20.06.22 A ship is coming in  Author: Constantin Gillies • Reading time: 7 min.

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Summary

Liquefied natural gas (LNG) is an alternative to Russian pipeline gas. This is why Germany is going full steam ahead with building port terminals where LNG tankers can be unloaded. But there is one factor that is transforming the gas transition into a challenge: other countries are also turning to liquefied natural gas.


Wilhelmshaven is making rapid preparations for the arrival of a very special ship. Teams of construction workers are ramming 50-meter-long steel piles into the harbor basin almost non-stop to build a 370-meter-long wharf where a 100,000 metric ton vessel can moor. But this is no normal ship. In fact, it is more like a factory. It is a floating terminal for liquefied natural gas that will be anchoring in Wilhelmshaven. 

LNG carriers can easily be identified by the huge spherical tanks used to store the gas.

The LNG will be delivered by special tankers, returned to its gaseous state in the terminal and then fed into the normal gas network. The plan is for the terminal to begin operation in November. To achieve this, the normal approval processes have been speeded up and the waiting times in the public authorities shortened. “We have never seen things move as fast as this. Projects of this kind normally take much longer,” says Björn Munko from the German Technical and Scientific Association for Gas and Water (DVGW). 

LNG to replace Russian gas

The reason for the urgency is Germany’s new energy policy. LNG will help the country to become independent of Russian gas. In addition to the terminal in Wilhelmshaven, three further import facilities are being built. Germany’s Minister for Economic Affairs Robert Habeck signed the lease contracts for the floating terminals himself in May (they will be operated by Uniper among others). The facility in Wilhelmshaven alone can unload enough LNG to cover 8.5 percent of the German demand for gas. But is there enough LNG on the world market to allow for the gas transition? And what will the price of autonomy be? 

There are no technical obstacles to overcome, despite the fact that LNG is a relatively new type of fuel. Liquefied natural gas was first shipped from the USA to the United Kingdom at the end of the 1950s. Today there are more than 400 LNG carriers crossing the oceans. They can easily be identified by the huge spherical tanks used to store the gas. Before being loaded, it is liquefied at a temperature of minus 162 degrees Celsius, which reduces its volume 600-fold. This means that a single ship can supply almost a year’s worth of energy for a city of two million people. When the tanker arrives at its destination, the LNG is vaporized (regasified) and fed into the normal gas network. “The technology is mature,” explains Professor Thomas Kolb, an expert in chemical fuel technology at the Karlsruhe Institute of Technology (KIT). Only the first stage of the production process, cleaning the extracted natural gas, is critical. If sufficient care is not taken, the molecules do not liquefy simultaneously. “This can lead to blockages in the pipes,” says Kolb. 

LNG has been on the rise for years

The demand for LNG has been growing for some years and has increased as a result of the war in Ukraine. According to the energy company BP, global production rose by 26 percent between 2010 and 2019. The rising interest is due to the fact that liquid methane is a highly effective transition technology. LNG can replace coal in industry and is also ideal as a fuel for trucks and ships because of its high energy density. Almost one in every three new container ships is designed to run on LNG and the LNG tankers themselves use it in their engines. 

In theory, Germany could easily meet its gas requirements using tankers. Around 58 million metric tons of LNG would be needed every year. This year, 410 million metric tons are available on the global market, according to an estimate by the energy research company Rystad Energy. The problem is that other countries are also increasingly turning to LNG. This is likely to result in an increase in global demand to 436 million metric tons, which exceeds the available supply. Buyers who want their share will have to outbid the others. 

Competition for LNG

The competition for LNG is already raging. Europe could only meet its demand in the first quarter by buying deliveries actually intended for customers in Asia. The situation could intensify even further. “Demand will rise faster than supply for the foreseeable future,” predicts Eric Heymann, an analyst at Deutsche Bank Research, which is the bank’s thinktank. Germany is likely to have to spend more in the future in order to pay more than other customers, he explains. That will not be easy, because the competitors include economic heavyweights such as Japan and China. 

