gas-fired power plant as 10.08 to 13.98 US cents per kwh, IDB concludes that a number of RE technologies “no longer make sense.” Wind and water One of these is wind. The IDB points out that “the LRMC for wind is 10 US cents per kwh, but because wind is an intermittent technology, the LMRC of wind should be compared with the fuel price of a firm technology, such as low-speed diesel plants or natural gas plants.” In such a scenario, “all fuel prices, which range from 5.64 to 9.54 US cents per kwh, are below the LMRC of wind at 10 US cents per kwh, meaning that wind is no longer viable in a situation with natural gas.”’ That assessment will have to be taken into account in Jamaica, which is thinking of adding gas to replace oil in power generation, but already has a functioning wind farm; and in Trinidad and Tobago, which is conducting a wind resource assessment. The IDB’s verdict on hydro power is also negative. The Bank says hydro power “makes no sense” in the face of competition from gas. That will be a disappointment for entrepreneur Donald Baldeosingh, who is vigorously promoting a hydro-electric project in Guyana which he thinks can elbow out gas in Trinidad and Tobago eventually. (And of course the same IDB is busily offering loans to Caricom states to add RE to their domestic energy mix.) Why does the Bank rule out hydro power? “The LRMC for a hydro plant “Wind is no longer viable in a situation with natural gas” is 12 US cents per kwh,” it says, “and the only Caribbean state where the LRMC of a natural gas power plant is higher than a hydro plant is Dominica, where the estimated LRMC of a natural gas plant is 13.98 US cents per kwh. So hydro still makes sense in Dominica.” But not elsewhere. Energy Caribbean April 2014 15

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