You are on page 1of 396

Confidential

Natural Gas in the


CaribbeanFeasibility Studies
Revised Final Report (Volume I)

Report to the Inter-American


Development Bank
30 June 2015

Copyright Castalia Limited. All rights reserved. Castalia is not liable for any loss caused by reliance on this
document. Castalia is a part of the worldwide Castalia Advisory Group.

Confidential

Table of Contents
Executive Summary

iii

Technical Summary

xii

0.1

Overview of the Caribbean Energy Sector

xiii

0.2

The Global and Regional Markets for Natural Gas

xv

0.3

Spread between Natural Gas and Oil Prices

0.4

Delivering Natural Gas to the Caribbean as LNG

xix

0.5

The LNG Supply Chain

xxi

0.6

Three Scenarios for Creating a Competitive Market for


Natural Gas in the Caribbean

xviii

xxiii

0.7

Environmental and Safety Impacts and Risks of Introducing


Natural Gas
xxxvi

0.8

Social Impacts and Risks of Introducing Natural Gas

xxxvii

0.9

Strategy for Implementing Scenario 1

xxxvii

Introduction

Part I: Background

Overview of the Caribbean Energy Sector

2.1

Overview of Countries in the Caribbean

2.2

Review of Existing Uses of Fossil Fuels in the Caribbean

2.3

Overview of the Electricity Systems in the Caribbean

13

2.3.1

Existing and potential generation alternatives

18

2.3.2

Market structures of the electricity sectors in the


Caribbean

20

2.3.3

Regulatory and legal framework of the electricity


systems in the Caribbean

21

2.4
3

Potential for Natural Gas in the Caribbean Energy Sector

24

The Global Market for Natural Gas

26

3.1

Evolution and Current State of the Natural Gas Sector

26

3.1.1

Supply

26

3.1.2

Demand

31

3.1.3

Trade

32

3.1.4

Regional price and market structure

33

3.1.5

The natural gas market in the United States

35

Confidential

3.1.6
3.2

3.3

39

3.2.1

Future outlook: demand

39

3.2.2

Future outlook: supply

41

3.2.3

Future outlook: trade

42

Spread between Natural Gas and Oil Prices

3.3.2
3.3.3

44

Fuel Oil Prices Decreased 44 percent from end-June


2014 to end-April 2015

45

Natural Gas Prices Decreased 42 percent from endJune 2014 to end-April 2015

47

The Spread between the Spot Prices of HFO and


Natural Gas Has Decreased

48

Drivers and Challenges for Future Natural Gas Market


Development

49

Natural Gas in the Caribbean

55

4.1

Countries in the Caribbean with Natural Gas Reserves

55

4.2

Production and Exports of Natural Gas in the Caribbean

56

4.3

Imports of Natural Gas in the Caribbean

59

4.4

Potential Demand for Natural Gas in the Caribbean

61

4.4.1

Demand for natural gas for electricity generation

62

4.4.2

Demand for natural gas for transportation and other


uses

63

4.5

4.6

Potential Suppliers of Natural Gas for the Caribbean

64

4.5.1

United States

66

4.5.2

Canada

75

4.5.3

Trinidad and Tobago

75

4.5.4

Mexico

78

4.5.5

Colombia

79

4.5.6

Venezuela

83

Implications of Regional and Global Trends for the


Caribbean

Part II: Using LNG to Deliver Natural Gas to the Caribbean


5

37

Future Outlook

3.3.1

3.4

The natural gas market in Japan

Comparison of the Delivery Options: LNG, CNG, and


Pipelines
5.1

Options for Transporting and Storing LNG in the


Caribbean

84
87
88
89

Confidential

5.2

5.1.1

LNG preparation

90

5.1.2

LNG vessels

91

5.1.3

LNG storage and offloading systems

96

5.1.4

Cryogenic road tankers

Options for Transporting and Storing CNG in the


Caribbean

105

5.2.1

CNG carriers

105

5.2.2

CNG storage systems

110

5.2.3

CNG road tankers

110

5.3

Options for Transporting Natural Gas in Pipelines

111

5.4

Cost Comparison of Delivering LNG, CNG, and Natural


Gas by Pipeline

113

5.5

Options for Distribution Infrastructure

114

5.6

Conclusion: LNG is likely the Best Technical Option for


Delivering Natural Gas to the Caribbean

117

The LNG Supply Chain


6.1
6.2

6.3

6.4

118

Market Activities and Participants Required for Delivering


and Regasifying LNG in the Caribbean

118

The Acquired Price of Natural Gas

122

6.2.1

Pricing of natural gas in international LNG markets

123

6.2.2

Forecasts for HFO and natural gas prices used in


this study

127

6.2.3

Pricing LNG: cost plus approach

132

6.2.4

Pricing LNG: opportunity cost approach

133

6.2.5

Pricing LNG: substitution cost approach

135

Costs for Assets and Technologies in the LNG Supply


Chain

137

6.3.1

Liquefaction facilities

138

6.3.2

Vessels for shipping LNG

140

6.3.3

Regasification facilities

141

6.3.4

Converting existing generation plants to gas-fired


plants

145

Building new plants for generating electricity

146

6.3.5
7

102

Making the Decision to Import Natural Gas

149

Challenges of Buying, Shipping, and Using LNG in the


Caribbean

153

Confidential

7.1

Financing Challenges

153

7.2

Legal and Regulatory Challenges

156

7.3

Commercial Arrangements

158

7.4

Technical Aspects of Using LNG

159

Natural Gas Liquids as Alternatives to Fuel Oil


8.1

8.2

8.3

160

Liquefied Petroleum Gas (LPG) as an Alternative to Fuel


Oil

161

8.1.1

Global market for LPG

161

8.1.2

Current use of LPG in the Caribbean

164

8.1.3

Using LPG for electricity generation

165

8.1.4

Supply chain for delivering LPG for electricity


generation

167

Ethane as an Alternative to Fuel Oil

168

8.2.1

Global market for ethane

168

8.2.2

Ethane trade in the US and the Caribbean

172

8.2.3

Using Ethane for Electricity Generation

174

8.2.4

Supply chain for delivering ethane for electricity


generation

176

NGLs could be delivered at lower cost or more quickly than


LNG in some cases, but price and supply chain uncertainty
are high

177

Part III: Three Scenarios for a Competitive Regional Market for


Natural Gas

180

General Assumptions for All Scenarios

182

10

Scenario 1: Hub and Spoke

184

10.1

Scenario 1: Required Assets, Offtakers Involved, Suppliers,


and Volume of LNG Contracted

185

10.1.1 Assets used for delivering and regasifying LNG

186

10.1.2 Pricing for this scenario

186

10.1.3 The offtakers involved in this scenario

187

10.1.4 Suppliers of LNG

188

10.1.5 The volume of LNG contracted in this scenario

188

10.2

Scenario 1: Market Structure

189

10.3

Scenario 1: Estimated Investment and Operating Costs

190

10.4

Scenario 1: Cash Flow Projections

202

Confidential

11

Scenario 2: Virtual Hub


11.1

12

Scenario 2: Required Assets, Offtakers Involved, Suppliers,


and Volume of LNG Contracted

206

11.1.1 Assets used for delivering and regasifying LNG

206

11.1.2 Pricing for this scenario

206

11.1.3 The offtakers involved in this scenario

207

11.1.4 Suppliers of LNG

208

11.1.5 The volume of LNG contracted in this scenario

208

11.2

Scenario 2: Market Structure

209

11.3

Scenario 2: Estimated Investment and Operating Costs

209

11.4

Scenario 2: Cash Flow Projections

219

Scenario 3: Individual Contracts


12.1

13

14

205

222

Scenario 3: Required Assets, Offtakers Involved, Suppliers,


and Volume of LNG Contracted

223

12.1.1 Assets used for delivering and regasifying LNG

223

12.1.2 Pricing for this scenario

223

12.1.3 The offtakers involved in this scenario

224

12.1.4 Suppliers

225

12.1.5 The volume of LNG contracted in this scenario

225

12.2

Scenario 3: Market Structure

225

12.3

Scenario 3: Estimated Investment and Operating Costs

226

12.4

Scenario 3: Cash Flow Projections

236

Comparison of the Three Scenarios

239

13.1

Market Size

241

13.2

Fuel Prices

242

13.3

Commercial Viability

243

13.4

Risk Matrix

246

13.5

Meeting IDB priorities

251

Impact of Introducing Natural Gas in the Caribbean

254

14.1

Replacing Fuel Oil with Natural Gas Will Reduce the Cost
of Generating Electricity

254

14.2

Biomass, Hydro, and Wind Technologies Might be Viable in


Scenarios Where Natural Gas Replaces Fuel Oil

261

14.3

At Least Eight Energy Efficiency Initiatives are Viable in


Scenarios where Natural Gas Replaces Fuel Oil

267

Confidential

15

16

17

Cost Benefit Analysis

270

15.1

Scenario 0: Business as Usual (No Natural Gas)

272

15.2

Scenario 1: Hub and Spoke (Natural Gas)

273

15.3

Scenario 2: Virtual Hub (Natural Gas)

274

15.4

Scenario 3: Individual Contracts (Natural Gas)

276

Sensitivity Analysis

279

16.1

Maximum Viable Natural Gas Prices for Each Case

281

16.2

Scenario 1 has the lowest pricing and highest economic


benefits in most cases

284

16.3

Feasibility of Renewable Energy Technologies in three Price


Cases

288

Scenario 1 is the Preferred Scenario for the Caribbean

291

Part IV: Socio-Environmental Impact and Risk Analysis

293

18

Legal and Regulatory Framework

295

18.1

Summary of Country-Level Policies and Laws

295

18.2

Summary of Country-Level Institutions

297

18.3

International Agreements

298

18.4

IDB Policies

302

19

Infrastructure Needed for the Scenarios

304

20

Environmental Impact of Introducing Natural Gas

305

20.1

Environmental Setting

305

20.2

Business as Usual

310

20.3

Positive Impacts

312

20.4

Negative Impacts

314

20.5

Options for Mitigating Environmental Risks

316

21

Social Impact of Introducing Natural Gas

319

21.1

Social Setting

319

21.2

Business as Usual

322

21.3

Positive Impacts

323

21.4

Negative Impacts

324

21.5

Options for Mitigating Social Risks

325

Part V: Strategy for Implementing Scenario 1

326

22

327

Implementation Strategy

Confidential

22.1

23

Activity 1: Agree on Process and Key Terms for First-Phase


Tender

328

22.2

Activity 2: Identify and Carry Out Complementary Studies

330

22.3

Activity 3: Develop Financing Mechanism

331

22.4

Activity 4: Legal and Regulatory Reform

333

22.5

Activity 5: Develop Tender Documents

334

22.6

Activity 6: Contract NG Supplier

335

22.7

Activity 7: Develop Required Infrastructure

336

22.8

Timeline for the Implementation Strategy

337

Estimated Costs of the Implementation Strategy

339

Tables
Table 0.1: Comparing the Three Scenarios

xxvii

Table 0.2: Net Benefits of Scenarios (NPV in 2018 in US$ million)

xxxii

Table 0.3: Financial Savings in the Scenarios (NPV in 2018 in US$


million)

xxxiii

Table 0.4: Delivered Price of Natural Gas in 2023 by Market Scenario


and Price Case
xxxv
Table 2.1: Overview of Countries in the Caribbean

Table 2.2: Fossil Fuel Use in Energy Importing CountriesBy Sector

13

Table 2.3: Overview of the Electricity Systems in the Caribbean


(2012)

17

Table 2.4: Sources of Electricity Generation at Utility Scale

18

Table 2.5: Potential Options for Expanding Baseload Generation

19

Table 2.6: Market Structure of Electricity Sector in the Caribbean

20

Table 2.7: Overview of the Regulatory Framework in the Caribbean

23

Table 2.8: Emissions for Natural Gas and Fuel Oil (kgs per MWh)

25

Table 3.1: Top 10 Countries with Technically Recoverable Shale Gas


Resources

30

Table 3.2: Average LNG and Natural Gas Prices (US$ per MMBtu)

35

Table 4.1: Gas Contracts in Trinidad and Tobago (2014)

58

Table 4.2: Projected Average Daily Demand for LNG (in MMcfd)

63

Table 4.3: Potential Suppliers of Natural Gas for the Caribbean

64

Confidential

Table 4.4: Ranking Potential Natural Gas Suppliers

65

Table 4.5: DOE Non-FTA LNG Export Permit Application Status

71

Table 4.6: Trains at Atlantic Liquefaction Facility in Trinidad

76

Table 5.1: LPG Ship Time Charter Hire Basis, 6-18 month duration
(Dec. 2012)

95

Table 5.2: Cost Estimates for Small LNG Receiving Terminals

101

Table 5.3: SeaNG Coselle Ship Characteristics

108

Table 5.4: Undersea Pipeline Costs

112

Table 5.5: Estimated Final Delivered Cost of Natural Gas

114

Table 5.6: Sample Mexico Residential Natural Gas Tariffs (US$ per
MMBtu in March, 2014)

116

Table 6.1: Calculation of Liquefaction Costs (in US$ per MMBtu)

139

Table 6.2: Assumptions for LNG Shipping Costs

141

Table 6.3: Size of Regasification Units in Each Country (in cubic


meters)

143

Table 6.4: Assumptions for Costs of LNG Regasification

144

Table 6.5: Investment Cost for Regasification Facilities

145

Table 6.6: Investment Cost of Converting Existing Plants

146

Table 6.7: Investment Cost of Building New Power Plants

148

Table 6.8: Electricity Operating and Maintenance Assumptions

149

Table 7.1: Sovereign Credit Rating of Countries of Emphasis

155

Table 8.1: Global Use of LPG by Sector

163

Table 8.2: LPG Consumption by Sector and Country (thousand


tonnes, 2012)

165

Table 8.3: Example of potential deals and developments of


infrastructure to export ethane

173

Table 10.1: Options for Structuring the Market in Scenario 1

189

Table 10.2: Scenario 1: Cash Flows for Each of the Companies

203

Table 11.1: Options for Structuring the Market in Scenario 2

209

Table 11.2: Scenario 2: Cash Flows for Each of the Companies

220

Table 12.1: Options for Structuring the Market in Scenario 3

225

Table 12.2: Scenario 3: Cash Flows for Each of the Companies

237

Table 13.1: Comparing the Three Scenarios

241

Table 13.2: Commercial Viability of the Three Scenarios

244

Table 13.3: Comparing Market Structures

246

Confidential

Table 13.4: Capital Costs by Activity and Scenario, 2015-2022

246

Table 13.5: Risk Matrix

248

Table 13.6: Comparing the Scenarios: The IDBs Priority Areas

252

Table 14.1: Percentage of Electricity Generated with each Source


(2023)

257

Table 14.2: Economic Viability of RE Technologies in Scenario 0

262

Table 15.1: Net Benefits of Scenarios (NPV in 2018)

270

Table 15.2: Costs of Scenario 0: Business as Usual (2018-2032)

272

Table 15.3: Costs of Scenario 1: Hub and Spoke (2018-2032)

273

Table 15.4: Economic Benefits and Financial Savings of Scenario 1:


Hub and Spoke

274

Table 15.5: Costs of Scenario 2: Virtual Hub (2018-2032)

275

Table 15.6: Economic Benefits and Financial Savings of Scenario 2:


Virtual Hub

276

Table 15.7: Costs of Scenario 3: Individual Contracts (2018-2032)

277

Table 15.8: Economic Benefits and Financial Savings of Scenario 3:


Individual Contracts

278

Table 16.1: Three Cases for Future Oil Prices

279

Table 16.2: Maximum Viable Price of Natural Gas in Each Case in


2023 (US$ per MMBtu)

281

Table 16.3: Delivered Price of Natural Gas in 2023 for each Scenario
and Case

285

Table 16.4: Net Benefits of Scenarios (NPV in 2018)

287

Table 18.1: Laws and Regulations Relevant to Infrastructure


Development in the Caribbean

296

Table 18.2: National Policies Relevant to LNG in the Caribbean

297

Table 18.3: Institutions with Responsibility for Environmental


Assessments and Planning

298

Table 18.4: Relevant International Treaties and Conventions

299

Table 20.1: Environmental Characteristics by Country

306

Table 20.2: Environmental Vulnerabilities and Risks by Country

309

Table 21.1: Basic Social Data by Country

320

Table 21.2: Socioeconomic Vulnerabilities by Country

321

Table 23.1: Estimated Costs of the Implementation Strategy

340

Confidential

Figures
Figure 0.1: Average Electricity Tariffs in the Caribbean and Florida
(2012)

xiv

Figure 0.2: Historical and Projected Prices for Caribbean Fuel


Options

xv

Figure 0.3: Spot Prices of WTI and Henry Hub 2005-2015

xviii

Figure 0.4: Spread between WTI and Henry Hub, and Price Ratios
(Jan 2014-Jan 2015)

xix

Figure 0.5: Natural Gas Transportation Options

xx

Figure 0.6: LNG Supply Chain

xxii

Figure 0.7: Scenario 1: Hub and SpokeExample of Barbados in


2023

xxv

Figure 0.8: Scenario 2: Virtual HubExample of Barbados in 2023

xxvi

Figure 0.9: Scenario 3: Individual ContractsExample of Barbados


in 2023

xxvii

Figure 0.10: Average Cost of Electricity Generation in 2023

xxviii

Figure 0.11: Viable Renewable Generation Technologies with a


Competitive Caribbean Market for Natural Gas

xxx

Figure 0.12: Energy Efficiency Cost Curve with Natural Gas, 2023

xxxi

Figure 0.13: WTI Forecast in Reference Case and Three Alternative


Cases, 2018-2032
Figure 0.14: Timeline for Implementing Scenario 1

xxxiv
xxxviii

Figure 2.1: TPES in the Countries of Emphasis

10

Figure 2.2: Average Use of Energy Sources by Country

12

Figure 2.3: Map of Countries in this Study

14

Figure 2.4: Average Electricity Tariffs in the Caribbean and Florida


(2012)

15

Figure 2.5: Historical and Projected Prices for Caribbean Fuel


Options

24

Figure 3.1: Global Primary Energy Consumption by Fuel (million


tonnes of oil equivalent)

26

Figure 3.2: Evolution of Natural Gas Production by Region

27

Figure 3.3: Evolution of Global Proven Natural Gas Reserves

28

Figure 3.4: Natural Gas Reserves to Production (R/P) Ratio by


Region

28

Figure 3.5: Natural Gas Consumption by End-User (2012)

31

Confidential

Figure 3.6: Natural Gas Demand by Region

32

Figure 3.7: Major Natural Gas Trade Movements, 2013 (billion cubic
meters)

33

Figure 3.8: Natural Gas Wholesale Prices ($/MMbtu)

34

Figure 3.9: Fuel Share of Global Primary Energy (percentage)

39

Figure 3.10: Natural Gas Demand Outlook by Region

40

Figure 3.11: Regional Natural Gas Demand by Sector

40

Figure 3.12: Global Natural Gas Production Outlook by Region

41

Figure 3.13: Production Outlook for Natural Gas from


Unconventional Sources

42

Figure 3.14: Net Natural Gas Trade by Region

43

Figure 3.15: U.S. Natural Gas Imports and Exports, 2000-2040

44

Figure 3.16: Spot Prices of WTI and Henry Hub 2005-2015

45

Figure 3.17: Monthly and Daily Spot Prices for WTI, 2005-2015

46

Figure 3.18: Monthly and Daily Spot Prices for Natural Gas at Henry
Hub, 2005-2015

47

Figure 3.19: Prices of Natural Gas Liquids (2014-2015)

48

Figure 3.20: Spread between WTI and Henry Hub, and Price Ratios
(Jan 2014-Jan 2015)

49

Figure 4.1: Proven Reserves of Trinidad and Tobago (2000-2013)

56

Figure 4.2: LNG Exports from Trinidad and Tobago (2000-2014)

57

Figure 4.3: Trinidad and TobagoSpot Market Sales of LNG (20062014)

59

Figure 4.4: LNG Imports (2009-2014)

60

Figure 4.5: LNG Imports in the Caribbean

60

Figure 4.6: Share of Total Oil Consumption by Sector

61

Figure 4.7: Potential Natural Gas Supply Sources

65

Figure 5.1: Natural Gas Transportation Options

88

Figure 5.2: Liquefaction Operational Capacity, 2006-2014

90

Figure 5.3: Global LNG Carrier Fleet by Vessel Age (end-2014)

92

Figure 5.4: Global LNG Carrier Fleet by Vessel Size

93

Figure 5.5: Distribution of Operating Small-Scale LNG Carriers by


Size (end-2014)

93

Figure 5.6: LNG Fleet, 2006-2014

95

Figure 5.7: Potential ports for LNG or CNG delivery

97

Confidential

Figure 5.8: Global LNG Regasification Capacity by Terminal Size

98

Figure 5.9: LNG Receiving Terminal Storage Volume by Maximum


Throughput Capacity

99

Figure 5.10: Regasification Units 2006-2014

100

Figure 5.11: CNG Trucks Transported by Ferry in Indonesia

106

Figure 5.12: Design of Gresik Marine CNG Vessel

107

Figure 6.1: LNG Traded on Spot or Short Term Contracts, 2006-2014

127

Figure 6.2: Forecast Price of Natural Gas at Henry Hub, in 2013


dollars (2010-2032)

128

Figure 6.3: EIA Scenarios for Henry Hub Prices 2010-2032

128

Figure 6.4: Forecast Price of WTI, in 2013 dollars (2010-2032)

129

Figure 6.5: EIA Scenarios for WTI 2010-2032

129

Figure 6.6: WTI Prices and Caribbean HFO Prices (2013-2032)

130

Figure 6.7: WTI and Brent Spot Prices (2012 to 2040)

131

Figure 6.8: Price of Fuel Oil vs. Price of NG at Henry Hub (20142032)

132

Figure 6.9: Global Delivered LNG PricesApril 2015

134

Figure 6.10: LNG Supply Chain

137

Figure 6.11: Comparing cost of Delivering LNG and HFO

150

Figure 8.1: Natural Gas Liquids

160

Figure 8.2: LPG Production by Region (2002 to 2012, million tonnes)

162

Figure 8.3: LPG Consumption by Region (2002 to 2012, million


tonnes)

162

Figure 8.4: United States LPG Exports (2006 to 2015)

164

Figure 8.5: Prices for HFO and Ultra-Low Sulfur No. Diesel (2010 to
2015)

167

Figure 8.6: LPG Supply Chain

168

Figure 8.7: Global Ethane Production (2003 to 2012)

169

Figure 8.8: U.S. Gas Plant Production of Ethane-Ethylene

170

Figure 8.9: Spot propane and ethane prices (US$/MMbtu)

171

Figure 8.10: Ethane and Ethylene Exports

174

Figure 8.11: Ethane Supply Chain

177

Figure 8.12: Historical and Projected Prices of No. 2 Diesel, LPG,


HFO, and Natural Gas in the United States (2000 to 2020)

178

Figure III.1: Comparison of the Three Scenarios

180

Confidential

Figure 10.1: Scenario 1: Hub and SpokeExample of Barbados


(2023)

184

Figure 10.2: Average Discount of HFO 2018-2032

188

Figure 10.3: Volumes Contracted under Scenario 1, by Offtaker, 20182032

189

Figure 10.4: Investment Costs for Scenario 1 by Activity, Excluding


Investments in Power Plants

191

Figure 10.5: Investment Costs for Scenario 1 by Activity, Including


Investments in Power Plants

192

Figure 10.6: Investment Costs for Scenario 1 by Market Player,


Including Investments in Power Plants

192

Figure 10.7: Cost of Delivered Natural Gas for Scenario 1, 2018-2032

194

Figure 10.8: Scenario 1: Discount on Fuel Oil Prices

197

Figure 10.9: Henry Hub v Acquired Price of Natural Gas for Scenario
1

198

Figure 10.10: Costs of Generating Electricity with Natural Gas,


Scenario 1

199

Figure 11.1: Scenario 2: Virtual HubExample of Barbados (2023)

205

Figure 11.2: Average Discount of HFO 2018-2032

208

Figure 11.3: Volumes Contracted under Scenario 2, by Offtaker, 20182032

209

Figure 11.4: Investment Costs for Scenario 2 by Activity, Excluding


Investments in Power Plants

210

Figure 11.5: Investment Costs for Scenario 2 by Activity, Including


Investments in Power Plants

211

Figure 11.6: Investment Costs for Scenario 2 by Market Player,


Including Investments in Power Plants

211

Figure 11.7: Cost of Delivered Natural Gas by Offtaker for Scenario 2,


2018-2032

212

Figure 11.8: Scenario 2: Discount on Fuel Oil prices

214

Figure 11.9: Henry Hub v Acquired Price of Natural Gas for Scenario
2

215

Figure 11.10: Costs of Generating Electricity with Natural Gas,


Scenario 2

216

Figure 12.1: Scenario 3: Individual ContractsExample of Barbados


(2023)

222

Figure 12.2: Average Discount of HFO 2018-2032

224

Confidential

Figure 12.3: Volumes Contracted under Scenario 3, by Offtaker in


2018, 2023, and 2032

225

Figure 12.4: Investment Costs for Scenario 3 by Activity, Including


Investments in Power Plants

227

Figure 12.5: Cost of Delivered Natural Gas by Offtaker for Scenario 3,


2018-2032

228

Figure 12.6: Henry Hub v Acquired Price of Natural Gas for each
Contract in Scenario 3

231

Figure 12.7: Discount on fuel Oil for each Country in Scenario 3

232

Figure 12.8: Costs of Generating Electricity with Natural Gas,


Scenario 3

233

Figure 13.1: Scenarios: Commercial Viability vs. Delivered Price of


Natural Gas

240

Figure 13.2: Volumes by Scenario, 2023

241

Figure 13.3: Acquired Price of Natural Gas and HH Price, 2023

242

Figure 13.4: Price of Delivered Natural Gas by Scenario and Offtaker,


2023

243

Figure 14.1: Comparing Cost of Generating with Natural Gas with the
Cost of Generating with Fuel Oil (2023)

256

Figure 14.2: Average Generation Cost of Systems with Natural Gas


(2023)

258

Figure 14.3: All-in Costs of Generation of Natural Gas Plants v. Fuel


Oil Plants (2023)

260

Figure 14.4: RE Cost Curves with Natural Gas, 2023

263

Figure 14.5: Energy Efficiency Cost Curve with Natural Gas, 2023

268

Figure 16.1: WTI Forecast in Three Cases, 2018-2032

280

Figure 16.2: Maximum Delivered Price of NG for it to be Feasible in


Three Cases

283

Figure 16.3: Price of Delivered Natural Gas by Scenario and Offtaker,


2023

286

Figure 16.4: Feasible RE Technologies in Four Fuel Price Scenarios

289

Figure 20.1: Carbon Dioxide Emissions from Thermal Electricity


Generation in Business as Usual Scenario (even years from 2018 to
2032)

312

Figure 20.2: Carbon Dioxide Emissions from Thermal Electricity


Generation in Scenario 1 v Business as Usual Scenario (million
tonnes, in even years)

314

Confidential

Figure 21.1: Electricity Bill (for 161 kWh) as a Percentage of Per


Capita GNI (2012)

323

Figure 22.1: Timeline for Implementing Scenario 1

328

Figure 22.2: Timeline for Activity 1: Agree on Process for First-Phase


Tender

328

Figure 22.3: Timeline for Activity 2: Identify and carry out


complementary studies

330

Figure 22.4: Timeline for Activity 3: Develop Financing Mechanism

332

Figure 22.5: Timeline for Activity 4: Legal and Regulatory Reform

333

Figure 22.6: Timeline for Activity 5: Develop Tender Documents

335

Figure 22.7: Timeline for Activity 6: Contract NG Supplier

336

Figure 22.8: Timeline and Tasks for Activity 7: Develop Required


Infrastructure

337

Figure 22.9: Timeline for Implementation Strategy with All Activities


and Tasks

338

Confidential

Abbreviations and Definitions


AAV
ABS
Bcf
EBS
BEL
BL&P
Btu
BOT
CAPEX
CGL
CNG
CREG
DES
DOE
EBITDA
EBS
ECGPC
EDH
EIA
FSRU
FTA
FSRUs
Gasfin
GBPC
GBS
GDP
GI-9
GPL
GT
IDB
IMF
IMO
IRR
JCC
JPS
LNG

Ambient Air Vaporizer


American Bureau of Shipping
Billion cubic feet
Energie Bedrijven Suriname
Belize Electricity Limited
Barbados Light & Power Company Limited
British thermal unit
Build Operate Transfer
Capital Expenditure
Compressed Gas Liquid
Compressed Natural Gas
Comisin de Regulacin de Gas
Delivered Ex-Ship
US Department of Energy
Earnings Before Interest, Taxes, Amortization and Depreciation
Energie Bedrijven Suriname
Eastern Caribbean Gas Pipeline Company Limited
Electricit d'Hati
Energy Information Administration
Floating Storage and Regasification Unit
Free Trade Agreement
Floating storage and regasification units
Gasfin Development S.A
Grand Bahama Power Company
Gravity-based structure
Gross Domestic Product
Ninth General Capital Increase of the IDB
Guyana Power & Light Inc.
Grupo de Generadores Trmicos
Inter-American Development Bank
International Monetary Fund
International Maritime Organization
Internal Rate of Return
Japan customs-cleared crude price
Jamaica Public Service Company
Liquefied Natural Gas
i

Confidential

LPGs
mtpa
MMBtu
MMcf
MMscfd
NBP
NEB
NGLs
NGVs
O&M
OPEX
ORV
Pacific Rubiales
R/P
SCV
S&P
Tcf
TPES
VOTRANS

Liquid Petroleum Gases


Million tonnes per annum
Million British thermal units
Million cubic feet
Million standard cubic feet per day
National Balancing Point
National Energy Board
Natural Gas Liquids
Natural gas vehicles
Operating and Maintenance Costs
Operating Expenses
Open rack vaporizers
Pacific Rubiales Energy Corporation
Reserve-to-Production ratio
Submerged combustion vaporizer
Standard & Poors
Trillion cubic feet
Total primary energy supply
Volume Optimized Transport and Storage

ii

Confidential

Executive Summary
The Inter-American Development Bank (IDB) contracted Castalia to determine the
feasibility of establishing a competitive commercial supply chain for natural gas in the
Caribbean region. Our analysis looks at the entire Caribbean region to develop the best
scenario for developing a supply chain for natural gas, paying particular attention to The
Bahamas, Barbados, Belize, Dominican Republic, Guyana, Haiti, Jamaica, Suriname, and
Trinidad and Tobagothe countries of emphasis.
The Caribbean energy sector and the potential for natural gas
Caribbean countries small size and isolation from producers of fossil fuels has led most to
rely on oil products to generate electricity and meet other energy needs. Oil products meet
86 percent of energy needs for the eight countries of emphasis that import fossil fuels.1 The
Dominican Republic is the only one of these countries that imports large amounts of fossil
fuels other than oil products (Haiti imports a small amount of natural gas by truck from the
Dominican Republic).
The high price of oil products leads to high energy costs in the region, which slows
economic growth and hurts competitiveness. Electricity prices in many Caribbean countries
are at US$0.30 per kWh or more, about three or four times higher than prices in neighboring
Florida. Thirty-eight percent of businesses in the region cite electricity concerns as a
constraint to business success.2 In most Caribbean countries, high prices are driven by the
high cost of the fuel oil3 used for electricity generation. Oil prices are also volatile, making it
difficult for consumers to predict electricity and other energy expenses.
Replacing oil products with natural gas in the Caribbean could reduce energy prices and the
environmental impact of the regional energy sector. Oil prices dropped by almost 50 percent
between mid-2014 to mid-2015,4 reducing energy import costs around the Caribbean.
Despite this drop, alternative fossil fuels, including natural gas, are still cheaper than oil
products in many markets. Natural gas emits about 56 percent less NOx and 38 percent less
CO2 than oil products when burned for electricity generation, and almost no SO2.5
However, wide differences in natural gas prices in different markets around the world show
that importing natural gas economically in the Caribbean could be difficult. High
1

Average weighted by consumption for The Bahamas (2008 estimate), Barbados (2010), Belize (2010), Dominican Republic
(2012), Guyana (2010), Haiti (2012), Jamaica (2012), and Suriname (2010)

The World Bank Group, Business Enterprise Survey.

The most common oil product used is heavy fuel oil (HFO), thought diesel and other oil products are also used. In these
report, fuel oil refers to all oil products used as fuel.

For example, on 30 April 2015, the spot price of West Texas Intermediate crude oil was US$60 per barrel, a 44 percent
reduction from 30 June 2014 (US$106) (price data from the United States Energy Information Administration).

Values for NOx and SO2 are Castalia calculations based on US EPA average emissions from US power plants, natural gas
vs. all oil products. Values for CO2 are based on natural gas vs. HFO. They are Castalia calculations based on carbon
content data from the Intergovernmental Panel on Climate Change (IPCC) and Castalia assumptions. IPCC reports
carbon contents of 25 kg/GJ for coal, 13.8 for natural gas, and 20 for HFO. We then use the following points to
estimate CO2 emissions for each fuel a) thermal efficiencies of 35 percent for HFO and 39 percent for natural gas b) an
oxidization factor of 99 percent for all fuels c) we convert carbon into CO2 by a factor of 3.67 to account for the higher
molecular weight of CO2 after oxidation of carbon (44/12 is the ratio between the molecular weights of carbon and
oxygen).

iii

Confidential

transportation costs and competition for globally traded gas lead to higher prices for
imported natural gas, compared to natural gas produced domestically.
Across the Caribbean, demand for natural gas is expected to be determined primarily by its
use for electricity generation, for two main reasons. First, electricity generation is the largest
potential market for natural gas, accounting for 43 percent of fossil fuel use in the eight
countries that import fossil fuels in this study. Second, electricity generators, whether
independent power producers or utilities, represent large potential offtakers for natural gas,
and will have the demand to justify large capital investments in infrastructure to import
natural gas without partnering with other energy users.
Global and regional markets for natural gas and implications for the Caribbean
Natural gas is among the most important sources of energy in the world today. Globally,
natural gas consumption reached 118 trillion cubic feet (Tcf) in 2013. This is 24 percent of
total primary energy consumption worldwide, putting natural gas on par with oil and coal as
the worlds largest energy sources. Global demand is projected to grow to 132 Tcf in 2020,6
supplied largely by conventional natural gas, but also increasingly by unconventional
resources, including shale gas.
Natural gas markets remain relatively isolated due to the high cost to transport natural gas,
especially relative to coal and oil products. In 2013, only 30 percent of total global demand
was traded across borders. Just over two-thirds of this total was transported via pipelines.
The remainder of global gas trade was in the form of liquefied natural gas (LNG). The only
Caribbean country that exports LNG, Trinidad and Tobago, was among the top 5 LNG
exporters in 2013, shipping 699 Bcf. As demand for natural gas grows, global LNG
production is expected to increase from 11.5 Tcf per year in 2013 to 18 Tcf by 2025.7 A
number of potential suppliers have also proposed transporting compressed natural gas in
ships built specifically for that purpose, and although some projects are planned, no such
ships have been built.
Most Caribbean countries have been unable to import natural gas and take advantage of the
price difference compared to fuel oil, because their demand is too small to justify investing in
the expensive infrastructure needed to import natural gas, and because tight global supply
has made it difficult to contract natural gas at a competitive rate. However, expectations of
large new supplies of tradable natural gas, cheap natural gas in the United States and other
producing countries, technology advances, and growing pressure to reduce greenhouse gas
emissions are creating an opportunity to bring competitive natural gas to smaller markets,
such as the Caribbean.
New supply to the region will most likely come from the United States, but other
neighboring countries, including Canada, Mexico, Colombia, and Venezuela, have the
potential to substantially increase natural gas production. Trinidad and Tobago already
supplies the Caribbeans existing LNG import facilities in the Dominican Republic and
Puerto Rico,8 and could supply other Caribbean countries as well.
6

United States Energy Information Administration, International Energy Outlook. 2013.

Alan Weitzner, LNG Development Outlook, Stakeholders Infrastructure Advisory LLC, October 2013.