In addition, LNG is more expensive than pipeline gas. A look at the market before the COVID-19 pandemic gives an indication of the price difference. At that point Germany was buying pipeline gas at a price of 5 US dollars per million British thermal units (BTU, a unit of measurement for energy). Japanese customers were paying almost 10 US dollars for LNG at the same time. The price difference is partly due to the fact that liquefying and transporting the gas and then regasifying it gives rise to additional costs. 

Furthermore, two thirds of the LNG produced is traded via the spot market or flexible contracts, which leads to considerable fluctuations in the price. In the past, LNG tankers have often been known to change course in mid-ocean to head for a customer who was prepared to pay more. Despite the higher price of gas supplied by ship, pipelines are not necessarily more cost-effective. “Above a distance of 4,000 kilometers, LNG can even be cheaper because of the high cost of constructing pipelines,” explains Thomas Kolb. 

Higher prices possible in the short term

The changeover to LNG could prove costly in the short term. If Russia shuts down its pipelines, a price of 100 US dollars per million BTU is possible, according to Rystad Energy. The current figure is around 20 US dollars. However, in the longer term prices could also fall, for example because countries like the Netherlands and Norway increase their natural gas production and ease the tension on the energy market. “There are also deposits that have not yet been exploited,” adds Eric Heymann. Wherever oil is found, gas can in theory also be extracted and liquefied, for example in Argentina, Eastern Europe, and Africa. These newcomers could provide competition for the established exporters. The largest existing producers of LNG are Australia, Qatar, and the USA, followed some way behind by Russia. However, Heymann warns against getting our hopes up. “It will take time for new exploration to lead to a noticeable increase in supply.” 

Time is the critical factor in the move from pipelines to tankers. This is why the government is pushing ahead with the construction of LNG terminals. Interestingly, Germany does not actually need the facilities at the moment, because it can obtain the quantities of LNG it requires via terminals in the Benelux countries. However, the experts do not believe that this is an appropriate long-term solution. “We will not be able to replace the entire supply of Russian gas with LNG unless we have our own terminals,” says Björn Munko from the DVGW. Purely for reasons of security of supply, it makes sense for Germany to build its own infrastructure.  

The terminal in Wilhelmshaven can come on stream so quickly because it is a floating facility. It is being leased from a shipping company and will arrive in the port under its own power. All that is needed there is a wharf and pipeline connected to the gas network. However, floating storage and regasification units (FSRUs) of this kind are only an interim solution. “If the plan is to use LNG in the long term, then we need facilities on land with a higher throughput,” explains Thomas Kolb. For example, the terminal in Wilhelmshaven can process 3.4 million metric tons of gas in liquid form every year. The world’s largest LNG terminal in the South Korean city of Incheon has a capacity of 40 million metric tons. 

Using LNG terminals for hydrogen derivatives

Building LNG import facilities on the coast could bring additional benefits in the long term, because the infrastructure will also be suitable for hydrogen derivatives. For instance, if ammonia is imported in the future for use as a fuel, it could be fed into the German network via the LNG terminals. “The connection pipelines of the terminals are designed to be hydrogen ready,” says Björn Munko from the DVGW. His association is already testing the distribution of hydrogen via the normal gas network. 

But the hydrogen transition is still many years off. By contrast, the move away from Russian gas needs to happen as quickly as possible. Can it be achieved with the help of LNG? Most experts are cautiously optimistic. “If we exploit all the possibilities, we can do it,” says Björn Munko from the DVGW. These possibilities include reducing gas consumption and making greater use of other fuels such as biogas. Eric Heymann believes that liquefied gas is a reliable transition technology, but also predicts significant challenges: “The German chemical industry alone consumes four times as much gas as the whole of Denmark. Finding new sources of LNG on this scale will be far from easy.” 

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