Small going big: Why small-scale LNG may be the next big wave

Giorgio Biscardini, Rafael Schmill, Adrian Del Maestro
July 18, 2017

Executive summary

Small-scale liquefied natural gas (ssLNG), a niche but nascent industry that is already profitable and scalable, boasts significant potential. It is well placed to meet the growing demand from the shipping and trucking industries for fuels that are more environmentally friendly than oil and diesel. ssLNG also enjoys advantages in addressing off-grid power generation for industrial and residential needs in remote locations. Because LNG burns more cleanly than other fossil fuels such as petroleum and coal, ssLNG is likely to gain further traction as market and regulatory pressures to transition to lower-carbon energy intensify. In the same way that “fracking” transformed the U.S. energy landscape, ssLNG has the potential to transform the role of gas in a number of key geographies and industry sectors.

As companies approach the ssLNG market, they should be prepared to act quickly. In selected applications, such as marine and off-grid power generation, it will be vital for participants to establish first-mover advantage. But they will also need to have the right strategy in place, underpinned by the appropriate capabilities, which include the ability to build partnerships across the LNG chain.

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A small business gains scale

In the vast global natural gas industry, much of the conversation revolves around major trends such as oversupply, the growth of liquefied natural gas (LNG) spot trades, and the prospects of mega-LNG projects like the US$54 billion Gorgon project in Australia. Amid this forest, the comparatively diminutive tree of small-scale LNG (ssLNG) doesn’t get much attention. Aside from a handful of market players, this segment is not yet on the radar of many industry participants. It should be.

The term ssLNG refers to the direct use of liquefied natural gas in its liquid form, as opposed to the traditional model of regasification and subsequent introduction into the gas transmission grid. Small-scale liquefaction plants are usually developed to serve specific markets and have a production capacity of less than 500,000 tons per year (by contrast, a large industrial-scale LNG plant like the Gorgon facility has an export capacity of approximately 16 million tons per year). These plants provide supply to end-users in places where traditional infrastructure does not reach, or to consumers requiring liquid fuel.

There are three major end uses for ssLNG: marine fuel (bunkering), fuel for heavy road transport, and power generation in off-grid locations. The market is relatively immature. However, several major energy companies are already involved in ssLNG, including Shell, Engie, ENI, Gasum, and Gazprom. The size of the market is expected to grow to approximately 100 million tons per year by 2030. Shell is developing bunkering services in the Amsterdam-Rotterdam-Antwerp region and in northern Germany. In August 2016, Shell and the government of Gibraltar signed an agreement for the supply of LNG for use in power generation there. Engie, the French natural gas production and distribution company, has pledged to invest €100 million (US$112 million) in ssLNG and compressed natural gas (CNG) trucking infrastructure across Europe by 2020, and it has just started ship-to-ship LNG bunkering service in the port of Zeebrugge, Belgium. For several years, Italian oil and gas company ENI has been leveraging its presence at Zeebrugge to get involved in ssLNG. The Finnish company Gasum is focusing on expansion in the Nordic region, investing heavily in reloading and storage facilities in Sweden and Finland. In late 2016, Gazprom approved a development program for 2017–19 that includes construction of natural gas filling stations and the production and use of small-scale LNG in Europe and China. In Southeast Asia, players such as the Indonesian national oil company Pertamina are investing in ssLNG facilities.

Given the dynamics in the global natural gas markets — lower commodity prices, oversupplied gas markets, and industry focus on cost reduction — it may seem that any subsector would have difficulty attracting interest. But a number of powerful factors favor the growth of ssLNG. First, ssLNG initiatives, in contrast to large-scale LNG projects, offer investors more immediate and potentially attractive returns in the medium term. The proven technology allows ssLNG projects to offer a “plug and play” service with lower investment requirements and accelerated commissioning schedules. And that leads to reduced uncertainty on the project execution timing. Second, ssLNG is scalable, meaning operators can easily add capacity to serve increased demand while gaining supply chain synergies. That makes ssLNG an ideal way to meet short-term fluctuations in demand. And finally, precisely because of this flexibility, ssLNG can stimulate demand in areas of the market that were previously unsuited to LNG as a fuel source, such as off-grid power generation on islands and in remote areas.

A number of powerful factors favor the growth of ssLNG.

Conclusion

It is clear that ssLNG is currently a small market. However, demand is likely to grow rapidly, catalyzed by increasingly stringent environmental regulations and the industry’s ability to unlock new seams of consumption. But success in this market will not be open to all players. Companies that can move with agility, that have the right strategy and capabilities in place, and that can build partnerships across the LNG value chain will benefit from the advantage that accrues to first movers. In the same way that “fracking” transformed the U.S. energy sector, ssLNG may be the next “small” revolution in the gas sector. Those first off the mark will be the most likely to reap the benefits.

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Rafael Schmill

Partner, Strategy& Italy

Adrian Del Maestro

Director, PwC United Kingdom

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