HOUSTON ̶ In some ways, the LNG fuels market is going through its own “stress test,” similar to what U.S. and world banks experienced in 2008 and afterward, Tom Campbell, director, Stratas Advisors, told attendees at Hart Energy’s recent World LNG Fuels Conference.

Recent crude oil price declines have narrowed the pricing gap between diesel prices and LNG as a fuel, making the case for conversion less economic, Campbell noted. “Yes, that margin has definitely shrunk to a pretty dramatic degree, but there is still a substantial margin,” he said. He explained that even with current low crude prices that there is still at least a $1 margin if not more, depending on the application.

“That’s actually an interesting step because it pushes certain applications and endangers others,” he said. “Economics that were difficult at times and a little more marginal have been pushed out and will remain so until oil prices rebound.”

He said the lower crude prices have also underlined the economics of stronger LNG fuel applications. “This is a stress test of a lot of the economics,” he said.

He outlined specific attributes that drive successful LNG projects.

  • Fuel consumption—is there enough burning of fuel to make economic sense?;
  • Incremental cost—is it worth it to pay the upfront cost for LNG fuel considering the life cycle; economics of this unit?; and
  • Service life—will the unit be used long enough for the payback to be worth it?

For any project to be successful, Campbell noted that it should include at least two of these aspects.

He said that other factors, such as regulatory and environmental compliance, government support and funding, market positioning and strategy and innovation gains can play a useful part but are secondary to the three main drivers.

Identifying The Right Application

Campbell showed various payback periods vs. fuel consumption indicating that the highest consumption unit types like locomotives, heavy-haul trucks and marine vessels require the smallest share of their overall service life to achieve payback and are the most attractive transportation markets. He noted that the relatively short service life of trucks combined with their “relative” lower fuel consumption challenge the application.

“There are still a few companies, including UPS and others, that are pushing for LNG in these applications, but we’re seeing less calls for them in the last couple of months given the price environment,” Campbell said.

The marine market is the main opportunity for investment, he said. “You’re seeing new vessels in the water and vessels being built.

“Although the upfront cost of LNG fuel capability on a container vessel can be in the tens of millions of dollars, the sheer volume of fuel consumed along with the long service life can enable payback in a few short years,” he noted.

Sharpening The Focus

He noted key opportunities in the near term while “waiting out the storm” until crude oil prices stabilize.

Marine: Massive fuel consumption and long service lives make this an ideal market. Another factor driving conversion: growing emissions concerns and regulatory obligations.

Rail/Mining: High unit fuel consumption and relative consistent operating patterns make LNG fuel attractive and manageable, along with long unit service lives. The market is still in its infancy, but holds tremendous potential, according to Campbell.

Distributed LNG: This application focuses on stationary, industrial uses with large consumption, low incremental cost and lengthy service lives. “There are a number of markets in North America and worldwide where people are not only paying regular diesel and fuel oil prices, but elevated prices because of their remote locations. It’s a tempting opportunity for LNG with applications like grain drying and asphalt plants,” Campbell said.

Within distributed LNG is the E&P market. While it is currently struggling, Campbell sees promise. He said drillers are trying to cut operating costs and this may be one way they can keep drilling while waiting for higher prices to return.

On The Horizon

Factors influencing the future include closer, cheaper supplies brought on by new facilities already under construction that are close to markets and will help reduce transportation costs. Also, larger, newer facilities will increase scale and lower liquefaction costs.

Finally, where will crude oil and diesel prices go from here? “Many people have a great deal of faith that what we’re seeing in crude oil prices is an aberration.”

He said that given the tenuous geopolitical situation, rather than entering a dawn of ultralow cost oil, we’re witnessing an aberration from a consistent trend of, if not $100 per barrel oil prices, relatively higher prices.