Sunday, June 10, 2007

Supply Chain: The Transportation of Energy

This piece was previously published earlier this year in the energy supplement of Atlantic Business Magazine.

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The curious paradox of the energy market is that supplies are seldom located very close to demand; the industry term for that is stranded. So, as an energy-rich region develops its sources, the challenge becomes what to do with the stranded energy - how to get it to customers

The practical problem for Atlantic Canada as an energy supplier is that it lies some distance from the largest energy-consuming markets.

The solution depends on which form of energy you want to sell. The obstacles are variously technical, economic and/or political.

Natural Gas

Natural gas has a well-developed transportation infrastructure in the Maritimes. The Sable Offshore Energy Project, for example, transports natural gas by underwater pipeline to a shore facility for processing and then to the US through a larger pipeline network into Maine. That’s possible because of the proximity of Sable to land, the absence of iceberg hazard to the pipes and the relatively short distance to the US.

In the Newfoundland and Labrador offshore, estimates of discovered gas range up to 9 trillion cubic feet (tcf) on the Grand Banks and the Labrador shelf, with a possible additional 36tcf or more in undiscovered conventional resources. Undiscovered unconventional resources consist of gas that is known to lie underground and has been penetrated by drilling, but lies in rock types that have not yet seen large scale commercial production.

The substantial distance from source to closest landfall and the risk of iceberg scour are impedients to a sea floor pipeline to on-shore processing facilities. Generally, the solutions proposed so far focus on sea-based transportation of either LNG (liquified natural gas) liquified at sea or CNG (compressed natural gas).

LNG is natural gas cooled at the production source to 160 Celsius to reach a liquid state. At 1/600th of its original volume, it is then shipped to a re-gasification plant closer to market. There, it is returned to gaseous form for delivery to customers, generally through pipelines but also by truck. It is the international standard for transportation and shipping of natural gas.

But LNG facilities for liquification and re-gasification are enormously expensive, and LNG has never been produced on an offshore platform.

CNG, on the other hand, is simply natural gas that is compressed to reduce volume but remains in gas form – essentially form ready for consumer use. CNG is easier to produce and easier to handle. Of course you produce it – it’s a product; the word is being used in the general sense of producing any product and not in the specialised oil and gas, sense. CNG vessels can fill up at the field, using a relatively low cost offshore mooring buoy, and then steam directly to market without needing re-gasification. This is what the literature says. . they mean low-cost compared to a $500mill+ liquification facility

There remains considerable difference in opinion regarding Atlantic Canada’s supply forecasts to 2020. These are dependent on international factors such as gas prices, stability of supply and international demand as well as domestic factors such the cooperation of local political actors. The forecasts range from no production to an optimistic possible high of 2.3 Bcf/d in 2020.

Although commercial development of Newfoundland and Labrador’s stranded gas is not anticipated before 2020, the industry has been exploring transportation options and opportunities while the provincial government is busily finalizing a natural gas royalty regime.

Several companies in particular are studying natural gas transportation and have different takes on it.

Newfoundland LNG takes a conventional approach and has announced plans to build North America's first LNG storage and transshipment facility at Grassy Point on Placentia Bay in southeastern Newfoundland. This St. John's based company is expecting a burgeoning market for LNG transshipment facilities for overseas imports entering the North American marketplace because of the economics of the LNG trade in the Atlantic Basin.

The facility would include eight 160,000 cubic metre storage tanks, three jetties with berthing facilities capable of mooring 265,000 cubic metre LNG cargo ships, and a tugboat basin along one of North America's deepest ice free ports. It will not include re-gasification facilities because of the lack of local end use markets.

The project, which is expected to accommodate up to 400 vessels per year, is slated to begin construction next summer and come into service in late 2010.

An emerging player in the international gas transport business is EnerSea Transport of Houston, Texas. They claim to have developed the first cost effective CNG marine transport and storage system. Called VOTRANS (Volume Optimized Transport and Storage), the prototype is an ocean going gas delivery system comprising large diameter pipes contained within insulated structures integrated onto specially designed and constructed ships or barges. Their Atlantic Canadian presence is the St. John’s based EnerSea Canada, a highly active player in the Newfoundland and Labrador R&D community.

