LNG: far from a silver bullet, yet revolutionary
The energy world is currently experiencing unprecedented change driven by multiple forces with no clear winners and losers yet. Much of the structural changes in the energy world are being driven by an innovation successfully commercialized by the United States: LNG. The fuel has transformational potential for numerous economies which have historically been isolated from liquid energy markets and are often dependent on a single supplier of fuel—which is not an ideal situation from energy security perspective. This is largely true for the CEE countries: Central-Eastern Europe. Therefore, it is not surprising to see local entrepreneurs and visionaries quickly seizing the opportunity offered by LNG.
The Polish LNG Platform was established in 2017 with the mission to promote development of alternative fuels in Poland including LNG. To this end, the Platform organized the first ever Polish LNG Conference, which took place in Warsaw in November last year. The event gathered all key stakeholders in the development of the LNG market in Poland and CEE more broadly. Attendees represented the private sector, academia, media, and government policy makers.
The Center for Industrial Development was delighted to be the only U.S. based institution sponsoring this inaugural energy event, and in this article, we aim to share the key insights from the conference. In order to explain how dynamic and relevant the development of the LNG market in Poland is, it is worth noticing that exactly one day before the start of the conference, on 21st November 2017, the Polish National Oil and Gas Company (PGNiG) signed a mid-term supply contact for deliveries of the U.S.-based LNG. The agreement with Centrica LNG Co. Ltd will see Poland receive nine shipments of the LNG between 2018-2022.
Poland’s domestic LNG market
The first presentation from Andrzej Leonczuk from Barter Gas, one of the largest independent suppliers of natural gas in Poland, was very valuable for understanding the current situation of the natural gas market in Poland, as well as envisioning possible paths for the market’s development. Poland, the largest economy in the CEE region, is currently using between 13 and 15 bcm of natural gas per year. The total energy use of the country amounts for 105 MTOE currently and is expected to decline to 85mtoe in 2050. 62% of Polish counties have access to pipe gas, which leaves 38% of the counties without such access. Leonczuk noted that while LNG has just recently made headlines in Poland, it has actually been in use in the country since the 1970s. The quantities of LNG imports have recently increased, though, to 40,000 tons in 2017, and are predicted to grow further to 100,000 tons by 2022.
International LNG market
The conference gave attendees the opportunity to juxtapose the picture painted by the representative of a local energy player with that of a global giant, Shell. Marcin Plocharski, representing Shell, stated that his employer predicts energy demand to double from current levels by 2050. While this ultimate projection is certain, the path to that future is far from being linear. Plocharski foresees a continuous process of change in which no fuel will die overnight. Instead, the transition process will take significant time in order to phase out certain fuels – say coal – entirely from the energy mix. Nevertheless, those changes may be accelerated by changes in policy, such as the ones seen recently in the U.K. against coal-based power generation.
Swinoujście LNG terminal
The reported increase in the imports of the LNG to Poland would not be possible without one critical piece of infrastructure: the LNG import terminal located in Swinoujście. Łukasz Trzeszczkowski, representing Gaz System– the operator of the terminal on behalf of PGNiG, who contracted 100% of the terminal’s capacity – illustrated how Poland’s LNG future is tied to the terminal. He explained that the terminal is part of a larger “Northern Gate” concept, which would enable Poland to diversify its sources of energy supply. The two key elements of the Northern Gate are the LNG terminal in Swinoujście and the Baltic Pipe off-shore gas pipeline, which will connect Poland with Denmark therefore, creating new supply route for the North Sea’s natural gas market.
While strategic directions for the development of diversification of natural gas supply routes are being set, it is also critical to understand how these strategies translate to day-to-day operational and investment decisions at the Świnoujście LNG import terminal. As noted by Trzeszczkowski, the terminal is already seeing significant growth in market demand for small-scale LNG, namely through LNG truck cisterns. In order to accommodate this demand, four types of investments are being considered for the terminal. Firstly, increasing the import capacity of the terminal by 50%: from its current 5 bcm currently to 7.5 bcm. Future investments could see capacity rise to a maximum of 10 bcm, if market conditions are favorable. Secondly, the operator is assessing validity of constructing a second pier, which will not only double the offloading capacity of the terminal, but also allow for simultaneous loading and unloading of two LNG tankers. The investment depends on regional demand for exports from the terminal. Thirdly, the operator of Świnoujście’s terminal is considering investment in LNG loading facility for rail-transport of LNG, which will be able to load 1,700 tons of LNG per 24h. That is equal to a hundred 40ft containers a day. Finally, the third LNG receiving tank is likely to be constructed on-site.
