LNG Investments Quietly Transforming Transportation Infrastructure, Overseas Markets

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Last week UGI Energy Services announced plans to build a liquefied natural gas production facility in Wyoming County, Pennsylvania.

Why Manufacturers Need to Ditch Purchase Price Variance

The facility will draw Marcellus Shale gas from UGI’s Auburn gathering system, then chill it to produce up to 120,000 gallons per day in liquid form. While we have regularly reported the slowdown in both new shale oil and LNG projects in the US this year — and the subsequent cutbacks in oil country tubular goods production — investments are still being made, in the US and overseas, in drilling.

Plants, Projects Planned

Bloomberg Business reported this week that Anadarko Petroleum Corp. selected a group of developers including Chicago Bridge & Iron Co. for a potential $15 billion LNG project in Mozambique.

CBI’s joint venture with Japan-based Chiyoda Corp. and Saipem SpA, based in Italy, will work on the onshore project that includes two LNG units with 6 million metric tons of capacity each, Anadarko said Monday. Construction plans also include two LNG storage tanks, each with a capacity of 180,000 cubic meters, condensate storage, a multi-berth marine jetty and associated utilities and infrastructure, according to Texas-based Anadarko, which says it will make a final investment decision by the end of the year.

Last week, the Department of Energy gave Cheniere Energy Inc. final approval for the nation’s fifth major export terminal at Corpus Christi in Texas, which will ship the fuel from 2018.

What’s Driving Infrastructure Investment?

While oil prices have bounced back from lows seen earlier this year, it’s certainly not the market that’s driving these investments. While high-cost projects, such as those in Canada’s oil sands, have been canceled by oil exploration companies, relatively inexpensive projects with a quicker path to payback, such as these LNG projects, are still being funded.

The payback is diverse and not confined to domestic home heating. LNG has been priced at a fraction of diesel prices for the last four years. Domestic trucking (18-wheelers and other heavy consumers of diesel) have yet to make a large-scale commitment to LNG, and most places where fuel is dispensed have yet to put in expensive infrastructure to handle the product, but there has been enough success for UGI to justify committing resources to its adoption.

UGI is already supplying trucking companies from its first and only LNG facility, built in the ’70s near Reading, Pa. UPS purchased 700 new LNG tractor trailers last year and operates the vehicles in 10 states. And there’s always, of course, Brazil where nearly all automobiles are fueled by LNG and where a drought has shifted energy production from hydro-electric generation to natural gas backup.

Companies such as Tokyo Gas Co. have said they will attempt to make a profit from buying and selling US LNG cargoes that, unlike those on most current contracts, aren’t tied to a destination. Cheniere, the operator of Sabine Pass, expects the US to produce 74 million metric tons of LNG by 2020. That’s about 22% of expected global output by 2019. Only Qatar and Australia will produce more.

Long-term contracts will likely be upended by significant US supply coming online in other markets.

What Does this Mean for Metal Buyers?

The downturn in demand for OCTG, steel sheet and other drilling products might be short-lived one. A significant boost for rebar, wide-flanged beams and other heavy construction products could also come from more US and international plant engineering investments.

US housing starts jumped to their highest level in nearly 7-1/2 years in April and building permits soared, as well. Single-family homes breaking ground gained 16.7%. Starts for the multi-family homes segment increased 27.2%. Single-family permits increased 3.7% last month and multi-family permits surged 20.5%. If housing and heavy construction, such as LNG facility construction, take off at the same time this summer we could see pre-2008-level robust construction demand.

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