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06 24, 2013 by The Advocate
LNG production, fueling terminals target marine industry
Boats that run on liquefied natural gas are months and even years away from reality, but companies are already gearing up to spend hundreds of millions on LNG production and fueling facilities to serve Louisiana’s marine industry.
Shell and Houston-based Waller Marine announced plans earlier this year to build liquified natural gas terminals to serve vessels along the Mississippi River and boats that are used to supply and maintain oil platforms and rigs in the Gulf of Mexico. They’re betting that the high cost of low-sulphur diesel fuel, which will be mandated by environmental regulations by 2015, will move the marine industry toward vessels that run on LNG.
And New Orleans-based Harvey Gulf Marine is evidence the trend may already be underway.
Harvey Gulf, which specializes in towing drilling rigs offshore and providing supply and support vessels for deepwater operations in the Gulf of Mexico, has already ordered six 302-foot workboats that run on LNG or diesel and is building a Port Fourchon fueling facility to serve them.
“You have to look beyond today, which most companies can’t do,” Harvey Chief Executive Officer Shane Guidry said. “They only look at quarterly returns, and sometimes you’ve got to sacrifice for the future.”
The dual-fuel boats each cost roughly $12 million more to build, but Harvey Gulf will recoup that through longer leases, higher day rates and lower maintenance costs. LNG costs today are roughly 40 percent of diesel, which means huge savings for the companies that charter the boats. In the workboat industry, the customers pay for the fuel.
The maintenance costs for engines that burn LNG are almost nothing compared with diesel, Guidry said. The LNG engines last forever without spending any money on them.
Although the demand for LNG is now zero in the Gulf of Mexico, Richard Wells, vice president of the Offshore Marine Service Association, thinks two things will drive the LNG market:
Offshore rigs shifting to the fuel and ever-tightening federal air quality regulations.
The marine diesel regulations start in 2016. The EPA estimates it will cost the marine industry $82 million to comply that year. By 2030, the estimated cost will have risen to $277 million.
“The decisions are very much outside the boat owner/operator’s hands,” Wells said. “It’s very dependent on their customers’ and their regulators’ decisions whether the use of LNG will be a necessity or just a curiosity.”
Houston-based Waller plans to build a $200 million liquefaction facility at the Port of Greater Baton Rouge. The plant will initially be able to produce 450,000 gallons of LNG per day.
Founder David Waller told the Port of Greater Baton Rouge this spring that Waller is confident that the cost of complying with the EPA regulations will force enough of the industry to convert to LNG-powered vessels. And if Waller’s Port Allen terminal is up and running by 2015, it will be there to fill the barges that head out to fuel them.
If Waller is right about the demand, the company has plans to ultimately double that initial $200 million investment.
Shell plans a small-scale gas liquefaction plant in Geismar. Proposed customers include LNG-powered vessels operating in the Gulf of Mexico, the Mississippi River and the Gulf Intracoastal Waterway, and commercial trucks. Shell has a preliminary agreement with Edison Chouest for barging and refueling operations in Fourchon.
However, Guidry said he doesn’t have time to wait around while Shell and one of his competitors try to figure out whether to build an LNG fueling facility.
Harvey Gulf’s first boat is scheduled for delivery by the end of March 2014.
That boat and two others have already been leased by Shell to serve its Gulf operations.
“I have no choice but to have the terminal. I have $400 million committed to the boats and the terminal,” Guidry said. “I have no choice but to have the marine fuel ready and available first quarter of next year.”
Right now, Shell and Edison Chouest only have a preliminary agreement, he said. The only thing they’ve committed to is discussing a fuel terminal.
Wells said tank trucks or barges can fuel LNG vessels until something more permanent becomes available.
There aren’t a lot of LNG fuel barges now, but changing that would be relatively quick and easy compared to building a pipeline, he said.
Wells said it’s difficult to tell when demand from LNG-fueled vessels will catch up with the proposed supply.
“That’s always the struggle unless the provider is the user,” Wells said.
“There’s always this little dance that goes on, saying. ‘Well I’m not going to buy the thing that needs it until you provide the facility.’ ‘And I’m not going to provide the facility until I know there’s some demand,’” Wells said.
The marine industry is conservative. No one wants to be the first to try something in case it doesn’t work, Wells said. Ships still used sails long after steam engines were available because the industry didn’t trust the newfangled contraptions.
“I think everybody is more than happy to watch Harvey Gulf and learn from him (Shane Guidry),” Wells said.
Guidry said he’s fine with that.
Only a few firms are big enough to take on that expense, he said. But Harvey Gulf’s investment in LNG-fueled vessels has already given it a long-term advantage. The first three LNG boats carry five-year charters, but the next three will have leases of seven or even 10 years.
“It will be a very long time before anyone else steps out there and does it, and it will be a lot longer before there’s even a basketful of them,” Guidry said.
Last week, Hornbeck Offshore Services CEO Todd Hornbeck told investors and analysts that LNG-powered vessels cost 20 times more than those using diesel. Securing a reliable source of LNG is difficult and cost-prohibitive, he said.
An American Clean Skies Foundation report from 2012 noted that converting a medium-sized tug to LNG, if that could be done, would cost $11 million.
Still, the potential demand for LNG in the marine industry is large.
For example, there were 949 tugs and 1,363 pushboats working in the Gulf in 2010, according to a report by the U.S. Army Corps of Engineers.
The marine transport industry consumes the equivalent of 4 billion cubic feet of natural gas per day, according to the federal Energy Information Administration.
The Offshore Marine Service Association’s members have around 1,200 boats working offshore.
Don Briggs, president of the Louisiana Oil and Gas Association, said the recent LNG projects are just the start of a major shift.
Long-haul freight trucks are already being converted to LNG. More and more boats will begin burning the fuel, too, because it’s cleaner and cheaper.
And natural gas prices are expected to remain affordable for the next 30 years, thanks to production from massive shale formations.
“This is the beginning of us seeing more and more of that happen. You’ll see large vessels, large fleets converted to LNG,” Briggs said.
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