Source: BP Statistical Review of World Energy, 2013

iv

Confidential

Despite these positive trends, many challenges remain. The capital costs for any natural gas
transportation infrastructure remains high. Many Caribbean countries and utilities face
financial pressures that may limit their ability to support investment of this scale. Also,
natural gas import projects benefit from economies of scale, suggesting the potential for
greater returns from larger markets than from smaller ones. As such, some suppliers may
charge a premium for delivering natural gas in small quantities, as some Caribbean countries
would require. Finally, small markets and relatively limited supply make it unlikely that prices
will be set in a competitive market between natural gas suppliers.
Delivering Natural Gas to the Caribbean as LNG
In general, natural gas can be transported to the Caribbean in three ways: in a pipeline, as
highly compressed natural gas (CNG) on a ship, or as liquefied natural gas (LNG) on a ship. 9
LNG is likely the best option for creating a regional natural gas market in the Caribbean,
because it is:
Likely cheaper than the alternatives.10 The cost of liquefying natural gas,
delivering LNG to the Caribbean, and regasifying it would range between
US$3.29 and US$6.57 per MMBtu, plus the price of natural gas at origin. The
price of natural gas at origin, that is, the price that LNG suppliers would charge
for the natural gas itself, is the most uncertain (and likely the largest) component
of the final delivered cost of natural gas
A mature technology with relatively certain costs and low risks. LNG has
been transported by ship for more than 50 years. CNG ships have been proposed
but none are yet operating commercially, which adds technology and cost risks for
this option
The most flexible supply option. LNG is technically feasible for all countries of
emphasis. In addition, there are many global LNG suppliers, which can help
ensure that offtakers do not depend on a single supplier.
Natural Gas Liquids as Alternatives to Fuel Oil
Liquid petroleum gases (LPG) and ethane are two natural gas liquids (NGLs) that could be
used for electricity generation in the Caribbean. Though they are not typically used for
power generation, excess supply from the U.S. has driven down prices for these fuels,
making them potentially competitive with fuel oil. The three main potential advantages to
LPG and ethane, compared to LNG, are that they:
May be cheaper than LNG to deliver to the Caribbean, though price
uncertainty is high. Propane was slightly more expensive than natural gas in the
9

In pipelines and compressed natural gas (CNG) vessels, natural gas is compressed while still in its gaseous state for
transportation. Proposed CNG vessels would compress natural gas to about 300 times its density at ambient
temperatures and pressures. When cooled to a liquid for transportation, natural gas becomes 600 times denser than at
ambient temperatures and pressures.

10

Our model for costs for the three technology alternatives estimated that LNG would be the cheapest technical option to
deliver natural gas in most markets. In the Dominican Republic, we estimated that CNG would cost about the same as
LNG. Pipeline costs are lower than LNG in Grand Bahama (though only if it is part of a pipeline that continues to New
Providence) and on par with LNG for Barbados, and for a pipeline that reaches Guyana and Suriname (but only if both
countries are included).

Confidential

United States in June 2015,11 but infrastructure to import LPG would likely be
much cheaper than the infrastructure to import LNGmore than enough to
offset the difference in fuel prices. Ethane was trading slightly below natural gas
in June 2015
Are likely easier to procure for Caribbean markets. A challenge to importing
LNG is that offtakers credit does not meet suppliers requirements, so suppliers
often ask for a financial guarantee. LPG and ethane suppliers may not demand
such stringent financial terms
May be available more quickly than LNG. NGL suppliers are looking for
markets immediately, and exporting and receiving infrastructure is quicker to
build for NGLs than for LNG.
Despite these advantages, we expect that LNG will be a better long-term option for most
Caribbean markets. First, because production and trading volumes are smaller than natural
gas, LPG and ethane are more vulnerable to demand shocks. LPG production was only 8
percent of natural gas production in the United States in 2014, and ethane production as
only 4 percent of natural gas production.12
For LPG, prices are likely to rise in the medium term, relative to other fuels. LPG prices
have historically been comparable to heavy fuel oil (HFO) prices, and the projected average
spread is US$1.6 per MMBtu between 2015 and 202013not enough to cover the cost of
investments to receive LPG.
Ethane has not been used for power generation by utilities anywhere in the world, creating
some technology risk and cost uncertainty. Although current projections are for ethane
prices to remain low over the medium term, ethane prices are unlikely to stay below natural
gas prices. This is because ethane can often be sold mixed with methane and sold as natural
gas (that is, ethane is not separated from methane during processing) when the price of
natural gas is higher than that of ethane.
Still, NGLs could be used as bridge fuels until LNG comes available. Infrastructure to
receive ethane is similar to the infrastructure needed for LNG, which may create options for
re-use and fuel switching as markets evolve. Generators can be ordered with the capacity to
use multiple fuels, or converted from fuel oil to a dual-fuel setup (either LPG and natural
gas, or ethane and natural gas). Infrastructure to receive LPG cannot be re-used for LNG,
likely making LPG less attractive as a bridge fuel than ethane.

11

On 15 June 2015 at the main U.S. trading hubs, LPG was trading at US$1 per MMBtu higher than natural gas (United
States Energy Information Administration).

12

Comparison of marketed natural gas production (production less producers own use and vented and flared gas) and
propane, butane, and isobutane production for LPG, and ethane production (United States Energy Information
Administration).

13

United States Energy Information Administration, Energy Outlook 2015. 14 April 2015.
http://www.eia.gov/forecasts/aeo/ accessed 22 June 2015

vi

Confidential

Pricing possibilities for LNG in the Caribbean


There are three general methodologies that can be used to set the price of LNG in the
absence of a market-set price based on competition between natural gas suppliers.
A cost-plus pricing system adds the cost of each segment of the natural gas value chain,
including a reasonable return on investment for each participating agent, to arrive at a fair
price for the natural gas delivered to the consuming market. An opportunity-cost pricing
system links the price for LNG delivered to a particular market with the price already being
paid for LNG in another market.
A substitution cost approach links the price of LNG with the fuel that it is replacing in the
destination market, creating price competition between liquid fuels and natural gas. For the
Caribbean, LNG prices would be discounted from fuel oil parity, that is, the equivalent price
of fuel oil on a per energy basis. The approach has the benefit of locking in a discount to the
cost of the fuel being replaced. For the cost estimates for the three scenarios below, we
assume that the substitution cost approach is used. This pricing is likely if there is relatively
low U.S. LNG export capacity available. Because suppliers would not face as much
competition from U.S. exports, there would be less pressure to match Henry Hub pricing, so
suppliers would instead price LNG based on the alternative fuel in each destination market
(in the Caribbeans case, heavy fuel oil).
Three Scenarios for Creating a Competitive Market for Natural Gas in the Caribbean
Based on the considerations abovethat LNG would be the best technology for a regional
market, that initial demand would come from electricity generation, and that pricing based
on the substitution cost is the most likelywe have designed three scenarios for developing
a regional LNG market.
In Scenario 1: Hub and Spoke, a private company in a country in the Caribbean acts as a
hub for purchasing large shipments of LNG. This LNG is then redistributed by the same
company that purchased the large volume of LNG, or by another private company, in
smaller ships to offtakers in other countries. In this scenario, we assume offtakers could pay
a delivered cost of natural gas equal to fuel oil parity minus 30 percent. For the three
scenarios, we assume that offtakers would participate in the market only if they can sign a
contract to buy natural gas at a minimum discount of 20 percent compared to the price of
HFO. This discount is necessary to justify investing in infrastructure to import and use
natural gas. In this scenario, all countries considered participate in the regional market,
except for Belize and the island of Grand Bahamasmall markets where the costs to deliver
natural gas would be too high. In this scenario, the cost of infrastructure to import and use
natural gas would be about US$4.0 billion for the region from 2015 to 2022, including the
cost of infrastructure to import LNG in each country and the cost of the trans-shipment
hub. About half of infrastructure investments would be in new power plantsinvestments
which will need to be made to meet growing demand whether natural gas is used or not.
In Scenario 2: Virtual Hub, a single private company provides LNG directly to all
countries with interested offtakers. The single supplier of natural gas acts as a virtual hub
that allows all interested countries to be part of the same arrangement and obtain the natural
gas at a feasible price. This supplier would deliver the gas directly from the supply point to
each of the offtakers. For this scenario, we assume offtakers could import LNG at a
delivered cost equal to fuel oil parity minus 25 percent. As in Scenario 1, all countries would
participate in Scenario 2 except for Belize and the island of Grand Bahama. In this scenario,
vii

Confidential

the cost of infrastructure to import and use LNG would be about US$3.9 billion for the
region between 2015 and 2022. As in Scenario 1, about half of the cost would be for new
power plants.
In Scenario 3: Individual Contracts, each country that finds it economically viable to buy
natural gas on its own does so by contracting individually and directly with a supplier. This
scenario would require less coordination among different countries. In this scenario, we
assume offtakers import LNG at a price equal to fuel oil parity minus 20 percent. In this
scenario, countries would spend between about US$200 million (Guyana) and just over
US$1 billion (Dominican Republic) to build the infrastructure to import and use natural gas
between 2015 and 2022.
Cost benefit and sensitivity analyses
A cost benefit analysis shows that net benefits are highest in Scenario 2 in the reference case.
Combined net economic benefits for all countries in Scenario 2 would be US$6.40 billion,
with total financial savings of US$4.4 billion, compared to the business-as-usual case[1]very
slightly higher than the estimated net economic benefits of US$6.36 billion and financial
savings of US$4.3 billion in Scenario 1. Scenario 3 still yields large benefits for the region: net
economic benefits of US$5.3 billion and financial savings of US$3.2 billion.[2] In 2023, it is
estimated that Scenario 2 would lead to an average reduction of 15 percent in the cost of
electricity generation compared to using HFO, slightly more than the 13 percent reduction in
Scenario 1 and the 12 percent reduction in Scenario 1.
We also analyzed three alternative projections for future oil and natural gas prices, in
addition to the reference case. In the reference case, oil prices are projected to be US$80 per
barrel in 2023, compared to US$56 in the lower fuel-price case, and US$102 and US$156 in
the two higher fuel price cases. In the low fuel price case, natural gas would not be feasible
for any of the countries of emphasisfuel oil would be a cheaper long-term option for
electricity generation. In the two higher fuel price cases, natural gas is feasible, since it is
lower cost than fuel oil, and Scenario 1 yields the lowest prices and highest benefits.
Scenario 1 is the preferred scenario for the Caribbean
All three Scenarios for a regional natural gas market would lead to reduced fuel prices for
electricity generation, which contributes to the IDBs goals of reducing poverty, addressing
the needs of small and vulnerable countries, and addressing climate change and
environmental sustainability.[3]
Scenario 1 is the preferred scenario because:
[1]

Net present values in 2018 for the years 2018 to 2032, in constant 2012 US$. We calculate total costs as the sum of the
cost of generation and the cost of carbon dioxide (CO2) emissions. We assume that all scenarios will generate the same
quantity of electricity. Based on this assumption, we do not estimate the benefits from generating electricity for each
scenario, because all benefits would be the same and the incremental benefits for any scenario would be zero. Because
the difference in benefits between scenarios is zero, we derive the savings in net benefits for each scenario by subtracting
the total costs of each scenario from the total costs of Scenario 0.

[2]

Both figures are for the years 2018 to 2032, in constant 2012 US$.

[3]

In the Ninth General Capital Increase (GI-9), the Board of Governors sets the IDBs objectives, strategic goals, and
sector priorities. These definitions result in the following main areas of action: Reducing poverty and social inequalities;
addressing the needs of small and vulnerable countries; fostering development through the private sector; addressing
climate change, renewable energy and environmental sustainability; and promoting regional cooperation and integration.

viii

Confidential

Regional demand for natural gas would be the highesta physical regional
hub could allow existing natural gas demand from the Dominican Republic to be
included in the regional scenario
It is the most commercially viablebecause demand would be the largest of
any scenario, supplier interest would be highest. This means that the required
contracts would be more likely to be available on the market than in the other
scenarios
Prices could be the lowestin our reference case for oil and natural gas prices,
Scenario 2 would lead to the lowest prices for offtakers. However, if the spread
between oil and natural gas prices widens more than forecasted in the reference
case, Scenario 1 would lead to the lowest prices.
Although Scenario 1 would be the best for the region, it may be the most difficult to arrange,
because of the need for a regional agreement among offtakers, coordinated infrastructure
investments, and a single regional tender to procure supply. If Scenario 1 is not possible,
other market scenarios with aggregated demand are preferable to an individual contracts
scenario. Potential advantages to Scenario 2 are that it would require slightly less
coordination, and that, in the reference case, it would likely lead to the lowest natural gas
prices for all offtakers. If no coordination is possible, seven[4] of the countries of emphasis
could still benefit by contracting for natural gas individually with suppliers, compared to the
business as usual scenario.
Based on the level of interest of potential suppliers and other market participants, it is likely
that some of the individual contracts that would form part of Scenario 3 will be secured
without any intervention in the market. Due to the level of additional coordination and
complexity required for Scenarios 1 and 2, external assistancefor example from an entity
like the IDBwould be essential for bringing all the parties together at the right time.
Viable renewable generation and energy efficiency technologies with natural gas
Biomass, hydro, on-shore wind, and large-scale solar PV technologies could all be viable
technologies for renewable generation if a competitive natural gas market were introduced in
the Caribbean, depending on the scenario. Indeed, large potential hydropower projects in
Guyana and Suriname could be a cheaper source of electricity generation than importing
natural gas, significantly reducing or eliminating future demand for LNG in these countries.
Eight of the 25 energy efficiency initiatives we analyzed are economically viable in any
natural gas scenario: coolingreduce infiltration on louvered windows (or leaky
doors/windows), premium efficiency transformers, retrofit existing windows with low
SHGC film, refrigerationthermosyphon oil cooling for screw compressors, chain drive to
synchronous belt drives, refrigeration2-stage compressor retrofit, power factor correction,
and refrigerationliquid pressure amplification on compressors. Seven other energy
efficiency initiatives would also likely be viable in some countries and scenarios.
Because the costs of natural gas, renewable generation technologies, and energy efficiency
technologies will vary according to the specific circumstances in each country, viable
[4]

All the fossil-fuel importing countries except for Belize, where demand is too low to recover needed infrastructure
investments.

ix

Confidential

renewable generation and energy efficiency technologies must be considered on a case-bycase basis.
Environmental and Social Impacts and Risks of Introducing Natural Gas
The introduction of natural gas in the Caribbean can have significant positive environmental
impacts, both locally and globally. In Scenario 1, carbon dioxide emissions from thermal
electricity generation would be reduced by about 23 percent across the region in 2018, rising
to 30 percent in 2032. Further, LNG is not flammable in its liquid state, meaning that it can
be less dangerous to store than many liquid fuels. In the event of a leak, LNG reverts to
gaseous form under ambient temperatures and pressures and quickly dissipates, so a major
leak or accident does not create the same long-term localized environmental damage as
would a spill of liquid fuels. The LNG industry has an exceptional marine and land safety
record.14 However, in the event of a major spill, LNG can flow rapidly and potentially create
a dense vapor cloud in gaseous form that could ignite. For this reason, LNG facilities need
numerous safety mechanisms to detect and prevent a catastrophic failure.
Reducing the high price of electricity in the Caribbean would be the most important social
effect of introducing natural gas to the region for electricity generation. Generation costs
could decrease as much as 26 percent, depending on the country and the scenariosavings
that could be passed on to consumers. Another social benefit from bringing natural gas to
the Caribbean is that the infrastructure development needed to import and use LNG would
create jobs for residents directly involved in construction and operations, and lead to
increased revenues near the areas of development. Social risks include risks of injury and
accidental death for on-site personnel, as with construction and operation of any large
industrial facility. Catastrophic leaks of the sort that would endanger the public are
exceedingly rare with proper precautions.
Strategy for Implementing Scenario 1
With a coordinated and well-structured regional approach, the first shipments of gas in
Scenario 1 could arrive between five and six years after countries agree on an approach to
the first-phase tender.
The first activity to implement Scenario 1 would be for participating countries to agree on a
process and key terms for a first-phase tender to contract natural gas supply. In Activity 2,
necessary complementary studies would need to be identified and carried out, including
engineering studies and detailed environmental and social impact assessments. In Activity 3,
a financing mechanism and business plans would need to be developed for offtakers. In
Activity 4, countries would need to make any legal and regulatory changes necessary to
enable the importation and use of natural gas.
In Activity 5, the tender documents and process for a regional natural gas supply agreement
would need to be prepared. Finally, countries would need to contract a natural gas supplier
according to the tender process (Activity 6), and develop the required infrastructure to
import and use natural gas (Activity 7).

14

Quillen Report. Chevron Texaco Corp. Investment in a Healthy US Energy Future. Retrieved from
http://www.netl.doe.gov/publications/proceedings/02/ngt/Quillen.pdf

Confidential

The total cost of in-country tasks would be in the range of US$1.9 million and US$2.4
million per country. The total cost of regional tasks would be in the range of US$0.5 million
to US$0.6 million, and cover three regional workshops and the development of a regional
financing mechanism. If all seven countries of emphasis that would import natural gas in
Scenario 1 participate in all in-country tasks, and all regional activities are completed, the
overall cost of the implementation strategy would be in the range of US$14 million and
US$17 million.

xi

Confidential

Technical Summary
The Inter-American Development Bank (IDB) contracted Castalia to determine the overall
feasibility of establishing a competitive commercial supply chain for natural gas in the
Caribbean region. In determining the feasibility of introducing natural gas in the region, we
analyzed the technical, economic, financial, and commercial feasibility, including an analysis of
investment costs, and costs and prices for delivering gas in the region. This Technical Summary presents
the conclusions from the five components of this study, originally completed in October
2014, and updated in June 2015:
Component I (Assessment of Potential Natural Gas Market in the Caribbean)
Component II (Technical Analysis of Natural Gas in the Caribbean)
Component III (Scenarios for Introducing a Competitive Natural Gas Market in
the Caribbean)
Component IV (Socio-environmental Impact and Risk Analysis)
Component V (Strategy for Implementing the Preferred Scenario).
Our analysis looks at the entire Caribbean region to develop the best scenario for developing
a supply chain for natural gas, paying particular attention to The Bahamas, Barbados, Belize,
Dominican Republic, Guyana, Haiti, Jamaica, Suriname, and Trinidad and Tobagothe
countries of emphasis. Caribbean countries rely heavily on imported oil-based fuels for
power generation and other energy needs. Although oil prices dropped sharply between mid2014 and mid-2015, oil products are still more expensive than alternative fossil fuels in
nearby markets. Prices are also volatile, meaning that prices could increase in the future, and
making it difficult on consumers to predict electricity and other energy expenses. Further, oil
products release higher emissions of CO2 and local pollutants than natural gas, and some
other alternative fossil fuels. As such, introducing a competitive market for natural gas in the
Caribbean could reduce the fuel prices in the Caribbean, and reduce the environmental
impact of the sector.
We determined that liquefied natural gas (LNG) would be the best technical option for
creating such a regional market, because it is likely to be cheaper than the alternatives for
most countries, and because it is a mature technology that is technically feasible for all the
countries of emphasis. We then designed three possible scenarios for a regional LNG
market: two in which countries would coordinate to pool demand from a single supplier, and
one in which each country would contract separately with a supplier.
To compare the impact of the scenarios on fuel prices in the region, we then built a model to
estimate the investment costs, final delivered price of natural gas, and estimated the price of
electricity generation from natural gas for each country in each scenario. We found that by
coordinating demand and contracting with a single regional supplier, countries could pay
substantially less for fuelwhich would substantially reduce electricity generation costs
compared to a scenario in which each country contracts separately with a supplier.
Nonetheless, all three scenarios for a regional LNG market would lead to lower fuel and
electricity costs than continuing to depend on fuel oil.15 Despite the complex coordination
15

In this report, fuel oil refers to all refined oil products.

xii

Confidential

required to aggregate demand, we conclude that a hub and spoke scenario, in which the
countries in this study aggregate LNG demand at a physical hub, then distribute it to all
offtaking countries, is the preferred scenario for the region. Under the reference case for oil
and natural gas prices, prices would be slightly higher in Scenario 1 than in Scenario 2 (a
virtual hub, where a single supplier meets all regional demand, but not from a hub within the
region). However, a slightly wider difference between oil and gas prices than our reference
case would make Scenario 1 the lowest cost. Further, Scenario 1 is likely the most
commercially viable, since the volume of natural gas contracted would be the largest.
A regional social and environmental risk and impact analysis shows that, with adequate
precautions, importing, storing, and using LNG can have lower risks for the environment
than handling oil products. The most important social impact of introducing natural gas for
in the Caribbean will be a reduction in the cost of electricity generation by as much as 26
percent, depending on the country and the scenario. These savings can be passed on to
residential, commercial, and industrial electricity consumers, reducing the burden of high
electricity tariffs across the region.
Based on our conclusions that a hub and spoke scenario would bring the largest benefits to
the region, and that such a scenario would have relatively low risks for the environment and
residents, we designed a strategy for implementing this market scenario across the
Caribbean. The strategy lays out seven activities required to implement the scenario, each of
which are broken down into various tasks. We proposed a timeline to ensure the effective
coordination and sequencing of each activity, anticipating the first flow of natural gas to the
region five or six years after countries agree to an approach to tender the contract for
regional supply. Based on the estimated cost per task, we estimated the total cost of all incountry and regional tasks in the range of US$14 and US$17 million.

0.1

Overview of the Caribbean Energy Sector

Caribbean countries small size and isolation from producers of fossil fuels has led most to
rely on oil to generate electricity and meet other energy needs. Oil products meet 86 percent
of energy needs for the eight countries of emphasis that import fossil fuels.16 The Dominican
Republic is the only one of these countries that imports large amounts of fossil fuels other
than oil products (Haiti imports a small amount of natural gas by truck from the Dominican
Republic).
The high price of oil products leads to high energy costs in the region, which slows
economic growth and hurts competitiveness. For example, Figure 0.1 shows that electricity
prices in the Caribbean are often US$0.30 per kWh or more, three or four times higher than
prices in neighboring Florida (except for in Suriname and Trinidad and Tobago). In most
countries in the region, high prices are driven by the high cost of the fuel oil used for
electricity generationfuel costs account for about 75 percent of operational expenses for
Caribbean utilities.17 In Suriname, low prices are largely due to high Government subsidies
on tariffs. Low prices in Trinidad and Tobago are largely due to the availability of low-cost
16

Average weighted by consumption for The Bahamas (2008 estimate), Barbados (2010), Belize (2010), Dominican
Republic (2011), Guyana (2010), Haiti (2011), Jamaica (2011), and Suriname (2010)

17

Average for BEL (Belize), LUCELEC (Saint Lucia), VINLEC (Saint Vincent and the Grenadines), BL&P (Barbados),
DOMLEC (Dominica), CUC (Cayman Islands), JPS (Jamaica), ANGLEC (Anguilla), GLP (Guyana), and GRENLEC
(Grenada).

xiii

Confidential

natural gas for electricity generation, though subsidies play a role in Trinidad and Tobago as
well.18
Figure 0.1: Average Electricity Tariffs in the Caribbean and Florida (2012)

Source: Annual Reports for the utilities; EDH website for the Haiti tariff; CDEEE for the DR tariff; SNL
Energy for Florida Average; T&TEC Business Plan for Trinidad and Tobago

The Potential for Natural Gas in the Caribbean


Replacing oil products with natural gas in the Caribbean could reduce energy prices in the
region. Figure 0.2 shows historical and projected prices across a variety of markets for
potential fuels for electricity generation in the Caribbean. Current and projected prices for
natural gas at Henry Hubthe largest natural gas trading hub in the United Statesare
easily the cheapest of fuels shown. However, the global variation in natural gas prices shows
that transporting natural gas economically to the Caribbean could be difficult. Europe and
Japan, the two of the largest import markets for natural gas, pay two times (Europe) or three
times (Japan) higher prices for natural gas than consumers in the United States, which
produces most of the natural gas that it consumes. High transportation costs and
competition for globally traded gas lead to higher prices for imported natural gas.
The countries of emphasis in the Caribbean would have to import all natural gas they use.
This will certainly make prices higher than in the United States. Whether the Caribbean pays
more (or how much more) than Europe and Japan for natural gas will depend on
18

The National Gas Company, which is wholly owned by the Government of Trinidad and Tobago, sells natural gas to
electricity generators and some industrial users at a lower price than it could earn by exporting the gas as LNG. The IMF
estimates that lost revenues from these sales of natural gas total about US$1 billion annually (4.45 percent of GDP)
(IMF, Energy Subsidy Reform: Lessons and Implications. 28 January 2013).

xiv

Confidential

developments in global and regional supply and demand, and developments in the price of
oilthe fuel that natural gas would replace in the Caribbean.
Figure 0.2: Historical and Projected Prices for Caribbean Fuel Options

Note:

All prices are 2013 US dollars.

Sources: Prices and projections for Japan LNG, Henry Hub, and Europe natural gas (cross border traded
average) are from the World Bank. Prices for No. 2 Diesel, LPG, and HFO are from the United
States Energy Information Administration. Projections for No. 2 Diesel and HFO are based on
projections for the price of crude oil. Projections for LPG at Mt. Belvieu are based on the U.S. EIAs
projections for propane prices for end users in the United States.

Natural gas also emits fewer local pollutants than fuel oil when burned to generate electricity.
Natural gas emits about 56 percent less NOx than fuel oil, and almost no SO2.19 Emissions of
CO2, an important greenhouse gas, are reduced by about 38 percent by using natural gas
rather than heavy fuel oil.20

0.2

The Global and Regional Markets for Natural Gas

Rising supply of natural gas, globally and near the Caribbean region, and new advances in
technologies that make natural gas cheaper to transportespecially to smaller marketsmay
allow Caribbean countries to contract natural gas at a competitive price in the near future.
Until now, most Caribbean countries have been too small to be able to contract natural gas
economically.
Global market trends for natural gas
Many regions around the world are looking to natural gas to play a more important role in
their future energy mix. Natural gas is among the most important sources of energy in the
world today, and global demand is expected to grow due to its environmental advantages
and low price. Globally, natural gas consumption reached 118 trillion cubic feet (Tcf) in
19

Castalia calculations based on US EPA average emissions from US power plants.

20

Castalia calculations based on data from the Intergovernmental Panel on Climate Change (IPCC) and assumptions of 53

xv

Confidential

2013. This accounted for 24 percent of total primary energy consumption, on par with oil
and coal, the other two largest energy sources in the world. The U.S. Energy Information
Administration projects that global demand will grow to 132 Tcf in 2020.21 This growing
demand will be supplied by conventional natural gas, but also increasingly by unconventional
resources, including shale gas. The United States is leading the way in developing shale gas
formations, but many countries also have substantial resources and are just now beginning to
exploit them.
Natural gas markets remain relatively isolated due to the high cost to transport natural gas,
especially relative to coal and liquid fuels. In 2013, only 30 percent of total global demand
was traded across borders. Just over two-thirds of this total was transported via pipelines.
The remainder of global gas trade was in the form of liquefied natural gas. The only
Caribbean LNG exporting country, Trinidad and Tobago, was among the top 5 LNG
exporters in 2013, shipping the equivalent of 699 Bcf of LNG. As demand for natural gas
grows, global LNG production is expected to increase from 11.5 Tcf per year in 2013 to 18
Tcf by 2025.22 A number of potential suppliers have also proposed transporting compressed
natural gas in ships built specifically for that purpose, and although some projects are
planned, no such ships have been built.
Implications of trends in the global natural gas market for the Caribbean
Most Caribbean countries have been unable to import natural gas and take advantage of the
price difference compared to fuel oil, because their demand is too small to justify investing in
the expensive infrastructure needed to import natural gas, and because tight global supply
has made it difficult to contract natural gas at a competitive rate. However, expectations of
large new supplies of tradable natural gas, cheap natural gas in the United States and other
producing countries, technology advances, and growing pressure to reduce greenhouse gas
emissions are creating an opportunity to bring competitive natural gas to smaller markets,
such as the Caribbean.
New supply to the region will most likely come from the United States, but other
neighboring countries, including Canada, Mexico, Colombia, and Venezuela, have the
potential to substantially increase natural gas production if sufficient investment is made.
Trinidad and Tobago already supplies the Caribbeans existing LNG facilities in the
Dominican Republic and Puerto Rico,23 and could supply other Caribbean countries as well.
In the past there was not an economical method to deliver natural gas in much of the
Caribbean, given the small size of many of the island economies and lack of economical
natural gas supply, transportation and storage technologies, but this is changing. Advances in
delivery technology, particularly in small-scale LNG shipping and floating regasification
units, are making natural gas a more economical option for small markets, such as those in
the Caribbean. For example, since 2006, the global fleet of ships with a capacity of 25,000
cubic meters or less has increased from 5 to 24.24 Further cost reductions are expected as
21

United States Energy Information Administration, International Energy Outlook. 2013.

22

Alan Weitzner, LNG Development Outlook, Stakeholders Infrastructure Advisory LLC, October 2013.

23

Source: BP Statistical Review of World Energy, 2013

24

GIIGNL, The LNG Industry. 2006 to 2014 publications, accessed 22 April 2015, http://www.giignl.org/publications.

xvi

Confidential

research and development matures the many smaller-scale technologies currently under
development.
Despite these positive trends, many challenges remain. The capital cost for any natural gas
transportation infrastructure remains high. Guarantees are required to finance projects to
import natural gas, often including long-term contracts, highly credit worthy buyers, and
sovereign support. Many Caribbean countries face financial pressures that may limit their
ability to support investment of this scale. Natural gas import projects benefit from
economies of scale, suggesting the potential for greater returns from larger markets than
from smaller ones. As such, some suppliers may charge a premium for delivering natural gas
in small quantities, as some Caribbean countries would require. Finally, while there is an
opportunity to deliver natural gas to the region at lower cost than oil-based fuels, small
markets and relatively limited supply still make it unlikely that prices will be set based on a
strong competitive market between natural gas suppliers.
Potential Demand for Natural Gas in the Caribbean
In addition to the technology used to deliver natural gas, the volume of gas that countries
demand will be an important factor in determining the delivered pricecontracting more
gas will lead to a lower price, while contracting less gas will lead to a higher price. Across the
Caribbean, demand for natural gas is expected to be determined primarily by its use for
electricity generation, for two main reasons. First, electricity generation is the largest
potential market for natural gas, accounting for 43 percent of fossil fuel use in the eight
countries that import fossil fuels in this study. Second, electricity generators, whether
independent power producers or utilities, represent large potential offtakers for natural gas,
and will have the demand to justify large capital investments in natural gas import
infrastructure without partnering with other energy users.
After electricity generation, transportation is the next largest oil consuming sector in the
countries of emphasis, accounting for 32 percent of fossil fuel use. All other sectors
represent a much smaller share. Natural gas can theoretically replace oil in each of these
sectors, although the cost and potential benefits from doing so vary significantly from sector
to sector. However, these sectors are more likely to purchase natural gas from offtakers that
have already begun importing natural gas for electricity generation, rather than taking part in
financing natural gas importation facilities themselves. This is the pattern that consumption
followed in the Dominican Republic, the only country in this study that imports natural gas.
Third parties signed the first purchase agreements with the natural gas importer, AES
Dominicanaan electricity generation companytwo years after the first shipment of LNG
arrived in the country.
Because of this time lag and the greater contractual and infrastructural complexities of
supplying natural gas to these other sectors, we use only the demand for natural gas for
electricity generation when analyzing the base case cost for a natural gas supply chain to the
Caribbean.

xvii

Confidential

0.3

Spread between Natural Gas and Oil Prices

Natural gas is less expensive on a per energy basis than oil,25 which creates an opportunity
for Caribbean countries to import natural gas and reduce their energy costs. While the
spread, or difference, between natural gas and oil prices fell between mid-2014 and mid2015, current prices and projections suggest that Caribbean countries could still save money
by switching to natural gas.
Oil prices are volatile. Since 2005 they have reached a maximum of US$145 per barrel (in
July 2008) and a minimum of US$30 per barrel (in December 2008), with an average of
US$82 per barrel and a standard deviation of about US$20. Natural gas prices are also
volatile, but to a lesser extent; they have reached a maximum of US$15.4 per MMBtu (in
December 2005) and minimum of US$1.8 per MMBtu (in April 2012), with an average price
of US$5.3 per MMBtu and a standard deviation of US$2.4. Until the recent fall in oil prices
that began in mid-2014, oil prices had been generally increasing since 2009 while natural gas
prices had remained stable.
However, the recent drop in oil prices has dramatically reduced the spread between the price
of oil at West Texas Intermediate (WTI) and natural gas prices at Henry Hub (see Figure
0.3). The spread has fallen from US$12.2 in June 2014 to US$6 per MMBtu in April 2015.
This is despite a drop in natural gas prices during the same periodfrom US$4.6 per
MMBtu in June 2014 to US$2.6 per MMBtu in April 2015.
Figure 0.3: Spot Prices of WTI and Henry Hub 2005-2015

Source: United States Energy Information Administration

In June 2014, the spot price of WTI was 3.7 times the spot price of natural gas. This value
fell to 2.5 in January 2015, before rising to 3.3 in April 2015. The difference, or spread,
between the two prices was US$12.4 in August 2014 and US$4.5 in January 2015, rising to
25

This section describes the spread between oil and natural gas prices in the United States. The market for oil products is
globalprices move together around the world, and prices are typically similar in most countries (except for countries
that subsidize oil products). Natural gas is much more expensive to transport, so prices vary greatly across markets (see
Section 3.1.4). The estimated costs of transporting natural gas to the Caribbean are discussed in Section 5.4.

xviii

Confidential

US$6 in April 2015. Figure 0.4 compares monthly spot prices from January 2014 to April
2015 for WTI and natural gas at Henry Hub, both reported in MMBtu. It also shows the
ratio between the prices for the same time period.
Figure 0.4: Spread between WTI and Henry Hub, and Price Ratios (Jan 2014-Jan 2015)

Source: United States Energy Information Administration

0.4

Delivering Natural Gas to the Caribbean as LNG

Liquefied natural gas (LNG) is the preferred technology for delivering natural gas in a
regional market, because it is likely to be the cheapest technical option to deliver natural gas
to the Caribbean, and because it is a mature technology that is technically feasible for nearly
all Caribbean countries. Each country that uses LNG will need to make large infrastructure
investments to import it and use it for electricity generation. The pricing mechanism for
Caribbean countries to contract for LNG is uncertain and will depend on how the global and
local markets evolve, but the most likely scenario is that Caribbean offtakers would pay a
price for LNG that is linked to HFOthe fuel that it is substitutingthrough a gas-toliquid competition.
LNG is the preferred technology for delivering natural gas to the Caribbean
The first step to creating a regional market for natural gas and taking advantage of its price
and environmental benefits is determining the most appropriate technology for delivering
natural gas. Technologies to deliver natural gas fall into three broad categories: pipelines that
use pressure to move the natural gas, compressed natural gas that uses a high-pressure vessel
to reduce the volume of the gas for transportation, and liquefied natural gas that cools the
gas to liquid form, thus greatly reducing its volume for transportation (see Figure 0.5).

xix

Confidential

Figure 0.5: Natural Gas Transportation Options

Based on our analysis, we believe LNG is the best technology for creating a regional natural
gas market in the Caribbean, because it is:
Likely cheaper than the alternatives. Our model for costs for the three
technology alternatives estimated that LNG would be the cheapest technical
option to deliver natural gas in nearly all markets26
An option for nearly all countries in the region. Pipelines are not an option to
reach many countries in the regiondeep seas and long distances between islands
make them technically unfeasible in some cases, and economically not viable in
others
A mature technology with relatively certain costs and low risks. CNG has
never been commercially transported by ship, which adds technology and costs
risks for this option
Allows for competition among suppliers. There are many global LNG
suppliers, and a spot market. In contrast, pipelines would tie offtakers to a single
source. The lack of CNG ships on the market, and greater cost per mile of transit
of CNG ships, also limits competition such that CNG offtakers would be nearly
completely tied to one supplier. If a single supplier raises prices or cuts off supply
entirely, the offtaker has few alternatives.

