A World Energy Outlook and the Future of LNG

 

Introduction

 

In recent years global climate change has largely become the leading topic in policy initiatives since it began garnering attention in the late 1980’s with the establishment of the International Panel on Climate Change by the United Nations (U.N.).  Following a Supreme Court ruling in 2007 labeling carbon dioxide and 5 other GHGs harmful to human health and the environment, the Environmental Protection Agency (EPA) was mandated to regulate these levels.  Thus sparked the need to draft and implement policy to protect the population and Earth’s global climate. 

 

The primary aim of our policy is to propose a viable option for international developing countries and their respective governing bodies to meet the needs of a growing energy

portfolio while reducing the effects of climate change, i.e. CO2 emissions.  Currently, there is no binding agreement among developed and developing nations to adhere to promises to cut greenhouse gas (GHG) emissions, as demonstrated through failed attempts in Kyoto and Copenhagen.  However, each individual nation or union (European Union (EU)) has made formal pledges to decrease emissions by 2020 with reference years of 1990 or 2005 emission levels.[1]  We propose the importation of liquefied natural gas (LNG) and subsequent potential utilization in natural gas power plants, resulting in positive impacts to social, energy, economic, and environmental aspects of a developing country.  Furthermore, this policy is an immediate solution to a growing problem and represents a way to achieve rational and viable outcomes. 

 

The broader implications of this policy will address the projected near-doubling of global energy demand needed to sustain the urbanization and development of the world’s increasing population until 2050, resulting in a 50% increase in GHG emissions.[2]  With the supplementation of coal-fired power generation plants with natural gas-firing power generation plants, we can decrease regional carbon emissions immediately.  Emission analysis of the newest technology in natural gas power plants, the natural gas combined cycle (NGCC), reveals roughly a 50% reduction in carbon dioxide emissions compared to a coal-fired power plant.[3]  Furthermore, assuming carbon capture and sequestration technology (CCS) is proven to apply on a large scale such as a power plant, if we analyze the cost of implementing CCS capabilities in coal-fired power plants to attempt to reach natural gas plant CO2 emissions (Figure 1), there exists an economic benefit to transition from coal-fired to gas-fired.  To further limit the impact of costs, coal-fired plants already in place can be retrofit to burn cleaner natural gas while new NGCC plants can be constructed to supply growing electricity demands.[4]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defining Concepts

 

The World Bank’s classification of countries (synonymous with economies) considers strength of economy as the primary distinguishing factor, specifically Gross National Income (GNI) per capita.  The economies are divided into four classes:

• Low-income economies – GNI per capita less than US$1,045

• Lower-middle-income economies – GNI per capita of US$1,045 to US$4,125

• Upper-middle-income economies – GNI per capita of US$4,125 to US$12,746

• High-income economies – GNI per capita greater than US$12,746

 

Developing Economy (Country) – used to denote all low- and middle-income countries

Developed Economy (Country) – used to denote all high-income countries

 

*Caveat – all countries categorized within a particular class are based solely on economic standing and do not reflect varying levels of development among countries within each class.

 

^Definitions and criteria were obtained from The World Bank [5]

 

Exporting Countries Statement

 

For the purpose of this policy (Undergraduate Project), we are making an educated assumption that a global natural gas market will exist over the next 30+ years where long-term contracts (>20 years) and implementation of policy will have the opportunity to reach fruition.  In addition, we assume that the United States, currently third in global recoverable resource, will export LNG in the foreseeable future, a safe assumption considering the Energy Information Agency (EIA) projects the US to be a net natural gas exporter by 2020.[6]  Further evaluation of US natural gas reserves shows that current estimates represent just under a 100 years of domestic supply, assuming current consumption rates.[7]  The exportation of natural gas by the US will prove competitive in the global market due to low natural gas prices compared to the rest of the world as presented in Figure 2, 3.[8,9,10,11,12]  Developing countries will not only look for fossil fuel energy sources with lower carbon emissions, but will also look for the cheapest alternative.

 

Market Evaluation

 

The global market for LNG is still in the stage of infancy, but has shown over a 50% increase since 2005 and accounts for 30% of global natural gas trade today.[13]  Since 2011, global trade of LNG has remained relatively constant with Asia being the primary importer.  Qatar is currently by far the largest exporter of LNG followed by Malaysia and Australia, whom the latter will likely retake the lead after which a number of projects will come online in 2015 and later.[14]  Projected increases in global market trends have been

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

somewhat inaccurate due to global natural gas prices being oil-indexed, with the exception of the US (Henry Hub price).  Spot prices across the world are often a factor of multiple variables and can prove volatile (FIGURE 2).  Asian spot prices in the first quarter of 2014 dropped to a record low by quarter three due to mild weather, while its bounce-back

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

was stifled in the winter months due to low oil prices.[15]  This occurred despite Asian imports outpacing supply.  Thus, the volatility of the current market leads to marginally accurate projection trends based on expected economic growth of the importing countries and the status of long-term contracts. 

 

As with any global trading market, versatile importing buyers make up a highly complex market that provides short-term options for exporting nations with supply.  Countries such as Portugal and Spain import over half of their consumed natural gas in the form of LNG in order to diversify from Algerian supply, and not because of an inability to import pipeline or other non-LNG natural gas sources.[16]  Non-long term spot trading saw a new high in 2013 to comprise 33% of global LNG trade, in part due to China’s strong demand growth in non-long term trade.  In instances where supply exceeds demand, excess LNG can be re-exported to higher paying markets, which has become an increasingly common practice.

