This year to date, the Belgian Zeebrugge LNG terminal has reloaded more small-scale (SS)LNG carriers than conventional carriers.
Six shipments of about 15,000 cubic metres (cbm) each have been reloaded up to the end of April, compared with only three conventional carriers, according to Zeebrugge terminal operator Fluxys.
By the end of the year, the operator expects 20 SSLNG reloads. The surge – from zero in 2014 – comes even before the commissioning of a dedicated second jetty which is only scheduled in the second half of this year. While that new infrastructure will improve SSLNG supply chain efficiencies, the driver behind the reloads is a two-year sales contract between Zeebrugge capacity holder Eni and Norwegian SSLNG trader, Skangass (see GLM 24 November 2014).
SSLNG growth in Europe depends on the number of such contracts and with marine emission controls coming into force from 1 January this year, some observers had expected the marine bunker market to lead SSLNG growth.
However, the Skangass volumes from Zeebrugge are not allocated for use as a marine fuel and the size of that market remains the smallest of all three SSLNG segments today.
LNG for off-grid industries and LNG as a fuel for heavy duty vehicles (HDV) both consume more than the marine sector and will continue to do so for some time despite arguably significant potential for global LNG bunkers. Regardless of the three broad end-markets for SSLNG, distribution today is almost entirely carried out by trucked cargo via trailers. In Europe, a relatively mature trucked LNG industry in Spain has spread northwards through France, Belgium and the Netherlands.
In North America, the Everett LNG terminal in Boston has been providing truck loads since the 1970s. And in China, where remote small-scale liquefaction, as well as importation of LNG is widespread, trucked LNG is traded on the Ningbo stock exchange.
Trailer truck distribution
The cargo carrying size of trailers varies depending on national legislation. While loads can only carry about 40cbm of commercial cargo, the sector in aggregate is characterised by thousands of loadings. Last year in Europe, more than 42,000 trucks supplied almost 1.9 million cubic metres of LNG – equivalent to 1.14 billion cubic metres of natural gas – according to Brussels-based industry body, Gas Infrastructure Europe (GIE).
The growth in truck-loading in northwest Europe has been little short of exponential since Belgium’s Zeebrugge LNG terminal started truck operations in 2010 (see chart 1). The terminal provided 1,670 loads in 2014 and has split its 4,000 loadings/year capacity amongst 18 active truck loading companies. The nearby Dutch Gate terminal added a significant truck-loading service to the market from January 2014 and has capacity for 5,000 loadings/year. The UK’s Isle of Grain terminal is on track to open its truck-loading service this summer.
In the US, the Everett LNG terminal has loaded more than 350,000 trailers since the early 1970s. France-headquartered terminal operator and gas distributor ENGIE recently signed sales contracts for about 9.5 billion cubic feet (bcf), or about 121,000 tonnes per year to regional gas utilities to be supplied by trailer trucks (see GLM 13 May 2015). Supply from Everett over recent years has been insufficient with ENGIE supplementing its portfolio through purchases from Montreal-based gas distributor Gaz Metro LNG across the border in Canada.
Trailer truck sectors initially developed in areas where there was a lack of pipeline infrastructure and where industries saw value in SSLNG. Northwest Europe and vast swathes of North America, however, have extensive gas pipeline networks so the recent growth has been mostly split between off-grid industry and the HDV segment. In 2014, more than 50% of Zeebrugge trucked LNG supply was allocated to off-grid industry, less than 40% went to vehicle refuelling stations, and less than 10% went to LNG bunkering.
With Fluxys identifying a potential HDV market within a 500km range of Zeebruuge of up to 5mtpa and ready to double its Zeebrugge truck-loading capacity to 8,000 loadings/year, the allocation to road transportation is expected to outstrip that of the off-grid industry, but the outlook is dependent on a number of variables.
