Small-scale, domestically produced LNG has the opportunity to capture at least a share of an 8 trillion cubic foot a year market, but risks to adoption could hamper investment by both potential suppliers and end-users.

Much of the discussion about liquefaction of domestically produced US gas has revolved around the potential for large-scale projects for export. But companies like Shell see market opportunity in small-scale plants that supply LNG as vehicle fuel for the trucking, marine and oil and gas industries.

“What we’re talking about is liquefaction plants, an LNG value chain that is geared towards domestic US or domestic continental industries,” said Todd Thurlow, Senior Vice-President at consultancy Pace Global Energy Services.

Shell has announced LNG-to-transport projects to establish LNG fueling corridors in three separate regions of North America, as well as a joint venture project with TravelCenters of America to further expand the availability of LNG refueling stations.

“In these corridors, wherever you see a Shell or a Shell joint venture retail network, there will be an LNG pump located at that retail network, so the long-haul truckers will be able to pull in and fuel up with LNG,” said the company’s Vice-President of Investor Relations for North America at the New York Society of Securities Analysts on June 4.

“We see that as a growing part of the business, and that’s not unique to North America. We see that opportunity over the entire globe,” said Lawrence.

The Market Opportunity

Thurlow pointed to three primary factors driving interest in small-scale LNG plants designed to serve the continental US market: the price spread between natural gas and petroleum-based fuels, market opportunity in heavy-duty trucking, and the environmental benefits of reduced emissions.

“The most significant of these is the price spread,” Thurlow said, noting that the spread between the price of wholesale diesel and the price of natural gas at the Henry Hub is about $20. Assuming a $4.30 per million Btu natural gas price, after adding in the cost of liquefaction, capital cost recovery from the liquefaction plant, fueling infrastructure and the incremental cost to the buyer of an LNG vehicle, “when we compare that of retail diesel, we see a healthy price spread of over $10/MMBtu”.

That spread can be used to convince some of the US fleet of diesel-fueled vehicles to make the switch to LNG, potentially adding substantial gas demand. “Diesel demand here in the US, it’s approximately a 60 billion gallon a year market,” Thurlow said. “That represents nearly 8 tcf [trillion cubic feet], which is about a third of the size of the US gas market.” He said the largest segment, highway trucking, represents about 36 billion gallons a year, or about 4.7 tcf, which translates into 12.9 billion cubic feet per day.

Shell wanted to see “the potential for somewhere between 4-5 billion cubic feet per day of gas that could be converted into a transport fuel, LNG, and sold into the markets in North America” to move ahead with investing in the business, Lawrence said.

Environmental benefits via a reduction in emissions – sulfur and toxics as well as carbon dioxide – are the other key driver. “Diesel obviously produces higher emissions of a number of different things,” Lawrence said.

What Stands in the Way?

The opportunity is there, but it is by no means guaranteed that LNG as vehicle fuel will become a prominent feature of the US transportation market.

“The most significant risk to this spread is, in our view, not an increase in natural gas prices, but more a significant decrease in crude oil prices,” Thurlow said. Even if natural gas prices increase dramatically, “we’re still going to see a healthy spread in the $8 [/MMBtu] range,” but if oil falls below $50 per barrel, “we would see significant pressure on that spread”.

Another obstacle is what Thurlow called “limited appetite to invest ahead of meaningful demand”, often referred to as a chicken-and-egg problem. This applies to investments in both the infrastructure required to fuel a significantly larger NGV fleet, and in new NGVs themselves. Though Shell has announced LNG-to-transport investment plans, “there’s actually no [Shell] operating station yet that sells LNG. That will be coming over the next year or two”, Lawrence said.

The Department of Energy’s Alternative Fuels Data Center lists 59 LNG fuelling stations in the US, of which 32 are open to the public.

And consumers would have to prioritize cost savings over time to the extent that they could overcome objection to the higher initial cost of buying an NGV, as well as concerns over limited fueling infrastructure. “Switching anxiety is a challenge,” Thurlow said. There is also a built-in fuel tax penalty, with LNG taxed at the same per-gallon rate as diesel, despite diesel’s per-gallon energy content advantage.

Will the Economics Win Out?

It is unlikely that Shell would be pushing ahead with its LNG-to-transport plans without some degree of confidence that it will capture a piece of the market. “Shell’s confident that we can get things kicked off, so we are moving ahead, even though not that many of the trucking companies have started converting,” Lawrence said.

“There’s a huge arbitrage today between diesel prices and gas prices, so the truckers benefit from that, and we’re able to make some extra money on that arbitrage that exists.”