26

Our model for costs for the three technology alternatives estimated that LNG would be the cheapest technical option to
deliver natural gas in most markets. In the Dominican Republic, we estimated that CNG would cost about the same as
LNG. Pipeline costs are lower than LNG in Grand Bahama (though only if it is part of a pipeline that continues to New
Providence) and on par with LNG for Barbados, and for a pipeline that reaches Guyana and Suriname (but only if both
countries are included).

xx

Confidential

0.5

The LNG Supply Chain

Caribbean countries would need to make large investments in the infrastructure to import
LNG, regasify it, and use it for electricity generation. The following steps are needed to
produce, import, and use LNG:
LiquefactionNatural gas is frozen at about -160 degrees Celsius, converting it
to a liquid with a density about 600 times greater than in its gaseous form.
Liquefaction is the most expensive link in the supply chain, and the most capital
intensive. Excluding the cost to acquire natural gas, liquefaction costs account for
about 50 to 70 percent of the total cost to deliver natural gas to the Caribbean as
LNG
ShippingLNG is then shipped to the destination market. Commercial scale
sea-borne LNG shipping has a history of more than 50 years, and a range of ship
sizes are currently in production, including sizes that are suitable to Caribbean
markets. However, it is more expensive to ship LNG in small-scale ships, and the
limited quantity of small-scale ships available globally may make it more difficult
to charter one
Regasification and StorageLNG delivered to the destination market is stored
and regasified when it is needed. On-shore and floating regasification and storage
systems can both be designed for a range of market sizes
Converting existing electricity generation plants to gas-fired plantsWe
assume that by 2018 all offtakers that participate in a regional market for LNG
will convert all installed capacity27 that burns fuel oil to be able to burn natural gas
Building new plants for generating electricityAll countries will need to
build new generation plants to meet increases in demand, regardless of whether
they use natural gas or not for generating electricity. Some countries may have the
opportunity to build low-cost hydroelectric power plants or other alternatives, but
most countries will continue to rely on thermal power plants that use oil products
or natural gas, for at least the medium term.
Figure 0.6 shows the steps in the LNG supply chain, with cost ranges for each step.28 The
price of natural gas at origin, that is, the price that LNG suppliers would charge for the
natural gas itself, is the most uncertain component of the final delivered cost of natural gas.

27

Except for Barbados, where we assume that some capacity fired by fuel oil will not be converted in 2018. However, we
assume that these remaining fuel oil fired generators will be used only as reserve, and will not generate any electricity.

28

Based on 10 percent weighted average cost of capital.

xxi

Confidential

Figure 0.6: LNG Supply Chain

Note:

U.S. GC is the United States Gulf Coast


Prices are highs and lows for participating across all three scenarios in this study.

Pricing possibilities for LNG in the Caribbean


There are three general methodologies that can be used to set the price of LNG in the
absence of a market-set price based on gas-on-gas competition: a cost-plus approach, an
opportunity cost approach, or a substitution cost approach.
A cost-plus pricing system adds the cost of each segment of the natural gas value chain,
including a reasonable return on investment for each participating agent, to arrive at a fair
price for the natural gas delivered to the consuming market. This would include the cost to
procure natural gas, liquefy it, transport it, regasify it, and deliver it to the final consumer. We
believe that cost-plus pricing is unlikely for the Caribbean because it would require abundant
US LNG exports, and slow global demand growth for LNG.
An opportunity-cost pricing system links the price for LNG delivered to a particular
market with the price already being paid for LNG in another market. Any difference in the
cost of shipping natural gas to each market is generally taken into account, such that the
LNG supplier receives the same return regardless of the market to which it sells. Japan is a
natural market for comparison since it is currently the most expensive LNG destination in
the world, and because it imports more LNG than any other country in the world.
We believe that opportunity cost pricing based on prices in Japan is not likely for two
reasons. First, for long-term contracts, suppliers would likely tend to prefer price-setting
mechanisms that are more closely linked to local energy markets. Second, Caribbean
countries contracting for long-term, consistent supply of LNG would expect to pay a price
below the spot rate, which is based on suppliers opportunity cost.

xxii

Confidential

A substitution cost approach links the price of LNG with the fuel that it is replacing in the
destination market, creating price competition between liquid fuels and natural gas. The
approach has the benefit of locking in a discount to the cost of the fuel being replaced. The
discount can be fixed or adjustable, depending on the formula being used. Prices linked to
fuel oil parity could be driven by the consumers of natural gas because they decide that fuel
oil parity with a discount is in their best interest, given uncertainties in the relationship
between oil and NG prices. Alternatively, they could be imposed by the LNG supplier,
which may refuse to sell for anything less.
For the cost estimates for the three scenarios below, we assume that the substitution cost
approach is used. This pricing is likely if there is relatively low U.S. LNG export capacity
available, compared to the amount currently proposed. Because supply is not built or
because suppliers cannot obtain permits for exports to non-free trade agreement countries,
supply is more likely to come from non-U.S. sources. Because suppliers are not facing as
much competition from U.S. exports, there is less pressure to match Henry Hub pricing, so
suppliers instead price LNG based on the alternative fuel in each destination market (in the
Caribbeans case, HFO).
Making the decision to import natural gas
The main reason why countries in the Caribbean would switch to natural gas for generating
electricity is to reduce the cost of generating electricity. Therefore, the decision to import
natural gas should be made with a methodology that ensures that countries will receive
natural gas at a price that is lower than that of fuel oil. This methodology starts by ensuring
that, at projected fuel prices, the country is receiving a discount on fuel oil that is high
enough to justify the investment in assets required to deliver natural gas. However, since fuel
prices are uncertain and volatile, countries also need to do a detailed sensitivity analysis of
the level of fuel prices that make natural gas feasible and design contracts that mitigate risks
identified in the sensitivity analysis.
Contracting strategies must consider the following aspects:
The approach used for pricing. As described in other sections of this report, it
is likely to be the substitution cost approach (based on HFO pricing)
The index that will be used to update the price of the contract. This will
likely be an oil-price index such as WTI or Brent. It could also be a natural gas
price index, such as Henry Hub
Using mechanisms to hedge. Assuming they have the required financial
capacity (which may not be the case for a number of offtakers and countries in
the Caribbean), offtakers could consider using mechanisms to hedge against
changes in the price of natural gas or fuel oil that would lead to losses
The duration of the contract for natural gas. Offtakers should seek to sign
contracts that match the duration of their assets. This will likely mean initial
contracts of about 10 to 15 years.

0.6

Three Scenarios for Creating a Competitive Market for Natural


Gas in the Caribbean

Based on the considerations abovethat LNG would be the best technology for a regional
market, that initial demand would come from electricity generation, and that pricing based

xxiii

Confidential

on the substitution cost is the most likelywe have designed three scenarios for developing
a regional LNG market. We find that all three scenarios would bring large benefits compared
to the current situation, where fuel oil is the primary fuel for electricity generation and other
energy uses. The two scenarios where Caribbean countries aggregate demand and contract a
single supplier for natural gas would likely lead to lower prices for natural gas and electricity
generation for the countries that participate in the regional market, compared to a scenario in
which each country contracts with a supplier separately. A cost benefit analysis also shows
that there would be larger economic and financial benefits overall with demand aggregation.
Bringing all the parties together to aggregate demand would be difficult, however, and likely
require external support. With the reduced cost of electricity in all scenarios, a number of
renewable energy and energy efficiency solutions would still be economically viable, and
should be considered on a case-by-case basis as part of each countrys energy mix.
The three scenarios
The three scenarios for a regional natural gas market include two in which countries
aggregate demand and one in which each country contracts with a supplier separately. The
two in which countries aggregate demand are the hub and spoke scenario, in which there
is a physical regional hub for LNG and a virtual hub scenario, in which a single private
company provides LNG directly to all countries with interested offtakers. The scenario in
which each country contracts separately with a supplier for LNG is called individual
contracts.
Scenario 1: Hub and Spoke
In this scenario, a private company in a country in the Caribbean acts as a hub for
purchasing large shipments of LNG. This LNG is then redistributed by the same company
that purchased the large volume of LNG, or by another private company, in smaller ships to
offtakers in other countries. The Dominican Republic may be the best option for a physical
hub in the Caribbean because it is centrally located, and because AES Dominicana already
has LNG facilities and operations in place there. There would be one sole supplier of LNG.
The risk that this supplier would be a monopolist can be reduced by contracting with the
supplier through an open tender process. Suppliers would then have to offer a competitive
price to win the tender. A drawback to this approach is that it would limit the competition
for market access to a single point in time. Limiting the contract period to a relatively short
length (15 years) would allow further competitive elements to be introduced as quickly as
possible, without scaring off initial investors.
The volume of gas demanded in this model could be sufficiently large for the company
purchasing the LNG to access full-sized LNG terminals in the Gulf Coast of the United
States or at Atlantic LNG in Trinidad and Tobago. In this scenario, we assume offtakers
could pay a delivered cost of natural gas equal to fuel oil parity minus 30 percent. For the
three scenarios, we assume that offtakers would participate in the market only if they can
sign a contract to buy natural gas at a minimum discount of 20 percent compared to the
price of HFO. This minimum discount is necessary to justify investing in infrastructure to
import and use natural gas. In this scenario, all countries considered participate in the
regional market, except for Belize and the island of Grand Bahama. These are small markets
where the costs to deliver natural gas would be too high.
Figure 0.7 illustrates the supply chain of natural gas from the point of origin to the power
plant in Scenario 1. The figure includes costs for each segment for Barbados in 2023. In this
xxiv

Confidential

case, the total cost of natural gas delivered to the power plant would be US$11.68 per
MMBtu. In this scenario, the cost of infrastructure to import and use natural gas would be
about US$4.0 billion for the region from 2015 to 2022, including the cost of infrastructure to
import LNG in each country and the cost of the trans-shipment hub. About half of
infrastructure investments would be in new power plantsinvestments that will need to be
made to meet growing demand whether natural gas is introduced or not.
Figure 0.7: Scenario 1: Hub and SpokeExample of Barbados in 2023

Scenario 2: Virtual Hub


In Scenario 2, a single private company provides LNG directly to all countries with
interested offtakers. The single supplier of natural gas acts as a virtual hub that allows all
interested countries to be part of the same arrangement and obtain the natural gas at a
feasible price. This supplier would deliver the gas directly from the supply point to each of
the offtakers. Since there would be no facilities for transferring LNG once it was purchased
from the supply point, this model would require liquefaction terminals that could provide
access to smaller sized vessels. As in Scenario 1, there would be a single supplier. Also as in
Scenario 1, the risk that this supplier would be a monopolist can be reduced by contracting
with the supplier after an open tender process.
For this scenario, we assume offtakers could import LNG at a delivered cost equal to fuel oil
parity minus 25 percent. As in Scenario 1, all countries would participate in Scenario 2 except
for Belize and the island of Grand Bahama.
Figure 0.8 illustrates the supply chain of natural gas from the point of origin to the power
plant in Scenario 2. In this case, the total cost of natural gas delivered to a power plant in
Barbados would be US$11.43 per MMBtu in 2023. In this scenario, the cost of infrastructure
to import and use LNG would be about US$3.9 billion for the region between 2015 and
2022. As in Scenario 1, about half of the cost would be for new power plantsinvestments

xxv

Confidential

that would need to be made to meet growing demand whether natural gas is introduced or
not.
Figure 0.8: Scenario 2: Virtual HubExample of Barbados in 2023

Scenario 3: Individual Contracts


In Scenario 3, each country that finds it economically viable to buy natural gas on its own
does so by contracting individually and directly with a supplier (as AES Dominicana has
done in the Dominican Republic). This scenario would only be viable for larger countries
that can negotiate natural gas contracts at prices at least 20 percent lower than what they pay
for heavy fuel oil. The benefit of this scenario is that it would require less coordination
among different countries and could be implemented more quickly. In this scenario, we
assume offtakers import delivered LNG at a price equal to fuel oil parity minus 20 percent.
Belize and Grand Bahama would also be excluded from this Scenario.
Figure 0.9 illustrates the supply chain from the point of origin to the power plant. In
Scenario 3, the total cost of natural gas delivered to a power plant in Barbados would be
US$12.63 per MMBtu in 2023. In this scenario, countries would spend between about
US$200 million (Guyana) and just over US$1 billion (Dominican Republic) to build the
infrastructure to import and use natural gas between 2015 and 2022.

xxvi

Confidential

Figure 0.9: Scenario 3: Individual ContractsExample of Barbados in 2023

Comparing the three scenarios


All three Scenarios for a regional natural gas market lead to reduced fuel prices for electricity
generation, which contributes to the IDBs goals of reducing poverty, addressing the needs
of small and vulnerable countries, and addressing climate change and environmental
sustainability (see Table 0.1). Compared to Scenario 3, Scenarios 1 and 2 would lead to lower
fuel prices and more regional integration, and are more commercially viable.
Table 0.1: Comparing the Three Scenarios
Pricing (in
US$/MMBtu)

Commercial
Viability

Size of Market
(in 2023)

Scenario 1

3
($9.6 11.8)

4
(490 MMcfd)

Scenario 2

4
($10.0 - 11.5)

3
(414 MMcfd)

Scenario 3

2
($10.4 16.1)

1
(20-234 MMcfd)

Note:

Risks Covers IDB


Priorities

The Harvey Balls indicate the attractiveness of each Scenario for each comparator. A 4 indicates the
highest level of attractiveness and a 0 the lowest level.

xxvii

Confidential

Because fuel costs would decrease in all three scenarios, natural gas would reduce the average
cost of electricity generation for all countries that participate in the regional market (see
Figure 0.10).29
Figure 0.10: Average Cost of Electricity Generation in 2023

In Scenario 1 (Hub and Spoke), negotiated gas prices would be lowest because the volume
would be higher than the other scenarios. The large volumes negotiated also mean that
Scenario 1 is likely the most commercially viable. However, the cost of electricity generation
would be lower in Scenario 2 (Virtual Hub) for most countries because of the large cost of
the regional hub in Scenario 1. Scenarios 1 and 2 would likely be the most difficult to
arrange, and the riskiest, because of the need for a regional agreement among offtakers,
coordinated infrastructure investments, and a single regional tender. The need for a regional
guarantee to contract LNG supply is an additional financial risk.
Scenario 3 (Individual Contracts) would be the easiest to implement, with the lowest risk.
However, natural gas prices would be higher than in the other two scenarios because each
country would contract supplies on its own. Because prices would be higher, Scenario 3 is
the least effective in meeting the IDBs priorities for the region.
Based on the level of interest of potential suppliers and other market participants, it is likely
that some of the individual contracts that would form part of Scenario 3 will be secured
without any intervention in the market. Due to the level of additional coordination and
complexity required for Scenarios 1 and 2, external assistancefor example from an entity
like the IDBwould be essential for bringing all the parties together at the right time. This
29

In Scenario 3, the reason the price of acquired gas would be highest for Jamaica, which has the second largest demand for
volume, is that Jamaica currently has the highest fuel oil prices. Because we assume that contracts in Scenario 3 would be
negotiated at a 20 percent discount compared to each countrys fuel oil price, Jamaica would end up paying the most for
delivered LNG. In practice, because Jamaica has a relatively high demand for LNG, it might be able to negotiate a larger
discountsuch as fuel oil parity minus 25 or 30 percent. This would lower the price of electricity for Jamaica.

xxviii

Confidential

external assistance would greatly contribute to generating the additional benefits that would
arise from an outcome similar to Scenario 1 or Scenario 2.
Viable renewable generation technologies with natural gas
A reduction in electricity generation costs would affect the economic viability of other
generation alternatives, including renewables. Cost estimates for the delivered price of
natural gas in the three scenarios and renewable generation technologies show that biomass,
hydro, on-shore wind, and large-scale solar PV technologies could all be viable technologies
for renewable generation if a competitive natural gas market were introduced in the
Caribbean (see Figure 0.11).
Biomass and hydro technologies are firm technologies that may have all-in costs that are less
than the estimated all-in generation costs for natural gas plantsUS$0.09 to US$0.14 per
kWh, depending on the country and scenario. As non-firm technologies, on-shore wind and
large-scale solar PV will be viable in cases where their all-in costs is less than the variable
cost of natural gas plants, which ranges from US$0.08 per kWh to US$0.11 per kWh. The
other renewable technologies considered, such as solar CSP, small-scale solar, off-shore
wind, and waste-to-energy, are not likely to be economically viable in any of the scenarios.
Because the costs of natural gas and renewable technologies will vary according to the
specific circumstances in each country, viable renewable technologies must be considered on
a case-by-case basis.

xxix

Confidential

Figure 0.11: Viable Renewable Generation Technologies with a Competitive


Caribbean Market for Natural Gas

Note: Variable cost is the sum of the variable operating and maintenance cost, and the fuel cost.
Sources: The range of all-in costs for each RE technology is based on the Renewable Power Generation Costs
in 2014 Report by the International Renewable Energy Agency (IRENA), Lazards Levelized Costs of
Energy Analysis (Version 8.0), and Barbados BL&P IR.

Large potential hydropower projects in Guyana and Suriname could be a cheaper source of
electricity generation than importing natural gas, significantly reducing or eliminating future
demand for LNG in these countries. For example, if the proposed Amaila Falls hydropower
plant were completed in 2018, it would generate an estimated 90 percent of electricity in
Guyana. Most of the remaining 10 percent would be generated from biomass, driving
demand for natural gas down to zero.
Viable energy efficiency initiatives
Introducing natural gas for electricity generation would also affect the energy efficiency
initiatives that are economically viable. Figure 0.12 below shows that energy efficiency
initiatives with costs of US$0.09 per kWh or less are economically viable in all natural gas
scenarios. As with renewable generation options, viable options vary according to the
country and natural gas scenario. Eight of the 25 energy efficiency options analyzed cost
US$0.09 per kWh or less: coolingreduce infiltration on louvered windows (or leaky
doors/windows), premium efficiency transformers, retrofit existing windows with low
SHGC film, refrigerationthermosyphon oil cooling for screw compressors, chain drive to
synchronous belt drives, refrigeration2-stage compressor retrofit, power factor correction,
and refrigerationliquid pressure amplification on compressors. Seven other energy
xxx

Confidential

efficiency initiatives might be viable in the natural gas scenarios because they fall within the
range of all-in costs of natural gas plants. The remaining ten energy efficiency technologies
are not viable in any of the natural gas scenarios because their costs exceed US$0.14 per
kWh, which is the highest all-in cost of a natural gas fired plant in all three scenarios.
Figure 0.12: Energy Efficiency Cost Curve with Natural Gas, 2023

Source: Sustainable Energy Framework for Barbados, July 2010 (and subsequent updates under the same
assignment)

Cost benefit analysis of the three scenarios


All three scenarios for introducing natural gas bring large benefits to the countries that
participate. Compared to the business-as-usual case (continued dependence on fuel oil), in
which no gas is used in the Caribbean, Scenario 2 has the highest savings in net benefits for
nearly countries in the reference case for oil and gas pricesbut savings in Scenario 2 are
only slightly larger than the savings in Scenario 1 (see Table 0.2). Scenarios 1 and 2 have
higher net benefits for all countries than Scenario 3.

xxxi

Confidential

We calculate total costs as the sum of the cost of generation and the cost of carbon dioxide
(CO2) emissions.30 We assume that all scenarios will generate the same quantity of electricity.
Based on this assumption, we do not estimate the benefits from generating electricity for
each scenario, because all benefits would be the same and the incremental benefits for any
scenario would be zero. Because the difference in benefits between scenarios is zero, we
derive the net benefits for each scenario by subtracting the total costs of each scenario from
the total costs of the business-as-usual case.
Table 0.2: Net Benefits of Scenarios (NPV in 2018 in US$ million)
Country

The Bahamas, BEC,


NP
Barbados, BL&P
Dominican Republic,
All
Guyana, GPL
Haiti, EDH
Jamaica, JPS
Suriname, EBS
Note:

Net Benefit
Scenario
1: Hub & Spoke

Net Benefit
Scenario 2: Virtual
Hub

Net Benefit
Scenario 3:
Individual
Contract
575

623

704

215
2,764

224
2,468

138
2,167

236
647
1,454
421

248
706
1,603
443

227
614
1,029
541

The discount rate is assumed to be 10 percent.


Calculations are for the period 2018 to 2032.

For each scenario we also estimate the financial savings (see Table 0.3). The financial savings
are calculated for each natural gas scenario by subtracting the cost of generating electricity in
that scenario from the cost of generating electricity in the business-as-usual case. Scenario 2
generates the highest financial savings for all countries, though only slightly higher than in
Scenario 1. Scenarios 1 and 2 has higher financial savings for all countries than Scenario 3.

30

We use US$41/tonne as our estimate for the cost of CO2 emissions. This is based on the average from the 2013:
Updated Short-term Traded Carbon Values, United Kingdom Department of Energy and Climate Change,
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/240095/shortterm_traded_carbon_values_used_for_UK_policy_appraisal_2013_FINAL_URN.pdf .

xxxii

Confidential

Table 0.3: Financial Savings in the Scenarios (NPV in 2018 in US$ million)
Country
The Bahamas, BEC, NP
Barbados, BL&P
Dominican Republic, All
Guyana, GPL
Haiti, EDH
Jamaica, JPS
Suriname, EBS
Note:

Scenario 1
438
126
2,002
140
394
1,060
205

Scenario 2
519
135
1,707
152
453
1,208
228

Scenario 3
390
49
1,406
131
362
635
212

The discount rate is assumed to be 10 percent.


Calculations are for the period 2018 to 2032.

Sensitivity Analysis
Future prices for oil and natural gas are highly uncertain.31 Although oil prices have dropped
recently, past price changes and current projections show that prices are uncertain and
volatile. When assessing the feasibility of natural gas in the Caribbean, the two key data
points are the spot price of oil at the time gas will be imported, and the spread between the
prices of oil and natural gas.
Figure 0.13 shows the forecast of WTI prices under the reference case for this study, and
three alternative cases. The broad differences between the cases demonstrate that future
prices for oil are highly uncertain. Though prices dropped from mid-2014 to mid-2015,
projections show that they are likely to increase over the medium term.

31

Durden, Tyler, Oil Jumps on El-Badris $200 a Barrel Sometime Comments. 26 January 2015. Talk
Markets. http://www.talkmarkets.com/content/commodities/oil-jumps-on-opecs-el-badris-200-a-barrelsometime-comments?post=57378 accessed 17 February 2015.

xxxiii

Confidential

Figure 0.13: WTI Forecast in Reference Case and Three Alternative Cases, 2018-2032

Source: United States Energy Information Administration

In the lowest price case (Case 1 in the figure above), it would not be feasible for the
countries of emphasis to switch from fuel oil to natural gasthe spread between oil and
natural gas prices would be too low. For prices at or above US$80 per barrel (price of oil for
2023 in the reference case, drawn from the U.S. EIA 2015 Annual Energy Outlook), natural
gas would be feasible.
In Cases 2 and 3 in the figure above, the delivered price of natural gas in 2023 would be
lowest in Scenario 1 (see Table 0.4). In the reference case with the price of oil at US$80 per
barrel, the scenario with the lowest pricing of delivered natural gas would be Scenario 2 for
most countries. However, if oil prices are higher than the reference case and the difference
between fuel oil and natural gas is wider (as it would be in Case 2 and 3), Scenario 1 always
has the best pricing of delivered natural gas.

xxxiv

Confidential

Table 0.4: Delivered Price of Natural Gas in 2023 by Market Scenario and Price Case
CASE
Reference
Scenario
1

Scenario
2

Price of
WTI, 2023
($/bbl)
Bahamas
(BEC)

$11.22

$10.54

Barbados
(BLPC)

$11.68

Dominican
Republic
(All)
Guyana
(GPL)
Haiti
(EDH)
Jamaica
(JPS)
Suriname
(EBS)

2
Scenario
3

Scenario
1

Scenario
2

3
Scenario
3

Scenario
1

Scenario
2

Scenario
3

US$152 (High Oil Price Case)

US$102 (Reference Case for


2014)

$11.15

$16.82

$17.61

$21.45

$11.22

$11.45

$14.27

$11.43

$12.63

$17.27

$18.53

$24.26

$11.68

$12.34

$16.15

$9.62

$10.06

$10.42

$15.21

$17.14

$20.01

$9.62

$10.96

$13.32

$11.76

$11.48

$11.48

$17.36

$18.57

$21.24

$11.76

$12.38

$14.14

$11.39

$10.97

$10.97

$16.99

$18.05

$20.39

$11.40

$11.87

$13.57

$10.67

$10.05

$11.98

$16.27

$17.12

$23.01

$10.68

$10.95

$15.32

$11.69

$11.42

$11.42

$17.29

$18.53

$19.76

$11.69

$12.33

$13.15

US$80 (Reference Case)

Note: Figures in green show the cases where natural gas would be feasible.
Source: Castalia calculations, based on projections from the United States Energy Information Administration

Scenario 1 is the preferred scenario for the Caribbean


All three Scenarios for a regional natural gas market would lead to reduced fuel prices for
electricity generation, which contributes to the IDBs goals of reducing poverty, addressing
the needs of small and vulnerable countries, and addressing climate change and
environmental sustainability.[3]
Scenario 1 is the preferred scenario because:
Regional demand for natural gas would be the highesta physical regional
hub could allow existing natural gas demand from the Dominican Republic to be
included in the regional scenario
It is the most commercially viablebecause demand would be the largest of
any scenario, supplier interest would be highest. This means that the required
contracts would be more likely to be available on the market than in the other
scenarios

[3]

In the Ninth General Capital Increase (GI-9), the Board of Governors sets the IDBs objectives, strategic goals, and
sector priorities. These definitions result in the following main areas of action: Reducing poverty and social inequalities;
addressing the needs of small and vulnerable countries; fostering development through the private sector; addressing
climate change, renewable energy and environmental sustainability; and promoting regional cooperation and integration.

xxxv

Confidential

Prices could be the lowestin our reference case for oil and natural gas prices,
Scenario 2 would lead to the lowest prices for offtakers. However, if the spread
between oil and natural gas prices widens more than forecasted in the reference
case, Scenario 1 would lead to the lowest prices.
Although Scenario 1 would be the best for the region, it may be the most difficult to arrange,
because of the need for a regional agreement among offtakers, coordinated infrastructure
investments, and a single regional tender to procure supply. If Scenario 1 is not possible,
other market scenarios with aggregated demand are preferable to an individual contracts
scenario. Potential advantages to Scenario 2 are that it would require slightly less
coordination, and that, in the reference case, it would likely lead to the lowest natural gas
prices for all offtakers. If no coordination is possible, seven[4] of the countries of emphasis
could still benefit by contracting for natural gas individually with suppliers, compared to the
business as usual scenario.
Based on the level of interest of potential suppliers and other market participants, it is likely
that some of the individual contracts that would form part of Scenario 3 will be secured
without any intervention in the market. Due to the level of additional coordination and
complexity required for Scenarios 1 and 2, external assistancefor example from an entity
like the IDBwould be essential for bringing all the parties together at the right time.

0.7

Environmental and Safety Impacts and Risks of Introducing


Natural Gas

The introduction of natural gas in the Caribbean can have significant positive environmental
impacts. For example, In Scenario 1, carbon dioxide emissions from thermal electricity
generation would be reduced by about 23 percent across the region in 2018, rising to 30
percent in 2032, compared to the business as usual scenario.
LNG is not flammable in its liquid state, and so can actually be less dangerous to store than
many liquid fuels. In addition, because LNG reverts to gaseous form under ambient
temperatures and pressures and quickly dissipates, a major leak or accident does not create
the same long-term localized environmental damage as would a spill of liquid fuels. The
LNG industry has an exceptional marine and land safety record. In the last three decades
there have not been reported LNG releases from a ships cargo tank. This reduces the risk of
groundwater and soil contamination, pollution of critical ecosystems, and contamination and
possible death of plant and animal life. The use of LNG can reduce the risk of potential oil
spills since LNG carriers are inherently more robust than typical, crude, fuel and chemical
tankers.32
However, in the event of a major spill, LNG can flow rapidly and potentially create a dense
vapor cloud in gaseous form that could ignite. LNG facilities need numerous safety
mechanisms to detect and prevent a catastrophic failure, including multiple containment
systems to protect LNG storage tanks, or a raised earthen dam surrounding LNG tanks in
order to contain the spread of the LNG pool in the event of a major leak. Once vaporized,
[4]

All the fossil-fuel importing countries except for Belize, where demand is too low to recover needed infrastructure
investments.

32

Quillen Report. Chevron Texaco Corp. Investment in a Healthy US Energy Future. Retrieved from
http://www.netl.doe.gov/publications/proceedings/02/ngt/Quillen.pdf

xxxvi

Confidential

natural gas is lighter than air, so once a spill has dissipated and the immediate risk of ignition
has passed, there would be no long-term local environmental risk, or risks for on-site
personnel or nearby residents.

0.8

Social Impacts and Risks of Introducing Natural Gas

Reducing the high price of electricity in the Caribbean would be the most important social
effect of introducing natural gas to the region for electricity generation. Generation costs
could decrease as much as 26 percent, depending on the country and the scenario33savings
that could be passed on to consumers. The high cost of electricity is an important social
problem throughout the Caribbean region, with an important negative impact on residents
and businesses. High prices in the Caribbean have hurt the regions competitiveness and
have affected several key industries. Businesses in the Caribbean cite problems with
electricity service, including high costs, as the second most important constraint to business
success. Thirty-eight percent of businesses cited electricity concerns as a constraint to
business success.34
Residents, especially in low-income countries that would begin importing natural gas, would
also see a large benefit from reductions in electricity prices. For example, in 2012, an average
residential consumer in Jamaica spent about 14 percent of per capita monthly GDP on his or
her electricity bill. This bill could be reduced by using natural gas instead of fuel oil.
Another social benefit from bringing natural gas to the Caribbean is that the infrastructure
development needed to import and use LNG would create jobs for residents directly
involved in construction and operations, and lead to increased revenues near the areas of
development. Social risks include risks of injury and accidental death for on-site personnel
(as with construction and operation of any large industrial facility). There is also some risk to
the general public, in the event of a catastrophic leak that results in a large fire or explosion.
However, as covered above, such catastrophic events are exceedingly rare with proper
precautions.

0.9

Strategy for Implementing Scenario 1

If implemented properly, Scenario 1 would lead to the lowest price for LNG, maximizing
environmental benefits and the reduction in electricity prices for all countries involved. We
designed a strategy to successfully implement Scenario 1 that will require the coordinated
efforts of stakeholders across several interrelated tracks. The strategy lays out seven
activities, each of which is broken down into various tasks. The activities proposed to
implement Scenario 1 are:
Activity 1: Agree on Process and Key Terms for First-Phase Tenderdefine
the steps to prepare the first-phase tender for natural gas supply
Activity 2: Identify and Carry Out Complementary Studiesidentify the
technical, environmental and financial characteristics that must be considered for
project development
33

Minimum and maximum reductions in generation costs between Scenario 0 and the natural gas scenarios, for all
countries.

34

The World Bank Group, Business Enterprise Survey.

xxxvii

Confidential

Activity 3: Develop Financing Mechanismdevelop business plans and


project finance strategies
Activity 4: Legal and Regulatory Reformcreate a legal and regulatory
environment that enables the development of natural gas import infrastructure
and the sale of natural gas to electricity utilities in each country
Activity 5: Develop Tender Documentsdevelop the documents and
processes that will govern the tender process for a regional natural gas purchase
and sales agreement
Activity 6: Contract NG Supplierthe goal of this activity is for it to culminate
in the signature of a set of contracts between key stakeholders involved in the
establishment of a regional natural gas value chain
Activity 7: Develop Required Infrastructurethis activity will result in the
construction and operation of the infrastructure and assets required for the
importation and consumption of natural gas in each country.
Figure 0.14 shows a timeline of six years for the project. With a start date in the first quarter
of the first year for Activity 1 and an expected completion date at the end of quarter three of
the sixth year for Activity 7. Activity 1 could begin immediately after the Updated Final
Report of the Feasibility Studies is published. The timeline for each of these activities is
described in greater detail below, followed by an estimate of the cost of implementation.
Figure 0.14: Timeline for Implementing Scenario 1

The total cost of in-country tasks would be in the range of US$1.9 million and US$2.4
million per country. The total cost of regional tasks would be in the range of US$0.5 million
to US$0.6 million, and cover three regional workshops and the development of a regional
financing mechanism. If all seven countries of emphasis that would import natural gas in
Scenario 1 participate in all in-country tasks, and all regional activities are completed, the
overall cost of the implementation strategy would be in the range of US$14 million and
US$17 million.

xxxviii

Confidential

Introduction

The Inter-American Development Bank (IDB) contracted Castalia to determine the overall
feasibility of establishing a competitive commercial supply chain for natural gas in the
Caribbean region. In determining the feasibility of introducing natural gas in the region, we
are analyzing the technical, economic, financial, and commercial feasibility, including an analysis
of investment costs, and cost and prices for delivering gas in the region. Our analysis looks at the entire
Caribbean region to develop the best scenario for developing a supply chain for natural gas,
paying particular attention to The Bahamas, Barbados, Belize, Dominican Republic, Guyana,
Haiti, Jamaica, Suriname, and Trinidad and Tobago the countries of emphasis.
This report includes all components to this assignment. In Component I, we assessed the
potential to develop a natural gas market in the Caribbean. In Component II, we conducted
a technical analysis of natural gas in the Caribbean. In Component III, we developed and
compared three scenarios to establish a competitive commercial supply chain in the
Caribbean. We conducted a cost benefit analysis for each scenario and found that developing
a hub for purchasing large shipments of LNG and then redistributing LNG in smaller ships
to each country is the preferred scenario. Component IV provides a socio-environmental
impact and risk analysis of the preferred scenario. Finally, Component V lays out the strategy
to deploy and implement the preferred scenario.
This study is informed by inputs from government representatives from nearly 20 Caribbean
jurisdictions, in addition to utilities, fuel suppliers, and other private sector stakeholders. The
first version of this study was completed and published in October 2014. This updated
version, completed in June 2015, updates the studies costs estimates and overall conclusions
based on recent changes in oil and natural gas prices and updated price projections.
Volume I of this final report consists of five parts:
Part I: Backgroundgives an overview of the Caribbean energy sector,
including the regional dependence on fuel oil35 to meet energy needs. It also
describes the potential for natural gas to decrease energy prices and trends in the
global and regional natural gas markets
Part II: Using LNG to Deliver Natural to the Caribbeanmakes the case
that LNG would be the best technical option for delivering natural gas to the
Caribbean region, explains the supply chain for delivering LNG to the Caribbean,
and explores three potential pricing possibilities for LNG in the Caribbean
Part III: Three Scenarios for a Competitive Regional Market for Natural
Gaspresents three market scenarios for supplying natural gas to the Caribbean,
and compares the market size, fuel prices, ease of implementation and risk matrix
of each scenario to determine the preferred scenario for the Caribbean. It includes
a cost benefit analysis for each of the three scenarios compared to the business as
usual scenario, in which countries in the region continue to depend on fuel oil as
their main source of electricity generation

35

Fuel oil refers to all refined oil products in all places in this report.

Confidential

Part IV: Socio-environmental Impact and Risk Analysisconducts an


analysis of the social and environmental impacts and risks associated with the
preferred scenario, and the mitigating actions to address risks
Part V: Strategy for Implementing Scenario 1lays out our proposed strategy
to implement Scenario 2, including the activities, timeline and estimated costs of
implementation.
Volume II of this report consists of the following appendices with background and
supporting information that are referred to in Volume I:
Appendix A: Summary of the Natural Gas in the Caribbean Conference (June 5-6,
2014)
Appendix B: Overview of the Energy Sectors in the Countries of Emphasis
Appendix C: Other Proposed Natural Gas Import Facilities in the Caribbean
Appendix D: History of Natural Gas Use in the Dominican Republic
Appendix E: Forecast of Demand for Natural Gas in Each Country
Appendix F: Natural Gas Prices at Regional Supply Points
Appendix G: Seaborne Route Maps
Appendix H: Expansion of the Panama Canal
Appendix I: Potential Ports for CNG and LNG delivery
Appendix J: Comparison of Costs for Technical Options for Delivering Natural
Gas
Appendix K: Some Existing and Planned Liquefaction Projects That Could
Supply the Caribbean with Natural Gas
Appendix L: Companies That Have Expressed Interest in the LNG Market in the
Caribbean
Appendix M: Existing and Planned Facilities That Could Serve as Hubs for
Transshipping LNG to the Caribbean
Appendix N: Electricity Demand and Supply Forecasts in Low and High RE
Scenarios
Appendix O: Costs for Renewable Energy Technology
Appendix P: Costs for Energy Efficiency Programs
Appendix Q: Cost of Generating with Fuel Oil for Each Offtaker
Appendix R: Generic Framework for an Environmental and Social Analysis
Appendix S: Environmental and Social Setting of the Countries of Emphasis
Appendix T: References.

Confidential

Part I: Background
Caribbean countries rely heavily on imported oil products for power generation and other
energy needs. This leads to high and volatile energy prices and a relatively large
environmental impact. Substituting natural gas, a relatively cheap and clean fossil fuel, for
fuel oil in the region could reduce energy prices and the environmental impact of the sector
(Section 2). Natural gas accounts for about one-quarter of all energy consumption in the
world. Recent technology improvements have led to increases in natural gas production, and
both production and consumption are likely to grow in the next few decades (Section 3).
In the Caribbean, however, only Trinidad and Tobago has large natural gas reserves, and
only the Dominican Republic and Puerto Rico import large quantities of natural gas (Haiti
imports a very small amount by truck from the Dominican Republic). High transport costs,
high infrastructure costs to receive natural gas, and limited global trade of natural gas have
limited most Caribbean countries ability to import gas. However, expanding global supply,
including a number of potential suppliers in the region, and technology advances could make
natural gas a good option for Caribbean countries in the near future (Section 4).

