US shale to the Caribbean

In 2005, the Natural Gas world looked at North America to become the El Dorado for all LNG exporters. Natural gas prices in the US were sky-high, reserves were dwindling, and demand ever growing. It resulted in an LNG bonanza without equal with more than 60 LNG import terminal proposals lining the coasts of North America. Some of the biggest LNG producers like Qatar had bet huge parts of their portfolio on the mushrooming US market and had developed LNG import terminal proposals of their own.

Since 2008, the world learned, that all those projections were not worth the paper they were written on. A relatively small band of rogue Natural Gas explorers developed ways to exploit shale gas, a relatively low yield but high abundance Natural Gas reserve. What followed was a shift of seismic proportions – it changed the face of the earth. The US became self-sufficient in Natural Gas, LNG makes huge strides to become as ubiquitous as diesel, prices are at historic lows and the US experiences an industrial revival of unseen proportions.

Before you doze off into dreamland as this is hardly news to you, let’s come to the juicier consequences of this story. Because it is always important to continuously remind the world what happened in those far-away North American prairies. Looking at energy from today’s vantage point it’s easy to assume that no lessons have been learned so far.

Now, the US exports LNG to those willing to pay for it. For a little while, Fukushima made Asia the white-hot beacon of “We will buy all the LNG you can get us at any price”. That has faded away as well now, even if Asia still seems to loom large on LNG exporters’ minds. However, it is more than clear by now that new, virtually virgin markets need to be developed to absorb the LNG glut that is inflating to grotesque proportions right before our very eyes.

A shame then that not everyone potentially willing to go for LNG would have access to it – even if he wanted to really, really hard. Because traditional LNG projects revolve around very large liquefaction plants and very large tankers bringing the commodity from one point to another. This was done because LNG transport is expensive relative to oil transport so economies of size (or scale as some like to say) were used to keep costs reasonable.

This traditionally made LNG inaccessible to small, isolated communities such as islands as the upfront investment to be able to take a full tanker load is too high. The capability to absorb conventional LNG cargo sizes translates into very large and expensive tanks that in turn require very large and expensive terminals.

Behind the scenes, though, other revolutions start to rattle the energy world even more to the bone. The concept of mid-scale transport and regasification, as well as vastly different off-take patterns, will enable those small communities to join the LNG ride.

And there is a plethora of small communities (island nations and those that are islands in gas terms) right at the feet of the new LNG giant in the making – the Caribbean Islands. I wrote about the Steel-drum paradigm years ago but so far, movement on this fringe market has been limited. This will change now as even the snootiest LNG producers cannot afford to turn a blind eye to any potential willing buyer anymore. Even if they are as small as Caribbean islands.

Caribbean nations have nowhere to go when it comes to fulfilling their energy needs. Their only alternative is Heavy Fuel Oil and diesel for power production and as a fuel for everything. This makes producing power and fueling machines a very expensive endeavor in this part of the world. Even the steep drop in oil prices of late has not produced a lot of upside for those islands as most of them import refined products which comes at a premium. Plus they are often locked into long-term supply agreements where the hedges they have entered into now shield them from lower prices – much to their dismay. And even if they could enjoy the much lower oil prices on the big markets, they have long memories and sure know that the current boon will not hold forever. Venezuela as the great “cheap oil benefactor” disintegrates right before their eyes and cannot be counted on anymore.

And to add insult to injury, toxic fumes ruin the economic basis of those nations that depend – for a large part of their income – on tourism.

Many Caribbeans would love to adopt LNG as the source for all of their energy needs. Time to bring it to them. But there is another stumbling block which is the local utilities that have had a great feasting on the plight of the Caribbean inhabitants. They will resist those now LNG ventures fiercely as this will also mean that some resorts will go completely off the grid. Small LNG distribution capacity lowers the price for the entry ticket and some big customers might be prepared to go down that path.

Jamaica seems to spend more on energy imports than it makes on tourism which is obscene. On some islands, one single resort accounts for more than 10% of the total electricity expenditure. Imagine one of those relatively giant customers going it alone as ssLNG would almost certainly enable them to do so. That’s a near-death experience for a bloated island utility that has feasted on captive customers for most of its existence.

They can – of course – never say publicly that they will do whatever they can to cast high prices and energy scarcity into iron. To douse the highest flames of discontent, they pretend to go for renewable developments fully knowing that their tiny grids will need even more diesel generation to back up fickle wind and solar.

For the US, the Caribbean market certainly is a tiny prospect but in those times of extreme oversupply and unbearable pain on the producing side, they might take those small markets a little more seriously and also put some real muscle into those developments. I was told today by a friend in an engineering company that small-scale LNG regasification barges are the real hit and that their order book for those units is starting to swell.

Time to grab the magnifying glass as there is still plenty of room for those LNG producers prepared to go the extra mile.