Important lessons can be learned about the new intercontinental energy commodity trade in low-carbon energy thanks to hindsight gained from the liquefied natural gas (LNG) market.
At a basic level, what has the LNG market done? As with crude oil, it takes excess energy produced in a country whose local supply exceeds demand and transports it to countries that face the opposite local dynamic.
So, how has LNG done this? It converts the energy from a gas into a liquid capable of seaborne transport, allowing it to be carried across oceans on large vessels and, at the other end, to be stored, traded, reconverted into another useful medium and consumed as fuel or feedstock.
As large quantities of LNG are being produced, transported and stored at any given time, an international market has developed on which cargoes can be traded, redirected and otherwise managed to minimise risks, optimise profit and deliver energy as efficiently as possible.
With the expansion of LNG supply and demand, infrastructure such as vessels, jetties, terminals, pipelines, storage facilities and integrated floating terminals has developed. This is a whole industry in itself.
When the LNG market started, relatively small vessels transported small quantities under long-term, bilateral, take-or-pay sale and purchase agreements structured to recover capital.
Over time, the supply proliferated, with suppliers building multiple projects feeding molecules into vertically integrated supply chains, creating enough liquidity to exert portfolio effects on the supply side while reducing prices. This incentivised further consumption and better supply chain systems.
In many ways, LNG’s low-carbon equivalents, such as green and blue ammonia and methanol, share characteristics with LNG.
As with LNG, producers will use bulk liquids to transport energy produced in one country to another that needs to import it. The energy and its carriers are now different – solar, wind, hydropower or decarbonised natural gas converting into ammonia, methanol or other molecules. But the basic business model and operations are the same.
Even the identities of the supplying and importing countries and regions are often the same: the US, Middle East and North Africa (Mena) and Australia, for example, shipping to the EU and northeast Asia. The countries that import hydrocarbons will import renewables because they cannot build enough to meet decarbonisation obligations.
Market participants will also be similar because the business operation and supply chain are familiar. In the Mena region, national and international energy companies have already started mobilising. Few know better how to handle and move liquid molecules around the world, trade them and manage a carbon capture and storage operation.
The low-carbon fuels market will need the same types of supply chains developed for LNG to facilitate trade, including storage, vessels, jetties, terminals and pipelines. The same players who build these for hydrocarbons will participate in their development and construction.
Low-carbon fuels will be used for similar purposes as LNG: fuel and feedstocks. Japanese utility developer and investor Jera, for example, is exploring using blue ammonia produced in the US to produce electricity at its Japanese power stations, replacing coal. Ammonia can be cracked back to hydrogen for use in fuel cells or refining; or it can be used directly as bunker fuels for vessels, feedstock for chemicals or fertilisers and more.
Fortunately, an enormous amount of capital is waiting to be deployed for well-structured and well-sponsored projects
Dan Feldman, King & Spalding
The market’s structure will likely resemble LNG’s, too. Early projects have to be structured as bilateral deals where a seller delivers large, long-term quantities to one or two offtakers, who often have an equity interest or other participation in the business or operations of the seller – as with early LNG projects.
As sellers build more projects, portfolio effects will allow buyers and sellers to trade on a more merchant basis, leading to efficient markets where prices are functions of supply-and-demand dynamics rather than simple capital recovery mechanics.
In time – perhaps within 15 years – we will likely see low-carbon fuels traded as grades across and within continents: green ammonia that meets the strict EU specification or a less strict one; blue hydrogen with carbon capture-based decarbonisation of 60 per cent or 95 per cent, pink hydrogen produced using nuclear-generated electricity, and so on.
Buyers will have a choice about the molecule that meets their needs regarding its source, availability, price, carbon intensity and regulatory status.
To get there, we will need a vast infrastructure build-out. Few, if any, low-carbon molecules have the energy intensity of LNG, meaning more of them must be produced, stored, transported and used to achieve the same energy outputs.
This is an immense development and financing opportunity, just as the LNG industry has provided for during its heyday, and as recent projects in Northern Europe demonstrate, it still is. Ultimately intercontinental pipelines will be needed.
The key difference between the current and new LNGs is on the regulatory side. The main reason to switch from LNG to a lower- carbon molecule is that regulation – whether a carbon tax, a quote or some other requirement – demands or incentivises it. So, sending a vessel laden with liquids and a “regulatory bill of lading” instead of simply certificates of analysis and quantity will be a new experience. This will create a whole industry of certifiers and auditors.
Another difference is speed. The new industry will need to move faster than LNG to achieve climate targets and avoid energy shocks of the kind resulting from the war in Ukraine.
Fortunately, an enormous amount of capital is waiting to be deployed for well-structured and well-sponsored projects, as is apparent from the advanced multibillion-dollar green fuels export megaprojects financings King & Spalding is advising on in Saudi Arabia and Canada.
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