Confidential

Overview of the Caribbean Energy Sector

The nine countries of emphasis in this study represent a diverse distribution of population,
geography, wealth, and energy consumption. For example, they range in population from
over 10 million inhabitants (Haiti and the Dominican Republic) to fewer than 300,000
(Barbados), and in annual energy consumption per capita from 3 MMBtu (Haiti) to 757
MMBtu (Trinidad and Tobago).36
Nonetheless, they also share some key features that may allow for common, or even
regional, energy solutions. Most importantly, Caribbean countries small size and isolation
from producers of fossil fuels, as well as their difficulty financing the infrastructure and
contracting the supply of cheaper fossil fuels, has led most Caribbean countries to rely on oil
to generate electricity and meet other energy needs. Eight of the nine countries of emphasis
import of fossil fuelsTrinidad and Tobago produces enough oil and gas to meet its own
energy needs, and is a major exporter of oil products and liquefied natural gas (LNG). For
the eight countries that import fossil fuels, oil products make up more than 60 percent of
imported fuels.37 Only the Dominican Republic and Haiti import natural gas, and only the
Dominican Republic imports coal. Only a few countries have low-cost renewable resources,
especially hydropower, that can be used to meet baseload demand.
Oil products are more expensive than other fossil fuels in most markets, and persistently
high oil prices over the last few years have led to high energy costs in the region. The high
energy costs slow economic growth and hurt competitiveness. Caribbean electricity prices,
for example, are often among the highest in the world, often US$0.30 to US$0.35 per kWh.
Only in a few fossil fuel-importing countries, such as Suriname and the Dominican Republic,
are prices much lower than this, but these low prices are due largely to government subsidies,
rather than low costs.
Oil prices fell about 44 percent between mid-2014 and April 2015, reducing costs in the
region (see Section 3.3.1). In Jamaica, for example, fuel costs for electricity generation are
passed directly on to customers through a fuel surcharge on each months bill. This
36

Information on energy use and energy use per capita comes largely from three sources in this report: the International
Energy Agency (IEA), UN Statistics, and the US EIA. The main metric that the IEA uses to report total energy use is
Total Primary Energy Supply (TPES), made up of Indigenous production + imports - exports - international marine
bunkers - international aviation bunkers +/- stock changes (see https://www.iea.org/stats/defs/Tpes.asp). UN Stats
reports the same statistic, but uses the term Total Energy Requirement. Total Primary Energy Consumption is the metric
the US EIA uses to report total national energy use. While the definition aligns it with the data used from the other two
sources, US EIA appears not to count some forms of biomass consumption. This accounts for the much lower reported
energy use in Haiti and Guyana in US EIA than in the other two sources. The definition of Total Primary Energy
Consumption is here: http://www.eia.gov/tools/glossary/index.cfm?id=P.
The reasons for using different data sources are that each has advantages and disadvantages. IEA has the most updated
data (2012), and includes sources and uses of primary energy supply, not just the final number. However, it does not
include some of the smaller countries analyzed in this report. UN Stats uses 2010 data and includes sources and uses of
primary energy supply. It was used for countries where IEA does not keep data. For The Bahamas and Belize, neither
UN Stats nor IEA reported energy sources and uses. For The Bahamas, information from the IDB was used (from
2008), and for Belize, information from the Nation Energy Policy was used (from 2010). US EIA reports data for all the
territories considered, so it a comparison among all countries from a single source (see Table 2.1). However, it is does
not include information on sources and uses, so was not used in the individual country analyses.

37

The Bahamas (2008 estimate), Barbados (2010), Belize (2010), Dominican Republic (2012), Guyana (2010), Haiti (2012),
Jamaica (2012), Suriname (2010), and Trinidad and Tobago (2012)

Confidential

surcharge fell 45 percent between May 2014 and May 2015, from US$0.25 per kWh
(JMD$28.1) in May 2014 to US$0.13 per kWh (JMD$15.5) in May 2015.38
Despite the recent benefits of lower oil prices, long-term dependence on oil products has
risks. First, oil price volatility creates uncertainty for residents and businesses. Second, fossil
fuel alternatives are still less expensive that oil products in nearby markets. As a result,
importing and using these alternatives (such as natural gas) could reduce energy prices for
the region. Using natural gas or natural gas liquids would also reduce the energy sectors
environmental impact, since these fuels burn cleaner than oil products.
For the eight fossil fuel importers, electricity generation uses 43 percent of fossil fuel
imports, by far the largest energy consuming sector in the region.39 This is one main reason
why electricity generation is the most important potential market for natural gas in the
region. The two other reasons are that the limited number of companies that generate
electricity in each country have large buying power, and do not need to coordinate with
other potential users, and because the cost to convert existing thermal generation capacity
from fuel oil to natural gas is relatively low. As such, it is important to analyze electricity
market structures in the region in order to understand the needs and interests of potential
buyers of natural gas in each country.
Differing market structures, legal contexts, and regulatory frameworks mean that electricity
generators (and potential natural gas purchasers) may be government-owned utilities, private
utilities, or independent power producers. Government regulators often play a role in
deciding the size and generation technology for investments in generation capacity, even if
state or privately owned companies will make the investments. Understanding these market
and regulatory structures is therefore key to evaluating the future of natural gas markets in
the Caribbean.
This section, an overview of the energy sector in the Caribbean, consists of the following
four parts:
Overview of countries in the Caribbean (Section 2.1)
Review of existing uses of fossil fuels in the Caribbean (Section 2.2)
Overview of the electricity systems in the Caribbean (Section 2.3)
Potential for natural gas to reduce energy prices and environmental impact in the
Caribbean (Section 2.4).

2.1

Overview of Countries in the Caribbean

The nine countries of emphasis in this study vary greatly in energy consumption, size,
wealth, and geography. These differences will be important in deciding whether using or
expanding the use of natural gas will play a role in meeting each countrys energy needs. An
understanding of these differences will be necessary in designing financing mechanisms for
38

JPS. Fuel and IPP Charge. http://www.myjpsco.com/business/billing-payment/fuel-rates/. Accessed 4 July 2015.


Calculated using an exchange rate for May 2014 equal to JMD$1=US$0.0089, and for May 2015 equal to
JMD$1=US$0.0086312100.

39

Average for the eight countries, weighted by energy use. Data is for the same eight countries. Belize is the only country of
emphasis that uses less than 30 percent of fossil fuel imports for electricity generation.

Confidential

building the infrastructure and signing the contracts necessary to deliver natural gas. This
section gives an overview of key economic, geographic, social, and energy sector indicators
for each country of emphasis.
Most of the countries of emphasis are islands or island chains, though Belize is in Central
America, and Guyana and Suriname are in northern South America. They range in
population from about 284,000 (Barbados) to about 10.4 million (Dominican Republic). The
countries wealth varies drastically as well, with per capita GDPs from US$758 (Haiti) to
US$23,133 (The Bahamas). The Bahamas and Trinidad and Tobago are the only two
countries with investment-grade sovereign credit ratingsall other countries of emphasis are
rated below investment grade, or are not rated by any ratings agency. All countries are
eligible for funding from the Inter-American Development Bank, and some are eligible for
funding from the World Bank as well.
The nine countries of emphasis for this study are described in more detail below. Table 2.1
gives an overview of key economic, social, political, and energy indicators for countries in
the Caribbean.
The Bahamas are a chain of about 700 islands in the far northern part of the
Caribbean Sea. The country has a population of about 377,000, about 70 percent
of which lives on the largest island, New Providence. The Bahamas is the
wealthiest of the countries of emphasis, with a GDP per capita of US$23,133, and
one of the wealthiest in the Caribbean region
Barbados is an island country of about 284,000 people located in the
southeastern part of the Caribbean Basin. It is one of the wealthiest of the
countries of emphasis, with a GDP per capita of US$15,198, though its sub-prime
credit rating suggests that it would pay a premium for access to commercial
financing
Belize is a country of about 331,000 people located in Central America, and
shares borders with Mexico and Guatemala. Despite its location, it is considered
part of the Caribbean for historical and cultural reasons. Belize has a GDP per
capita of just over US$4,500, and its low credit rating suggests that it would pay a
premium for access to commercial financing
Dominican Republic is located on the eastern half of the central Caribbean
island of Hispaniola, and shares its western border with Haiti. It has the largest
population of the countries of emphasis, with about 10.4 million inhabitants. The
Dominican Republics per capita GDP is US$5,766
Guyana is located on the northern coast of South America and shares borders
with Suriname, Venezuela, and Brazil. It has a population of nearly 800,000
people. It has a relatively low GDP per capita compared to other countries in this
study, at US$3,647
Haiti is located on the western half of the central Caribbean island of Hispaniola,
and shares its eastern border with the Dominican Republic. Haiti is the poorest of
the countries of emphasis, and the poorest country in the Americas, with a per
capita GDP of only US$758. It also has the second largest population of the
countries of emphasis, with about 10.3 million inhabitantsonly slightly below
the population of its eastern neighbor, the Dominican Republic
6

Confidential

Jamaica is a large island in the central Caribbean Sea, with 2.7 million inhabitants.
It has a per capita GDP of US$5,358, in the middle range of the countries of
emphasis for this study. A combination of high debt, at 146 percent, below
investment grade sovereign credit ratings, and fiscal restrictions agreed to with the
International Monetary Fund, mean that the Government of Jamaica has limited
ability to finance large investments
Suriname is located on the northern coast of South America, and shares borders
with Guyana, Brazil, and French Guiana. It has a population of about 530,000,
and a per capita GDP of US$8,716
Trinidad and Tobago consists of a number of islands in the southern Caribbean
Sea, just north of South America. About 95 percent of the countrys population
lives on the main island of Trinidad, and almost all of the rest live on the island of
Tobago. It is one of the larger and wealthier countries in the Caribbean, with a
population of about 1.3 million and per capita GDP of about US$19,000.

Confidential

Table 2.1: Overview of Countries in the Caribbean


Country

Population
(2013)

GDP per
Capita
(2011, in
US$)

Debt/GDP
Ratio
(2011, in
US$)

Sovereign
Credit
Rating
(Moodys)

Total Primary
Energy
Consumption
(2012, in ktoe)

Energy use
per capita
(2011, in
MMBtu)

% of Energy
Use from
Fossil Fuels
(2012)

The Bahamas

377,374

23,133

51

Baa2

1,261

156

98%*

IDB

Barbados

284,644

15,198

86

B3

429

66

93%*

IDB

Belize

331,900

4,609

78

Caa2

378

37

69%*

10,403,761

5,766

33

B1

8,373

32

89%

799,613

3,647

65

NA

554

31

76%*

Haiti

10,317,461

758

15

NA

757

19%

Jamaica

2,714,734

5,358

146

Caa3

3,582

46

81%

530,276

8,716

22

Ba3

1,059

66

45%

1,341,151

19,373

38

Baa2

23,000

757

100%

Dominican
Republic
Guyana

Suriname
Trinidad and
Tobago

Eligibility for
Borrowing from
Multilaterals

IDB
World Bank
IDB
World Bank
IDB
World Bank
IDB
World Bank
IDB
World Bank
IDB
World Bank
IDB
World Bank

Source: Total Primary Energy Consumption and Energy Use Per Capita from the United States Energy Information Administration. Percentage of Energy Use from
Fossil Fuels from IDB, UN Statistics, the International Energy Agency, and the Belize National Energy Policy. GDP and GDP Per Capita from the IMF.
Sovereign Credit Rating from Moodys. Population data from the World Bank, lending information from the World Bank and the Inter-American
Development Bank.
* Data prior to 2012: The Bahamas (2008); Barbados (2010), Belize (2011), and Guyana (2010).

Confidential

2.2

Review of Existing Uses of Fossil Fuels in the Caribbean

Total primary energy supply (TPES) for the nine countries of emphasis is 37,148 ktoe.
Trinidad and Tobago makes up about 52 percent of TPES for these countries. Fossil fuels
oil, natural gas, and coalaccount for 86 percent of TPES in these countries (see Figure
2.1). Natural gas accounts for 50 percent of all energy use in the countries of emphasis, but
Trinidad and Tobago alone accounts for 95 percent of this use. Oil products account for 34
percent of TPES, and are an important energy source for all countries. Biomass is the third
most important energy source, and the most important renewable resource, at 9 percent of
TPES.
Most countries that depend on fossil fuels for energy have no indigenous fossil fuel
resources, and must therefore import all oil, natural gas, and coal that they use. The price of
fuel imports, in particular, is a major burden for many countries. For example, in Jamaica,
Barbados, and Guyana, imports of oil products amounted to 12 percent or more of gross
national income in 2012.40 Trinidad and Tobago, on the other hand, is the only major
producer of oil and gas in the regionthe exploration, production, and refinement of oil
and gas accounted for 42 percent of GDP in 2013.41 Some other countries, such as Belize,
Barbados, and Suriname, have limited reserves of fossil fuels, but are not major producers or
exporters.

40

Ministry of Science, Technology, Energy and Mining, Total Petroleum Imports: Jamaica. 2012.
http://www.mstem.gov.jm/sites/default/files/pdf/Jamaica%20Petroleum%20imports%202008-2012.pdf. Accessed 3
June 2015..

41

Trinidad and Tobago Central Statistical Office. National Income Division: Gross Domestic Product of Trinidad and
Tobago, 2009-2013.

Confidential

Figure 2.1: TPES in the Countries of Emphasis

Note:

Trinidad and Tobago accounts for 52 percent of energy use for all countries of emphasis. About half
of Trinidad and Tobagos energy (9,655 ktoe) was natural gas used as petro-chemical feedstock.
Another large portion (3,677 ktoe) is used in the energy sector or incurred as losses other than for
generating electricity
The data corresponds to different years for each country according to availability as follows: The
Bahamas (2008 estimate), Barbados (2010), Belize (2010), Dominican Republic (2012), Guyana
(2010), Haiti (2012), Jamaica (2012), Suriname (2010), Trinidad and Tobago (2012)
Average TPES includes the 9 countries of emphasis (Belize, Barbados, Guyana, Suriname, The
Bahamas, Jamaica, Haiti, Dominican Republic, and Trinidad and Tobago)

Source: For Jamaica, Haiti, the Dominica Republic, and Trinidad and Tobago, data is from the International
Energy Agency (IEA). For countries where the IEA does not report data, other sources were used to
gather this data, including UN Statistics (Barbados, Guyana, and Suriname), the Inter-American
Development Bank (The Bahamas), and Belize National Energy Policy (Belize).

10

Confidential

Although oil products do not account for as much energy use as natural gas in the countries
of emphasis, oil is by far the most important energy source for most Caribbean countries.
Excluding Trinidad and Tobago, oil accounts for an average of 62 percent of TPES in the
countries of emphasis86 percent if weighted by consumption (see Figure 2.2). Biomass is
the second most important energy source, at 27 percent of TPES. For these eight countries,
natural gas accounts for only 5 percent of TPES, and coal 5 percentthe Dominican
Republic accounts for nearly all use of both sources.
Haiti is the only country that does not use fossil fuels to meet most of its energy needs
solid biomass accounts for 82 percent energy consumption. Haitis dependence on biomass
is largely due to lack of access to modern cooking fuels and electricity. Seventy-two percent42
of Haitians do not have access to electricity, and 93 percent43 do not have access to modern
cooking fuels.

42

Inter-American Development Bank, Energy Access accessed 10 June 2015

43

International Energy Agency, Energy access database,


http://www.worldenergyoutlook.org/resources/energydevelopment/energyaccessdatabase/ accessed 10 June 2015

11

Confidential

Figure 2.2: Average Use of Energy Sources by Country

Note:

Trinidad and Tobago accounts for 52 percent of energy use for all countries of emphasis.
The data corresponds to different years for each country according to availability as follows: The
Bahamas (2008 estimate), Barbados (2010), Belize (2010), Dominican Republic (2012), Guyana
(2010), Haiti (2012), Jamaica (2012), Suriname (2010), Trinidad and Tobago (2012)
Average TPES includes the 9 countries of emphasis (Belize, Barbados, Guyana, Suriname, The
Bahamas, Jamaica, Haiti, Dominican Republic, and Trinidad and Tobago)

Source: For Jamaica, Haiti, the Dominica Republic, and Trinidad and Tobago, data is from the International
Energy Agency (IEA). For countries where the IEA does not report data, other sources were used to
gather this data, including UN Statistics (Barbados, Guyana, and Suriname), the Inter-American
Development Bank (The Bahamas), and Belize National Energy Policy (Belize).

Electricity generation accounts for 43 percent of fossil fuel use in the countries of emphasis
that import fossil fuels (see Table 2.2). Other important uses of fossil fuels in these countries
are the transportation sector, 32 percent of TPES, and the industrial sector, at 12 percent of
TPES.

12

Confidential

Table 2.2: Fossil Fuel Use in Energy Importing CountriesBy Sector

Note:

Oil
(ktoe)

Natural
Gas (ktoe)

Coal
(ktoe)

Total
(ktoe)

% of Total

4,191

818

540

5,549

43%

4,081

15

4,096

32%

1,103

103

325

1,531

12%

727

729

6%

338

338

3%

244

244

2%
3%

Electricity Generation
Transport
Industrial
Residential
Agriculture and Forestry
Commercial and Services
Other
Total

383

28

412

11,067

965

865

12,898

Percentage

86%

7%

7%

100%

Other includes non-energy use, non-specified uses, and other conversions.


Data is for the countries of emphasis that are net fossil fuel importers: The Bahamas, Barbados,
Belize, Dominican Republic, Guyana, Haiti, Jamaica, and Suriname.
The data corresponds to different years for each country according to availability as follows: The
Bahamas (2008 estimate), Barbados (2010), Belize (2010), Dominican Republic (2012), Guyana
(2010), Haiti (2012), Jamaica (2012), Suriname (2010), Trinidad and Tobago (2012)
Other (including non-energy use and other conversions) (Row 8) takes into account conversions
outside the electricity sector and oil, natural gas, and coal use in industry for non-energy purposes
(such as petrochemicals). It also includes unspecified uses.

Source: International Energy Agency, UN Statistics, Belize National Energy Policy, Inter-American
Development Bank

2.3

Overview of the Electricity Systems in the Caribbean

As described above, electricity generation consumes more energy than any other use in the
Caribbean. This, along with the structure of the electricity sector, usually with a single utility
in each country, makes it the most promising market for natural gas in the region. As such,
understanding the structure of the electricity sector is an essential part of bringing a
competitive regional market for natural gas to the Caribbean. The rest of this section gives
an overview of the electricity sector in the Caribbean region and in the countries of emphasis
for this study. Appendix B of this report contains a more detailed analysis of the electricity
sector in each country of emphasis.
Figure 2.3 shows a map of the Caribbean, with the peak demand for electricity for each
country and the percentage of installed capacity that uses fuel oil.44 The figure shows that the
electricity systems in these countries have peak demands that range from about 17MW
(Dominica) to about 2,070MW (Dominican Republic). The figure also shows that most
Caribbean electricity sectors depend largely or entirely on fuel oil for generation. In 11 of

44

In this report, the term fuel oil refers to all refined oil products..

13

Confidential

these countries, and five of the nine countries of emphasis, fuel oil-fired power plants
account for over 75 percent of total installed capacity.
Figure 2.3: Map of Countries in this Study

Source: Antigua and Barbuda: Draft National Energy Policy 2010; The Bahamas: Emera 2011 Annual Report,
National Energy Policy 2010, BEC website, GBPC website; Barbados: BLPC 2012 Annual Report;
Belize: BEL Annual Report, 2012; Dominica: DOMLEC 2012 Annual Report; Dominican Republic:
Organismo Coordinador del SENI (Informe de Operacion Real del Ao 2012) and National Energy
Commission (Informe Annual Actuaciones del Sector Energetico 2013); Grenada: GRENLEC 2012
Annual Report; Guyana: GPL in Perspective, May 2012; Jamaica: JPS website and 2012 Annual
Report; Haiti: 2010 Nexant Report, 2012 EDH PresentationEtat des Lieux de Lelectricite en Haiti;
Nevis: 2011 RFP Terms of ReferencePower Interconnection Pre-Feasibility Study between St.
Kitts and Nevis and Puerto Rico, NEVLEC website, Nevis Geothermal Project and Power Takeoff presentation by NEVLEC General Manager Cartwright Farrell, 2012; St. Kitts: 2013 RFP Terms
of ReferenceRenewable Energy Infusion Study; St. Lucia: LUCELEC 2012 Annual Report; St.
Vincent and the Grenadines: VINLEC 2012 Annual Report; Suriname: Presentation at 2010
CARILEC Engineering Conference (S. Mehairjan and R. Mehairjan) and EBS Website; Trinidad and
Tobago: T&TEC 2011-2016 Business Plan, Trinidad and Tobago Ministry of Energy website

Electricity prices in the Caribbean are among the highest in the world, which negatively
impacts the regions economic growth and competitiveness. Figure 2.4 shows that electricity
prices in the Caribbean are US$0.30 per kWh or more, more than three times higher than
prices in neighboring Florida. Only in Suriname and Trinidad and Tobago are electricity
prices under US$0.10 per kWh. In Suriname, low prices are largely due to high Government
subsidies on tariffs rather than low costs. Low prices in Trinidad and Tobago are largely due

14

Confidential

to the availability of low-cost natural gas for electricity generation, though subsidies play a
role in Trinidad and Tobago as well.45
Figure 2.4: Average Electricity Tariffs in the Caribbean and Florida (2012)

Source: Annual Reports for the utilities; EDH website for the Haiti tariff; CDEEE for the DR tariff; SNL
Energy for Florida Average; T&TEC Business Plan for Trinidad and Tobago

Table 2.3 presents a more detailed overview of electricity systems in the Caribbean. It shows
that the high operating costs of Caribbean electricity utilities drive high tariffs for consumers.
High fuel costs drive high operating costs, even for the most efficient utilities in the
Caribbean. In nine of the utilities sampled, fuel costs account for 65 percent of total
operational expenses, on average.46
Recently, prices have fallen due to the decrease in oil prices. For instance, in Jamaica, fuel
costs for electricity generation are passed on to customers through a fuel surcharge every
month. Since the price of oil dropped in mid-2014, Jamaican consumers started paying a
lower fuel surcharge as part of their electricity tariff. In May 2014, the fuel surcharge totaled
US$0.25 per kWh (JMD$28.1), which decreased by an average of 4 percent each month and

45

The National Gas Company, which is wholly owned by the Government of Trinidad and Tobago, sells natural gas to
electricity generators and some industrial users at a lower price than it could earn by exporting the gas as LNG. The IMF
estimates that lost revenues from these sales of natural gas total about US$1 billion annually (4.45 percent of GDP)
(IMF, Energy Subsidy Reform: Lessons and Implications. 28 January 2013).

46

Average for BEC (The Bahamas), LUCELEC (Saint Lucia), VINLEC (Saint Vincent and the Grenadines), BL&P
(Barbados), DOMLEC (Dominica), JPS (Jamaica), GLP (Guyana), EBS (Suriname), and GRENLEC (Grenada).

15

Confidential

totaled US$0.13 per kWh (JMD$15.5) in May 2015.47 Nevertheless, customers are susceptible
to oil price fluctuations, which create uncertainty for residents and businesses.
In general, state-owned utilities tend to perform worse financially than privately owned
utilities. Utilities that perform poorly may have limited financial resources to cover
investments in natural gas for electricity generation. EDH in Haiti is an extreme example
not only does it depend on subsidies, amounting to nearly US$200 million annually, to
continue operations, but in the past it has not been able to pay independent power
producers (IPPs) for electricity under the terms of their power purchase agreement (PPA).
EBS in Suriname also receives large direct subsidies from the Governmentabout US$115
million in 2012.48

47

JPS. Fuel and IPP Charge. http://www.myjpsco.com/business/billing-payment/fuel-rates/. Accessed 4 July 2015.

48

Ruben S. Gattelet, Financial Analysis of the Company of Electricity and Gas Energiebedrijven Ssuriname N.V.,
September 2013

16

Confidential

Table 2.3: Overview of the Electricity Systems in the Caribbean (2012)


Country

Utility Name

Peak Demand
(MW)

Antigua and Barbuda


The Bahamas
The Bahamas
Barbados
Belize
Dominica
Dominican Republic
Grenada
Guyana
Haiti
Jamaica
Puerto Rico
St. Lucia
St Kitts & Nevis
St Kitts & Nevis
St. Vincent & the Grenadines
Suriname
Trinidad and Tobago

APUA
GBPC
BEC
BL&P
BEL
DOMLEC
All utilities
GRENLEC
GPL
EDH
JPS
PREPA
LUCELEC
SKELEC
NEVLEC
VINLEC
EBS
T&TEC

50
53
248 (2009)
157
82
17
2,070
30
110
250 (2011)
636
3,685
60
24
10
26
201
1,287 (2011)

Installed
Generation
Capacity
(MW)
83
104
438 (2009)
239
156
27
3,238
52
158
308 (2011)
934
5,839
86
43
15
57
313
1,761 (2011)

Gross
Generation
(GWh)

Average Tariffs
(US$/kWh)

Av. OPEX
(US$/kWh)

EBITDA
Margin (%)

Return on
Equity (%)

326 (2009)
386 (2011)
1,395 (2009)
1,024
528
102
13,850
199
690
1,033
4,136*
19,430
385
145
55
143
1,477
8,604

0.42
N/A
0.26 (2009)
0.32
0.21
0.43
0.20
0.40
0.31
0.38
0.36
N/A
0.38
N/A
N/A
0.36 (2011)
0.07
0.06 (2011)

N/A
N/A
0.24 (2009)
0.28
0.19
0.3
N/A
0.35
0.36
N/A
0.32
N/A
0.29
N/A
N/A
0.28 (2011)
0.15 (2010)
0.05 (2010)

N/A
N/A
12% (2010)
14%
7%
25%
N/A
23%
-8%
-200% (2011)
11%
N/A
24%
N/A
N/A
24% (2011)
-46% (2010)
26% (2010)

N/A
N/A
0% (2010)
6%
-5%
12%
N/A
19%
-90%
N/A
4%
N/A
14%
N/A
N/A
1.2% (2011)
N/A
2.7% (2010)

* For Jamaica, generation data is net generation plus total purchases.


Source: World Bank World Development Indicators; Annual Reports for BEC (2012), BLPC (2012), DOMLEC (2012), GBPC (2011), GRENLEC (2012), JPS
(2012), LUCELEC (2012), VINLEC (2012); Business Plan for Trinidad and Tobago (2011-2016); National Energy Policies and Action Plans for Antigua and
Barbuda (2010), The Bahamas (2010), Nevis (2010), St. Kitts (2010), and St. Vincent and the Grenadines (2012); government statistics for the Dominican
Republic (Organismo Coordinador del SENI (Informe de Operacion Real del Ao 2012) and National Energy Commission (Informe Annual Actuaciones
del Sector Energetico 2013); utility websites of GBPC, BEC, JPS, T&TEC, PREPA and NEVLEC; presentations by CARICOM (Wilson and Byer, 2009),
CARILEC (Mehairjan and Mehairjan, 2010), GPL (GPL in Perspective, 2012), EDH (Action Plan, 2012-2013), and NEVLEC (Power Take-off by
Cartwright Farrell, 2012); reports by the World Bank (Krishnaswamy and Stuggins, 2007), Nexant (Caribbean Regional Electricity Generation,
Interconnection, and Fuels Supply Strategy, 2010), and IDB (Energy Matrix Country Briefings, 2013); Terms of Reference for NEVLEC (Power
Interconnection Pre-Feasibility Study, 2011), SKELEC (Renewable Energy Infusion Study, 2013); the Renewable Energy & Energy Efficiency Partnership
(REEEP) database; Country Roadshow: Energy Transition in Guadeloupe and Martinique; and data from the US Energy Information Administration

17

Confidential

2.3.1 Existing and potential generation alternatives


Table 2.4 shows that nearly all Caribbean countries depend on oil products for electricity
generation. Two exceptions are Belize and Suriname. Belize and Suriname have developed
large hydroelectricity capacity. Belize also uses bagasse cogeneration for about 9 percent of
electricity generation, and imports over 45 percent of its electricity from neighboring
Mexico.
Table 2.4 also shows that countries with larger demand for electricity tend to utilize more
diverse generation technologies, and that only two countries use natural gas for electricity
generationthe Dominican Republic and Trinidad and Tobago. The Dominican Republic
has the largest peak demand for electricity in the Caribbeanabout 2,070MW in 2012
(existing unmet demand would further increase this value), and has taken advantage of this
relatively large scale to import coal and natural gas for electricity generation, in addition to
developing hydro resources. As a large producer of natural gas, Trinidad and Tobago can
transport it very inexpensively, and uses it for 99 percent of electricity generation.
Table 2.4: Sources of Electricity Generation at Utility Scale
Country

Oil

Natural
Gas

Coal

Hydro

Other

Antigua and Barbuda

100%

0%

0%

0%

0%

The Bahamas

100%

0%

0%

0%

0%

Barbados

100%

0%

0%

0%

0%

Belize

3%

0%

0%

40%

57%

Dominica

75%

0%

0%

25%

0%

Dominican Republic

52%

25%

13%

11%

0%

Grenada

>99%

0%

0%

0%

<1%

Guyana

100%

0%

0%

0%

0%

Haiti

86%

0%

0%

14%

0%

Jamaica

91%

0%

0%

4%

5%

St. Lucia

100%

0%

0%

0%

0%

St. Kitts & Nevis

98%

0%

0%

0%

2%

St. Vincent & The Grenadines

83%

0%

0%

17%

0%

Suriname

47%

0%

0%

53%

0%

Trinidad and Tobago

1%

99%

0%

0%

0%

Note:

The figures in this table are as a percentage of total electricity generated. They differ from the figures
in Figure 2.3, which show fuel oil fired generation capacity as a percentage of installed capacity in
each country.
Other includes imports from Mexico (Belize), biofuels (Jamaica), biomass (Belize), wind (Dominican
Republic, Jamaica), and solar (Grenada, St. Kitts & Nevis)

18

Confidential

Most Caribbean countries may be able to lower the costs and environmental impact of the
energy sector by switching to alternative fossil fuels or renewable energy resources. Each
countrys options vary depending on the size of the electricity system, renewable energy
resource endowments, and other factors. Deciding on the best option for expanding
electricity generation capacity, or replacing existing oil-fired capacity, will require a detailed
cost-benefit analysis for each country and supply option, including the environmental impact
of each. Table 2.5 shows a preliminary assessment of viable energy alternatives for each
jurisdiction.
Table 2.5: Potential Options for Expanding Baseload Generation

Note:

= In use,

= Viable as primary baseload,

= Viable to meet portion of baseload demand, =

Not in use
LNG=liquefied natural gas. LNG ratings are based on the conclusions of this study, that LNG is the
best way to deliver LNG to the Caribbean and the countries in which LNG is feasible. Countries that
we did not study in detail and that do not have plans to import LNG are listed as TBD = To be
determined.
* The resources are site-specific and need to be studied further.
Sources: Gerner, Franz and Megan Hansen, Caribbean Regional Electricity Supply Options. 2011. World
Bank. Castalia assessments.

19

Confidential

2.3.2 Market structures of the electricity sectors in the Caribbean


Table 2.6 provides an overview of the key attributes of the electricity market structures in a
number of Caribbean jurisdictions. This table shows that the countries of emphasis can be
classified into three institutional models for delivering electricity services. First, The Bahamas
(in the case of the island of Grand Bahama), Barbados, and Jamaica have vertically integrated
and privately owned utilities. Second, the Dominican Republic has a vertically unbundled
electricity market, with three state-owned distribution companies that buy power from IPPs.
Third, most other countries have vertically integrated state-owned utilities, including The
Bahamas (in the case of all areas outside of Grand Bahama), Belize, Guyana, Haiti, Suriname,
and Trinidad and Tobago. In this third case, Belize and Suriname purchase some of their
electricity from IPPs.
Table 2.6: Market Structure of Electricity Sector in the Caribbean
Country

Utility

Jurisdiction

Antigua and
Barbuda

APUA

All (monopoly)

The Bahamas

BEC

The Bahamas

GBPC

Barbados

BL&P

Dominica

DOMLEC

Belize
Dominican
Republic
Dominican
Republic
Dominican
Republic
Dominican
Republic
Grenada
Guadeloupe
Guyana
Haiti
Jamaica
Martinique
Puerto Rico
St. Vincent and the
Grenadines
St. Kitts and Nevis
St. Kitts and Nevis
St. Lucia

BEL

Suriname

EBS

Trinidad and
Tobago

T&TEC

Note:

EDEESTE
EDENORTE
EDESUR

All, except Grand


Bahama
Grand Bahama
All (only license, but no
monopoly)
All (only license, but no
monopoly)
All
Eastern Dominican
Republic
North Dominican
Republic
South Dominican
Republic

Government
Ownership
(%)

Role

IPPs for
Power
Generation

100%

G, T, & D

Yes

100%

G, T, & D

No

0%

G, T, & D

No

6.3%

G, T, & D

No

21%

G, T, & D

No

97.1%

G, T, & D

Yes

100%

Yes

100%

Yes

100%

Yes

ETED

All

100%

N/A

GRENLEC
EDF
GPL
EDH
JPS
EDF
PREPA

All (monopoly)

G, T, & D
G, T, & D
G, T, & D
G, T, & D
G, T, & D
G, T, & D
G, T, & D

No
No
Yes
Yes
Yes

All

21.6%
100%
100%
100%
19.9%
100%
100%

VINLEC

All

100%

G, T, & D

No

NEVLEC
SKELEC
LUCELEC

Nevis
St Kitts (monopoly)
All
All (except 2 mines and
rural areas)

100%
100%
45.56%

G, T, & D
G, T, & D
G, T, & D

No
No
No

100%

G, T, & D

Yes

100%

G, T, & D

Yes

All
All (monopoly)
All

All (not exclusive)

G=generation, T=transmission, D=distribution

20

Yes

Confidential

The design of each countrys electricity market determines which entities plan and invest in
new generation assets, and therefore whether or not, and in what quantity, the country could
import natural gas for electricity generation. Generation expansion planning includes
determining when new generation capacity is needed, as well as what generation technology
should be used to meet expansion needs. Depending on the market structure, planning and
investment roles would be taken on by privately owned and vertically integrated utilities,
governments or government-owned utilities, regulatory agencies, or IPPs. Each entity brings
its own set of priorities, perspectives, and criteria for success.
In countries with privately owned and vertically integrated utilities, the utility typically makes
generation asset planning decisions and finances investments in new assets. In most cases,
the legal framework guides planning and investment decisions (see Section 2.3.3). However,
this is not always the case. In Jamaica, for instance, the electricity sector regulator, the Office
of Utilities Regulation (OUR), decides when to issue tenders for new generation capacity and
specifies the technology in the tender. After the tender process, the preferred bidder makes
the investment in the new generation capacity. Bidders may include IPPs and the Jamaica
Public Service Company, the privately owned utility that owns and operates the national grid.
In countries with vertically unbundled electricity markets, planning and investment decisions
are made by regulators, utilities, and IPPs. For example, in the Dominican Republic,
according to the legal framework, the Superintendencia de Electricidad, a governmental regulatory
body, makes the ultimate determination to add new generation capacity through a tender
process. The Superintendencia also determines the generation technology that will be used. The
Superintendencia then issues a tender, to which IPPs respond. The IPP that wins the tender
makes the investment and operates the asset, selling power to the state-owned distribution
company.
Most of the countries of emphasis have state-owned and vertically integrated electricity
utilities. In these cases, the utility makes generation asset planning decisions, typically in line
with the governments objectives. In some cases, the utility or the government finance and
operate new generation assets directly. In other cases, the government or the utility issue
tenders, then buy electricity from the winning IPP under a PPA.
The disparities across Caribbean countries in degree of competition and market power
concentration, as well as market size, influence company and government strategy,
investment decisions, and pricing dynamics. These structural differences will have to be
taken into account when developing options for a regional natural gas market.
2.3.3 Regulatory and legal framework of the electricity systems in the Caribbean
For most Caribbean countries, the most important laws in the electricity sector are those that
either provide for electricity generation, transmission, and distribution licensing, or those
that establish the state-owned electricity utility. In some cases, the law provides for a single
license for electricity generation, transmission, and distribution, which may or may not be
exclusive. This license is often granted to a vertically integrated utility, such as in Barbados.
In other cases, the license is granted to a state-owned utility, such as in Guyana and Haiti. In
a few countries, such as Jamaica and the Dominican Republic, separate licenses are granted
for generation, transmission, and distribution. Companies with licenses in these unbundled
structures may be state owned or privately owned.