Heavy duty vehicle fuel
Taxation levels in road transport fuels play a crucial role. The tipping point for gas versus diesel is strongly dependent on local tax regimes, with approximately two thirds of the financial benefit of switching in Europe said to derive from taxation differentials, according to a 2013 study by US-based bank Citi Group. Although European countries have various tax arrangements and are mostly favourable to LNG road transport, a reliance on fiscal terms to make the business case is a concern amongst operators, Chris Le Fevre from the Oxford Institute for Energy Studies has said.
Within the HDV category, long-haul trucking provides the most attractive business case given high fuel consumption and often fixed routes which make LNG re-fuelling easier. Netherlands-based research institute, TNO has projected a feasible LNG consumption of 15% of the total energy consumption in the road HDV segment within the next decade. HDVs would account for 29mtpa of LNG consumption in Europe only with a 26% market share of truck sales but the company’s LNG business development manager, Bas van den Beemt, told ICIS a more realistic scenario at the moment would be 10% substitution taking the dependency on governmental taxation policies into account.
Coaches and buses can also use LNG profitably, particularly when refuelling stations capitalise on synergies with compressed natural gas (CNG). The latter form of gas has also made gains as a transport fuel recently but is limited to light duty vehicles covering shorter distances.
Diesel prices have dropped considerably over the last nine months but relative to other segments the LNG price advantage appears to be still most prominent in HDVs. Industry already receives diesel at a relative discount – mainly as a result of taxes on road transport diesel. That discount has grown very slightly over from 40% towards 50% since the oil price drop, according to a recent Fluxys presentation, while the Zeebrugge gas hub price in Belgium, which has decoupled from oil altogether, has remained constant at a 80-85% discount to road transport diesel.
The relative spreads
Payback times for investors in fuelling stations and LNG-powered trucks are a key metric with Le Fevre pointing to three years as the typical period to break-even after a new truck purchase. Following marginal investments of about €50,000 for LNG-powered trucks, fuel price then becomes crucial in determining truck utilisation and refuelling station utilisation, all of which impact payback times for the various stakeholders across the value chain.
The HDV markets across various geographies are, however, still largely shaped by government regulations. In the Netherlands, regular-sized diesel trucks are forbidden from entering city centres. A truck owner faces the choice of hiring two drivers for two smaller diesel trucks or a single driver for an LNG-powered truck. Comparing profitability across different countries is difficult because companies face different market conditions in each.
Benchmarking on a gas index
Given significant investments in new infrastructures to underpin supply chains and build demand centres, stakeholders require long-term contracts in order to guarantee a minimum return on investment.
Buyers of SSLNG will often have a choice in the way to price their volumes. For those that have displaced oil products or still have the ability to switch in duel-fuel applications, an indexation or discount to oil may seem natural. For others, it may be more relevant to index to gas. SSLNG can be redistributed from large import terminals but it can also originate directly from small-scale liquefaction. In most cases in Europe and north America the main end-markets for LNG are simply gas markets. ENGIE has offered SSLNG to industrial customers in France and northeastern USA on local gas hub prices.
In 2014 SSLNG was marketed from its Everett terminal in Boston for the HDV, marine, rail and off-grid industries with a free-on-board (FOB) purchase price equal to the US natural gas TETCO M3 price index plus a premium of $5.00/MMBtu.
In Europe, many LNG regasification terminals have struggled with under-utilisation and capacity holders have jumped at the opportunity to market FOB truck-loads on more attractive terms than the pipeline grids that are already well supplied with cheaper gas from elsewhere.
Although spreads between pipeline hub prices and the next best alternative fuels across the HDV, marine, and off-grid industries can be large, the logistics chain in the still nascent SSLNG markets can leave little room for profits. The first glimpse of certain stakeholders suffering from reduced margins could be seen from the first quarterly truck-loading data from Belgium’s Zeebrugge.
In the first three months of this year 278 truck-loading operations took place at Zeebrugge, according to the terminal operator, down from 363 over the same period in 2014.
This article first appeared on 14 May 2015 on the ICIS website.