Growing Markets: LNG Delivery to Hawaii

John Walker, Fortis Inc.’s executive vice president, Western Canadian operations, reflects on the company’s operations in B.C.

John Walker has his eyes on Hawaii.

Walker, the executive vice president of Fortis Inc.’s Western Canadian operations, isn’t just a tourist; he is firming up a long-term contract with Hawaii Electric to supply liquefied natural gas (LNG).

The idea of Canada helping Hawaii’s largest power provider switch from carbon-intense diesel to natural gas does raise some eyebrows. Particularly as there are numerous LNG export terminals being proposed in the U.S. mainland.

The kicker is FortisBC has the existing plants to liquefy the natural gas.

“Everybody’s talking about LNG but only a few can supply it,” Walker says. “Why did Hawaii Electric come to us? Because we can supply it. We can get it to that market. And the reason we can get to that market is because we operate an existing facility, we are zoned on that site, and it’s big enough to be expanded.”

John Walker has his eye on Hawaii.

John Walker has his eye on Hawaii.

The Hawaii deal is one of a number of opportunities FortisBC is pursuing as demand continues for LNG, a super-cooled, condensed version of natural gas which can be transported in containers. With its $400 million Tilbury liquefaction plant expansion underway, and an abundance of natural gas in the province – a jaw-dropping 800 trillion cubic feet at last count – Walker is confident about the future, despite a substantial drop in oil prices and narrowing price differentials.

Additionally, the opportunity for LNG development has become greater since the Federal Government recently announced that they intend to establish new Capital Cost Allowance (CCA) rates to help support investment in LNG facilities in Canada. This aims to provide the right conditions for the LNG industry to succeed and compete in Canada and abroad.

“The real drivers are two-fold,” he said of LNG demand. “Cost differential, and equally important, a very significant environmental benefit because natural gas has a significant advantage over diesel in terms of emissions.”

Tilbury Fortis BC

“With its $400 million Tilbury liquefaction plant expansion underway, and an abundance of natural gas in the province, Walker is confident about the future.”

Communities grappling to find alternatives to higher cost, and more carbon-intensive fuels have gravitated to LNG, and in large part because it can be transported by truck. Remote communities such as Inuvik and Whitehorse, far from pipeline grids, are benefiting from LNG trucked in to provide peak power during high demand periods.

“Obviously, with the drop in oil prices, the differential between gasoline or LNG and diesel has contracted. But diesel hasn’t dropped as significantly as gasoline. And everyone looks at this as a long-term consideration.”

Another factor in LNG’s favor is the reduced price volatility, he argued, as buyers aren’t as exposed to global oil markets or refining constraints, or other factors impacting an oil-based product.

“Why did Hawaii Electric come to us? Because we can supply it. We can get it to that market.”

In recent years the shale gas revolution unleased billions of cubic feet of natural gas into North American markets, pulling down domestic returns and making export markets based on crude prices more attractive. Demand for LNG rose as a less costly alternative to diesel, as well as for LNG’s lessor impact on the environment.

vest

Minister Greg Rickford recently visited the Tilbury facility – “Fortis currently is expanding Tilbury to 36,000 gigajoule – roughly 34 million cubic feet – per day capacity from 5,000 GJ per day.”

Dozens of LNG export terminals have been proposed in the United States, with two, the 2 billion cubic feet per day (bcf/d) Freeport and 2.1 bcf/d Cheniere plants, under construction. But only Alaska’s 0.19 bcf/d Kenai plant is operational, rebooted into production in early 2014 after being mothballed in 2011 on lack of demand.

In Canada, 11 LNG export licences have been approved for as many projects, with eight under review. None have started construction.

Meanwhile, FortisBC owns two of five LNG plants operating in Canada, the $200-million Mount Hayes liquefaction plant near Nanaimo, on Vancouver Island, and the Tilbury plant in the lower mainland. FortisBCV currently is expanding Tilbury to 36,000 gigajoule – roughly 34 million cubic feet – per day capacity from 5,000 GJ per day. The plant also will have 1 bcf of storage capacity, essential to meet demands from the transportation sector, the largest growth market for FortisBC.

Historically, LNG has been used to supplement hydro or natural gas generation during peak periods in British Columbia as well as the United States West Coast, or as insurance in case a system went down. But residential use of natural gas has been falling over the past decade, with average consumption dropping as a result of conservation and more energy-efficient homes, Walker noted.

The utility started to look for opportunities in new markets, rather than maintain focus on residential and commercial heating, and the one that really jumped out, “first and foremost,” was transportation, he said.

“The transportation sector gets broken down into a couple of opportunities, with LNG and compressed natural gas. The difference between the two is how many molecules you can put in a tank,” Walker explained. “With LNG, you get more density of fuel and it’s really good for heavy, big engines, some long-haulers which need higher amounts of fuel. CNG tends to be used in garbage haulers, vehicles that are on short routes and closer to home base.”

Of about 400 vehicles running on natural gas in the province, approximately 120 vehicle run on LNG, with the remainder powered with CNG. However, Walker sees the bulk of new demand coming for LNG. Interest in LNG for vehicles was renewed with the announcement of the Tilbury expansion, Walker noted. Seaspan Ferries Corporation is converting two vessels to LNG, the first marine vessels to go LNG, and BC Ferries recently signed a ten year contract with FortisBC, who will provide up to 300,000 gigajoule of LNG per year to help fuel three of the company’s intermediate class ferries. The provincial service for coastal and island communities will be running two dual-fuel vessels, diesel and LNG in 2016-17, and will convert existing vessels, the big Spirt-class boats, to LNG.

“The utility started to look for opportunities in new markets, rather than maintain focus on residential and commercial heating, and the one that really jumped out, “first and foremost,” was transportation.”

On the ground, mining giant Teck Resources is going to test run using LNG as a fuel for its massive mine vehicles, converting six mine hauling trucks to LNG.

“As we demonstrate that there is supply available, the market has responded to that, and it’s all being driven by this transportation sector. Obviously, the industry is very well supported by the provincial government in terms of our being able to use a great natural resource we have here, natural gas, and extrapolate the benefits.”

High costs and soft economics due to falling oil prices have slowed LNG developments in the North, including rival mega-projects by Royal Dutch Shell and Malaysia’s Petronas. However, the slow-down does not affect FortisBC’s more modest plans.

“Of about 400 vehicles running on natural gas in the province, approximately 120 vehicle run on LNG, with the remainder powered with CNG. However, Walker sees the bulk of new demand coming for LNG.”

“Compared to the northern projects, we are talking a much smaller scale, more scalable,” Walker said. “We can add in increments, just by the nature of where we are. We are also in the circumstance where we are working off an existing site, with existing infrastructure and rights-of-way.

“There is a finite demand out there for LNG, it will only grow at a certain rate,” Walker admitted. “Right now there is a large amount of demand from those who can get to the market first. But you have to remember that all the questions about low commodity prices, the ability to extract gas, the market demand – everyone is contending with them.”

At the end of the day, Walker sees a strong future for natural gas in British Columbia as a lower-cost source of energy, competitiveness and lower environmental impact.

“I don’t see natural gas as the only solution, nor do I see electricity as the only solution; I see a world of broad customer choice and this is a part of that,” he said.

Dina O’Meara is former business writer with the Calgary Herald and is now a communications consultant.