The case for LNG as a major bulk trade is compelling. Methane is a green fuel with vast onshore and offshore reserves “stranded” far from consumer markets. The technology to transport the gas as a liquid was developed in the 1940s and the first cargo shipped in 1959 from Lake Charles, USA to the UK on board a converted Liberty ship the “Methane Pioneer”. It’s a natural.
But waiting for the LNG trade to hit the big time has been painful – like watching grass grow. It’s nearly 50 years since the first purpose-built LNG ship, “Methane Progress”, was built, but by 1st April 2013 there were still only 372 LNG carriers, with no change since early-2012. With energy prices high and environmental pressure higher LNG should be much bigger. So what’s the problem?
Actually, a 50 year development lag is not unusual in shipping. Sailing ships were still built in 1900, 50 years after steamships appeared. And the first oil tanker was built in 1886, but the trade did not take off until after the 1950s. But three features of the LNG business make trade growth difficult.
Heavy Project Costs
The first is project infrastructure which has made the LNG trade inflexible. Liquefaction trains and re-gas plants need multi-billion dollar investments. And the ships are expensive. A 160,000m³ LNG vessel costs $200m; an Aframax oil tanker $47m. Such big bucks mean arguments over pricing, and have delayed projects for years. Even once a project starts, these complex facilities are prone to technical delays.
Big World, No Market, No Pricing
The second related problem is that LNG use is too narrow to support a global market. Fuel-switching between coal and oil involves fairly manageable investment. But LNG delivery requires expensive re-gas and storage facilities and a pipeline distribution network. That’s fine in the USA, which has all of the above, but for many consumers it involves major investment. Coastal power utilities are an ideal market, but installing LNG reception facilities is a major step which few have taken.
And, finally, the lack of a market has made LNG pricing problematic. Currently the price of gas in the USA is $3/mcf, but $18/mcf in Japan, suggesting that this is not a global market. The shipping of LNG may be viable, but until there is a pricing system, who will sign up? No wonder LNG is taking a long time to develop.
Fifty Years On and Counting
So there you have it. The LNG trade is looking for its great leap forward, and things may be looking up. In the last two years gas vessel investment has overtaken that for crude oil tankers (see chart), an important milestone. With oil, LNG’s main competitor, at sky high prices and the carbon footprint just as high on government agendas, maybe the scene is finally set for LNG to break out and claim that major role. Have a nice day.