21

Confidential

Within the Caribbean, the regulatory frameworks have been developed to different levels.
Most of the countries of emphasis have established regulatory entities for the electricity
sector that have some responsibility over setting tariffs, granting licenses, and setting and
enforcing service standards. In some cases, the regulators are credible and function well, in
accordance with clear guidelines established by law. The OUR in Jamaica, and the FTC in
Barbados, for example, are both multi-sector regulators with well-developed processes for
tariff setting. In other cases, however, regulators have set tariffs below the cost of service,
which has endangered the financial viability of the utility.
A few countries, such as Haiti, the Dominican Republic, and Suriname, do not have clear
regulatory guidelines. In these countries, tariffs are set or heavily influenced by the
government, and political pressure has led to tariff levels that are well below the cost of
providing service. As a result, governments must heavily subsidize companies in the
electricity sector, but budget limitations often mean that service quality is not adequate.
Even in countries with credible regulatory structures, utilities do not often have incentives to
invest in least-cost electricity generation technologies. Many regulatory structures guarantee
the utility a return on their investment in generation assets, without requiring or encouraging
the utility to consider all energy sources. This gives the utility no incentive to invest in new
generation technology, which may continue to add fuel oil-fired generation capacity even
though other renewable and fossil fuel options have lower costs. This is the case in
Barbados, where the regulatory framework functions well otherwise.
Table 2.7 below summarizes the regulatory framework for each country of emphasis.
Appendix B of this report describes the legal and regulatory framework in detail for each
country.

22

Confidential

Table 2.7: Overview of the Regulatory Framework in the Caribbean

Country
The Bahamas
(BEC)
Barbados
Belize
Dominican
Republic

Guyana
Haiti

Jamaica
Suriname

Trinidad and
Tobago

Electricity
Regulator
Government

Entity Responsible
for Setting Tariffs
Government

FTC
PUC

FTC
PUC

Superintendencia de
Electricidad,
Organismo
Coordinador
PUC
Government

Superintendencia de
Electricidad

OUR
EBS, but has only
limited regulatory
functions
RIC

PUC
Ministry of Public
Works,
Transportation,
Energy and
Communications
OUR
Government with
advice from the
EAC
RIC

Tariffs
reflect
costs
No
Yes
Yes
No

Fuel Adjustment?
Yes
Yes

Incumbent has
exclusive right
to generate?
Yes

IPPs allowed by
existing legal
framework
Yes

Who selects
generation
expansion capacity?
Government/Utility

Yes
No
No

Yes
Yes
Yes

Utility
Utility

No
Yes

Yes
Yes

Utility
Ministry for Public
Works,
Transportation, and
Communications

No
No

No, but the tariff is


indexed to fuel cost,
but not a separate
part of the tariff
Yes
No

Yes
No

Yes
No

No
No

Yes
Yes

OUR
EBS/MNH

No

Yes

No

Yes

Utility

23

Superintendencia de
Electricidad

Confidential

2.4

Potential for Natural Gas in the Caribbean Energy Sector

Replacing oil products with natural gas in the Caribbean could reduce energy prices in the
region. Figure 2.5 shows historical and projected prices across a variety of markets for
potential fuels for electricity generation in the Caribbean. Current and projected prices for
natural gas at Henry Hub are easily the cheapest of fuels shown. However, the global
variation in natural gas prices shows that transporting natural gas economically to the
Caribbean could be difficult. Europe and Japan, the two of the largest import markets for
natural gas, pay two times (Europe) or three times (Japan) higher prices for natural gas than
consumers in the United States, which produces most of the natural gas that it consumes.
High transportation costs and competition for globally traded gas lead to higher prices for
imported natural gas.
The countries of emphasis in the Caribbean would have to import all natural gas they use.
This will certainly make prices higher than in the United States. Whether the Caribbean pays
more (or how much more) than Europe and Japan for natural gas will depend on
developments in global and regional supply and demand, and developments in the price of
oilthe fuel that natural gas would replace in the Caribbean.
Figure 2.5: Historical and Projected Prices for Caribbean Fuel Options

Note:

All prices are 2013 US dollars.

Sources: Prices and projections for Japan LNG, Henry Hub, and Europe natural gas (cross border traded
average) are from the World Bank. Prices for No. 2 Diesel, LPG, and HFO are from the United
States Energy Information Administration. Projections for No. 2 Diesel and HFO are based on
projections for the price of crude oil. Projections for LPG at Mt. Belvieu are based on the U.S. EIAs
projections for propane prices for end users in the United States.

Natural gas is also cleaner than either LPG or fuel oil (see Table 2.8). On average, natural gas
emits lower SO2 and NOx than either LPG or fuel oil. Natural gas also emits less carbon
dioxide, an important greenhouse gas, than either LPG or fuel oil. Exact levels of all
emissions will vary depending on plant efficiency, among other factors.

24

Confidential

Table 2.8: Emissions for Natural Gas and Fuel Oil (kgs per MWh)
SO

NO

Fuel Oil

5.4

1.8

LPG

0.1

1.5

NG

0.05

0.8

Source: EPA average emissions from U.S. power plants.

The combination of the low price of natural gas and its environmental benefits could
transform the regional energy sector. While natural gas is not yet widely used in the
Caribbean, the price difference between HFO and diesel49 and natural gas creates an
opportunity for fossil fuel offtakers to substitute natural gas for oil products to reduce their
fuel costs. These savings could be passed along to consumers. Further, using natural gas for
electricity generation (and other energy needs) would substantially reduce regional emissions
of carbon dioxide and local pollutants.
Whether or not Caribbean countries can increase natural gas imports to take advantage of
the price and environmental benefits will depend on developments in the global and regional
markets, and will require finding the right technical option for delivering natural gas. The
next sections in the report examine these questions in more detail.

49

Many Caribbean utilities also use diesel fuel for electricity generation. It is a cleaner fuel than HFO, but more expensive.

25

Confidential

The Global Market for Natural Gas

While natural gas is not yet widely available in the Caribbean, increasing supply of natural gas
may make it available in the near future. Increasing supply is due to significant technological
advances in its production, transport, and use. Because of the supply increase and because
natural gas is a relatively clean fossil fuel (producing fewer local pollutants and less carbon
dioxide than oil or coal), consumption has also grown over the past 30 years. Continued
technological innovation, environmental pressures, and economic growth are expected to
support strong growth in natural gas demand for decades to come.
This section begins with a review of the current state of the global natural gas industry and
its evolution to date. It also describes important regional and national natural gas markets
around the world, and the future outlook for these markets. Next, it evaluates the spread
between natural gas prices in the United States and oil prices, which points to potential
savings for the Caribbean by switching from oil products to natural gas. Finally, the section
presents the expectations for the industrys future development, highlighting the various
drivers that support its growth and the potential challenges that may limit it.

3.1

Evolution and Current State of the Natural Gas Sector

Natural gas is among the most important sources of energy in the world today. Globally,
natural gas consumption reached 118 trillion cubic feet (Tcf) in 2013. This accounted for 24
percent of total primary energy consumption, placing natural gas on par with oil and coal in
meeting the worlds energy needs (see Figure 3.1).
Figure 3.1: Global Primary Energy Consumption by Fuel (million tonnes of oil
equivalent)

Source: BP Statistical Review of World Energy (2014).

3.1.1 Supply
In 2013, global natural gas production reached nearly 120 Tcf. Like oil, natural gas
production is concentrated in a relatively small number of countries, with the top two

26

Confidential

producing countries (United States [24.2 Tcf] and Russia [21.3 Tcf]) accounting for 38
percent of total global production. The remaining top five producers are much smaller, with
Iran producing roughly 5.9 Tcf per year and Qatar and Canada each producing 5.5 Tcf. As
shown in Figure 3.2, North America and Europe/Eurasia dominate global natural gas
production, although other regions have grown significantly in the past decade, most notably
the Middle East (with the worlds largest reserves) and Asia (with the worlds fastest growing
demand).
Figure 3.2: Evolution of Natural Gas Production by Region

Source: BP Statistical Review of World Energy (2014).

Proven natural gas reserves (this represents known natural gas resources that can be
economically produced at current prices) were just over 6,550 Tcf at the end of 2013. The
Middle East is home to 43 percent of the total (primarily Iran [1,193 Tcf] and Qatar [871
Tcf]), and a further 30.5 percent is located in Europe and Eurasia (primarily Russia [1,103
Tcf] and Turkmenistan [617 Tcf]).
Proven natural gas reserves fluctuate as natural gas is produced and consumed, new reserves
are found, or changes in natural gas prices make known reserves economically viable. Global
proven natural gas reserves have more than doubled in the past 30 years, despite cumulative
natural gas production of 2,340 Tcf in that period (see Figure 3.3).

27

Confidential

Figure 3.3: Evolution of Global Proven Natural Gas Reserves

Source: BP Statistical Review of World Energy (2014).

The number of years of natural gas production that can be supported by available proven
reserves (known as the Reserve-to-Production ratio, or R/P) has remained remarkably stable
at the global level (see Figure 3.4), averaging close to 55 years for the past three decades.
Figure 3.4: Natural Gas Reserves to Production (R/P) Ratio by Region

Source: BP Statistical Review of World Energy (2014).

28

Confidential

Regional ratios have evolved more dramatically over that time, especially in the Middle East,
as production volumes (primarily for export) have steadily grown to match the regions
significant resource base. In Figure 3.4, a downward slope indicates natural gas production
outpacing reserves replacement, while an upward slope indicates the opposite. Since 2005,
R/P ratios have broadly risen in North America and Europe/Eurasiathe two largest gas
producing regions of the world.
The vast majority of natural gas production (86 percent in 2010) comes from conventional
resources, including gas associated with oil production and non-associated gas that is
produced alone. Unconventional resources, such as coal-bed methane (that is, natural gas
that is trapped within coal deposits), shale gas (gas found in shale rocks), and gas found in
similar tight rock formations, are a much smaller share of global production but represent
the fastest growing resource.
Shale gas and tight gas in particular have undergone a boom in production growth, especially
in the United States. In 2002, shale gas represented just 2.4 percent of U.S. natural gas
production, or roughly 1.2 Bcf per day (0.45 Tcf per year). By 2013, shale gas production had
grown more than 25 times to 31.1 Bcf per day (11.3 Tcf per year) and accounted for 46
percent of U.S. supply.50
Only two other countries are currently producing shale gas: Canada, which produced an
average of 3.9 Bcf per day (1.4 Tcf per year) as of May 2014; and China, which produced
roughly 0.2 Bcf per day (roughly 0.006 Tcf per year) in 2014, accounting for about 1.6
percent of Chinas total natural gas production.51
While extensive shale gas deposits have been known for decades, producing shale gas was
uneconomic until U.S. independent gas producers developed new production techniques. A
combination of three separate technologieshorizontal drilling (needed to follow shale
seams deep under the ground and increase the pay region per well), hydraulic fracturing
(fracking, needed to release the gas trapped within the shale rock), and the specific cocktail
of drilling fluids and proppants (small particles such as sand or plastic beads that lodge
within the crack created during the fracturing process and hold the fracture open)allowed
them to greatly increase gas production per well, while reducing production costs.
The shale gas revolution has opened a new chapter in U.S. gas production, reversing
expectations of growing U.S. natural gas imports, particularly in the form of liquefied natural
gas (LNG).52 The U.S. is now expected to become a major natural gas exporter, and led the
world in proposed new liquefaction capacity in 2013.53 Shale gas also has the potential to
remake global markets and trade relationships as many other countries also have significant
shale resources. The most recent assessment of global shale resources by the U.S. EIA
50

US EIA, Annual Energy Outlook 2015. Total gas production in the United States was 24.4 Tcf in 2013.

51

US EIA, Shale gas and tight oil are commercially produced in just four countries, February 13, 2015,
http://www.eia.gov/todayinenergy/detail.cfm?id=19991

52

To transport natural gas as LNG, natural gas is liquefied to a density 600 times greater than its gaseous state, then
transported by ship to its destination. At its destination, it is re-gasified and used. To transport natural gas as compressed
natural gas (CNG), natural gas is compressed to 300 times its normal density, transported to its destination, and then
expanded for use. Section 5 describes the main technical options for transporting natural gas in detail.

53

IGU World LNG Report 2014 Edition, accessed 22 April 2015, http://www.igu.org/sites/default/files/node-pagefield_file/IGU%20-%20World%20LNG%20Report%20-%202014%20Edition.pdf.

29

Confidential

estimated that shale gas could boost global proven and unproven gas reserves by 48 percent,
an increase of 7,300 Tcf. Countries with significant shale potential include major natural gas
importing countries such as China, Mexico, Argentina, and Brazil, in addition to current
major gas producers such as Russia and the United States (see Table 3.1).54
Table 3.1: Top 10 Countries with Technically Recoverable Shale Gas Resources
Estimated Shale Gas
Resource (Tcf)

Country
China

1,115

Argentina

802

Algeria

707

United States

665

Canada

573

Mexico

545

Australia

437

South Africa

390

Russia

285

Brazil

245

Source: EIA Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale
Formations in 41 Countries Outside the United States, June 2013

Although shale gas resources are immense, the pace and ultimate volume of natural gas that
can be economically produced remains highly uncertain. Large-scale shale development has
been underway for just over a decade in the United States, and resources outside the U.S. are
only now being identified and delineated. As new information becomes available, initial
estimates can change dramatically. Even once the shale gas is under development, individual
wells tend to be depleted very rapidly. This means that new wells must be continuously
drilled in order to maintain production levels. Regulatory changes or price fluctuations that
affect drilling rates can have a significant and immediate impact on shale gas production.
In addition, the conditions that allowed rapid development of shale gas in the United
Statessupportive regulations, sub-surface royalty rights for private land holders, available
water supply, and the necessary pipelines, roads, and other infrastructure to support
development and transport the gas to marketmay not exist in other countries. As a result,
54

With regard to Chinas dominant position regarding the estimated shale gas resources, this is not expected to have much
impact on international trade of LNG. To begin, China is moving much more slowly than the U.S. to develop shale,
faces many barriers (like lack of water supply and available pipelines to bring the gas to market), and is not investing
nearly as much money in shale yet. If China did decide to develop its shale, it could increase volumes quickly, but it
would all be for domestic consumption. Chinas natural gas share of total energy is very small, and it would want to use
the gas to replace coal for local environmental reasons first, reduce natural gas imports second, and only then think about
exporting gas. For the next 20 to 30 years China could have a virtually limitless demand for natural gas if it was available
at a competitive price.

30

Confidential

the rapid rise in U.S. shale gas production may not be duplicated in other countries. These
risks to future natural gas development from shale resources are described in greater detail in
Section 3.1.5.
3.1.2 Demand
Natural gas is consumed in four basic ways:
As an industrial feedstock, used to produce petrochemical compounds and basic
manufactured goods;
Burned to heat buildings and provide heat in manufacturing processes
Burned to generate electricity
To a much lesser degree, it is used as a transportation fuel.
Because it is a gas, natural gas has lower energy density (the energy provided per unit of
volume) than liquid fuels like diesel and gasoline, making it more difficult to transport and
store. Its benefits, including a smaller environmental impact and lower cost, have led many
countries to develop extensive infrastructure of pipelines, storage tanks, and distribution
grids to enable natural gas use.
Worldwide, power generation accounts for the largest portion of natural gas consumption,
about two-fifths of the global total in 2012 (see Figure 3.5). Industrial use and combined
residential and commercial consumption made up nearly one-quarter each. Other uses,
including transportation and use in the energy sector, made up the remaining 14 percent.
Figure 3.5: Natural Gas Consumption by End-User (2012)

Source: International Energy Agency

In 2013, the United States consumed 28.5 Tcf of natural gas, or roughly 78 Bcf per day on
average. Russia was the second largest consumer, but far smaller at 15.8 Tcf, despite its
relatively similar levels of production. Russia exports much of its natural gas while the
United States imports significant volumes from Canada (see Figure 3.7). The worlds next
three largest gas consumers include Iran (6.2 Tcf or 17 Bcf per day), China (6.2 Tcf or 17 Bcf
per day), and Japan (4.5 Tcf or 12 Bcf per day). Although North America and
Europe/Eurasia remain the largest gas-consuming regions, Asia Pacific and the Middle East
are growing rapidly (see Figure 3.6).

31

Confidential

Figure 3.6: Natural Gas Demand by Region

Source: BP Statistical Review of World Energy, 2014

3.1.3 Trade
Natural gas markets remain relatively isolated due to the high cost to transport natural gas,
especially relative to coal and liquid fuels. In 2013, only 36.6 Tcf of natural gas was traded
across borders, representing 30 percent of total global demand. Just over two-thirds of this
total was transported via pipelines, with over half of that volume coming from just two
major pipeline systems (see Figure 3.7):
The North American system that connects the United States, Canada and Mexico
(4.35 Tcf)
The Europe/Eurasian system that connects Europe with Russia and the countries
of the former Soviet Union (8.44 Tcf).

32

Confidential

Figure 3.7: Major Natural Gas Trade Movements, 2013 (billion cubic meters)

Source: BP Statistical Review of World Energy, 2014

The remainder of global gas trade was in the form of liquefied natural gas (LNG). Major
LNG exporters include Qatar, Australia, Nigeria, Algeria, and Trinidad. Qatar alone accounts
for roughly one-third of global LNG exports, sending more than 3.7 Tcf to markets in Asia
and Europe. Trinidad and Tobago, among the top five LNG exporters in 2013, shipped the
equivalent of 699 Bcf of LNG.
3.1.4 Regional price and market structure
The relative geographic isolation of regional natural gas markets described in the section
above has allowed a wide range of natural gas market structures and pricing systems to
evolve and co-exist. Industry structures range from the single provider model (often in
countries with a national oil company that also maintains a monopoly on liquid fuel supplies)
to highly competitive markets of multiple suppliers and consumers. In a similar manner,
price setting mechanisms are very different in different markets. Examples include:
Competitive systemsSupply and demand set the price of natural gas at specific
trading hubs. In North America, the most important pricing point is Henry Hub
(Louisiana), with a spot and futures market trading on the New York Mercantile
Exchange (NYMEX). In Europe, the most important hub is the National Balancing Point
(NBP) in the United Kingdom, which is a virtual trading point for the Intercontinental
Exchange (ICE). It contains both a spot and a futures market, although trading volumes
fall sharply for future natural gas deliveries of more than a few months out
Oil-linked systemsMost of the gas traded in continental Europe and Asia, including
long-term LNG and pipeline contracts, falls in this category. Gas contract formulas vary

33

Confidential

in a number of ways based on factors such as: Indexation to oil prices, Slope/Coefficients
of the indexation, presence of S-curves, and Lag and Averaging Mechanisms
Regulated systemsIn many parts of the world, prices are regulated with the
government setting wellhead, transportation, and end-user prices. In many countries in
the Middle East and North Africa, regulated gas prices are subsidized and barely cover
production costs. In Latin America, the former Soviet Union, and in much of Africa, gas
prices are similarly set with no direct linkage to oil or costs.
This wide range of pricing methods has resulted in dramatically different natural gas prices
worldwide, and has affected the development of regional LNG markets (see Section 6.2.1
below). The price of natural gas in most major consuming regions moved in a tight band
from the mid-1990s until 2008, staying generally in line with oil price movements. The
higher oil price levels of the past five years, in addition to the U.S. shale gas surge, widened
the price range between Henry Hub in the U.S. and European and Asian price indices. Prices
have dropped sharply in Japan, Europe, and the United States in the first five months of
2015, compared with 2014 (see Figure 3.8).
Figure 3.8: Natural Gas Wholesale Prices ($/MMbtu)

Notes:

2015 prices are from January 2015 until end-May 2015.


All prices are in 2015 US dollars. The European average is the average import border price and a spot
price component, beginning April 2010 including UK; during June 2000 - March 2010 prices excludes
UK. The Japan LNG prices is the import price, cif.

Source: World Bank Commodity Price Data (The Pink Sheet). 2015 prices are nominal. Prices for other years
adjust to 2015 based on information from Oregon State University
(http://liberalarts.oregonstate.edu/spp/polisci/faculty-staff/robert-sahr/inflation-conversionfactors-years-1774-estimated-2024-dollars-recent-years/download-conversion-factors)

Currently, the United States has the lowest prices of any major natural gas market, with
wholesale prices at the Henry Hub (a point at which several major transcontinental pipelines
meet, and so a major pricing point and reference price for the competitive market) reaching
an annual average between $2.8 per MMBtu in 2012 and rebounding to $4.6 in 2014. Prices
have since fallen back to $2.8 per MMBtu for the first five months of 2015.

34

Confidential

By comparison, prices in Europe have ranged between $8 and $11 per MMBtu in the past
five years. Continental Europes natural gas prices are heavily influenced by oil-indexed
contracts for natural gas imported from Russia. The worlds highest natural gas prices are
found in Asia, especially Japan, where prices linked to imported oil prices (known as the
JCC, Japan Customs-cleared Crude or the Japanese Crude Cocktail) averaged over US$15
per MMbtu between 2012 and 2014 on the back of global oil prices that were often near
US$100 per barrel55 (see Table 3.2).
Table 3.2: Average LNG and Natural Gas Prices (US$ per MMBtu)
2012 Price

2013 Price

2014 Price

2015 Price

U.S.Henry Hub

2.83

3.90

4.57

2.81

European average

11.82

12.31

10.52

8.10

JapanLNG

17.05

16.67

16.78

13.36

Brent Crude Oil

19.54

19.28

17.55

9.69

Note:

2015 prices are from January 2015 until end-May 2015.


All prices are in 2015 US dollars. The European average is the average import border price and a spot
price component, beginning April 2010 including UK; during June 2000 - March 2010 prices excludes
UK. The Japan LNG prices is the import price, cif.
Brent price per barrel converted at 5.9 MMBtu/barrel.

Source: World Bank Commodity Price Data (The Pink Sheet). 2015 prices are nominal. Prices for other years
adjust to 2015 based on information from Oregon State University
(http://liberalarts.oregonstate.edu/spp/polisci/faculty-staff/robert-sahr/inflation-conversionfactors-years-1774-estimated-2024-dollars-recent-years/download-conversion-factors)

The gaps among regional natural gas prices respond to differences in market size and
structure, and regulations in the trading countries. In the next sections, we examine some of
the characteristics of the natural gas market in the United States and Japan, given their
importance in the global market and trade for natural gas. The natural gas market in the
United States is the largest in the world, consuming 78 Bcf per day on average in 2013.56
Japan is the largest LNG importer in the world, averaging 11.5 Bcf per day.57
3.1.5 The natural gas market in the United States
The U.S. market is the largest competitive gas market in the world. The natural gas price at
the U.S. Henry Hub (the markets main pricing point) is the index used for recently
contracted LNG exports from facilities now under construction on the U.S. Gulf Coast.
The United States is a net natural gas importer, although the shale gas revolution has
dramatically increased domestic natural gas production. In 2013, gross U.S. natural gas
imports averaged 7.86 Bcf per day, of which 7.6 Bcf per day came from western Canada via
pipeline. The remainder, roughly 0.3 Bcf per day, was in the form of LNG. Net imports to
55

Between US$104 in 2012 and US$94 in 2014.

56

BP, Statistical Review of World Energy, 2014.

57

BP, Statistical Review of World Energy, 2014.

35

Confidential

the United States were significantly lower, however, as the U.S. also exports 4.3 Bcf per day
of gas via pipeline to eastern Canada (2.7 Bcf per day) and Mexico (1.3 Bcf per day). The
U.S. also exports a limited amount of LNG from Alaska (0.1 Bcf per day on average).58
United States: Market design, participants, and regulation
The U.S. natural gas market is designed to manage the production, transportation, and sale
of natural gas across a very wide geographical territory and among a very large number of
participating companies at each stage of the process. Market and financial regulations,
generally at the federal level, control the sale and transfer of ownership of natural gas.
Federal and state level regulations control access to land where the gas is produced, how it is
produced, how it is shipped to trading and consuming centers, as well as companies
obligations to minimize environmental harm each step of the way.
While many levels of government regulate the natural gas industry, all investment and
operations are done by private companies. There are no explicit limitations on an individual
companys market share or vertical integration across different segments of the natural gas
value chain, although anti-trust laws may limit a companys activities if they are found to
limit competition and harm consumers.
LNG receiving and liquefaction terminals are often partly owned by large integrated energy
companies, such as ExxonMobil, or international energy companies, such as BP. In addition,
financial investors and gas consumers, such as Mitsubishi from Japan, may also take an
equity stake.
United States: Price setting mechanism
U.S. wholesale natural gas prices are market driven, determined by the active trade of
contracts to physically supply natural gas as well as financial contracts based on gas trade,
such as futures contracts, swaps, and other financial derivatives. The U.S. is the largest and
most complex natural gas market in the world, with more than 40 physical trading points for
settling physical trades (including hubs in Canada), and a wide range of financial instruments
of varying tenor, complexity, and risk.
Financial contracts make up the vast majority of natural gas-related trading. The most basic
standardized futures contract is set for a fixed volume of natural gas (10,000 MMBtu, or
roughly 10 MMcf) at a fixed location (Henry Hub in Louisiana) to be delivered at a fixed
time (generally at least one month in the future, and as far as several years forward). These
fixed contracts are traded on the NY Mercantile Exchange (NYMEX) as well as off the
exchange as over-the-counter (OTC) financial products. These financial contracts expire the
week before the start of the month of physical delivery, and traders either settle the financial
differences in their position or agree to take actual delivery of the natural gas in the coming
month. This financial market allows natural gas producers and consumers to hedge against
future changes in the price of natural gas, as well as creating opportunities for purely
financial investors to bet on gas price changes. The size and complexity of the U.S. gas
market has led to the creation and trade of a large number of derivative financial products,
including options, swaps, and structured financial products.

58

BP, Statistical Review of World Energy, 2014.

36

Confidential

Once the futures contracts have closed for a given month, the final settled price for the
months contract sets the physical delivery price at Henry Hub plus or minus any basis
variation for the gas value at the actual point of delivery. The more than 40 physical trading
hubs in the United States and Canada all have distinct gas prices, and many have financial
trading similar to Henry Hub on the NYMEX. Variations between these regional hubs and
Henry Hub are known as the regions basis differential. The basis differential is influenced by
the cost, volume, and direction of gas flows through the inter-continental pipeline system, as
well as local supply and demand balances.
The physical market is further balanced through day-ahead trading in which buyers and
sellers set the following days gas price. This fine tuning of the gas price reflects immediate
changes in supply and demand, such as those caused by pipeline outages or changes in the
weather at a particular location. The average of these daily market prices over the course of a
month is known as the index price, and can be very different from the monthly contract
price as set by the financial futures market at the end of the previous month.
LNG pricing in the continental U.S. is directly linked to the Henry Hub, or other suitable
regional pricing hubs, whether the LNG is being imported or exported. New liquefaction
facilities, such as Chenieres Sabine Pass plant and Freeport LNG, have signed offtaker
contracts based on tolling arrangements (for customers with domestic natural gas production
or a trading presence in the U.S. market), freight on board (FOB) pricing (to portfolio LNG
traders and shippers) or delivered ex-ship (DES) pricing (primarily to Japanese utilities).
3.1.6 The natural gas market in Japan
Japan imports more LNG than any other country, and the Japanese natural gas market is the
highest-priced destination for long-term contracted LNG trade. As such, it is often the
market to beat for countries seeking to secure spot cargoes of LNG. Many smaller LNG
importers have seen prices linked to the Japanese LNG import price in recent years.
As an island nation with negligible natural gas resources of its own, Japan was Asia's first
LNG importer with supplies first landing from Alaska in 1969. Japan imports LNG from
around the world, most notably Malaysia, Qatar, and Russia. It has received cargoes from
more than 15 different sources, including Trinidad & Tobago. Historically, Japan has
indexed its LNG prices to an oil basket, thus linking its natural gas price to the price of the
liquid fuels that it is substituting. High oil prices over the past several years have greatly
inflated LNG import prices, leading several Japanese importers to seek alternative price
setting options for future contracts.
Japan: Market design, participants, and regulation
The Japanese natural gas market is designed to manage natural gas imports as a substitute
fuel for higher cost liquid fuel imports. Because Japan has few domestic energy resources,
virtually all of its energy needs are met by imports. Domestic natural gas production
accounts for less than three percent of current supply, and the lack of available reserves
limits the growth potential for domestically sourced gas.59 During the oil crises of the 1970s,
Japan built multiple LNG regasification terminals to reduce the countrys dependence on
increasingly expensive oil imports. Regional gas companies were created on the LNG
59

Baker & McKenzie, The International Comparative Legal Guide to Gas Regulation 2009, Chapter 17: Japan.

37

Confidential

terminals that each controlled, resulting in a small number of participating companies. Each
companys natural gas pipeline system was also limited to supplying its own local market.
Therefore, Japan did not develop a large-scale country-wide pipeline system the way the
United States and Europe did.
Today, Japan has 233 natural gas utilities, including 173 privately held companies and 70
Governmentrun companies. The three largestOsaka Gas, Toho Gas, and Tokyo Gas
account for three-quarters of the total market.60 These utilities are served by roughly 30 LNG
regasification terminals, which are typically located near major power generation stations or
where incremental demand growth is expected. Regional utilities are regulated by the
national Government through the Ministry of Economy, Trade, and Industry (METI) and
are required to provide third-party access to their local pipeline systems. Natural gas prices
and the price for transportation, storage, distribution, and other services are set via contract
between private companies, and so are not directly regulated or set by the Government.61
There is still little gas trade within the country given the lack of an integrated pipeline system
most gas trading among Japans natural gas companies is done through swapping LNG
cargoes as they are delivered rather than via a pipeline system.62
Japan: Price setting mechanism
Because there is no country-wide market for natural gas, Japan does not have a single natural
gas price. Each individual utility has its own average price for natural gas supply at the
wholesale level, based on the mix of supply contracts it has negotiated.
As noted above, Japans LNG import prices have historically been linked to an oil index,
namely the Japan customs-cleared crude price (JCC, also commonly known as the Japan
crude cocktail), which is an average of imported crude oil prices in Japan. Most JCC-linked
contracts also employ an S-curve structure. In this pricing methodology, LNG prices are set
at some percentage of the crude basket price within a range of crude prices. If the price of
crude drop below the minimum threshold, the price relationship would flatten, essentially
setting a price floor for the seller in the event crude becomes very cheap. In a like manner,
the LNG price also flattens if the crude price rises above the upper limit as set in the
contract. This allows the buyer some protection against very high gas prices should the price
of crude increase significantly.
Japans LNG contracts are often set using DES pricing, as the JCC price index is also based
on delivered price of oil and oil products. More recently, however, several of Japans largest
utilities have contracted LNG supply with a DES contract indexed to the U.S. Henry Hub.
For example, in November 2012, Kensai Electric, a Japanese electric utility, contracted 0.5
million tonnes of LNG, representing roughly seven percent of the companys total demand,
from BP Singapore using a price structure linked to Henry Hub. Larger gas consumers,
including Osaka Gas and Chubu Electric, have also moved to secure gas linked to Henry
Hub prices by signing tolling agreements with Freeport LNG. In this arrangement, the
Japanese customers are responsible for buying and delivering the gas to Freeport for
60

Baker & McKenzie, The International Comparative Legal Guide to Gas Regulation 2009, Chapter 17: Japan.

61

Baker & McKenzie, The International Comparative Legal Guide to Gas Regulation 2009, Chapter 17: Japan.

62

Baker & McKenzie, The International Comparative Legal Guide to Gas Regulation 2009, Chapter 17: Japan.

38

Confidential

processing into LNG. Osaka Gas and Chubu Electric have together contracted the full
processing capacity of Freeport LNGs first liquefaction train, equal to roughly 4.4 mtpa of
LNG.63

3.2

Future Outlook

Natural gas is expected to continue to play an important role in future global energy demand
as continued technological innovation, environmental pressures, and economic growth
support strong growth in natural gas demand for decades to come. This section presents the
expectations for the industrys future development, highlighting the various drivers that
support its growth and the potential challenges that may limit it, with an emphasis on the
implications for the Caribbean region.
3.2.1 Future outlook: demand
The EIAs Base Case projection in the 2013 International Energy Outlook forecasts natural
gas consumption to increase to just over 130 Tcf per year by 2020 and to 185 Tcf per year by
2040. Even so, the share of natural gas of total primary energy remains relatively constant,
increasing from roughly 22 percent of the total in 2012 to 23 percent by 2040 (see Figure
3.9).
Figure 3.9: Fuel Share of Global Primary Energy (percentage)

Source: EIA International Energy Outlook, 2013

63

Freeport LNG, News release : FLNG Signs Liquefaction Contracts with Osaka Gas and Chubu Electric, accessed 21
April 2015, http://freeportlng.newsrouter.com/FLNG_News_Releases_view.asp?editid1=6891.

39

Confidential

On a regional basis, natural gas consumption is projected to increase the most in nonOECD countries, especially the Middle East and developing countries in Asia. OECD
Americas (essentially the United States) will remain the largest natural gas market in the
world, but by 2040 it will likely represent a much smaller share of the global total than it does
today (see Figure 3.10).
Figure 3.10: Natural Gas Demand Outlook by Region

Source: EIA International Energy Outlook, 2013

Industrial consumers and power generators are projected to remain the largest sources of
natural gas demand through 2040. Residential demand will grow quickly in Asia and Eurasia,
as will demand from the transportation sector in the Americas and Europe; however, these
sectors will remain a small share of total gas consumption (see Figure 3.11).
Figure 3.11: Regional Natural Gas Demand by Sector

Source: EIA International Energy Outlook, 2013

40

Confidential

3.2.2 Future outlook: supply


This growing demand will be met by increasing supply from nearly all the worlds regions
(Figure 3.12). Supply is projected to rise to nearly 190 Tcf by 2040. North American
countries and European and Asian suppliers will continue to be the worlds largestproducing regions.
Figure 3.12: Global Natural Gas Production Outlook by Region

Source: EIA International Energy Outlook, 2013

Supply will continue to come from conventional natural gas, but also increasingly by
unconventional resources, including shale gas, tight gas, and coalbed methane. The United
States is leading the way in developing shale gas formations, but many countries also have
substantial resources and are just now beginning to exploit them. Figure 3.13 below
highlights the projection that unconventional gas will play a growing role in global natural
gas supply, accounting for about one-third of global production, compared to almost
nothing in 2008. While North America has the greatest share of total production as well as
the most rapid growth, Asia and Europe/Eurasia are expected to produce significant
volumes of tight gas within the next thirty years.

41

Confidential

Figure 3.13: Production Outlook for Natural Gas from Unconventional Sources

Source: EIA International Energy Outlook, 2013

It is also important to note that North America is the only region where conventional gas
production is expected to decline significantly in the coming decades. This makes the region
far more reliant on the continued successful development of shale resources to support
growing natural gas production.
3.2.3 Future outlook: trade
Natural gas trade is also expected to grow dramatically as new pipelines and LNG facilities
are built to link supply regions with demand. In addition to expanding total trade, patterns of
global trade are expected to shift, largely in response to growing natural gas production in
the Americas.
In 2013 about 36.6 Tcf of natural gas was traded via pipelines and LNG. Much of this trade
takes place within regions, such that global net trade between regions is much smaller. The
global market consisted of large net imports into Asia and Europe/Eurasia (and much
smaller net volumes into North America) being matched by large net exports from the
Middle East and Africa (as well as much smaller net volumes from Central and South
America, including the Caribbean). By 2040, Asia is expected to account for virtually all net
gas imports as North America shifts to become a net exporter and Europe/Eurasias net
imports shrink to negligible volumes. Middle Eastern net exports grow substantially during
the period, although Africas net exports remain relatively constant (see Figure 3.14).

42

Confidential

Figure 3.14: Net Natural Gas Trade by Region

Source: EIA International Energy Outlook, 2013

LNG is expected to play a major role in this growth, with LNG production expected to
increase from about 240 million tons (about 11.5 Tcf per year) in 201364 to 371 million tons
by 2025.65 Much of this growth in new liquefaction capacity is expected to come from
projects in the United States and Canada, as well as development of Mozambiques recently
discovered natural gas reserves.
Increases in supply are estimated using committed projects and expected projects.
Stakeholders Infrastructure Advisory LLC, a consulting firm, expects that LNG capacity will
increase from an anticipated 282.6 million tons at end-2013 to approximately 365.5 million
tons at end-2018.66 In 2014, new liquefaction capacity came online in Algeria, Australia, and
Papua New Guinea, in addition to final investment decisions to build new capacity in the
United States and capacity of 61.8 million tonnes of capacity under construction in Australia
alone.67
The remaining anticipated new liquefaction capacity that will be in place by 2025 is in the
planning phase. The ultimate volumes and timing of these projects is therefore far more

64

BP, Statistical Review of World Energy, 2014.

