Small-Scale LNG: A Growing Niche
Manish Vaid
Junior Fellow
Observer Research Foundation

The oversupplied and cheap liquefied natural gas (LNG) markets hasled to changed LNG dynamics characterised by high volumes and diversified LNG trade . This has allowedsmall-scale LNG (SSLNG) to expand while paving way for natural gas consumption to niche markets in a low gas price regime. Thishas created greater opportunities for countries to curb their emissions to meet the increasingly stringent global requirements, alongside meeting their increasedenergy demand.

According to International Energy Agency's (IEA) World Energy Outlook 2016, Natural gas is set to play a bigger role in global primary energy mix in its New Policies Scenario, wherein the share of natural gas share would increase by around 49% from 2,893 million tonnes of oil equivalent (MTOE) in 2014 to 4313 MTOE in 2040 . IEA's Analysis and Forecasts to 2022 (GAS 2017) projects gas demand to grow at 1.6% per year until 2022 , of which 90% demand comes from developing economies led by China and India. This would result in increase in gas consumption from 3630 BCM in 2016 to 4000 BCM in 2022. SSLNG thus, have a greater role to play in future natural gas demand.

SSLNG under low gas price regime has an opportunity to grow as a powerful alternative to large-scale conventional LNG plants, which are complex, capital intensive in nature and require several years of development, until they become operational. Unlike conventional LNG, which are often located far from the point of use resulting in transportation time and cost, SSLNG can be set up close to the end usage to meet instant gas demand.

SSLNG phenomenon is not new as the dawn of LNG industry featured small LNG carriers and terminals. Compared to existing LNG cargoes averaging 160000 cubic metres(m3), the size of LNG carriers built in the 1960s and 1970s was in the range of 30000-90000 m3. As far as terminals were concerned, in 1964, the first terminal in Canvey island in the UK was equipped with six tanks having installed capacity of 4,000 ton each. Thus, such carriers and terminals are considered under the category of SSLNG, at present .

What is SSLNG?

International Gas Union (IGU) defines small scale liquefaction and regasification facilities as plants having a capacity of less than 1 million tones per annum (MTPA), while SSLNG carriers are defined as vessels with a LNG storage capacity of less than 30,000 cubic metres . Thus, SSLNG is a step in the conventional value LNG chain, whereby LNG is used as a fuel byindustrial users, road and maritime transport in a limited size. In addition, it can also be used to designate smaller LNG regasificationterminals or ships.

SSLNG can be sourced from either existing conventional liquefaction or re -gasification facility or by a small-scale liquefaction facility itself. This way it can serve wide range of end-users in niche areasby providing flexibility in faster installation and coping with robust gas demand in these areas compared to a conventional LNG value chain. SSLNG is therefore, an innovative and cost-efficient way of getting gas to end users that have localised, flexible or geographically scattered gas requirements, not served through pipeline-based gas system .
Key drivers for SSLNG developments
Though, key drivers for SSLNG, such as environment, economic and geopolitics , are derived from conventional LNG value chain, it is the global commoditization of LNG itself, which is a catalyst to future LNG growth. This is helping toprovide a solid base for the emergence of new LNG applications and markets . The main drivers for future growth of SSLNG are as under:

Environmental factors: Seeking cleaner environment is the biggest reasons behind SSLNG growth.There has been an increased focus on emission reductionprompting vessel owners and charterers to comply with the regulation.For instance, International Maritime Organisation has set up Emission Control Areas (ECAs) through a stricter sulphur dioxide (Sox) regulation for shipping in the Baltic Sea, the North Sea and the English Channel. Under ECAs, the sulphur content of fuel oil must be less than 1% by weight, falling to 0.1% after January 1, 2015. Outside ECAs, the limit is 3 .5%, which will come to 0.5% after January 1, 2020.

Economic factors:Given the energy cost advantage SSLNG has over alternative energy sources, such as diesel,and conventional LNG for end -users, particularly in the absence of pipeline infrastructure, makes it economically attractive. The present low gas scenario also allows SSLNG to grow by replacingconventional LNG liquefaction projects, yet to reach a final investment decision. Unless the costs of these projects are reduced to meet the new lower gas prices, more numbers of planned LNG liquefaction projects could be either delayed, or scaled down or put permanently on hold, creating moreroom for floating LNG liquefaction (FLNG). Similarly, due to time and the cost advantage it has in construction, floating storage and regasification units (FSRUs) are on riseover the last seven-eight yearsand are gradually replacing onshore LNG import terminals, thereby absorbing more and quicker gas imports.Increased LNG liquefaction plants too has helped create demand for additional FSRUs.