 

As the number of importing nations increases and new demand enters the market, so too will exporting nations develop projects to redistribute supply.  With the expansion of global capacity and the increased energy demand by developing nations, new long-term contracts will be favorable in a market that is no longer considered “tight”.  The opening of new liquefaction plants in the next few years will enable the tight market to keep up with growing Asia Pacific demand and promote growth.[16]

 

The versatility of natural gas in the energy equation has led to the supplementation of other fossil fuel sources by countries.  Whether the reason is to cut carbon emissions on a national scale or to bridge the gap between domestic energy production and increased demand, natural gas will continue to be a desired energy source globally.

 

Methods of Aid (Funding)

 

Because most developing nations do not have substantial economies (with the exception of China) to provide in-house funding for infrastructure developments, proven and unique methods of financing are proposed to address capital costs. 

 

            US Export-Import Bank

The United States Export-Import Bank provides funding and loans necessary for a company or business to trade their product internationally.  They provide these services through a variety of ways, but promises to manage risk and not compete with the private sector.[17]  In the same way FERC determines whether or not to accept a project proposal based on environmental factors, the Ex-Im Bank evaluates loan requests based on economic impact.  General bank policies are aimed at screening economic impact implications, assess risk, and treat each case in a fair, consistent and transparent manner.  However, in order to diversify their screening process, the bank has adopted the Environmental and Social Due Diligence Procedures and Guidelines.[18]  With experience in almost every industry and a foot in almost every market, the Ex-Im Bank could provide the financial means to help a LNG US-based exporting company.

 

            Tax Credits

Tax credits have been implemented since the beginning of taxes.  They are widely used used by every nation in the world, and, in the corporate world, provide a way for companies to deduct overhead costs or “reward” a company for good withstanding in the community or world.  For the sake of clarity, any tax credit henceforth mentioned will be considered a nonrefundable tax credit, one in which a taxpayer will not be paid a difference if the total tax credit exceeds the amount of taxes due. 

 

            Feed-in Tariffs

Feed-in tariffs are not to be confused with export tariffs, taxes, or duties, of which the later will be discussed within the policy.  These are policies implemented by a governing body that promote the sale or mandate the purchase of a product for the purpose of supporting an immature or struggling market.  A successful example of a lead-in tariff occurred in Germany, which mandated the purchase of electricity from renewable generators by German utilities at higher fixed cost.  This provided a subsidy for the renewable generators that provided the base for the renewable industry in Germany.[19]  Because a developing country may not possess the infrastructure, energy production, or stable economy, this system would prove to be difficult to implement up-front and would likely require an “all-in” approach by the government. 

 

            Copenhagen Accord

Following a failed attempt to bring together the major nations of the world and implement a binding agreement to cut CO2 emissions in Kyoto, representatives from around the world met again at the Framework Convention on Climate Change in Copenhagen (2009) to bring the nations together in a binding agreement to no avail.  However, as with Kyoto, it was not a complete failure as many countries pledged to cut emissions by varying degrees.  Also, an interesting idea was formulated that would require developed nations to assist developing nations financially to develop the infrastructure needed to limit the rise in carbon emissions as a result of their growing energy consumption and development.  The proposed goal for developed nations would be to mobilize US$100 million per year until 2020 and distribute to developing nations in need.[1]

 

Our Proposed Policy

 

 

Who Enforces?

 

With little precedent on the enforcement of carbon emission reduction by country on a global scale, it is believed binding agreements must be made before any such implementable enforcement can provide accountability.  With the possible addition of an internationally implemented carbon tax, accountability and enforcement could prove increasingly difficult to establish.  Global cap and trade markets have opened up opportunities for the indirect regulation of GHG emissions by targeting them on a company level.  Integration of incentive and penalty ideas drive a company to pay special attention to future investments, as they likely correlate with emission projections.  Ultimately, regulation on a company level can have indirect impacts on local, national and even global emissions.

 

Carbon Footprint

 

The growing concern for climate change and the anthropogenic consequences of production and consumption of fossil fuels has created the need to analyze carbon emissions at incremental stages during the development and implementation of projects/processes.  China, a leader in total energy consumption, coal consumption and carbon dioxide emissions, has implemented a multi-year policy shift away from coal with an emphasis on gas-fired power plants, consequently increasing China’s LNG demand.[14,20]  Norway began a project in 2012 to combine a modern gas-fired power plant with CCS, an expensive approach using a largely unproven technique, all for the purpose of curbing carbon emissions.[21]

 

Considering a future with an internationally implemented carbon tax, motivation to screen project decisions will become important.  Through improved design and technology, projects will be able to lower the carbon footprint, but only so much.  The major factor in a project, such as an electricity generation plant, pertains to the fuel of choice.  With choices ranging from fossil fuels to renewables, there are a wide variety of options to choose from.  A case study was performed analyzing the carbon footprint of the burning of two fossil fuels in a power plant: coal and natural gas.  In addition to the combustion of the fuel, the transportation and processing of each was explored.  Results conclude natural gas as the cleaner option in fossil fuel power plants by almost 50%, including transportation, production and processing factors as seen in Figures 4,5.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For further information on the environmental impact, please consider reviewing our Environmental Impact page.