65

Alan Weitzner, LNG Development Outlook, Stakeholders Infrastructure Advisory LLC, October 2013.

66

Alan Weitzner, LNG Development Outlook, Stakeholders Infrastructure Advisory LLC, October 2013.

67

GIIGNL, The LNG Industry, 2014.

43

Confidential

uncertain, and will be affected by the future evolution of global supply, demand, and regional
prices.
The United States was a net natural gas importer of close to 4 Tcf per year in 2000. Figure
3.15 shows the potential impact of growing U.S. natural gas production according to the
EIAs latest long-term outlook. It is now expected to become a net natural gas exporter by
2017, with next exports reaching 2.6 Tcf per year by 2020 and nearly 6 Tcf by 2040. In 2020,
about one-half of exports are expected to be as LNG.
Figure 3.15: U.S. Natural Gas Imports and Exports, 2000-2040

Source: EIA Annual Energy Outlook 2015

3.3

Spread between Natural Gas and Oil Prices

Natural gas is less expensive on a per energy basis than oil,68 which creates an opportunity
for Caribbean countries to import natural gas and reduce their energy costs. Potential savings
from using natural gas depend on the spread between the price of oil and the price of natural
gas.
Oil prices are volatile; since 2005 they have reached a maximum of US$145 per barrel (in
July 2008) and a minimum of US$30 per barrel (in December 2008), with an average of
US$82 per barrel and a standard deviation of about US$20. Natural gas prices are also
volatile, but to a lesser extent; they have reached a maximum of US$15.4 per MMBtu (in
December 2005) and minimum of US$1.8 per MMBtu (in April 2012), with an average price
of US$5.3 per MMBtu and a standard deviation of US$2.4.
68

This section describes the spread between oil and natural gas prices in the United States. The market for oil products is
globalprices move together around the world, and prices are typically similar in most countries (except for countries
that subsidize oil products). Natural gas is much more expensive to transport, so prices vary greatly across markets (see
Section 3.1.4). The estimated costs of transporting natural gas to the Caribbean are discussed in Section 5.4.

44

Confidential

Until the recent fall in oil prices that began in mid-2014, oil prices had been generally
increasing since 2009 while natural gas prices had remained stable.
However, the recent drop in oil prices has dramatically reduced the spread between the price
of oil at West Texas Intermediate (WTI) and natural gas prices at Henry Hub (see Figure
3.16). The spread has fallen from US$12.2 in June 2014 to US$6 per MMBtu in April 2015.
This is despite a drop in natural gas prices during the same periodfrom US$4.6 per
MMBtu in June 2014 to US$2.6 per MMBtu in April 2015.
Figure 3.16: Spot Prices of WTI and Henry Hub 2005-2015

Source: United States Energy Information Administration

Below we describe the changes in spot prices for oil and natural gas prices in more detail,
and then the changes in the spread between the two.
3.3.1 Fuel Oil Prices Decreased 44 percent from end-June 2014 to end-April 2015
As of 30 April 2015, the spot price of WTI was US$60 per barrel, a 44 percent reduction
from 30 June 2014 (US$106). The monthly average spot price of WTI fell as low as US$43
per barrel in March 2015 (Figure 3.17). While this drop is large, its not unusual since oil
prices have been volatile in recent years. For example, the ten-year average price for WTI is
US$82 per barrel, with a standard deviation of US$20.4 per barrel.

45

Confidential

Figure 3.17: Monthly and Daily Spot Prices for WTI, 2005-2015

Source: United States Energy Information Administration

Around the world, weak demand for oil products and growing supply has led to the drop in
the price of oil.69 Demand has been particularly weak in Europe and Japan, largely due to
overall economic uncertainty. In the United States, demand has grown only slightly
compared to previous years; demand was 1.6 percent higher in December 2014 than in
December 2013. Increasing supply has come from OPEC countries and outside of OPEC.
Saudi Arabia, the worlds top exporter, has maintained steady production in recent months,
and increasing supply from Iraq has compensated for decreasing exports from Libya. North
American production continues to grow, though many producers are expected to reduce
their capital expenditures in response to low prices, reducing expectations for further
production increases in 2015.70

69

International Energy Agency, Oil Market Report: 16 January 2015.


https://www.iea.org/oilmarketreport/omrpublic/currentreport/#Supply

70

International Energy Agency, Oil Market Report: 16 January 2015.


https://www.iea.org/oilmarketreport/omrpublic/currentreport/#Supply

46

Confidential

3.3.2

Natural Gas Prices Decreased 42 percent from end-June 2014 to end-April


2015
On 30 April 2015, the daily spot price of natural gas at Henry Hub was US$2.6 per MMBtu,
42 percent lower than the price of US$4.4 per MMBtu on 30 June 2014. The monthly
average spot price of Henry Hub fell from US$4.6 in June 2014 to US$2.6 in April 2015
(Figure 3.18).
Figure 3.18: Monthly and Daily Spot Prices for Natural Gas at Henry Hub, 2005-2015

Source: United States Energy Information Administration

A few Caribbean islands have considered using certain natural gas liquids (NGLs), such as
liquid petroleum gas (LPG) or ethane, for electricity generation. While these fuels may
require less capital investment to import as alternatives to fuel oil, they are not widely used
around the world for electricity generation. One exception to this is the United States Virgin
Islands, which are close to completing a conversion from fuel oil to LPG as the main fuel
for electricity generation.71 Section 8 describes the supply chain and estimates costs for using
NGLs for electricity generation in the Caribbean.

71

The first delivery of LPG to the Virgin Islands is expected in July 2015.

47

Confidential

Prices for natural gas liquids also decreased between mid-2014 and early 2015. A composite
index of natural gas liquids fell by 46 percent from June 2014 to March 2015 (see Figure
3.19).
Figure 3.19: Prices of Natural Gas Liquids (2014-2015)

Note: The natural gas liquids (NGPL) composite price is derived from daily Bloomberg spot price data for
natural gas liquids at Mont Belvieu, Texas, weighted by gas processing plant production volumes of
each product
Source: U.S. Energy Information Administration

3.3.3 The Spread between the Spot Prices of HFO and Natural Gas Has Decreased
In June 2014, the spot price of WTI was 3.7 times the spot price of natural gas; this value fell
to 2.5 in January 2015, before rising to 3.3 in April 2015. The difference, or spread, between
the two prices was US$12.4 in August 2014 and US$4.5 in January 2015, rising to US$6 in
April 2015. Figure 3.20 compares monthly spot prices from January 2014 to April 2015 for
WTI and natural gas at Henry Hub, both reported in MMBtu. It also shows the ratio
between the prices for the same time period.

48

Confidential

Figure 3.20: Spread between WTI and Henry Hub, and Price Ratios (Jan 2014-Jan
2015)

Source: United States Energy Information Administration

3.4

Drivers and Challenges for Future Natural Gas Market


Development

Global natural gas markets are at a crossroads. The ongoing transformation of the United
States from an expected major LNG importer to a top LNG exporter is affecting LNG
projects and markets worldwide, creating uncertainty in the pace of new capacity
development and regional pricing methodologies. Six key factors will heavily influence the
future development of global LNG trade:
Development of shale gas in the U.S.
Status of free trade agreements and U.S. export constraints
Global shale gas development
Demand for natural gas in Japan and Korea
The pace of LNG infrastructure development
Technological innovation across the natural gas value chain.
Development of shale gas in the United States
As noted above, future growth in U.S. natural gas production depends heavily on a
continued surge in shale gas supply. While there is clearly a huge potential resource, shale gas
development is still a young, frontier industry. Many key factors remain highly uncertain,
including:
Ultimate resource volume is unknown. Expectations are very high for U.S.
shale gas reserves, and estimates have rapidly increased in recent years as more is
known about the various shale basins and exploration continues. However, these

49

Confidential

estimates have little historical underpinning and could continue to be revised for
many years to come. Of particular concern is how well productivity changes as
producers move away from the sweet spot of greatest productivity
Production rate depends on continuous drilling. Shale gas wells have very
high decline rates early in their life, but then have a long tail of steady, low
volume production. New wells must be drilled continuously to maintain and grow
production. In recent years, drilling has continued even at very low natural gas
prices due to the value of associated liquids and contract requirements with land
owners. Many smaller independent producers are now under financial strain as
the cost of drilling has outpaced the value of the gas produced. Long-term
productivity per well is also uncertain. Expectations of a long tail could prove
incorrect and small changes in long-term sustainable production per well can lead
to large changes in future total gas output
Production costs are changing rapidly. The combination of horizontal drilling,
hydraulic fracturing, and the drilling fluid and proppant cocktail that makes shale
gas economic to produce is a relatively recent innovation. As a result, the
technology and processes are still seeing rapid improvements that can reduce
costs significantly. Recent advances include drilling multiple wells from the same
pad (horizontally drilling in different directions), drilling into multiple formations
at different depths, and optimizing fracturing liquids and proppants for the
specific formation/region. Further improvements could make even greater
volumes of natural gas available at even lower prices than currently envisioned
Environmental impacts and related regulatory constraints can limit
production. Shale gas development, like all hydrocarbon extraction activities, can
result in environmental damage. Concerns include contamination of underground
aquifers and the disposal of wastewater after the hydrofracking process. Many of
these issues are already dealt with in traditional natural gas production, but the
newness of shale gas production and its location (outside of traditional oil and gas
producing regions in the U.S. and Europe) have raised additional concerns. Some
countries, such as France, have banned hydrofracking and shale gas production;
other regions within the United States have increased regulatory scrutiny as well.
Regulatory restrictions on shale gas drilling and production can have a major
impact on the ultimate volumes of gas produced.
Future U.S. shale gas production has the potential to surprise on both the upside and
downside. The future natural gas price in the United States will be driven more by the
ultimate success of shale gas development than by export volumes (which will likely be
limited by global market forces rather than domestic factors). Greater than expected
production will keep prices low for many years to come, but disappointments in future
drilling could result in higher prices sooner than expected. Given the competitive market
system in the U.S. these changes in supply and demand balance will quickly be reflected in
the gas price.
Status of free trade agreements and United States export constraints
The ongoing debate in the U.S. about the level of natural gas exports that should be allowed
to non-Free Trade Agreement (FTA) countries could have a large impact on global LNG
supply (see Section 4.5.1). Natural gas producers seek to export as much as they can to reach

50

Confidential

additional markets, while natural gas consumers, especially large industrial customers, seek to
limit exports to protect their current price advantage. This debate will continue for many
years, and will be influenced by the evolution of U.S. gas prices (whether directly influenced
by export volumes or not).
South Korea is the only major LNG-importing country that has an FTA with the United
States. However, the United States is currently pursuing a number of FTAs with LNG
importing countries, which could increase the quantity of U.S. LNG on the global market,
even if regulatory restrictions limit exports to non-FTA countries. The most important FTAs
are the Trans-Pacific Partnership, which includes Japan, the worlds largest LNG importing
country, and a potential agreement with the European Union, another major LNG importing
region. As of June 2015, the Trans-Pacific Partnership appeared likely to be approved in the
near future, which could quickly lead to expanding exports from the United States to Japan.
The potential agreement with Europe, however, is unlikely to be completed in the near term.
Global shale gas development
Many countries also have significant shale gas potential, but development has lagged behind
the U.S. The reasons for this are both political and technical. In the U.S., land owners hold
the rights to any sub-soil resources and can lease development rights to energy companies.
In most other countries, the state retains sub-soil rights, with no payments to land owners,
making it far more challenging to drill on private property. In Europe, shale gas development
is also slowed by political opposition in many countries, citing concerns about the safety of
fracking. In other countries, shale gas development has been slowed by political risk,
artificially low regulated gas prices, and limitations on foreign investment in the energy
sector.
Many countries also face greater technical hurdles to developing their shale resources. In
China for example, much of the countrys shale formations are in arid regions, limiting the
availability of water that is critical to the fracking process. Other countries lack basic support
services and sufficient enabling infrastructure, such as roads to bring in equipment or
pipelines to transport the gas once it is produced.
These constraints may significantly slow the global development of shale gas, and limit other
countries ability to replicate the shale boom seen in the United States. If they can be
overcome, however, countries that are currently expected to import natural gas could
become more self-sufficient sooner than expected. This potential threat to future LNG
import markets makes it more difficult for LNG project developers to predict the future size
of their market.
Demand for natural gas in Japan and Korea
Japans LNG imports surged after the countrys entire fleet of nuclear power plants, with a
combined installed capacity of about 46GW, were shut down following the Fukushima
disaster in 2010. Safety standards have been raised after the Fukushima incident, and as of
June 2015, no plants have been re-started. However, the Japanese Government has stated in
planning documents that the nuclear plants will be re-started, and Japan will rely on nuclear
power for about 20 percent of electricity generation until 2030. As of June 2015, 24 of

51

Confidential

Japans 43 nuclear plants were applying for re-start approvals, and two plants had been
approved by the Nuclear Regulation Authority for re-start.72
Whether or not even a portion of Japans nuclear fleet is re-started will have an impact on
global LNG balances. In the most extreme demand shock scenario, Japan would not re-start
any reactors and Korea would also decommission its nuclear fleet and replace it with LNGsupplied natural gas fired electricity generation. The cumulative effect of these shocks would
be a greater call on U.S. LNG exports and higher overall natural gas prices.73 This outcome
would have the effect of increasing the likely price that Caribbean countries would have to
pay for LNG imports, since they would be competing with multiple importing countries in a
relatively tight market. Caribbean countries may also find it more difficult to close an LNG
contract in this situation, as other markets may be viewed as more attractive owing to their
size or better financial circumstances. This may further add to the premium that the region
would have to pay to attract an LNG supplier to negotiate a contract.
The pace of LNG infrastructure development
Currently, the world has much greater capacity to regasify LNG than it does to liquefy it. In
2000, 11 countries had the necessary infrastructure to import LNG. Today, that number has
increased to 30 and may reach more than 40 by 2020.74 Many liquefaction projects, including
massive projects in Mozambique, Australia, and Russia, face delays, cost overruns, or
uncertainty over the pricing terms for long-term contracts.
The U.S. shale boom has upended expectations for global LNG markets, reversing the
worlds largest natural gas importer to what may become the worlds fastest growing
exporter. Therefore, there is an expectation of increased future investments in LNG
liquefaction facilities in the U.S. However, the competitive natural gas price setting in the
U.S. does not always translate into efficient allocation of capital for new investments in LNG
infrastructure. Also, price flexibility in the U.S. market does not ensure a return on
investment. Twice in the past 40 years, large-scale investment in LNG import infrastructure
has been stranded by new discoveries of domestic natural gas supplies: first in the late 1970s
and most recently in the 2000s (as a result of the shale gas revolution). The markets highly
responsive gas price introduces greater risk to long-term investments in capital intensive
infrastructure such as LNG terminals, as there is no requirement for the infrastructure to be
used or a minimum gas price to be paid to support the investment.
Traditionally, LNG exports have been priced based on the importing markets conditions,
whether a competitive market (such as for former U.S. natural gas imports), or an oil-based
index (such as for Japan). However, the potential surge in available and tradable natural gas
is already upsetting regional market dynamics and redefining global trade relations. In
particular, Asian LNG importers are increasingly focused on securing U.S. exports at a
Henry Hub parity price. That is, LNG that is priced based on the cost at Henry Hub plus the
cost to liquefy, transport, and regasify it, rather than the traditional oil basket price link.
72

World Nuclear Association, Nuclear power in Japan. 22 May 2015. http://www.world-nuclear.org/info/CountryProfiles/Countries-G-N/Japan/ accessed 5 June 2015

73

NERA Consulting, Updated Macroeconomic Impacts of LNG Exports from the United States, February 2014

74

IGU World LNG Report 2014 Edition, accessed 22 April 2015, http://www.igu.org/sites/default/files/node-pagefield_file/IGU%20-%20World%20LNG%20Report%20-%202014%20Edition.pdf.

52

Confidential

Japans recent contracts for LNG linked to Henry Hub demonstrate that LNG linked to a
market price from the point of export is possible. Examples of Henry Hub-linked exports
include Kensai Electrics 15-year contract with BP Singapore for 0.5 million tonnes of LNG
negotiated in late 2012. LNG deliveries are expected to begin in 2017 and will be supplied
from BPs portfolio of LNG liquefaction facilities, including Egypt and Trinidad and
Tobago.75 Osaka Gas and Chubu Electric have also signed supply agreements with Freeport
LNG totaling 4.4 mtpa that are linked to Henry Hub, and the Japanese power utility Tepco
has secured 0.8 mtpa of LNG from Cameron LNG that will also be linked to Henry Hub.76
The regulatory hurdles to U.S. exports mentioned above may slow the pace of development,
as companies work to acquire the necessary permits. Currently, most recent liquefaction
projects that have reached final investment decision (FID) are in the U.S. Project developers
in other countries have increasing difficulty securing contracts linked to oil and cannot move
forward with construction until long-term contracts are in place. However, the possible
approval of the Trans-Pacific Partnership could speed up large-scaled LNG exports from the
U.S.
Technological innovation across the natural gas value chain
The expected supply surge from shale gas, and pressure from the demand side for more
environmentally friendly energy sources, is driving innovation across the natural gas value
chain. Key relevant areas include transportation (such as small-scale LNG and sea-borne
CNG), regasification and storage (such as floating regasification and storage ships, or satellite
LNG stations using container-sized storage units), and LNG uses (such as directly using
LNG in fleet vehicles and ships).
While LNG has long been an option for bigger markets, a growing number of small-scale
LNG projects are being developed worldwide. These include small-scale liquefaction (to
monetize natural gas fields that would otherwise be stranded) and regasification, floating
liquefaction for stranded off-shore natural gas reserves, floating storage and regasification
units (FSRUs) that can be quickly deployed, and LNG ships with on-board regasification
capabilities. This ongoing innovation has helped bring costs down for smaller scale projects,
although larger scale projects still benefit from economies of scale.
Since 2005, 14 countries have started to import LNG. Six of these countries (Argentina,
Brazil, Kuwait, Dubai, Indonesia, Israel, and Lithuania) have used FSRUs. One (Chile) used
a ship as a floating storage unit (FSU) with the regasifiers located onshore, until land-based
storage tanks were completed. There is a long list of countries either actively developing or
planning to start importing LNG using an FSRU, and of existing importing countries
planning to use the technology to increase their capacity. There are 20 large-scale FSRUs
operating worldwide, capacity of about 44 mtpa, or roughly 6 percent of global regasification

75

Takeo Kumagai, Japan starts to break the oil-index tie on its LNG purchases, December 2012, Platts: McGraw Hill
Financial, accessed 22 April 2015, http://blogs.platts.com/2012/12/04/japan_lng/.

76

Jared Anderson, Tepcos US LNG Agreement ; Small Volumes, Big Deal, 19 February 2013, Breaking Energy,
accessed 22 April 2015, http://breakingenergy.com/2013/02/19/tepcos-us-lng-agreement-small-volumes-big-deal/.

53

Confidential

capacity.77 Eight more FSRUs had been ordered by the end of 2014 (three for delivery in
2015), suggesting the market will continue to grow strongly in the coming decade.78
FSRUs tend to have lower up-front capital investment requirements, faster start-up times,
and lower environmental impact. They are also well-suited to seasonal markets, where the
ship can be used as a conventional trading vessel when demand is low and it is not required
to receive and regasify LNG.
Despite these benefits, there are some disadvantages to FSRUs, including generally higher
operating costs, throughput limited by the capacity of the on-board regasifiers, and back-up
storage limited by the capacity of the ships tanks.
Ship-borne compressed natural gas (CNG) has also been investigated by several companies,
although its commercial deployment remains constrained by a number of factors. The lure of
seaborne CNG is the dramatically lower cost of compressing gas relative to liquefying it.
This lower cost would allow much smaller natural gas fields to be linked to markets and
monetized. However, there are no ships in operation that were purpose-built to transport
and store CNG. As a result, costs for this technology are relatively uncertain.
In Part II of this report, we evaluate the main transport options for natural gas to the
Caribbean (pipelines, LNG, and CNG) in greater detail, including a comparison of the costs
and risks for each option.

77

World LNG Report 2014, International Gas Union (IGU).

78

The LNG Industry, GIIGNL, 2014.

54

Confidential

Natural Gas in the Caribbean

While natural gas is one of the worlds most important energy sources, the natural gas
market in the Caribbean is smallfew countries in the region have natural gas resources and
few countries import natural gas. Trinidad and Tobago is the only country in the region with
significant natural gas resources. Puerto Rico and the Dominican Republic are the only
countries in the Caribbean that import natural gas at large scale, in both cases as LNG. Haiti
imports small amounts of LNG by truck from the Dominican Republic. In 2014, Dominican
Republic imported 40 Bcf (0.8 million tonnes of LNG) and Puerto Rico imported 60 Bcf
(1.3 million tonnes of LNG).
This section analyzes the natural gas market in the Caribbean by describing:
Countries in the Caribbean with natural gas reserves (Section 4.1)
Production and exports of natural gas in the Caribbean (Section 4.2)
Imports of natural gas in the region (Section 4.3)
Potential demand for natural gas in the Caribbean (Section 4.4)
Potential suppliers of natural gas in the Caribbean (Section 4.5)
Implications of regional and global trends for the Caribbean (Section 4.6).

4.1

Countries in the Caribbean with Natural Gas Reserves

Trinidad and Tobago is the only country in the Caribbean with significant natural gas
reserves, and is one of the largest producers of natural gas in the Western Hemisphere.
Though Barbados has proven natural gas reserves and produces natural gas, its reserves and
production are small.
Trinidad and Tobago
Trinidad and Tobago is the fourth largest natural gas producer in the Western Hemisphere,
despite its small population and economy. It exports many products that use natural gas as a
feedstock, such as ammonia and fertilizer. It also exports energy-intensive products, such as
direct-reduced iron. Natural gas has also been directly exported as LNG since 1999,
primarily supplying the United States and Europe.79
Trinidad and Tobagos proven natural gas reserves have decreased over the last decade, but
have remained stable over the past few years. Proven natural gas reserves have fallen from a
high of 20.8 Tcf in 2002 to a low of 12.4 Tcf in 2013. Figure 4.1 provides more detailed
information about how Trinidad and Tobagos proven natural gas reserves have changed
over the past decade.

79

Kevin Ramnarine, The State of the Natural Gas Sector 2013, 31 July 2013.

55

Confidential

Figure 4.1: Proven Reserves of Trinidad and Tobago (2000-2013)

Source: BP Statistical Review of World Energy, 2014.

Trinidad and Tobago may have additional probable and possible reservesabout 26 Tcf
including the 3Ps (proven, probable, and possible). The country may have up to 32 Tcf of
natural gas, including exploration reserves.80
Barbados
Barbados is the only other country in the Caribbean with natural gas reserves, but its reserves
are very low. Since 2010, Barbados natural gas reserves have remained at approximately
0.004 Tcf. This is the lowest level that the countrys reserves have ever reached. It is only
0.03 percent of the total value of proven reserves in Trinidad and Tobago.
Barbados produces very small amounts of natural gas. In 2010, the country produced its
highest volume of natural gasapproximately 1.1 Bcf. However, since then natural gas
production has fallen, to 0.7 Bcf in 2012.81

4.2

Production and Exports of Natural Gas in the Caribbean

Trinidad and Tobago is the only country in the Caribbean that produces and exports natural
gas. Trinidad and Tobago exports natural gas as liquefied natural gas (LNG). Since 2000,
there have been two significant changes to Trinidad and Tobagos LNG exports. First, LNG
exports have increased dramatically, from 124 Bcf in 2000 to 630 Bcf in 2014. This is an
increase of an average of 29 percent per year or of more than four times in the past 15 years.
LNG exports peaked in 2010 at 720 Bcf and fell 13 percent to 630 Bcf in 2013.
Second, Trinidad and Tobago has increased the number of countries to which it sells LNG.
In 2000, Trinidad and Tobagos exports were dominated by one countrythe United States
80

The Minister of Energy and Energy Affairs, The State of the Natural Gas Sector 2013.

81

U.S. EIA, Barbados Country Data. http://www.eia.gov/countries/country-data.cfm?fips=bb#pet accessed 16 April


2014.

56

Confidential

(see Figure 4.2). Seventy-seven percent of Trinidad and Tobagos LNG exports were sent to
the United States, and the remainder was sent to Spain (23 percent of gas exported). In
contrast, in 2014, Trinidad and Tobago sold LNG to 24 countries.82 The countries that
received the largest volume of exports were Chile (19 percent), Argentina (16 percent), Spain
(11 percent), Brazil (10 percent), and the United States (7 percent).
Figure 4.2: LNG Exports from Trinidad and Tobago (2000-2014)

Source: BP Statistical Review of World Energy, 2014 and GIIGNL, The LNG Industry, 2014

Mechanisms for Exporting Natural Gas


In 2014, Trinidad and Tobago sold about half of its LNG through short-term contracts and
on the spot market (52 percent), and half through medium-term and long-term contracts (48
percent). In 2014, Trinidad and Tobago sold 13.1 million tonnes (0.6 Tcf) of LNG via 13
contracts.83 These contracts have the following characteristics:
The contracts vary in size from 0.6 mtpa to 2.5 mtpa. Seven contracts are 1 mtpa
or more, and five are below 1 mtpa
All but three of the contracts are Free-on-board (FOB) contracts. The remaining
three are Delivered ex-ship (DES) contracts
82

GIIGNL, The LNG Industry, 2014.

83

GIIGNL, The LNG Industry, 2014.

57

Confidential

Most contracts are long-term contracts that range from 18 to 21 years. The only
exceptions are the first two contracts, which were signed in 1999. These contracts
were 10-year contracts, and have expired
Most of the contracts are older contracts. All contracts except one were signed
between 1999 and 2006
Atlantic LNG has the largest number of contracts (10) and sells approximately 15
mtpa through these contracts
There are a large number of buyers, and no single buyer makes up a significant
amount of the contracted volume of sales.
Table 4.1 provides more information about Trinidad and Tobagos medium-term and longterm contracts in 2014.
Table 4.1: Gas Contracts in Trinidad and Tobago (2014)
Seller
Atlantic LNG T1
Atlantic LNG T1
Atlantic LNG T2 & T3
Atlantic LNG T2 & T3
Atlantic LNG T2 & T3
Atlantic LNG T2 & T3
Atlantic LNG T2 & T3
Atlantic LNG T2 & T3
Atlantic LNG T4
Atlantic LNG T4
Atlantic LNG T4
BP
GDF Suez

Buyer
GDF Suez
Gas Natural
Aprovisionamientos
BG
BG
Shell (former Repsol
contract)
BP Gas Marketing
Naturgas Energia
Gas Natural sdg
BP
BG
Shell (part of Repsol
LNG acquisition)
AES
Ecoelctrica

Nominal Quantity
ACQ (mtpa)

Duration

Type of
Contract

1.98

1999-2018

FOB

1.06
1.70
0.40

1999-2018
2004-2023
2004-2026

FOB
FOB
FOB

1.6
0.85
0.70
0.65
2.50
1.50

2006-2023
2002-2021
2003-2023
2002-2023
2006-2025
2006-2025

FOB
FOB
FOB
FOB
FOB
FOB

1.00
0.75
0.60

2014-2024
2003-2023
2000-2020

DES
DES
DES

Source: GIIGNL, The LNG Industry, 2014.

Trinidad and Tobagos LNG sales on the spot market have decreased to 7 million tonnes
since their peak of 16 million tonnes in 2010. Spot sales nonetheless increased by about 3
million tonnes in 2014 compared to 2012. Figure 4.3 demonstrates how Trinidad and
Tobagos LNG Exports to the spot market have evolved since 2006.

58

Confidential

Figure 4.3: Trinidad and TobagoSpot Market Sales of LNG (2006-2014)

Source: GIIGNL, The LNG Industry, 2014.

Barbados does not export natural gas


Though Barbados has small, proven natural gas reserves, it neither imports nor exports
natural gas. Barbados produces only a small amount of natural gas for internal consumption.

4.3

Imports of Natural Gas in the Caribbean

The Dominican Republic, Puerto Rico, and Haiti are the only jurisdictions in the Caribbean
that import natural gasall import natural gas only as LNG. Puerto Rico was the first
jurisdiction to import LNG, opening its regasification terminal in 2000. The only
regasification terminal in the Dominican Republic was opened in 2001.84 In 2014, the
Dominican Republic imported 0.8 million tonnes and Puerto Rico imported 1.3 million
tonnes. In both cases, LNG imports have increased in recent years (see Figure 4.4). Starting
in 2013, Haiti began importing a very small amount of LNG (enough to meet fuel about 2
percent of electricity generation) by truck from the Dominican Republic.85
Jamaica and Haiti have also proposed building LNG import terminals, and construction has
begun on the facility in Haiti (see Appendix C).

84

LNG-Liquified Natural Gas Worldwide, California Energy Commission, accessed 20 December 2013,
http://www.energy.ca.gov/lng/international.html.

85

Gluski, Andres, U.S. Dominican Republic Relations: Bolstering Economic Growth and Independence. Testimony
before the House Committee on Foreign Affairs; Subcommittee on the Western Hemisphere. President and CEO of
AES Corporation. Wednesday, July 23, 2014.

59

Confidential

Figure 4.4: LNG Imports (2009-2014)

Source: IGU World LNG Report, 2014 Edition and GIIGNL, The LNG Industry, 2014.

The Dominican Republic and Puerto Rico both import LNG from several countries, but buy
most of their LNG from Trinidad and Tobago. In 2014, Trinidad and Tobago provided 0.77
million tonnes to the Dominican Republic (93 percent of total LNG imports) and 0.96
million tonnes to Puerto Rico (77 percent of total LNG imports). Figure 4.5 shows which
countries export LNG to the Dominican Republic and Puerto Rico.
Figure 4.5: LNG Imports in the Caribbean

Source: IGU World LNG Report, 2014 Edition and GIIGNL, The LNG Industry, 2014.

60

Confidential

4.4

Potential Demand for Natural Gas in the Caribbean

Although only two Caribbean jurisdictions import gas to meet a significant portion of their
energy needs, the draw of cost savings and the environmental benefits for Caribbean
countries that currently depend on oil products creates a large potential market for natural
gas in the near future. This section estimates the size of the potential demand for natural gas
for each of the countries of emphasis for this study. Potential natural gas demand for each
country is the sum of natural gas demand for generating electricity, transportation, industry,
and other sectors.
Across the Caribbean, demand for natural gas is expected to be determined primarily by its
use for electricity generation, for three main reasons.
Electricity generation is the largest potential market for natural gas, accounting for
43 percent of fossil fuel use in the eight countries that import fossil fuels in this
study (see Figure 4.6). After electricity generation, transportation is the next
largest oil consuming sector in the countries of emphasis, accounting for 32
percent of fossil fuel use. All other sectors represent a much smaller share
Electricity generators, whether independent power producers or utilities,
represent large potential offtakers for natural gas, and will have the demand to
justify large capital investments in natural gas import infrastructure without
partnering with other energy users
A relatively low capital investment is required to use natural gas for electricity
generation, as existing thermal generators can be converted to use natural gas
rather than fuel oil.
Figure 4.6: Share of Total Oil Consumption by Sector

Source: Data from 2010 and 2012 from the International Energy Agency, Belize National Energy Policy, and
United Nations.

61

Confidential

Natural gas can theoretically replace oil in each of these sectors, although the cost and
potential benefits from doing so vary significantly from sector to sector. However, these
sectors are more likely to purchase natural gas from offtakers that have already begun
importing natural gas for electricity generation, rather than taking part in financing natural
gas importation facilities themselves. Both existing LNG import projects in the Caribbean
in the Dominican Republic and Puerto Ricobegan with a single electricity generation plant
as its only customer. By first focusing on serving electricity generation, which offers the
largest single-point natural gas of any of the potential offtakers, the project developers were
able to simplify the project, bring it to completion more quickly, and minimize upfront
investment. Once established, they were able to make additional investments to serve
secondary consumers. This indicates that any natural gas supply chain must be viable with
serving its main customer first, and, if so, can expand to serve additional sectors at a later
date. Appendix D describes the history of natural gas importation and use in the Dominican
Republic in more detail.
Because of this time lag and the greater contractual and infrastructural complexities of
supplying natural gas to these other sectors, in this report we use only the demand for
natural gas for electricity generation when analyzing the base case cost for a natural gas
supply chain to the Caribbean. Appendix E elaborates further on the methodology used to
forecast natural gas demand in the Caribbean, and presents detailed forecasts for each
country.
4.4.1 Demand for natural gas for electricity generation
The electricity sector is expected to be the anchor client for natural gas imports in each of
this studys countries of emphasis. As such, the potential demand for natural gas by the
electricity sector will define the size of the infrastructure required for importing and using
natural gas. Infrastructure for importing natural gas to serve electricity demand must be sized
to accommodate the variability of electricity demand (including electricity demand swings
through the course of the average day as well as seasonal changes in electricity demand). In
this way, infrastructure for importing natural gas must accommodate average consumption
for generating electricity as well as peak demand.
Based on our estimates, the maximum volume of natural gas that the countries of emphasis
would buy for electricity generation in 2018 is approximately 427 MMcfd. This would rise to
about 502 MMcfd in 2023 and 586 MMcfd in 2028 (see Table 4.2).

62

Confidential

Table 4.2: Projected Average Daily Demand for LNG (in MMcfd)
2018

2023

2028

The Bahamas, BEC, NP

38

40

48

The Bahamas, GBPC

10

11

Barbados, BL&P

17

20

24

Belize, BEL

Dominican Republic, All

215

238

263

Guyana, GPL

19

23

23

Haiti, EDH

29

43

81

Jamaica, JPS

77

92

89

Suriname, EBS

22

34

42

Total

427

502

586

Sources: Projections for 2018, 2023, and 2028 are based on Castalias calculations. The detailed projections by
country are presented in Appendix E.1.

4.4.2 Demand for natural gas for transportation and other uses
The potential secondary markets for natural gas include transportation, industrial processes,
residential use, and commercial use. These markets represent a significant share of each
countrys total oil consumption that could be substituted with natural gas. In each case,
however, the potential demand is spread across a much larger number of potential customers
than for electricity generation. This implies that a much greater investment in distribution
infrastructure, whether it is underground distribution pipelines or satellite LNG and CNG
stations, would be required to bring the gas to the final customer.
This additional investment typically comes once the largest anchor consumers are well
established and the fuel supply chain is operating smoothly. Appendix D describes the
experience in the Dominican Republic in developing secondary markets for natural gas once
the natural gas supply chain for electricity generation was well established. The original
project to bring natural gas to the island was fully profitable based on electricity generation
alone, and the infrastructure to distribute natural gas more widely was not built until two
years after natural gas was first delivered to the Dominican Republic. AES started selling to
third-party buyers in 2005, for a diversity of end uses.86 87 88 In 2012, 47 percent of natural gas

86

Francisco Antonio Mendez, Impacto del Gas Natural en la Produccin de Energa Elctrica en la Repblica
Dominicana, Superintendencia de Electricidad de la Republica Dominica, 28-30 April 2010. Salvador de Bahia, Brazil.

87

AES Andes Energy Complex, AES Dominicana, accessed 24 April 2015,


http://www.aesdominicana.com.do/app/en_2011/neg_andres.aspx.

88

Francisco Antonio Mendez, Impacto del Gas Natural en la Produccin de Energa Elctrica en la Repblica
Dominicana, Superintendencia de Electricidad de la Republica Dominica, 28-30 April 2010. Salvador de Bahia, Brazil

63

Confidential

bought by third parties was used for electricity generation, 46 percent in industry, and 7
percent in transportation.89
Given this history of phased market development for natural gas, we do not include specific
demand for any sector beyond electricity generation in our base case forecast for natural gas
demand.

