I have written a few pieces on Liquefied Natural Gas companies, here, and in many of them I go straight to the analysis. I am an avid believer that we should understand the things we invest in, so here is an explanation of the chemistry, process, and economics behind LNG.
What is it?
LNG(liquefied natural gas) in the broadest sense refers to the long-distance shipping of natural gas between regional markets. It is the practice of cooling natural gas into a liquid, which is 300 times more dense. This enables a ship to transport this liquid, and for the cost of transportation to be comparable to the cost of pushing it through a pipeline, accounting for the distance. LNG is used to supply energy to distant continents.
What about the process?
LNG is liquefied by cryogenically cooling it to temperatures below -162 degrees Celsius or -260 degrees Fahrenheit. One issue for turning natural gas into a liquid by intense cooling is natural gas is not all the same compounds. Natural gas, as it exists in the ground and in our pipeline system has a very high concentration of Methane(CH4) gas, but also has small amounts of other compounds such as butane, propane, ethane, carbon dioxide, nitrogen, and even some water. These other compounds(especially the water) can freeze during the process and damage the cryogenic equipment used to store and transport natural gas. As such, the process for liquefying natural gas includes a process for purifying it from all of the other compounds. Whereas natural gas typically has approximately 90% methane, the purification process brings the finished product (NYSEMKT:LNG) to almost 100% methane.
LNG has been in use for a while, and currently has 2 main techniques. The Cascade process, and the Linde process. The Cascade process involves cooling the natural gas through a heat exchanger with a liquid, then cooling it again through another heat exchanger with another liquid. Some variations on this process can have as many different heat exchangers as they like, but typically a plant will have 2 heat exchangers with 2 different cooling liquids. The Linde process is actually fascinating, since it cools the gas by continually passing it through a small orifice into a bigger area to expand the gas. As it expands, the gas cools. This process is continually repeated until the gas turns into a liquid.
Large-scale LNG was first used in 1918, where natural gas was purified and cooled to separate the helium, which was a key product for the British dirigible. The LNG was then immediately regasified and fed into the gas system. Since then it had been used to stockpile natural gas for use in seasonal demand peaks, in fact there are many LNG facilities in the mainland U.S. that are just used for this purpose. Now, the shipping economics have sweetened to allow companies to move it across oceans and still make a profit on the sale.
But it is bad for the environment, right?
Not completely. Despite the fact most natural gas is a fossil fuel, it burns much cleaner than heavier petroleum products. In fact natural gas burns 40% cleaner than coal and 28% cleaner than oil. This, along with the fact it is sometimes cheaper, gives natural gas an advantage in the energy mix, since many major governments are trying to manage ambitious carbon emissions reductions. Many governments pledge an average of 30-40% in reductions, paving the way for renewables and natural gas to completely overtake coal and oil as our primary source of energy.
Some environmentalists argue that natural gas will displace other renewables as a new source of power. However, the truth is that most energy projects are decided based on the economics. Renewables are our long term goal to eliminate 100% of carbon emissions, but natural gas is the thing we can do immediately to reduce emissions.
Economics of LNG
Many regions of the world have their own contained natural gas markets. Some regions have a surplus of natural gas and others have very little at all.
The United States has had an energy revolution because of the new technologies it has developed to exploit the shale gas within its borders. The U.S. has been able to drill for oil, and due to the nature of those shale oil deposits, there is also an economic amount of natural gas. This lead to the capture and sale of natural gas even when it was uneconomic for natural gas only wells to produce. These economics allowed for American utilities to easily and profitably burn natural gas for energy.
Europe, due to a combination of a lack of gas reserves and government policy restricting its production, produces very little of its own natural gas. Instead, they must import it from places such as Russia, Qatar, and the United States.
Japan has very few reserves of its own. Instead, its government has invested heavily in supporting domestic energy companies to develop overseas supplies for import to Japan. Japan must import all its hydrocarbons, and since the nuclear accident at the Fukushima Reactor, have needed to import far more hydrocarbons than usual. After the earthquake in 2011, and subsequent failure of 2 nuclear reactors, Japanese authorities shut down nearly all nuclear facilities pending a comprehensive safety inspection to ensure it did not happen again. In the interim, Japanese consumers have had to live with higher energy prices since Japanese utilities have had to purchase large amounts of overpriced LNG and other petroleum products to bridge the gap the nuclear reactors were filling.
LNG companies can exploit relative natural gas prices by liquefying natural gas on a continent where it is cheap, shipping it to a continent where it is expensive, regasifying it, and selling it to the local gas grid.
Natural gas has long been a commodity with a regional market. Unlike oil, it was difficult to ship it across the world. LNG requires a special ship with cryogenic equipment to transport, so it still is not quite as easy. However, the cost of liquefying and shipping natural gas has been steadily declining, and allowing companies to take advantage of the arbitrage opportunities that exist between markets. As more and more advances occur in the LNG industry, I expect the volume of LNG traded across the world to increase, and for natural gas prices around the world to become more freely traded. For that to happen, companies will invest in infrastructure required to move the commodity around the world, and make a good profit in the present.
I do all the research on LNG, down to the individual costs, to make it simple to you. If you want to know about opportunities in the energy and LNG space, follow me here on Seeking Alpha. It is free, and I care about my readers :)