Regional FSRU and potential in Poland
While Poland is benefiting from bold investment in the on-shore LNG receiving terminal, Lithuania is also enjoying the transformative effects of LNG. With FSRU Independence coming online in Klaipeda (Lithuania’s largest and only significant sea port) in late 2014, the country has been able to capitalize on the interconnected global LNG market. Vitalijus Trakselis of Klaipedos Nafta, the operator of the FSRU, was proud to say that in 2016 the FSRU supplied 60% of Lithuania’s natural gas demand. Similar to the developments in Poland, the operator of Lithuania’s FSRU extended the truck loading facility in 2017, supporting the development of small-scale LNG in the region.
LNG as a Marine Fuel
Today it is difficult to find pessimists on the future of the LNG market, though it is critical to understand that LNG’s development history is very new and entrepreneurial at its core. Starting with unprecedented perseverance of George Mitchell, who is the father of hydraulic fracturing, and leadership of Sharif Souki, the co-founder of Cheniere and the co-founder of Tellurian Investments, whose successes were rooted in the quickly changing market dynamics and their ability to capitalize on them.
A similar story is developing regarding LNG as marine fuel. The marine market for LNG began out of necessity. This is because once the LNG is loaded on the ship, it boils off, which causes a problem. One has three options to deal with the challenge. Firstly, one can re-liquefy the boil-off, which requires CAPEX investment in the liquefaction equipment and creates on-going OPEX costs. Secondly, one can flare off the boil-off, not only harming the environment, but also hurting the bottom-line. Lastly, one can capture the boil-off and use it to power the vessel, therefore changing the paradigm and turning challenge into opportunity.
While LNG-powered vessels were first created out of the necessity described above, further tailwind for the development of the market was provided by the Government of Norway. As explained by Egil Rensvik from Network LNG Norway, in 1996 Norway’s Parliament accepted a bill promoting development of LNG as a marine fuel. The first LNG-powered ferry started operations in Norway in 2000. Since then, the country has developed world’s largest fleet of LNG-powered vessels. This story represents how important it is to distinguish between innovation, which needs space in order to flourish, and successful government support, which supports market forces rather than distort them. A similar story of innovation out of necessity was by Aleksandra Koska-Legieć from the University of Gdańsk, who told the story of when in 1979 the fully loaded LNG carrier El Paso Paul Kaiser rab aground at 17 knots off Gibraltar. In order to free the vessel, the first ever ship-to-ship transfer of LNG was conducted.
The discussion about LNG’s developmental trajectory as marine fuel quickly turned towards legislative issues, which greatly support the development of the market. While the International Maritime Organization (IMO) governs and regulates the global legal regime for water transportation, the EU has its own set of requirements, which are more stringent than those of the IMO. Therefore, as the shipping business is inherently global business, the ship-owner has to ultimately comply with the EU’s regulation in order to operate their ship on international shipping routes. As explained by Leszek Jurczyk, Infrastructure Director at the Port of Gdynia – one of the four key commercial sea-ports of Poland – ECAs: Emission Control Areas introduced in the territorial waters of the EU restrict the maximum level of Sulphur in vessel’s fuel to 0.1%. Similar restrictions have been introduced on both the West and East Coasts of the United States. According to the experts present at the Polish LNG Conference, those restrictions are of a great help in popularizing LNG as vessel fuel.
Be sure to look for part 2 of our review, to be published next week. We hope you are enjoying the insights from the conference, and we encourage you to contact us with any questions about the event or LNG in general. You can also find the official report from the Polish LNG Platform exclusively here.
Mateusz Ciasnocha is constantly on a mission to “unleash dormant potential.” He specializes in agriculture, energy, and Africa, and is also passionate about innovation and entrepreneurship. A Hult International Business School graduate, Mateusz currently studies at ESCP Europe Business School and the University of Oxford, where he is receiving a Masters in Energy Management and Philosophy Certificate, respectively. Mateusz is currently in India participating in the prestigious IDEX Fellowship, which enables him to work with Vrutti to support 130,000 smallholder farmers.