4.5

Potential Suppliers of Natural Gas for the Caribbean

The six countries that could supply natural gas to the Caribbean, in order of potential, are
the United States, Canada, Trinidad and Tobago, Mexico, Colombia, and Venezuela. Peru is
also a Latin American natural gas producer with operational LNG export facilities. However,
Peru was not analyzed in detail for this study because its greater distance from the
Caribbean, and the additional cost of transiting the Panama Canal, made it less competitive
than the six countries noted above. Each of these six countries is geographically close to the
Caribbean and has substantial natural gas reserves (see Table 4.3). Furthermore, several
countries have large shale gas resources that are under evaluation or development.
Table 4.3: Potential Suppliers of Natural Gas for the Caribbean
Natural Gas
Market
Overview
(2013 data)

Proved
Reserves to
Production
Consumption
Reserves
Production
(Bcf)
(Bcf)
(Tcf)
(R/P) Ratio

Net
Exports
(Bcf)

Shale
Technically
Recoverable
Reserves
(Tcf)

R/P
Ratio
with
Shale
Added

Canada

71

5,468

13

3,655

1,836

573

117

Colombia

446

13

378

76*

55

136

Mexico

12

2,000

2,922

-933

545

278

Trinidad &
Tobago

12

1,513

791

697

United
States

330

24,282

14

26,034

-1309

665

41

Venezuela

197

1,005

196

1,078

-76*

167

362

Note:

Data for Trinidad and Tobago not available.* 2012 data. Appendix F contains information on natural
gas prices at supply points in these countries.

Source: BP Statistical Review of World Energy June 2014 and U.S. EIA Technically Recoverable Shale Oil
and Shale Gas Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the
United States, June 2013 (2012 data).

Table 4.4 shows the relative rankings of each potential supply source for the Caribbean
based on estimated reserves, the reserve to production ratio (as a proxy for reserve volumes
available for export), the likely timing when export infrastructure could be available, and a
qualitative assessment of political risk to export projects.

89

AES Andes Energy Complex, AES Dominicana, accessed 24 April 2015,


http://www.aesdominicana.com.do/app/en_2011/neg_andres.aspx.

64

Confidential

Table 4.4: Ranking Potential Natural Gas Suppliers

United States
Canada
Trinidad &
Tobago
Mexico
Colombia
Venezuela

Natural Gas Source Rankings (1=most favorable)


Reserve to
Timing of
Known
Production
Export
Reserves
Ratio
Infrastructure Political Risk
(w/shale gas) (w/shale gas)
Availability
to Exports
1
5
2
3
2
4
4
2

Average
Ranking
(unweighted)
2.75
3

3.5

3
5
4

1
3
2

5
3
6

5
4
6

3.5
3.75
4.5

The ranking suggests that the United States is the most likely supply source. It is important
to note, however, that most sources in the region ranked in a tight range, as each option
brings specific strengths and weaknesses. Further detail about each of these supply options is
provided below. Figure 4.7 shows the export points best suited to serving the Caribbean for
each natural gas exporting country, based on available port and related infrastructure,
proximity to domestic natural gas infrastructure, and proximity to the Caribbean.
Figure 4.7: Potential Natural Gas Supply Sources

Below we provide further details regarding the potential of each country to supply natural
gas to the Caribbean, in the order of their ranking above: the United States (Section 4.5.1),
Canada (Section 4.5.2), Trinidad and Tobago (Section 4.5.3), Mexico (Section 4.5.4),
Colombia (Section 4.5.5), and Venezuela (Section 4.5.6). In addition, Appendix G presents
the seaborne routes between each supply source and destination country of emphasis.

65

Confidential

4.5.1 United States


The U.S. shale gas revolution has dramatically increased the countrys natural gas reserves
and production, meaning that the U.S. is likely to become a net exporter of LNG by 2016
and a net exporter of natural gas overall by 2017.90 Current estimates suggest the U.S. has
more than 660 trillion cubic feet (Tcf) of technically recoverable shale gas reserveson top
of about 350 Tcf of traditional reserves91allowing the country to maintain current
production levels for the next 40 years or more.
NERAs study Updated Macroeconomic Impacts of LNG Exports from the United States
(the NERA study), pairs the baseline international LNG supply outlook from the EIAs
2013 International Energy Outlook with the three U.S. natural gas supply scenarios in the
EIAs 2013 Annual Energy Outlook report: a base case, a high oil and gas resource case, and
a low oil and gas resource case. The study also considers a range of U.S. LNG export
volumes, including zero, 6 Bcf per day, 12 Bcf per day, and unlimited (that is, constrained
only by global market conditions), with varying rates of export capacity growth.
In the base case, U.S. LNG exports are projected to range between 0.36 to 2.13 Tcf per year
in 2018, based on variations in the rate of LNG export growth and in the global gas market
balance. By 2028, U.S. LNG exports are projected to reach a range of 1.63 to 5.25 Tcf per
year. These ranges are highly dependent on the assumptions for demand growth and
available supply from the United States and other global LNG exporters. In particular, the
NERA study finds that the degree to which the U.S. exports LNG depends upon the
abundance and quality of the U.S. resource base. That is, U.S. LNG exports are projected to
increase under the high oil and gas resource scenario as U.S. exports compete effectively to
meet incremental global demand or to displace planned LNG supplies in other regions.
Under the low oil and gas resource scenario, U.S. LNG exports are delayed and at overall
much lower levels than in the base case.
This supply surge has led previously planned LNG import projects to reinvent themselves as
LNG export terminals, particularly in the U.S. Gulf Coast region. Multiple LNG liquefaction
projects are under development in the U.S. Gulf coast region.
Approval process for adding liquefaction capacity in the United States
One potential constraint on total U.S. LNG liquefaction capacity may be the Department of
Energy authorization process. The DOE reviews proposals to export natural gas to
determine if they are in the public interesta separate process from the environmental
impact studies for new terminals, which are carried out by the Federal Energy Regulatory
Commission (FERC). Proposals to export natural gas to countries that have a free trade
agreement (FTA) with the United States are considered to be in the public interest, and are
typically approved quickly. Proposals to export natural gas to non-FTA countries trigger a
thorough (and often long) review to determine whether or not they are in the public interest.
Until recently, the DOE considered each application in the order they were received (with
priority for those received before 5 December 2012 that had already been approved to use
90

Annual Energy Outlook 2015, United States Energy Information Administration.

91

United States Energy Information Administration, US Crude Oil and Natural Gas Proved Reserves.
http://www.eia.gov/naturalgas/crudeoilreserves/ accessed 28 May 2015

66

Confidential

the FERC pre-filing process). This approach implied that projects higher up in the list had a
greater chance of being approved; the risk that the DOE will find that further exports are
not in the public interest grew with the cumulative volume of approved export projects.
On 15 August 2014, the DOE changed the LNG export approval process to prioritize those
projects that have already completed the required FERC environmental reviews. This was a
change from the previous process of approving export permits conditional on the successful
completions of the environmental reviews, carried out by FERC and required under the
National Environmental Policy Act (known as NEPA reviews).92 Under the new approval
process, the DOE no longer issues conditional permits to export to non-FTA countries, and
instead waits until the proposed project has completed its NEPA reviews before issuing the
export permit. In effect, this change moves those projects that are well advanced in their
development to the front of the approval queue.93
The U.S. Congress has also taken an interest in promoting faster approval of LNG exports,
with both chambers introducing related bills that would place strict time limits on the DOEs
approval process for LNG exports to non-FTA countries. A number of bills have been
introduced in both the House of Representatives and the Senate.94 A bill was approved by
the House of Representatives in late January 2015, and other bills were being considered in
the Senate.95 However, similar bills introduced in 2014 did not pass.
Proposed liquefaction facilities approved for export to non-FTA countries
Nine projects have already received final permission to export to non-Free Trade Agreement
(FTA) countries, with a total capacity of 8.6 Bcf per day. Two other projects, totaling 3.25
Bcf per day, have received conditional permission, subject to final environmental approvals.
These 11 projects are described below:
Sabine Pass LNG terminal (Cheniere Energy, Inc.). The first stage of the project, four
liquefaction trains with 18 mtpa of total capacityequal to roughly 860 Bcf of natural gas
per yearis expected to start shipping gas by the end of 2015.96 Two additional trains will
increase total capacity to 27 mtpa (1,300 Bcf) by 2018. Of this total, roughly 20 mtpa (just
under 1 Tcf per year) is already contracted. Sabine Passs customers include BG (Britain),
GN Fenosa (Spain), KOGAS (Korea), GAIL (India), Total (France), and Centrica
(Britain)97
92

DOE Adopts Revised Procedures for Reviewing Applications to Export LNG to Non-FTA Nations, Sutherland LNG,
accessed 27 April 2015, http://www.lnglawblog.com/2014/08/doe-adopts-revised-procedures-for-reviewingapplications-to-export-lng-to-non-fta-nations/.

93

A Proposed Change to the Energy Departments LNG Export Decision-Making Procedures, Energy.gov, accessed 27
April 2015, http://energy.gov/articles/proposed-change-energy-departments-lng-export-decision-making-procedures,
posted May 29, 2014.

94

Another LNG Export Bill Introduced, Sutherland LNG, accessed 27 April 2015,
http://www.lnglawblog.com/2014/07/another-lng-export-bill-introduced/ .

95

Cama, Timothy and Cristina Marcos, House passes bill to speed up liquefied natural gas exports. The Hill. 28 January
2015. http://thehill.com/blogs/floor-action/house/230990-house-passes-bill-to-speed-up-liquefied-natural-gas-exports
accessed 29 May 2015.

96

Cheniere Energy, Sabine Liquefaction Project Schedule.


http://www.cheniere.com/sabine_liquefaction/project_schedule.shtml accessed 28 May 2015

97

About Cheniere Energy, CHENIERE, accessed 24 April 2015, http://www.cheniere.com/corporate/about_us.shtml.

67

Confidential

Freeport LNG (Freeport LNG Development, L.P.), including an expansion of the


original proposal. Freeport LNG applied and was approved by the DOE as two separate
projectsthe original and the expansion. Freeport is planning to bring 13.9 mtpa
(roughly 670 Bcf per year) of capacity online by 2018.98 Osaka Gas and Chubu Electric,
both Japanese energy companies, have contracted 100 percent of the first trains
liquefaction capacity, totaling 4.4 mtpa or roughly 210 Bcf per year of conversion
capacity. BP (Britain) has contracted the second 4.4 mtpa train, and the third planned
train remains open. Freeport in particular is an illustrative example of the changing form
of contract agreements, as Freeport provides liquefaction services on a tolling basis:
customers must provide the gas to be liquefied and the shipping to take it away, while
Freeport merely charges a fee to convert it from gaseous form to liquid form99
Lake Charles LNG Export Project (Southern Union Co.).100 Lake Charles is one of a
number of LNG import facilities built in response to the 1970s oil crisis that is now
reorienting to LNG exports. Its permit for non-FTA exports was approved in August
2013 for up to 15 mtpa (roughly 730 Bcf per year) of capacity. The project has contracted
all of its initial capacity to BG and expects to begin operations in 2018
Cove Point LNG (Dominion Cove Point LNG, LP owned by Dominion Resources,
Inc.). Cove Point LNG also aims to add LNG export capacity to one of the original four
LNG import facilities built in the early 1980s. The project expects to export up to 1 Bcf
per day of natural gas equivalent, and on September 11, 2013 the proposed project
received authorization from the U.S. Department of Energy (DOE) to export up to 5.85
mtpa of LNG (0.77 Bcf per day of natural gas equivalent) to non-FTA countries. The
project also has 20-year sales contracts for the entire proposed terminal capacity: half will
serve GAIL Global LNG LLC (a U.S. affiliate of GAIL, Ltd of India) and the remaining
half will serve Pacific Summit Energy LLC (a U.S. affiliate of Sumitomo Corporation
(Japan)). Pacific Summit has already announced it holds sales agreements with Tokyo Gas
Company and Kansai Electric Power Company (both of Japan). Construction began in
2014 and the facility is expect to come on-line in late 2017101
Cameron LNG, owned by Sempra Energy (50.2 percent), GDF SUEZ S.A. (16.6
percent), Japan LNG Investment, LLC (a joint venture formed by subsidiaries of Nippon
Yusen Kabushiki Kaisha and Mitsubishi Corporation) (16.6 percent), and Mitsui & Co.,
Ltd. (16.6 percent). Cameron LNG plans to add 12 mtpa of liquefaction capacity (roughly
1.7 Bcf per day of natural gas equivalent) to the Cameron LNG import facility that was
completed in 2009 in Hackberry, LA. The proposed export facility received DOE
authorization to export up to the full 12 mtpa to non-FTA countries on February 11,
2014. Construction began in October 2014, and the first LNG is expected to be produced

98

Freeport LNG, accessed 24 April 2015, http://www.freeportlng.com/.

99

Freeport LNG, accessed 24 April 2015, http://www.freeportlng.com/.

100

Press Release: Lake Charles LNG Export Project Update, Energy Transfer, accessed 24 April 2015,
http://ir.energytransfer.com/phoenix.zhtml?c=106094&p=irol-newsArticle&ID=1860668&highlight.

101

Dominion, Dominion Begins Construction Activities For Cove Point LNG Export Project.
http://dom.mediaroom.com/index.php?s=26677&item=136953 accessed 28 May 2015

68

Confidential

in 2018, with full commercial operations in 2019.102 The entire proposed capacity has been
contracted under a tolling arrangement to GDF Suez and U.S. affiliates of Mitsui and
Mitsubishi
Carib Energy (U.S.A.) LLC. Wholly owned by Crowley Marine, this project has roughly
30 MMcfd of total proposed capacity, of which 10 MMcfd is expected for non-FTA
countries. The project will use excess liquefaction capacity at other terminals for its LNG
supply, and then transport the LNG via intermodal ISO containers to container ports on
the U.S. Gulf or Atlantic coasts for export.103 It was approved for 0.04 Bcf per day in
exports to non-FTA countries in Central and South America or the Caribbean in
September 2014.104 Although it will export relatively small quantities of LNG, Carib
Energys focus on the Caribbean Basin gives it particular relevance to the region and this
study
Corpus Christi Liquefaction, LLC is wholly owned by Cheniere Energy, Inc. It is a
planned liquefaction terminal near Corpus Christi, Texas, and near the proposed Corpus
Christi natural gas pipeline. The project has been given final approval to export to nonFTA countries, and construction is scheduled to begin in 2015 and come on-line in
2018.105 Cheniere has already contracted the 2.1 Bcf per day liquefaction to six offtakers:
Endesa, Iberdrola, Gas Natural Fenosa, Woodside Energy Trading Singapore, Pertamina,
and Electricite de France
Jordan Cove Energy Project, L.P., is majority owned by Veresen, a Canadian energy
infrastructure company. Located in Coos Bay, Oregon, Jordan Cove is the first proposed
liquefaction facility located on the U.S. Pacific Coast. The facility would have a proposed
6 mtpa of liquefaction capacity (roughly 0.8 Bcf per day of natural gas equivalent). In
2009, Jordan Cove received FERC authorization to build an LNG import facility on the
same site, but this facility which was never built, and the FERC authorization was
rescinded when the facility was changed to export LNG. The proposed export facility
received conditional DOE authorization to export up to the full 6 mtpa to non-FTA
countries on March 24, 2014.106 FERC approval to build and operate the facility is still
pending, but construction is expected to begin in 2015, with LNG production starting in
2019. The company aims to provide liquefaction services under a tolling arrangement to
Asian LNG buyers107
Oregon LNG is owned by LNG Development Company LLC, which is in turned owned
by Leucadia National Corporation, a diversified holding company. Planning for Oregon
LNG began in 2004 as an import terminal. In 2012 a liquefaction facility was added to the
102

Cameron LNG, Liquefaction Project/Project Timeline. http://cameronlng.com/project-timeline.html accessed 29


May 2015

103

Carib Energy LLC-FE Dkt. No. 11-141-LNG-Non-Free Trade Agreement Countries, US Department of Energy.

104

Carib Energy LLC-FE Dkt. No. 11-141-LNG-Non-Free Trade Agreement Countries, US Department of Energy.

105

Cheniere Energy, Corpus Christi Liquefaction Project Schedule.


http://www.cheniere.com/corpus_christi/project_schedule.shtml accessed 29 May 2015

106

DOE FE Docket No. 12-32-LNG and DOE/FE Order No. 3413

107

Veresen presentation to LNG Export USA 2014: Global Buyers Congress, April 30, 2014

69

Confidential

project plan. The terminal will have capacity of 1.3 Bcf per day. The facility has received
conditional approval from the U.S. Department of Energy.
The most advanced of the large projects is Sabine Pass, which is scheduled to begin shipping
LNG by the end of 2015. Therefore, Sabine Pass is used as a proxy for U.S. Gulf Coast
LNG exports in this study.
Many of these liquefaction facilities are close to Henry Hub, the United States main natural
gas pricing point, and are in a highly industrialized region with a long history of hydrocarbon
development and related industries.
Other proposed liquefaction facilities
Including the 11 LNG projects that have already been authorized to export to non-FTA
countries, an overwhelming 356 mtpa108 (47 Bcf per day, or about half of the current total
U.S. daily natural gas consumption) of additional liquefaction capacity has been proposed in
the United States and has been granted authorization to export to FTA countries.109
A further 368 mtpa (48 Bcf per day) of export capacity has been proposed in Canada (and is
described in greater detail in Section 4.5.2 below).110 In total, U.S. and Canadian proposed
additions account for more than two times the worlds current existing liquefaction
capacity.111 Not all of these projects will come to fruition, but even a fraction of the total has
the potential to substantially change global LNG markets. As a result, Henry Hub-indexed
LNG supply is expected to expand significantly in the coming decade.
Table 4.5 below shows the current status of all projects that had filed with the DOE for
permits to export to non-FTA countries as of May 13, 2015. Most have already been
approved for exports to FTA countries, and are currently under DOE review for exports to
non-FTA countries.

108

Summary of LNG Export Applications, US Department of Energy, accessed 24 April 2015,


http://energy.gov/fe/downloads/summary-lng-export-applications.

109

The existence of a free trade agreement with a country means that any exports to that country (including LNG) are
automatically determined to be in the best interest of the United States and so applications to export to FTA countries
are automatically granted.

110

National Energy Board (Canada), Market Snapshot: Canadian LNG Projects Face a Competitive Global Market.
https://www.neb-one.gc.ca/nrg/ntgrtd/mrkt/snpsht/2015/03-01cndnlng-eng.html accessed 29 May 2015

111

Global liquefaction capacity was 298 mtpa in 2014 (GIIGNL, The LNG Industry in 2014).

70

Confidential

Table 4.5: DOE Non-FTA LNG Export Permit Application Status


Company
Sabine Pass Liquefaction, LLC
Freeport LNG Expansion, L.P. and
FLNG Liquefaction, LLC
Lake Charles Exports, LLC
Carib Energy (USA) LLC
Dominion Cove Point LNG, LP
Jordan Cove Energy Project, L.P.
Cameron LNG, LLC
Freeport LNG Expansion, L.P. and
FLNG Liquefaction, LLC
Gulf Coast LNG Export, LLC
Gulf LNG Liquefaction Company,
LLC
LNG Development Company, LLC
(d/b/a Oregon LNG)
SB Power Solutions Inc.
Southern LNG Company, L.L.C.
Excelerate Liquefaction Solutions I,
LLC
Golden Pass Products LLC
Cheniere Marketing, LLC and
Corpus Christi Liquefaction, LLC
Main Pass Energy Hub, LLC
CE FLNG, LLC
Waller LNG Services, LLC
Next Decade Partners, LLC
(Formerly Pangea LNG (North
America) Holdings, LLC)
[WITHDRAWN]
Magnolia LNG, LLC
Lake Charles LNG Export
Company, LLC (Formerly Trunkline
LNG Export, LLC)
Gasfin Development USA, LLC
Freeport-McMoRan Energy LLC
Sabine Pass Liquefaction, LLC
Sabine Pass Liquefaction, LLC
Venture Global Calcasieu Pass, LLC
(Formerly Venture Global LNG,
LLC)
Advanced Energy Solutions, L.L.C.
Argent Marine Management, Inc.
Eos LNG LLC
Barca LNG LLC
Sabine Pass Liquefaction, LLC
Delfin LNG LLC
Magnolia LNG, LLC
Annova LNG Common

Quantity (Bcf
per day)

FTA
Applications

2.2
1.4

Approved
Approved

Non-FTA
Applications (c)
(Docket Number)
Approved
Approved

2.0
0.1
1.8
2.0
1.7
1.8

Approved
Approved
Approved
Approved
Approved
Approved

Approved (conditional)
Approved
Approved
Approved (conditional)
Approved
Approved

2.8
1.5

Approved
Approved

Under DOE Review


Under DOE Review

1.3

Approved

Approved

0.1
0.5
1.4

Approved
Approved
Approved

n/a
Under DOE Review
Under DOE Review

2.0
2.1

Approved
Approved

Under DOE Review


Approved

3.2
1.1
0.4
1.1

Approved
Approved
Approved
Approved

n/a
Under DOE Review
Under DOE Review
Under DOE Review

0.5
2.0

Approved
Approved

n/a
Under DOE Review

0.2
3.2
0.3
0.2
0.7

Approved
Approved
Approved
Approved
Approved

Under DOE Review


Under DOE Review
Under DOE Review
Under DOE Review
Under DOE Review

0.02
0.003
1.6
1.6
0.9
1.8
1.7
0.9

Approved
Approved
Approved
Approved
Approved
Approved
Approved
Approved

n/a
n/a
Under DOE Review
Under DOE Review
Under DOE Review
Under DOE Review
Under DOE Review
n/a

71

Confidential

Company
Infrastructure, LLC (Formerly
Annova LNG LLC)
Texas LNG LLC
Louisiana LNG Energy LLC
Alturas LLC
Strom Inc.
SCT&E LNG, LLC
Venture Global Calcasieu Pass, LLC
Formerly Venture Global LNG,
LLC)
Sabine Pass Liquefaction, LLC
Downeast LNG, Inc.
Cameron LNG, LLC
Air Flow North America Corp.
American LNG Marketing LLC
Venture Global Calcasieu Pass, LLC
American LNG Marketing LLC
Cameron LNG, LLC
Floridian Natural Gas Storage
Company
G2 LNG LLC
Port Arthur LNG, LLC
Texas Brownsville LNG LLC
Sabine Pass Liquefaction, LLC

Quantity (Bcf
per day)

FTA
Applications

Non-FTA
Applications (c)
(Docket Number)

0.3
0.6
0.2
0.3
1.6
0.7

Approved
Approved
Pending approval
Approved
Approved
Approved

Under DOE Review


Under DOE Review
n/a
Under DOE Review
Under DOE Review
Under DOE Review

0.6
0.5
0.4
0.002
0.008
0.4
0.1
1.8
0.04

Approved
Approved
Approved
n/a
Approved
Pending approval
Pending approval
Pending approval
Pending approval

n/a
Under DOE Review
n/a
Under DOE Review
Under DOE Review
Under DOE Review
n/a
Under DOE Review
Under DOE Review

1.8
1.4
0.6
0.6

Pending approval
Pending approval
Pending approval
n/a

Under DOE Review


n/a
Under DOE Review
Under DOE Review

Source: US Department of Energy, Long Term Applications Received by DOE/FE to Export Domestically
Produced LNG from the Lower-48 States (as of May 13, 2015)
http://energy.gov/sites/prod/files/2015/05/f22/Summary%20of%20LNG%20Export%20Applications.pdf
accessed 29 May 2015.

A few proposed projects stand out with special relevance for the Caribbean. For example,
several LNG export projects specifically target South America, Central America, and the
Caribbean using intermodal ISO containers that can be delivered with standard container
ships. These projects are very small and are best suited for individual industrial or
commercial consumers rather than utility-scale exports. Proposed projects include:
SB Power Solutions Inc. This project proposes up to 70 MMcfd of LNG exports to
South America, Central America, and the Caribbean using ISO containers. The project is
only targeting FTA countries, and was given approval for exports in June 2012112
Argent Marine Management Inc. This small-scale project proposes up to 3 MMcfd of
LNG exports to the Caribbean using ISO containers carried on a ship of their own
design. It would source its LNG from a partner liquefaction facility, transport to any
112

SB Power Solutions Inc. FE Dkt. No. 12-50-LNG, US Department of Energy, accessed 27 April 2015,
http://www.fossil.energy.gov/programs/gasregulation/authorizations/2012_applications/SB_Power_Solutions_12-50LNG.html.

72

Confidential

viable port via LNG trucks, and load it onto the small scale ISO container carrier. The
project is only targeting FTA countries and was given approval for exports November 6,
2013113
Advanced Energy Solutions LLC. This project proposes up to 20 MMcfd of LNG
exports to FTA countries in Central America and the Caribbean using small scale ISO
containers. It would source its LNG from a partner liquefaction facility, transport to the
Floridian port facility in Martin Country, Florida via LNG trucks, and load it onto small
scale ISO container carriers. The project is only targeting FTA countries and was given
approval for exports November 14, 2013.114
Other small-scale projects have also directly referenced the Caribbean in their export
authorization applications. Example projects include:
Waller LNG Services LLC. This project is partially sponsored by Waller Marine, a
marine transportation company that is developing a patented articulated tug and barge
system to transport LNG at a smaller scale than traditional LNG ships. The projects
application specifically states it will target smaller markets in South America, Central
America, and the Caribbean that may not have ports or markets that are able to
accommodate larger LNG ships. The application anticipates exports of up to 160 MMcf
per day to FTA countries, and up to 190 MMcfd to non-FTA countries.115 The project
was approved for export to non-FTA countries
Magnolia LNG LLC. This project has a proposed total capacity of 1.08 Bcf per day, of
which half is proposed for exports to FTA countries and half is proposed for non-FTA
countries. Authorization for export to FTA countries was granted on February 27, 2013
and the project is currently under consideration of authorization to export to non-FTA
countries.116 Magnolia LNG has signed non-binding tolling agreement Term Sheets with
Latin American subsidiaries of AES (operator of the LNG import facility and power
plants in the Dominican Republic as well as power plants in Chile, Colombia, and El
Salvador), Gunvor Group (the aggregator securing LNG supplies for the planned Panama
LNG import facility near Colon), Gas Natural Fenosa (the operator of the LNG import
facility in Puerto Rico), and LNG Holdings (operator of a network of FSRUs targeting
U.S. and international markets).117 Although non-binding, the Term Sheet agreements
stipulate that the parties will negotiate 20-year tolling agreements for access to the
113

Argent Marine Management, Inc, - FE Dkt. No. 13-105-LNG, US Department of Energy, accessed 27 April 2015,
http://www.fossil.energy.gov/programs/gasregulation/authorizations/2013_applications/13_105_lng.pdf.

114

Argent Marine Management, Inc, - FE Dkt. No. 13-105-LNG, US Department of Energy, accessed 27 April 2015,
http://www.fossil.energy.gov/programs/gasregulation/authorizations/2013_applications/13_105_lng.pdf.

115

Waller LNG Services, LLC FE Dkt. No. 13-153-LNG, US Department of Energy, accessed 27 April 2015,
http://www.fossil.energy.gov/programs/gasregulation/authorizations/2013_applications/13_153_LNG.pdf.

116

Magnolia LNG, LLC FE Dkt No. 12-183-LNG, US Department of Energy, accessed on 27 April 2015,
http://www.fossil.energy.gov/programs/gasregulation/authorizations/2012_applications/magnolia_lng_llc_12-183LNG.html.

117

Tolling Agreement Term Sheet Signed with the AES Group Another Step for Manolia LNG Project, Liquefied
Natural Gas Limited, accessed 27 April 2015,
http://www.lnglimited.com.au/IRM/Company/ShowPage.aspx/PDFs/199218847741/TollingAgreementTermSheetSignedWithTheAESGroup.

73

Confidential

terminals liquefaction capacity with fixed monthly capacity payments plus operating costs
for the actual LNG processed.118
The Panama LNG terminal has been suggested as a potential hub for re-exports of LNG
to other countries in Central America and the Caribbean. All Central American countries
have FTA status, but the Dominican Republic is the only Caribbean nation with a free
trade agreement with the United States.
Finally, although it does not currently have any LNG facilities, Southern Florida is another
potential export point, particularly to The Bahamas. Florida does not itself produce natural
gas, but the state has a sizeable market, consuming more than 3 Bcf per day. The Florida
market is connected to the U.S. Gulf Coast gas-producing basins via two major interstate
pipelines: the Florida Gas Transmission Companys extensive state-wide pipeline system
links to the southern U.S. pipeline grid via the Florida panhandle, and the undersea
Gulfstream pipeline119 links Louisiana directly to the Tampa Bay area.
A proposed third major pipeline, the Sabal Trail Transmission project,120 would link to the
MidContinent Express trunk line via Georgia bringing roughly 1 Bcf per day of additional
natural gas supply to central Florida. A second project, sponsored by Florida Power and
Light, the Florida Southeast Connection Pipeline,121 would extend the pipeline to a large
power generation complex in Indiantown, Florida near Lake Okeechobee. These projects are
undergoing regulatory approvals. If approved, they are expected to come online in 2017. The
terminus of the proposed new pipeline is less than 30 miles from a suitable port and power
generation/industrial complex north of West Palm Beach. From there, Nassau, The
Bahamas, is just over 200 miles away. Ship-born LNG and CNG could also potentially be
exported from the region (very small containerized gas shipments for small consumers are
already being exported from Florida).
Caribbean countries that have FTAs with the United States
Across the greater Caribbean region there are eight countries with FTAs with the United
States: six in Central America (Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica,
and Panama), the Dominican Republic, Mexico, and Colombia. These countries may have
better chance of buying natural gas from the United States than other countries in the
region, depending on how quickly the DOE approves facilities to export to non-FTA
countries.
The U.S. Government has not made an explicit decision about the legality of re-exporting
LNG from an FTA country to a non-FTA country (although most LNG purchase and sale
agreements do restrict the buyers ability to re-sell the LNG to an alternative market).
118

Tolling Agreement Term Sheet Signed with the AES Group Another Step for Manolia LNG Project, Liquefied
Natural Gas Limited, accessed 27 April 2015,
http://www.lnglimited.com.au/IRM/Company/ShowPage.aspx/PDFs/199218847741/TollingAgreementTermSheetSignedWithTheAESGroup.

119

About Gulfstream; Delivering a brighter future, Gulfstream Natural Gas System, accessed 27 April 2015,
http://wp.gulfstreamgas.com/.

120

The Sabal Trail Project Is Sabal Trail Transmission, accessed 27 April 2015,
http://www.sabaltrailtransmission.com/.

121

Florida Southeast Connection Pipeline, Florida Southeast Connection, accessed 27 April 2015,
http://www.floridasoutheastconnection.com/.

74

Confidential

Greater clarity on the potential for re-exports from both a regulatory and contractual
perspective could open up multiple opportunities for non-FTA countries in the Caribbean
region to receive U.S.-sourced natural gas from their neighbors.
4.5.2 Canada
Canada is the second largest natural gas producer in the Western Hemisphere and also the
second largest consuming market. Canadas natural gas production reached 5.5 Tcf and total
Canadian demand was 3.7 Tcf in 2013. Canadas natural gas system is tightly integrated with
the United States pipeline grid. Net exports to the United States account for the 1.9 Tcf
difference between Canadas domestic supply and demand in 2013. Total natural gas trade is
actually higher. Canadas western producing regions (primarily Alberta) exported roughly 2.8
Tcf of natural gas to the United States in 2012, while the countrys eastern consuming
regions (primarily Ontario and Quebec) imported nearly 0.9 Tcf of natural gas from the
United States.122
Like the United States, Canada has substantial shale gas resources, estimated to be on the
order of 573 Tcf.123 This enormous resource base, combined with relatively limited domestic
natural gas demand, has led many Canadian natural gas producers to seek additional export
opportunities through LNG.124 As of May 2015, a total 35 LNG export projects had applied
for export approval from Canadas National Energy Board (NEB), of which 12 had been
approved and 16 were under review.125
Most of these are located on the Pacific coast and will be supplied by natural gas production
in Alberta, while a few are on Canadas Atlantic Coast. Those on the Atlantic Coast are more
likely to supply the Caribbean, since they are closer. Ships would not have to pass through
the Panama Canal and the distances, while farther than U.S. based options, are still closer
than other African or Middle Eastern suppliers.
4.5.3 Trinidad and Tobago
As described in Section 4.1, Trinidad and Tobago is the only country in the Caribbean that
exports natural gas. Trinidad and Tobago produces LNG at the Atlantic Liquefaction Facility
at Point Fortin, and is the main LNG supplier to the Dominican Republic and Puerto Rico.
A new small-scale LNG export facility has also been proposed for the La Brea Industrial
Estate just north of Point Fortin. In addition, the East Caribbean Pipeline has been
proposed to transport natural gas from fields near Tobago to Barbados and eventually
extend to Martinique, Guadeloupe, and St. Lucia. Each of these three export projects is
described in greater detail below.

122 Statistical Review of World Energy, BP, June 2014.


123 EIA Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41
Countries Outside the United States, June 2013
124 Canadas small population limits its total natural gas demand despite rapid development of natural gas fired power
generation, industrial uses of natural gas, and a sizeable winter heating load
125 LNG Export License Applications, National Energy Board, accessed 29 May 2015, https://www.nebone.gc.ca/pplctnflng/mjrpp/lngxprtlcnc/index-eng.html#s1

75

Confidential

Trinidad & Tobago: Atlantic Liquefaction Facility at Point Fortin


Atlantic LNG owns and operates a four-train liquefaction facility in Trinidad and Tobago
that can produce Liquefied Natural Gas (LNG) and also Natural Gas Liquids (NGLs). The
facility is located on the south-west coast of Trinidad at Port Fortin. It can produce up to
100,000 cubic meters of LNG per day. It is the largest producer of LNG in the Western
Hemisphere, and is the seventh largest LNG facility in the world. The facility is not involved
in the exploration, shipping, or distribution of natural gas.
The Atlantic Liquefaction Facility processes natural gas using the Phillips Optimized Cascade
Process. Through this process, it cools natural gas with refrigerants until it liquefies at
atmospheric pressure. The facility receives natural gas from fields in and around Trinidad
and Tobago, and processes it in four trains, described in detail in Table 4.6.
Table 4.6: Trains at Atlantic Liquefaction Facility in Trinidad
Train

Capacity
(mtpa)

Storage

Train 1

3.1

Two 102,000m storage tanks

1999

To customers from the


port

Train 2

3.4

Single 160,000m storage tank


(shared with Train 3)

2002

To customers from the


port

Train 3

3.4

Single 160,000m storage tank


(shared with Train 2)

2003

To customers from the


port

Train 4

5.2

Single 160,000m storage tank

2004

To the subsidiaries of the


4 major shareholders

Year
Operational

Sales

Source: Point Fortin Refinery/LNG Liquefaction Plant, Trinidad and Tobago, accessed 27 April 2015,
http://www.hydrocarbons-technology.com/projects/pointfortin/

The Atlantic Liquefaction Facility is owned by a five-shareholder partnership, which is


referred to as the Trinidad Model. This partnership has four major international energy
companies and a state-owned enterprisethe National Gas Company of Trinidad and
Tobago. The private partners are BP, BG, Repsol, and Summer Soca Liquefaction S.A. (a
subsidiary of the China Investment Corporation).126
Trinidad & Tobago: LNG Liquefaction Facility at Brighton Point, La Brea
Gasfin Development S.A. (Gasfin), an independent developer and operator of mid-scale
LNG facilities, plans to build a mid-scale LNG liquefaction plan in Trinidad and Tobago.
The plant would be located at Brighton Port, La Brea at the La Brea Industrial Estate. It
would produce 0.5 million tonnes of LNG per year, which would be sold to countries in the
Caribbean. The plant will cost approximately US$400 million, and terminal facilities and a

126

Atlantic Liquefaction Facility, Point Fortin, Atlantic, accessed 27 April 2015,


http://www.atlanticlng.com/index.php/our-business/overview.

76

Confidential

chain of shipping will cost another US$400 million.127 A second train could be developed
later, adding 0.5 mtpa of capacity.
The project targets the islands of Guadeloupe and Martinique in the eastern Caribbean (both
departments of France) to be the anchor offtakers for LNG from La Brea, with the first
delivery by 2018. Martinique and Guadeloupe would each install an FSRU with a capacity of
25,000 cubic meters, and a maximum send out capacity of about 440,000 mtpa. Mid-scale
LNG carriers, with a capacity of about 20,000 cubic meters (but potentially ranging from
6,500 cubic meters to 30,000 cubic meters) would deliver the LNG.128 About 440MW of
existing fuel oil generators on Guadeloupe and Martinique would be converted to run on
natural gas. Remaining supply could be sold to smaller markets in the region, such as
Barbados or Guyana. Container-based options would be needed to reach the smallest
markets in the region, such as Saint Lucia, Saint Vincent and the Grenadines, and Grenada.
Gasfin and the National Energy Corporation of Trinidad and Tobago Limited (a subsidiary
of the National Gas Company) signed an agreement in 2012 to develop the project.129 The
Government approved the project in 2013 and has signed a project development
agreement.130 A final investment decision is expected by the end of 2015.131
Eastern Caribbean Gas Pipeline
The Eastern Caribbean Gas Pipeline is a proposed natural gas pipeline that would provide
eastern Caribbean countries with natural gas from Trinidad and Tobago. The proposed
project has two phases.132 The first phase of the project would connect Tobago and
Barbados via a 188 mile, 12-inch pipeline. A proposed second phase would connect
Barbados to Martinique via a 120-mile, 10-inch pipeline, and then would connect Martinique
to Guadeloupe via a 188-mile, 8-inch pipeline. The pipeline between Barbados and
Martinique would supply gas to St. Lucia via a side spur. If completed, the project would
send 50 million standard cubic feet per day (MMscfd) to Barbados, and 100 MMscfd
combined to Martinique, Guadeloupe, and Saint Lucia.133 However, a connection to
Martinique and Guadeloupe is unlikely if these two islands are supplied by LNG from
Trinidad and Tobago as planned.