A home-grown variation on CNG is a concept championed by Trans Ocean Gas, also based in St. John’s. They have designed and patented fibre-reinforced modular plastic pressure vessels that can be fitted on ships, barges or trucks. Destructive burst testing on full scale fibre reinforced plastic pressure vessels will be conducted at Atlantic Steelworks facility in Sheet Harbour NS this fall.

The company has also announced an extension to their concept taking out patents for a plastic vessel designed to transport pressurized LNG, a high density liquefied natural gas form created by combining low temperatures with relatively low pressures.

Whatever the transportation solution adopted by the market factors such as strong natural gas prices over the long term, establishment of a royalty regime, continued exploration of new basins, uncertainty of LNG imports to the U.S. from overseas and the province's relative proximity to the U.S. market, all bode well for the development of the province's natural gas reserves.

Hydro

In the long term, the region’s largest single source of new energy is the proposed Lower Churchill development in central Labrador. This recently announced $9 billion hydro-electric project would produce roughly 4000 MW of energy every year that the facility remains in working order and water continues to flow.

Unlike oil, this source of energy is virtually infinite. Its operating costs are comparatively low, although the capital costs are comparable to offshore oil or higher.

But the question of getting it to market is fraught with political and technical challenges and is realistically limited to three options: selling generated power to Quebec, wheeling it through Quebec or developing the co-called “Anglo-Saxon route”.

The political problem with selling Lower Churchill power to Québec is the infamous 1969 Upper Churchill pact between former Newfoundland premier Joey Smallwood and his Québec counterpart, Jean Jacques Bertrand. At the time, Québec refused to provide a transmission right of way to the US.

A deal was signed requiring Newfoundland to sell power to Hydro Québec at a predetermined low price while Québec was free to resell the power to American buyers for whatever price the market would bear. When the 1970s energy crisis and inflation caused prices to soar, the result was a $14 billion windfall for Quebec between 1976 and 1995, while Newfoundland made do with $2 billion in net profit according to Newfoundland government estimates. The deal expires in 2041.

That history ensures that any deal that involves selling power to Québec will be a tough political sell in Newfoundland and Labrador. Compounding this difficulty is a declaration by Premier Williams that there could be no Lower Churchill deal with Québec unless Upper Churchill was revisited. But after more than 20 years of failed interprovincial litigation aimed at just that end, Québec remains disinclined to re-open the previous deal.

The second option, wheeling the power through Québec, is being actively pursued. Two choices present themselves. The first is that Québec would agree to transmit the power along their own lines for a fee. The Newfoundland and Labrador government has submitted a request to the government of Québec for quotes on power transmission.

However, because Québec is working to develop its own hydro projects, there may be no capacity left to carry additional power from Churchill Falls. That leaves the option of Québec granting permission for Newfoundland and Labrador to construct transmission lines through the province to the US or Ontario. Last estimates put that additional capital cost at $3 billion.

Finally, there’s the much-debated “Anglo-Saxon route” or Maritime route. First explored by Smallwood in 1964 to thwart Québec’s ‘revenge of geography’, this option involves running power lines east through Labrador, under the straits to the northern tip of the island of Newfoundland, down the west coast, under the gulf straits to the Maritimes and then finally into the US - all in order to bypass Québec territory.

Smallwood’s best estimate concluded that this route would cost almost $1 billion and would raise the price of electricity so much that it could no longer be sold at a competitive rate in the US market. No doubt today’s costs would be much higher.

And so Atlantic Canada grapples with the energy paradox. Having a source, even in abundance, is only the first step to viable development. There must also be effective ways of moving energy to market, so that it is competitively priced when it get there. Fortunately, there are always people, companies and universities in Atlantic Canada ready to generate and invest in innovative solutions to do that.

1 comment:

katty said...

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