Liquefied natural gas uptake ‘will rely on price’

Price will be a critical incentive to persuade SA’s industrial and transport sectors to switch from their existing fuel sources to liquefied natural gas (LNG).

Government policy can play a role in influencing the price, Kishan Pillay, director of upstream and midstream oil and gas industrial development at the Department of Trade and Industry, told a South African Oil & Gas Alliance presentation on Tuesday.

The government has started to develop a gas strategy as substantial offshore LNG discoveries in Mozambique and studies on shale gas fracking in the Karoo indicate there may be regional potential.

The first step is intended to be the building of coastal power stations fed with imported LNG to provide the anchor demand for investment in infrastructure and market development.

Pillay said the department had studied how the first 15 years of gas industrialisation, based on imported LNG, could be encouraged.

By looking at the industrial and transport sectors in the KwaZulu-Natal-Gauteng corridor, it found LNG demand from these sectors would be 24 petajoules (PJ) in the short-term and 47PJ in the long-term.

Industry was already using 9.6PJ of methane-rich gas and would switch to LNG if the price was similar, at about $6 to $8 per million British thermal units (mmbtu). It was also using 7.7PJ of coal and to compete with that, LNG would have to be priced at less than $4 per mmbtu and new infrastructure would be needed. There was existing demand of about 1.5PJ for liquefied petroleum gas (LPG), which could switch if the infrastructure was in place.

Pillay said the cheapest price for LNG that SA could achieve was about $6/mmbtu, but this was linked to the Henry Hub price and was not fixed.

Industrial and transport demand was highly price sensitive, the study found. If the delivered price of LNG rose by $4 per mmbtu, 80% of industry demand would be lost. In transport, 75% of demand would be lost if the price increased by US50c or R7.84 per litre through imposing the fuel levy. The government had to balance the need to grow the gas market with taxrevenue considerations.

In several other countries including Iran, Pakistan and Argentina, full or partial state incentives were needed to boost gas penetration, Pillay said.