LNG power generation: A positive in current LNG market

While most headlines in the LNG sphere dealt with the coronavirus and its impact on LNG exports and cargo cancellations, a niche segment – LNG-to-power – has been budding in the background. With the right regulations, these projects can generate LNG demand quickly, easing the pressure on the LNG shipping market.

The development of small-scale LNG projects for power generation has been slow with only a few projects coming online. The commencement of the first gas-to-power project in Malta in 2017 successfully showcased the technology and the subsequent fall in LNG prices has led many countries in Asia, Latin America and Africa to invest in similar projects. Furthermore, the planning and financing of many LNG-to-power projects has gained steam in 1H20, while major delays in liquefaction project FIDs have occurred.

The fall in global energy commodity prices has increased the incentive to burn LNG for power generation, but countries such as China and Japan continue to retain coal and oil as the preferred choice for base-load power generation due to their lower cost. However, the need to reduce air emissions coupled with lower LNG prices is leading to acceleration in coal-to-gas switching, with natural gas accounting for an increasing share in power generation.

LNG-to-power projects club together the infrastructure for power generation and that for LNG imports to provide electricity in remote areas or to meet a sudden surge in power demand. These projects also alleviate intermittent power issues associated with renewable power generation (such as wind and solar) and are more environmental friendly than coal or heavy distillates. Furthermore, they require less time and investment compared with conventional LNG infrastructure.

The world’s first LNG-to-power project— Malta’s Delimara project — started operations in 2017 to replace heavy fuel oil with LNG for power generation. In 2017, global LNG prices averaged $17 per MMBtu which were much higher than coal. However, lower LNG prices and development in LNG small-scale technology in following years have increased the economic benefits of LNG-to-power projects leading to many other projects being initiated using Malta’s model.

Asian spot LNG prices are currently trading near $2 per MMBtu and are expected to remain below $5 per MMBtu for the next few years as the market remains oversupplied. The comparative power generation cost between gas and coal has been narrowing since 4Q19, with the expected slide in oil-linked LNG contract prices further shrinking the cost advantage that coal currently has over gas. In some countries such as South Korea, where cleaner air laws have increased tax duties on coal, gas power generation can provide a cheaper option to coal in 2020.

Many smaller Southeast Asian countries such as Indonesia, the Philippines, Thailand and Myanmar are now investing in LNG-to-power projects to meet power generation shortages and to provide reliable power to remote islands. Countries with vast LNG import infrastructure such as India, China, Japan and Brazil are also looking to invest in LNG-to-power projects to meet the sudden surge in power demand and to provide electricity to remote areas.

LNG companies are taking note of the potential of such projects with Golar Power, New Fortress Energy, and VPower (which specialise in LNG-to-power projects) now all investing in this segment. Major energy companies such as ExxonMobil and Total are also looking to invest in this sector, with proposed projects in Vietnam and Myanmar respectively.

Globally, around 12 GW of LNG-to-power generation capacity is either under construction or planned which will come online by 2023, increasing LNG demand by 7-9 mtpa. Another 14 GW capacity is proposed at present which can further increase the global LNG demand by another 10-12mtpa.

The majority of the planned and proposed projects are in Southeast Asia with Vietnam and Myanmar leading the charge. Vietnam has one planned and two prosed LNG-to-power projects with potential for many more similar projects in light of the power demand surge in the country. The Bạc Liêu floating LNG import terminal project by Delta Offshore energy has already signed an agreement with Magnolia LNG for the supply of 2 mtpa of LNG and is currently in advanced stages of approval. Myanmar became the latest entrant to the LNG importers club with Petronas supplying the first LNG cargo to the country in June 2020 following the completion of VPower’s Thaketa LNG-to-power project. While two more such projects by VPower are under construction in Myanmar, companies such as Total-Siemens, TTCL and Mee Lin Gyaing Electric Company have also proposed the setting up of other LNG-to-power projects in the country.

The increase in LNG-to-power projects will require robust small-scale LNG supply chains with additional investments in small-scale LNG vessels and plants. We expect the increasing interest in LNG-to-power to lead to more orders for small-scale LNG carriers and to generate employment for FSRU and FSU vessels in the fleet. Meanwhile, three 127,000 cbm LNG carriers are currently under conversion to FSRUs by Karpower International and Mitsui OSK Lines to provide LNG for floating power plants (ships that are used to generate power) in Mozambique, Indonesia and Ghana. These ships will enter the fleet by end 2020.

LNG-to-power projects are therefore expected to bring a ray of hope to an otherwise gloomy LNG market where production is being hampered by the lack of demand and issues related to storage. However, using LNG for power generation, despite its positives, requires a regulatory push by governments for the niche segment to succeed. The United Nations has commented that countries should not fall back on coal even though the economic impact of COVID-19 has been disastrous for new investments. A possible resolution in the UN Energy Convention backed by major LNG exporting countries such as the US, Australia and Russia can change the way we consume energy in favor of a gas rich energy mix.

Meanwhile, tax breaks, increased duties on coal and the issuing of LNG import licenses to non-state players are some of the moves which a few countries have taken so far to increase the incentives for such projects. The fast implementation of these projects will also boost global LNG demand and they are expected to account for 16% of global LNG consumption by 2030. Meanwhile, the fast-tracking of these projects will also benefit LNG shipyards which are currently battling a significant fall in new vessel orders.
Source: Drewry

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