johnmortonJohn Morton, a member of Mid Fife & Glenrothes CLP and Fife Co-op Party, takes a look at a new gas storage facility gracing the Firth of Forth, and wonders what it might be for.

 

I was intrigued by the liquefied natural gas (LNG) facility, recently completed in Grangemouth. According to Scottish Energy News:

“The investment into the ethane project represents part of a £450 million rescue package for Grangemouth. The tank is designed to hold over 60,000 cubic metres of ethane brought from the United States to replace declining North Sea supply.”

Would bringing ethane from the US to Grangemouth actually be economically viable? According to BBC Business News:

“Take the basic cost of the gas at $3, add in a small mark up, liquefaction costs of $3 and transport costs of $2, and suddenly, as Luis Barallat at Boston Consulting Group says, ‘the economics don’t work that well’.”

So it costs around $3 a unit to get natural gas from shale in the USA, a further $3 to liquefy it and another $2 to transport it (for example in large, refrigerated ships), giving an estimated minimum cost of around $8 a unit at the receiving facility. However, much of Europe (the UK included) is already linked up by gas pipelines, and the BBC notes that in Europe:

“cheaper transport costs are offset by a lower gas price of about $6.5.”

So “European” gas is costing around $6.5 a unit, whether the source is the North Sea, Norway or Russia. It would, therefore, seem marginally cheaper NOT to import LNG from the US. But let’s look at those transport figures again. According to Market Realist, the actual cost of importing LNG from the USA would be somewhat higher, at $10.66 a unit:

market realist

So, we have a situation where the US can produce natural gas from shale (“fracking”) for around $3 a unit, but it would cost INEOS (or whoever) maybe $11 a unit to import into its LNG facility. Meanwhile, natural gas is currently available in Europe for around $6.5 a unit. This is beginning not to sound very viable. So why has the facility been built?

There are two main factors at work here. Firstly, gas supplies from the North Sea are becoming somewhat depleted – we’ve used a lot of it up. Secondly, it is thought imprudent to be too reliant upon the copious supplies of natural gas from Russia.

But even with the demise of North Sea gas, the Russian offer is still likely to be considerably less than $11 a unit. So does this make sense as a move solely designed to reduce our reliance on gas supplies from Russia? Given the major involvement of European and US-based companies in the production of oil and gas in Russia, the “threat” of reliance on Russian supplies is both somewhat over-egged and unlikely to sway a major oil and gas company like INEOS.

So, why have they built this facility? There is really only one possible explanation. I mentioned at the start that the costs involved in producing a unit of gas by “fracking” in the US were around $3 a unit. Here is something relevant to that – and to the UK – from the UK Onshore Oil and Gas site:

“In the US cost of extraction varies significantly based on a number of the factors above, in particular geology.

Reports vary on how the UK shale extraction cost will compare to the US, with some commentators predicting the difference as high as three times more expensive in the UK.

Unlike the US however, the UK already has access to sophisticated gas distribution and transmission systems. Not only would it cost several billion pounds if these systems had to be built today, but it also means that the need for flaring will be far less than in the US.

Whilst it still needs to be fully tested, at this stage, it appears that in certain parts of the UK, the shale is significantly thicker than in the US. Consequently, this will allow more gas to be extracted per well site.

However the UK suffers from a number of potential cost pressures compared to the US in particular the current lack of shale supply chain. For example one recent rig count identified 1900 land rigs and 500 fracturing crews in the US compared with 77 rigs and 10 fracturing crews in the whole of Europe. This position will steadily improve as it did in the US. In addition to the immature supply chain there is also a bigger environmental and regulatory cost of doing business in the UK, longer lead times particularly around planning make scheduling difficult.”

So, while the costs here MAY be up to 3 times those in the US (ca $9 a unit), this is strongly offset by the UK’s existing infrastructure and the fact that it’s likely more gas could be extracted per site.  Thus, the actual cost of UK “fracked” gas may well be comparable with that in the US, around $3, maybe $4 or so.  Add on liquefying costs and you have LNG for around $7 a unit – somewhat cheaper than getting it from the US and, more importantly, in the sort of price range to make it “competitive” with natural gas coming from Russia.

My conclusion is, therefore, that there may be no genuine intention to use this facility to store LNG imported from the US.  Rather, it seems its only viable economic function would be as a repository for UK-fracked gas, prior to export to the rest of Europe.