LNG in the Black Sea – a pipedream?

Ukraine has an LNG problem. It’s a major blunder and it looks like LNG in the region is doomed. As strange as it sounds, there might be a bright future for LNG in the Black Sea still.

For many people, LNG is a magical cure for the ills of the world. Too much gas flaring? LNG is the solution. Need something fresh for the traders to cut their teeth in? Hey, there is LNG. Wanna get rid of the historical natural gas supplier? LNG is the way.

But things are not always that simple as the Ukrainian government learns the hard way right now.

For a starter – LNG is no miracle cure for resolving supply conflicts. LNG cannot simply be bought at the gas station when you need it. This is a lesson that many of those looking at it seem not to have understood. LNG supply (especially the long-term variant) is usually part of a very inflexible and unforgiving supply chain project where the parties are tightly interwoven for a long time. Simple and quick purchase deals must remain an exception in the industry, at least for the time being.

On top comes the fact that LNG is hardly on the cheap side. If Russian gas is too expensive for you, chances are that LNG won’t make you happy.

But besides the usual problems of availability and price, there is one very specific to the Black Sea region. How to get the LNG into the Black Sea region in the first place! In theory, no problem. The Black Sea is connected to the world’s oceans through the Bosporus Strait. But nobody has ever tried to bring LNG through it and there are strong indications that Turkey won’t be very happy about it.

But even if the LNG passes the strait, the final price to the customer will go up once again as passage will surely not be cheap and the seller has no incentive to swallow the additional cost.

As strange as it sounds, there is a solution to that. Not an easy one to be sure. What if the LNG was produced in the Black Sea in the first place? That would resolve the Turkey issue but also the supply problem as a Black Sea producer would not have a zillion possibilities for marketing the LNG.

Why would a producer do that? Well for the same reasons he puts a steel tube in the earth and pumps gas through it. Let’s be frank. The Caucasian region is not exactly the Gulf of Mexico or West Africa. This is a heavily landlocked region. International shipping is a problem as there are long marine legs to cover and numerous narrow (and sometimes expensive) straits to pass before the open ocean can be reached.

Gas export from such a region will always be regional irrespective if it’s by steel tube or as a cryo-liquid. No LNG project needs a Japanese customer at crude parity to fly. Sensibly structured LNG projects are profitable at much lesser market conditions. The problem is that there are very few sensibly structured LNG projects around these days and there is a widespread impression that LNG always must be super expensive (especially when one looks at Australia and its cost explosions).

A sensibly structured project would probably be modest in size and use modular technologies. It would use smaller vessels as the distances in the Black Sea are not extreme and vessels can be used in high frequency. They would use inexpensive and sturdy IMO Type C tanks and shore-based tanks could be kept smaller too, reducing the investment need considerably.

But then again, you might say, the producer might not be happy and go for something that gives him better returns. That’s true but what are his choices? The pipeline option is not particularly attractive in its own right as no matter where the gas goes, there are expensive and hard-to-deal-with transit countries on the way. The European premium market is far away and there is no or very little existing infrastructure that can be used.

LNG, on the other hand, has an upside that Natural Gas cannot match. I am convinced that LNG will become the liquid fuel of the future and dethrone king diesel. If I am right with this prediction, then the Black Sea region will not be different from the Baltic. There is a marine industry waiting to be converted from diesel and HFO to LNG. There are the heavy trucking and utility vehicles of the region ready to get a fill.

This is a new market to be sure and a significant chicken and egg problem to deal with as well. But a sensible producer could get ready now by going for a first LNG plant, building it on the back of a classic LNG off-take agreement with a buyer with stable needs and some sink capacity such as Ukraine, and then slowly cannibalize the supply chain through flex clauses in the contract to start developing his premium LNG for fuel market. If this is sensibly done, a buyer would almost certainly be able to deal with that.

Diesel is much more expensive than LNG on a mmBtu comparison. The fuel should be very competitive and environmental protection becomes an issue in the Black Sea too.

Blunders like the recent one in Ukraine can be averted easily by asking a couple of simple questions before Captain Wishful Thinking takes command. Just be sure they are the right questions.