Moreover, LNG is increasingly being used as a fuel, particularly over the past decade. Accordingly, owners and operators of ships, busses, heavy trucks, locomotives and drilling equipment are actively seeking LNG for their vehicles, forcing engine manufacturers to begin designing and building a range of natural gas and dual fuel engines for use with LNG. Thus, there has been rise in both LNG trucks and refuelling infrastructure. For instance , China have around 3,00,000 LNG trucks (2015), which is largest in the world. It is further aiming to create LNG refuelling infrastructure with around 3,000 LNG refuelling stations by 2025 from 2,600 in 2005 . In Europe, the 'Blue Corridors' is under way to build LNG fuelling infrastructure, particularly for heavy trucking. This corridor includes 14 LNG or L-CNG stations on critical points/locations in the Blue Corridors and the building–up of a fleet of approx. 100 LNG Heavy Duty Vehicles operating along the corridors .

Geopolitical factors: The future of natural gas also rests on emerging geopolitical dynamics where there is an interplay of gas exporting and importing countries. Like conventional LNG value chain, small -scale value chain too offers independence from transit countries and flexibility in its value chain through greater geographical outreach which expands beyond the conventional value chain. The environmental credentials of natural gas in improving the local air quality, its comparative advantage with respect to higher efficiency over coal fired power plants, lower greenhousegas (GHG) emissions relative to other fossil fuels, and suitability for partnering with renewables as a back-up fuel has increased its usage across the globe. However, it is the LNG exports by the U.S. resulting from its shale revolution, which has geopolitically pushed the growth of natural gas. Recently, there has been a significant shift in U.S. energy policy, wherein natural gas exports have become a major policy instrument of Trump Administration going a long way in helping curb their trade deficit withcountries like China and India. While large LNG consumers , such as in the Europe has been the important focus of U.S. LNG exports, further expansion of global LNG demand is possible if such exports reach niche markets, making the role of SSLNG vital. The smaller markets for LNG demand is growing, wherein amid slow pace of onshore liquefaction proposals and depressed charter rates, several FLNG projects,particularly small-scale, areunder development.

The case of SSLNG in India

Owing to increased demand for power, fertilizer and automotive sectors,India would lead the LNG growth in the rest of Asia, after China. To push towards gas-based economy, government has formulated several policies, which includes, increasing imports of cheaper and abundantly available LNG. However, to propel the LNG growth, government has taken steps to expand SSLNG distribution. There are plans to expand LNG terminals through FSRUs, particularly in the eastern coast of India to fix regional imbalance of gas grid, under a broader 'Urja Ganga' project. Out of five proposed FSRUs having total capacities of 21.5 MTPA, two are in West Bengal. This project would cater to the needs of fertilizer units, refineries, petrochemical plants, and industrial units in the Eastern India region, covering states like West Bengal, Uttar Pradesh and Odisha, besides expansion of city gas distribution network.

The growth in SSLNG would get further momentum withspur the demand for Micro , Small & Medium Enterprises (MSMEs), as noted by Dr. Mahesh Gupta, President, PHD Chamber. According to him , "new LNG prices regime would propel several gas fed industries in large sector including host of MSMEs in segments such as glass and ceramic for economic viability, which otherwise was killing these sectors due to LNG price regime which was as high as $12 -13 per million British thermal unit (mBtu)".

Government, along with Inland Waterways Authority of India (IWAI), has also decided to promote the LNG fuel for craft that sail the Ganges by replacing diesel. IWAI in this regard, is planning to supply LNG bunkers from Sahibganj and Gazipur, with further investments in inland storage and distribution of LNG byinitially focussing on the stretches of Ganges between Varanasi and Kolkata . For this, India is also looking to collaborate with Norway, which has developed SSLNG for more than 10 years.

Besides these plans, in November 2016, India's first LNG-powered truck has already rolled out in Kerala, following which, in March 2017, the Road, Transport and Highways Ministry has given approval to use of LNG as automobile fuel. Government has further notified changes in gas cylinder norms to pave way for LNG fuelling stations on the line with CNG stations in India .

Thus, to support India's gas-based economy plan through increase LNG imports in a more effective manner, it is important for the government to offer LNG as a viable alternative fuel to meet the demands of regional and niche markets by developing sustainable SSLNG distribution network. This necessitates the increased usage of gas by identifying MSMEs in different parts of the country. The role ofcompanies like 'Sahaj Ganga', as a service provider,would hence become important as they would act as an intermediate between large suppliers and small customers. Under this mechanism they can facilitate LNG as a fuel in ships, trucks, locomotives while also offering as an alternative to diesel and naphtha to several industries. India would do well to power its busses and trucks, which travel longer distance in single fill by LNG as a base fuel. All these steps would help India to cut down its crude oil imports to a significant extent.

Disclaimer: The views expressed in this article are personal. Manish Vaid, Junior Fellow, Observer Research Foundation (ORF), New Delhi, with research interests in energy policy and geopolitics.

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