127

Carla Bridglal, Gasfin hoping to build US $400m LNG plant at La Brea, Trinidad Express Newspapers, accessed 27
April 2015, http://www.trinidadexpress.com/businessmagazine/Gasfin_hoping_to_build_US_400m_LNG__plant_at_La_Brea-190948141.html.
128 Roland Fisher, Caribbean LNGa supply project is approved. Gasfin Development, Platts Energy Conference,
Miami: January 2014.
129 Roland Fisher, Caribbean LNGa supply project is approved. Gasfin Development, Platts Energy Conference,
Miami: January 2014.
130

Gasfin, Natural Gas for the OECS: A unique opportunity for cooperation between France and Trinidad to deliver on
climate change and economic regional integration 2015.

131

Gasfin, Gasfin signs landmark project development agreement with Government of Republic of Trinidad & Tobago
for Caribbean LNG. http://www.gasfin.net/news.php accessed 1 June 2015.

132

Khan, Nazar, ECGPC Herald of Natural Gas in the Caribbean. Beowulf Energy. Presentation to Trinidad and
Tobago Energy Conference 2014; Port of Spain, Trinidad and Tobago4 February 2014.

133

Nexant, Caribbean Regional Electricity Generation, Interconnection, and Fuels Supply Strategy, March 2010.

77

Confidential

Construction for the pipeline is expected to cost between US$550 to US$800 million.134
Phase I is expected to cost US$300 million. If constructed, the pipeline would be financed by
the ECGPC. Beowulf Energy LLC and First Reserve Energy Infrastructure Fund own 60
percent of the Eastern Caribbean Gas Pipeline Company Limited (ECGPC).135 Guardian and
United Trust Corporation of Trinidad each own 15 percent, and National Gas Company of
Trinidad owns 10 percent of ECGPC.136
The project has faced several delays, and there is no indication that it is moving forward. The
pipeline was initially proposed in 2002 by the Prime Minister of Trinidad and Tobago. Since
then, several feasibility studies have been completed and the ECGPC was created.137
4.5.4 Mexico
Mexico is the third largest natural gas producer in the Western Hemisphere, having grown
rapidly in the past decade with the installation of new gas-fired power generation capacity.
Mexico produces associated gas (gas that is developed alongside crude oil) in its offshore
Gulf of Mexico fields, as well as non-associated gas, primarily in the Burgos basin near the
Texas border.
Like the United States and Canada, Mexico has significant shale gas reserves. This resource
remains largely untapped as upstream investment is focused on oil production. As a result,
Mexico continues to import natural gas via pipeline from the United States, as well as via
LNG at three receiving terminals: the LNG Terminal Altamira138 on the Gulf coast,
Manzanillo LNG Regasification Terminal139 on the Pacific coast, and Energa Costa Azul140
in Baja California near the California border.
Mexicos rapidly growing demand for natural gas and limited investment in new gas
production raises concerns about its ability to support exports to the Caribbean. This risk is
partially mitigated by the countrys growing connections to the United States natural gas
market and the excess of available supply near the U.S.-Mexico border. In effect, growing
exports of U.S. gas into northern Mexico could offset domestic supplies from further south,
freeing it for potential exports to the Caribbean. In this case, Ciudad Pemex, the southern
pricing point for the Mexican natural gas pipeline system, would be the mostly likely pricing
point for Mexican exports. Because Mexico is too far from the Caribbean island markets to
134

Nexant, Caribbean Regional Electricity Generation, Interconnection, and Fuels Supply Strategy, March 2010.

135

Chief Secretary meets with Beowulf Energy LLC & Eastern Caribbean Gas Pipeline Co. Ltd, Toabago House of
Assembly, accessed 27 April 2015, http://www.tha.gov.tt/news/chief-secretary-meets-with-beowulf-energy-llc-a-easterncaribbean-gas-pipeline-coltd/.

136

Gas Pipeline Project Makes Headway, The Gleaner, accessed 27 April 2015, http://jamaicagleaner.com/gleaner/20120314/business/business7.html.

137

Chief Secretary meets with Beowulf Energy LLC & Eastern Caribbean Gas Pipeline Co. Ltd, Tobago House of
Assembly, accessed 27 April 2015, http://www.tha.gov.tt/news/chief-secretary-meets-with-beowulf-energy-llc-a-easterncaribbean-gas-pipeline-coltd/.

138 LNG Terminal Altamira, Vopak, accessed 27 April 2015, http://www.vopak.com/latin-america/lng-terminalaltamira-cbm.html.


139 Overseas LNG Re-gasification Terminal Projects, KOGAS, accessed 24 November 2013,
http://www.kogas.or.kr/kogas_eng/html/what/what_06.jsp.
140 Energia Costa Azul, accessed 27 April 2015, http://eca.sempralng.com /.

78

Confidential

support a pipeline, the most likely export option would be to convert the Altamira LNG
receiving terminal to also allow for LNG liquefaction and exports, similar to the additional
investments being made to U.S. Gulf Coast LNG receiving terminals such as Cheniere and
Freeport LNG.
Altamira LNG was originally developed by a consortium consisting of Shell (50 percent
ownership), Total (25 percent ownership), and Mitsui (25 percent ownership). In 2011, it was
acquired by Vopak (60 percent) and Enagas (40 percent). Vopak is a Dutch storage and
terminal operator that specializes in handling liquid chemicals, gases, and oil products.
Enagas operates the Spanish natural gas pipeline system, as well as four LNG receiving
terminals in Spain.
In addition, Mexico reformed its Constitution on 12 December 2013 to allow private sector
investment in oil and gas exploration and production, as well as the downstream oil and gas
sector and power generation industry. It will take time for the enabling legislation,
regulations, and contracts to be developed, and years of investment after that to bring new
gas volumes to market. Nevertheless, the opening has the potential to dramatically increase
Mexicos natural gas production in the longer term.
Mexico could also export natural gas to Belize via pipeline. In this case, the natural gas
supply would most likely come from Pemexs production in southern Mexico, via Pemexs
major gas processing center in Ciudad Pemex at the southern end of Mexicos national
pipeline system. A pipeline from Ciudad Pemex to Belize City would be roughly 300 miles
long. Alternatively, the potential pipeline could connect to GDF Suezs Energa Mayakan
pipeline, which extends northeast from Ciudad Pemex to Valladolid at the tip of the Yucatan
Peninsula. This configuration would reduce the length of the new pipeline to less than 200
miles, but may require capacity expansion on the Energa Mayakan pipeline to accommodate
the additional demand.
4.5.5 Colombia
Colombias natural gas sector has grown rapidly over the past two decades, driven by new
discoveries (owing to an exploration boom) and extensive investment in gas-fired power
generation and natural gas distribution. Production grew from 194 Bcf in 1994 to 1,094 Bcf
in 2012an increase of more than four times.141
The country has an extensive natural gas pipeline system, linking producing fields with large
demand centers near Bogota, Medellin, and Cali. In addition, distribution grids have been
built in more than 300 cities and towns as part of a country-wide effort to promote natural
gas consumption, which began in 1994. These include many cities along the Caribbean coast,
such as Barranquilla, Cartagena, and Santa Marta, as well as many minor villages. Some
smaller villages are also served by CNG transported via truck, where investing in a pipeline is
not economically feasible.
Private developers have recently announced two projects that could export LNG to the
Caribbean. The first project is a liquefaction facility being built by Pacific Rubiales Energy
Corporation142 (Pacific Rubiales) to export natural gas from La Creciente, a natural gas
141

United States Energy Information Administration

142

Highlights, Pacific Rubiales Energy, accessed 24 November 2013, http://www.pacificrubiales.com.co/corporate.html.

79

Confidential

production field. The project would allow the country to access a larger number of export
markets for its growing production, such as the Caribbean. The second project, a
regasification facility being built by a group of Colombian electricity generators, would allow
companies with thermal generation capacity to support their obligations of firm contracts of
fuel143 and to import gas for periods of peak natural gas demand. Some of the LNG coming
from this second project, and that would not be used for generating electricity, could be
exported to the Caribbean.
However, it is unlikely that, in the next five years, either project will allow offtakers in the
Caribbean to sign firm contracts for natural gas. Furthermore, although the natural gas
market in the country has grown, the supply of natural gas, especially for power generation
has been variable. This means that it is not clear if natural gas will be available for export on
a firm basis in the next five years or so.
Therefore, even though these projects should be watched closely, we do not consider
Colombia as a likely point of supply of natural gas to the Caribbean countries in this study.
Below, we explain each project in more detail and the reasons why no firm contracts would
be available.
Pacific Rubiales Liquefaction Facility
Pacific Rubiales holds the concession for a natural gas field called La Creciente. La Creciente
had natural gas reserves of 420 billion cubic feet of certified reserves in 2012, and the gas is
mainly used for internal consumption. La Creciente, Colombias natural gas pipeline system,
and other major producing fields are close to the port of Coveas, which is located in the
Caribbean coast. Colombias growing natural gas production could be exported to the
Caribbean basin via LNG, CNG, or pipeline from Coveas once the required infrastructure
is built.
To export the growing natural gas production at this site, Pacific Rubiales was planning to
place a floating liquefaction, storage, and regasification vessel with capacity of 69.5 MMcfd
capacity144 in 2015. This vessel is under construction, but the fall in oil and natural gas prices
in 2014 and 2015 have led Pacific Rubiales to delay its placement at La Creciente. Pacific
Rubiales still plans to take delivery of the vessel in 2015, but may place it at a different site
for the short or long term.145
The LNG from the La Creciente project was to be sold to third parties who would then
transport the LNG to other destinations, but this arrangement is being reconsidered in light
of the projects postponement. In late 2014, Pacific Rubiales signed a Sale and Purchase
Agreement to sell to Gazprom approximately 0.5 million tonnes per year of LNG (around
65.8 MMcfd) for a four-year period.146 Gazprom would buy the LNG from Pacific Rubiales
143

144

In order to receive Capacity Payments, often the largest source of income for natural gas fired power plants, generators
must have long term firm contracts for natural gas.
Pacific Rubiales presentation at the Caribbean energy Platts Conference on January 2014.

145

Platts, Pacific Rubiales' LNG project in Colombia delayed: partner. http://www.platts.com/latestnews/shipping/bogota/pacific-rubiales-lng-project-in-colombia-delayed-21927015 accessed 1 June 2015

146

LNG World News, Gazprom M&T, Pacific Rubiales sign LNG SPA. 25 December 2014.
http://www.lngworldnews.com/gazprom-mt-pacific-rubiales-sign-lngspa/?utm_source=emark&utm_medium=email&utm_campaign=Daily%20update%20LNG%20World%20News%2C%
202014 accessed 1 June 2015

80

Confidential

FOB at the Caribbean coast in Colombia and then ship it to other destinations. Since the
projects postponement, Pacific Rubiales and Gazprom have announced that they are
considering other options.147
The size of this facility would not be enough to supply all the Caribbean countries in this
study, based on our estimate of 427 MMcfd in demand for 2018 (see Section 4.4). Therefore,
although this project could be used to supply most countries individually (with the exception
of Jamaica and the Dominican Republic), it could not be used for a regional project which
would demand almost five times the capacity of the Pacific Rubiales project.
Furthermore, this exporting capacity will be competing with domestic needs during the dry
seasons. In Colombia, natural gas power plants are used to replace the reduced output from
hydroelectricity generation during dry seasons and in particular during the periodic droughts
caused by the El Nio southern oscillation. This means that during these seasons, higher
domestic demand for the natural gas from Pacific Rubiales fields could reduce its availability
for export as LNG. This could make the supply from this export project unreliable to
support a firm supply contract.
Regasification Facility for the Thermal Electricity Generators Group
Grupo de Generadores Trmicos (GT), a group of Colombian electricity generators, plans to
develop and install the first LNG regasification terminal in Colombia. All electricity
generating companies in Colombia with natural gas fired power plants are eligible to join
GT. There are three companies in GT: TEBSA (a 918MW plant in Barranquilla) who is
leading the GT, Termocandelaria (a 157MW plant in Cartagena), and Zona Franca Celsia (a
610MW plant in Barranquilla).
The project is being regulated by the Comisin de Regulacin de Gas (CREG), which has
allowed gas power plants to use LNG contracts to back up their capacity charges starting
December 2015.148 Currently, some power plants have the possibility of generating electricity
with gas or fuel oil. Because regulations in Colombia make it hard for generators to secure
firm contracts of natural gas and because several existing natural gas supply contracts are
ending between 2012 and 2016,149 these generators use firm contracts for fuel oil to back up
their capacity charges. The fuel oil contracts are at higher prices than what they would pay
for firm contracts for natural gas. The CREG has incentivized these generators to switch
from firm contracts for fuel oil to firm contracts for LNG for backing up their firm capacity
charges by giving the generators a fixed capacity payment for 10 years, equal to the one given

147

148
149

Reuters, UPDATE 1-Pacific Rubiales says impossible to predict Colombia LNG start-up.
http://mobile.reuters.com/article/idUSL6N0VC3X120150202?irpc=932 accessed 1 June 2015.
CREG Resolutions 061 of 2013, 062 of 2013, 129 of 2013, and 143 of 2013.
Priority on firm contracts is given to other customers such as residential customers. Natural gas is available for electricity
generation on the spot market.

81

Confidential

to power plants that participated in the 2011 auction (which gave capacity payments to new
plants starting operations in 2015-2016).150
The project requires that the GT secure a firm contract for LNG for the next 10 years.
However, since these generators own mostly peaking plants, it is most likely that the
generators will not use most of this gas. Colombias hydro power unitswhich constitute a
majority of the countrys power generation capacityare vulnerable to swings in rainfall
associated with the El Nio/La Nia weather patterns.
As a result, Colombias use of its gas-fired power generation capacity and need for gas
supplies can surge periodically. For example, natural gas accounted for about 25 percent of
generation in Colombia in June 2014,151 but only 17 percent in June 2013152the difference
was driven by the availability of hydropower. Therefore, depending on weather patterns,
some of the LNG secured by the GT would likely be available for export to the Caribbean at
some times. This periodic swing in hydropower availability due to the El Nio/La Nia
weather pattern, and the resulting swing in the need for thermal power generation, is a
significant challenge to natural gas fired power generation, since it is difficult to ramp natural
gas production up or down to meet the changes in gas demand for power generation.
SPEC SA ESP, a Spanish firm, has been contracted to design and build the facility. The first
phase of the terminal will be the maritime facilities, including an FSRU with 400 MMcfd of
send-out capacity, and 170,000 cubic meters of storage capacity. It will cost about US$150
million and will be completed in 2015 or 2016. The second phase will consist of onshore
regasification, storage, and liquefaction facilties. It will cost about US$350 million.153 154
Even if the project is built, it seems unlikely that natural gas will be available for export to
the Caribbean on a firm basis. The CREG needs to authorize the GT to export the LNG
that the generators will not use. Because the purpose of the project is to lower the costs of
the fuel used to back up capacity payments and to make sure that natural gas is available for
peak periods, it is not likely that the CREG will allow the generators to sell the natural gas on
150 New

power plants that win the generation auctions are guaranteed a reliability charge for 20 years. All other power
plants get a reliability charge based on total demand of the system prorated by each of the plants firm energy generation.
Because of this, older power plants such as the ones being considered for this project would normally get somewhere
around 90 percent of their maximum reliability charge, and the percentage and price are set each year depending on the
demand versus the committed firm energy obligations from auctionsthis means that the revenue stream for existing
companies has some variability. However, the CREGs incentive means that plants that switch from fuel oil to LNG (or
any other form of imported natural gas) to back up their reliability charges will get 100 percent of their maximum
reliability charge for 10 yearswhich means these companies can have more stable revenue streams from reliability
payments.

151

Unidad de planeacion minero energetica (UPME), Informe Mensual de Variables dDe Generacin y del Mercado
Elctrico Colombiano Junio De 2014.
http://www.siel.gov.co/portals/0/generacion/2014/Seguimiento%20Variables%20-%20Junio%202014.pdf accessed 1
June 2015

152

Unidad de planeacion minero energetica (UPME), Informe Mensual de Variables dDe Generacin y del Mercado
Elctrico Colombiano Junio De 2013. http://www.siel.gov.co/portals/0/generacion/2013/boletinJunio%202013.pdf accessed 1 June 2015

153

Business Intelligence, Colombia: Construction of regasification gas plant begins in June.


https://www.bilatam.com/news-alert/colombia-construction-regasification-gas-plant-begins-june/ accessed 1 June 2015
154

LAVCA, SPEC Selected as Successful Bidder on Regasification Terminal Process in Colombia.


http://lavca.org/2014/02/26/spec-selected-as-successful-bidder-on-regasification-terminal-process-in-colombia/
accessed 1 June 2015.

82

Confidential

a firm basis. Therefore, we do not think this project would be a firm source of supply for the
Caribbean and it would be complex to implement from the commercial and political
viewpoints.
4.5.6 Venezuela
Venezuela has the third largest natural gas reserves in the hemisphere, reaching nearly 200
Tcf. Current natural gas production is primarily associated gas, much of which is re-injected
to maintain reservoir pressure and support oil production. Venezuelas domestic gas market
is small relative to its resource potential, smaller than Trinidad or Colombia at roughly 2.9
Bcf155 per day. Proposals to use this resource to supply gas-fired power generation capacity,
energy-intensive industries, petrochemicals or exports have yet to result in actual investment
and development. Venezuela imports natural gas from Colombia to support oil production
in its western fields, rather than developing its domestic resources in the east and building a
pipeline to link the two.
A recent announcement related to the Perla natural gas discovery in western Venezuela
could indicate progress in developing the countrys gas resources, but progress remains slow.
The Perla field was discovered in 1976 in the Gulf of Venezuela near the mouth of Lake
Maracaibo, but additional delineation and calculation of the fields actual resource base was
not completed until 2009.156 Further test wells drilled by the fields concessionaires, Repsol
and ENI, confirmed the field has a resource potential of roughly 16 Tcf. Plans to develop
the field have moved forward with engineering and construction contracts for the required
drilling, development, processing, and pipeline facilities awarded in late 2010. The field was
expected to come on line in early 2013.157 However, the project has faced several delays and
production is now expected to begin by mid-2015.158 Production could reach about 1.2 Bcf
per day by 2019.159
The project will largely support Venezuelas domestic market, particularly the western oil
producing fields near Lake Maracaibo by providing gas for reinjection to maintain well
pressure. However, gas could be available for export, likely to Colombia through existing
pipelines, by 2016.160
Three joint venture companies have been created between Petrleos de Venezuela, SA, the
state-owned oil and gas company, and private companies to develop LNG liquefaction and
export facilities on the northern coast of the country. However, any projects have been

155

In 2013. Data from the United States Energy Information Administration

156

Perla Field, Gulf of Venezuela, Venezuela, Offshore Technology, accessed 27 April 2015, http://www.offshoretechnology.com/projects/perla-field/.

157

Cedigas News Report, Vol 51, no. 1, January 26, 2012.

158

Noon, Chris, Timeline: The hunt for Venezuelas pearl. http://interfaxenergy.com/gasdaily/article/16145/timelinethe-hunt-for-venezuelas-pearl accessed 1 June 2015

159

Noon, Chris, Timeline: The hunt for Venezuelas pearl. http://interfaxenergy.com/gasdaily/article/16145/timelinethe-hunt-for-venezuelas-pearl accessed 1 June 2015

160

Espinosa, Lilian Marino, Despus de que empiece produccin en Perla, Venezuela exportar gas a Colombia.
http://www.larepublica.co/despu%C3%A9s-de-que-empiece-producci%C3%B3n-en%E2%80%9Cperla%E2%80%9D-venezuela-exportar%C3%A1-gas-colombia_257526 accessed 1 June 2015

83

Confidential

delayed by a lack of gas and other difficulties.161 Guiria is the site of the proposed CIGMA
industrial complex that would exploit the Plataforma Deltana/Mariscal Sucre natural gas
fieldsextensions of the same geological structures below Trinidad. The complex is planned
to include petrochemicals production and LNG liquefaction. Although the natural gas
reserves were discovered decades ago, proposed development and related industrial projects
on the Venezuelan side have not moved forward. In addition to perceived political risks,
regulatory requirements to sell a percentage of natural gas supply to the domestic market at
artificially low rates have limited investor interest in large, capital-intensive natural gas
projects. Therefore, while Guiria is the expected port for any future Venezuelan natural gas
exports, it is unclear when the required infrastructure will be built.

4.6

Implications of Regional and Global Trends for the Caribbean

A convergence of several key changes to global natural gas markets is creating an


opportunity to bring natural gas to the Caribbean region. Most notably, the surge in potential
natural gas supply around the world, combined with growing pressure to address greenhouse
gas emissions, has concentrated unprecedented research and investment attention on the
natural gas value chain. This, in turn, has led to expectations of large new supplies of
tradable natural gas to enter the market in the coming decade.
At least four trends in global natural gas markets will have direct implications for the
Caribbean natural gas supply chain. First, the challenges facing the US market given a
growing potential natural gas supply. Second, changes in the price setting mechanism in the
Asian markets due to increasing natural gas supplies. Third, the political and geopolitical
aspects of natural gas trade in the Caribbean, and finally, technological innovation in natural
gas markets that impact small LNG markets.
Volatility of supply, especially from the United States
Future natural gas prices will be driven by the success of shale gas developments in the U.S.
Therefore, shifts in non-conventional gas supply can lead to higher volatility in natural gas
prices, given the price flexibility of the U.S. market. In a setting of high price flexibility, LNG
investments can become stranded quickly when alternative sources of natural gas or cheaper
alternative fuels become available. As a result, price volatility in natural gas markets in the
U.S. will be accompanied by LNG supply volatility.
Implications for the Caribbean
Even for Caribbean countries with experience as small energy importing countries it may be
more difficult to manage this risk for natural gas imports than for oil imports. This is
because of the much smaller number of potential supply sources and relative difficulty of
securing spot cargoes. Flexibility on the consuming side (such as power generation with fuel
switching capability and storage capacity to smooth seasonal peaks) can help moderate price
volatility. The ultimate question is how the market and contracting allocate risk: on the
infrastructure owner (volume risk if the gas is no longer needed) or on the gas consumer
(price risk if the contract has significant take or pay obligations). Any new gas market or
contracting in the Caribbean will need to address this issue carefully.
161

United States Energy Information Administration, Venezuela: Analysis.


http://www.eia.gov/beta/international/analysis.cfm?iso=VEN accessed 1 June 2015.

84

Confidential

Price setting mechanism in the Asian markets


Traditionally, natural gas prices in the Atlantic Basin have been linked to oil prices to secure
long-term natural gas contracts. However, the recent extended period of high oil prices and
the availability of low priced gas in the United States began to shift the regions historical
emphasis on energy security to one that encourages greater competition and price flexibility.
Buyers improved bargaining power due to increased natural gas supplies has led to some
contracts for sale to Japan that are linked to Henry Hub. However, these contracts remain a
small share of Japans total LNG imports.
Implications for the Caribbean
Caribbean countries may have difficulty securing Henry Hub-linked prices, since they are
smaller individual markets, many of which do not currently have LNG import facilities. Most
Caribbean countries also do not have investment grade credit ratings, and do not have the
capacity to guarantee long-term LNG contracts in the same way Japanese utilities can. These
factors and their impact on Caribbean countries ability to secure favorable contract terms
for LNG are examined in detail in Section 7.
Oil prices have fallen dramatically since mid-2014, reducing the spread with natural gas
prices in the United States (see Section 3.3). Linking prices to an oil index can protect against
paying too much, but can also remove much of the cost benefit from oil and gas market
price differences. Caribbean countries should carefully assess this risk and take appropriate
measures to mitigate it should they switch to imports of natural gas. Ensuring that power
plants that are converted to use natural gas remain able to also use liquid fuels (dual-fuel
capability) and securing flexible contracts could allow Caribbean importers to switch fuels
should oil ever become cheaper than their natural gas supply.
Geopolitical Challenges
In addition to the domestic U.S. political questions surrounding natural gas exports,
substituting natural gas for oil in the Caribbean carries particular geopolitical overtones.
Much of the region receives oil and oil products through favorable financing arrangements
from Venezuela via the PetroCaribe program. Venezuela may export up to 400,000 barrels
of oil per day162 to the region under this program, and the program costs the government
between US$2.3 billion163 and US$5 billion164 every year. However, the recent fall in oil prices
has reduced the Government of Venezuelas income, limiting its ability to maintain the
subsidies. As a result, exports under the PetroCaribe program have fallen, and some
benefitting countries have begun to look elsewhere for oil supplies.165 Reducing oil
162

United States Energy Information Administration, Venezuela: Analysis.


http://www.eia.gov/beta/international/analysis.cfm?iso=VEN accessed 1 June 2015.

163

The Economist, Winners and Losers. http://www.economist.com/news/international/21627642-america-and-itsfriends-benefit-falling-oil-prices-its-most-strident-critics accessed 1 June 2015

164

Delgado, Antonio Maria, Venezuela slashes oil shipments to Cuba, Caribbean in half. Miami Herald: 26 March 2015.
http://www.miamiherald.com/news/nationworld/world/americas/venezuela/article16381898.html#emlnl=The_Americas accessed 1 June 2015

165

Delgado, Antonio Maria, Venezuela slashes oil shipments to Cuba, Caribbean in half. Miami Herald: 26 March 2015.
http://www.miamiherald.com/news/nationworld/world/americas/venezuela/article16381898.html#emlnl=The_Americas accessed 1 June 2015

85

Confidential

consumption by switching power generation to natural gas that is supplied by a different


country would further reduce the importance of the PetroCaribe program.
Implications for the Caribbean
Fuel supply agreements and related contracts will be not just commercial agreements among
private-sector providers, but will also carry regional geo-political implications. This may
affect some countries decision to participate. In addition, the delivered price of natural gas
must be able to compete against oil supplies that may be sold under favorable terms of
financing, not just oil sold at the global market rate.
Technology innovations
In the past, there was not an economical method to deliver natural gas in much of the
Caribbean, given the very small size of many of the island economies. However, this
challenge is being overcome by advances in delivery technology, particularly in small-scale
shipping and floating regasification units. Further cost reductions are expected as research
and development matures the many smaller scale technologies currently under development.
Implications for the Caribbean
Caribbean countries should monitor these new technological developments, and be prepared
to adopt those that are suitable for each countrys specific needs once it is cost effective to
do so. Technologies that may help facilitate joint venture arrangements with other regional
natural gas importers could be of particular interest.
In general, trends point to natural gas being available at competitive prices in the Caribbean
in the near future, but many difficult challenges remain. The capital cost for any natural gas
transportation infrastructureincluding pipelines, LNG, and CNGremains high, and adds
substantially to the final delivered cost of natural gas. Guarantees are required to finance
projects of this scale, often including long-term contracts, highly credit worthy buyers, and
sovereign support. Many Caribbean countries face financial pressures that may limit their
ability to support investment of this scale.
Many other competing importing countries can also offer far larger markets for gas
exporters. Natural gas projects, especially LNG projects, benefit from economies of scale,
suggesting the potential for greater returns from larger markets than from smaller ones
some developers may charge a premium for the intermittent, spot cargoes that may be all
that smaller Caribbean markets require. Larger markets also have more flexibility in
diversifying their sources of natural gas imports, providing greater security of supply and
reducing their dependence on any one project. Many Caribbean markets do not have that
luxury given their relatively small populations and economies. Aggregating demand from
multiple countries to support a single import project could create the required volume to
attract exporters interest and negotiate more favorable contract terms. Such multi-national
arrangements can also greatly increase the projects political risk and complexity, however.
Finally, investment across the many stages in the natural gas value chainfrom upstream
supply through liquefaction, shipping, and regasificationis often mistimed, creating
shifting bottlenecks and rapidly changing costs as different parts of the chain face shortages
or oversupply. As a small participant in a very large global market, Caribbean countries will
have little ability to influence these trends.

86

Confidential

Part II: Using LNG to Deliver Natural Gas to


the Caribbean
Liquefied natural gas (LNG) is likely to be the best technology for creating a regional natural
gas market in the Caribbean for three main reasons (Section 5). First, it is an option for
nearly all countries in the region. Second, it is a mature technology with relatively certain
costs, low risks, and flexible supply options. Third, it is likely cheaper than the two main
alternativescompressed natural gas (CNG) and delivering natural gas by pipeline.
The delivered price of LNG to Caribbean countries will consist of the price of the gas itself,
plus the price of the infrastructure needed to import and use the gas for electricity generation
(Section 6). Challenges to buying and using LNG in the Caribbean include financing
difficulties, legal and regulatory obstacles, the need to structure complex commercial
arrangements, and some technical and environmental challenges (Section 7). Section 8
describes the supply chains that would be needed to use natural gas liquids (particularly
propane and ethane) for electricity generation in the Caribbean, and evaluates the feasibility
and estimated prices for these options.

87

Confidential

Comparison of the Delivery Options: LNG, CNG,


and Pipelines

The first step to creating a regional market for natural gas and taking advantage of its price
and environmental benefits is determining the most appropriate technology for delivering
natural gas. Technologies to deliver natural gas fall into three broad categories: pipelines that
use pressure to move the natural gas, CNG that uses a high-pressure vessel to reduce the
volume of the gas for transportation, and LNG that cools the gas to liquid form, thus greatly
reducing its volume for transportation (see Figure 5.1). There are also several technology
options within each of these broad categories.
Transporting natural gas to the final consumption point via pipeline is a relatively
straightforward process, though pipeline infrastructure can be very costlyparticularly over
long distances and for undersea pipelines. Transporting natural gas as LNG or CNG is a
more complicated process that requires large investment in processing equipment at each
end of the route: liquefaction and regasification facilities for LNG, and compression and
expansion facilities for CNG (see Figure 5.1).
Figure 5.1: Natural Gas Transportation Options

The different costs along the value chain, and the inherent characteristics of each
transportation technology option, create specific benefits and challenges for each option.
Based on our analysis, we believe LNG is the best technology for creating a regional natural
gas market in the Caribbean, because it is:
An option for nearly all countries in the regionPipelines are not an option to reach
many countries in the regiondeep seas and long distances between islands make them
technically unfeasible in some cases, and economically not viable in others. The relatively
flexible market for LNG also means that there are more supply options than for CNG
and pipelines, where offtakers would likely be dependent on a single supply source

88

Confidential

A mature technology with relatively certain costs and low risksPipelines and LNG
are mature technologies used around the world to transport natural gas. However, no
seaborne CNG vessels have ever been built, making costs more uncertain and other risks
larger than with the other two technologies
Likely cheaper than the alternativesOur cost model for the three technical
alternatives estimated that LNG would be the cheapest technical option to deliver natural
gas in nearly all markets
Allows for competition among suppliersThere are many global LNG suppliers and a
spot market. In contrast, pipelines would tie offtakers to a single source. There are no
CNG ships currently on the market, meaning that CNG offtakers would be almost
certainly tied to one supplier. If a single supplier raises prices or cuts off supply entirely,
the offtaker has few alternatives.
The rest of this section identifies and analyzes the existing and potentially suitable
infrastructure and breakthrough technologies for transporting natural gas at medium and
small scale. Section 5.1 considers the options for transporting and storing LNG, including
LNG carriers, LNG storage systems, and cryogenic road tankers, and briefly describes trends
in global liquefaction capacity. Section 5.2 examines CNG technology options, such as CNG
carriers, CNG storage systems, and CNG road tankers. Section 5.3 assesses the third
technology option, natural gas pipelines. Section 5.4 compares the preliminary166 cost of
delivering natural gas to the Caribbean from different supply points. Section 5.5 evaluates
options for distribution infrastructure once natural gas has been deliveredonce natural gas
has been delivered to each country, there may be multiple domestic buyers. Finally, Section
5.6 presents conclusions on costs and technology risks for each transportation options.

5.1

Options for Transporting and Storing LNG in the Caribbean

LNG is already being delivered to the Caribbean region with operating receiving terminals in
the Dominican Republic and Puerto Rico. These are large-scale receiving terminals that serve
two of the largest energy consumers in the region. However, for most Caribbean natural gas
markets, medium, and small-scale LNG would be the most applicable. A growing number of
medium and small-scale LNG projects are being developed worldwide. These projects
include medium and small-scale liquefaction and regasification, floating liquefaction and offloading platforms for smaller stranded off-shore natural gas reserves, and LNG ships with
on-board regasification capabilities. This ongoing investment has helped bring costs down
for smaller-scale projects, although larger-scale projects still benefit from economies of scale.
Many Caribbean jurisdictions are working to begin importing LNG at small, medium, and
large scale. Additional LNG import projects have been proposed for Aruba, Guadeloupe,
Haiti, Honduras, Jamaica, Martinique, and Panama. Puerto Rico and the Dominican
Republic are also working to increase imports of LNG by building additional large-scale
facilities. This section analyzes LNG markets, transportation, and storage technologies in
general, as well as the technologies chosen for the existing projects in the region.

166

The costing presented in this section is preliminary and its purpose is to compare the costs of the different alternatives.
Part III provides a more detailed costing for supplying LNG to the Caribbean.

89

Confidential

5.1.1 LNG preparation


The first step in transporting and using natural gas as LNG is to cool it to about -260
degrees Fahrenheit, into liquid formthis process is called liquefaction. The resulting LNG
is about 600 times denser than in its gaseous state.167 Global liquefaction capacity is rising,
and is expected to continue to rise further over the next five to ten years. This increase in
global supply of LNG has important implications for LNG markets around the globe,
including in the Caribbean.
By the end of 2014, 20 countries were exporting LNG.168 Included in this total is Papua New
Guinea, which opened its first plant in May 2014. New LNG export projects are underway
and are expected to come online in Australia and in the United States. Many more projects
have been proposed, particularly in the United States, but many face financial or regulatory
difficulties. Further, liquefaction capacity has been increasing steadily since 2006with total
capacity of 298 mtpa at the end of 2014, more than100 million tonnes more than the
capacity available in 2006 (see Figure 5.2). LNG output fell below capacity due to force
majeure in Angola and Egypt, late start-up in Australias QCLNG plant, and feedgas
limitation in Algeria.169
Figure 5.2: Liquefaction Operational Capacity, 2006-2014

Source: The LNG Industry, 2006 to 2014 publications, http://www.giignl.org/publications, GIIGNL.

The increase in liquefaction capacity is expected to continue. For example, according to


NERAs study Updated Macroeconomic Impacts of LNG Exports from the United States
(the NERA study), by 2018, U.S. LNG exports are projected to reach a range of 0.36 to
2.13 Tcf per year, and by 2028 a range of 1.63 to 5.25 Tcf per year. Liquefaction capacity
would enter services between 2015 and 2020 and would help Caribbean nations negotiate a
favorable price for LNG imports, since there is a greater potential for multiple suppliers
competing to serve the regions needs. Factors that could support this outcome include more
rapid permitting and financing of U.S. export projects, as well as continued investment and
on-schedule construction of planned projects in Australia.
167

United States Department of Energy National Energy Technology Laboratory, Liquefied Natural Gas.
http://www.netl.doe.gov/publications/factsheets/policy/policy023.pdf accessed 29 April 2015.

168

The LNG Industry, GIIGNL, 2014, pg 2, 17.

169

The LNG Industry, GIIGNL, 2014, pg 17.

90

Confidential

5.1.2 LNG vessels


LNG is shipped in specially built vessels designed to keep the LNG in its liquid state on the
way to its destination. The technology for commercial scale sea-borne LNG shipping is well
established, with a more than 50-year history. As a mature technology, multiple ship designs
are available from a wide range of ship building companies. A range of ship sizes are
currently in production, including sizes that are suitable to Caribbean markets.
The main technical challenge for transporting LNG is maintaining its liquid state. LNG
carriers use special highly-insulated containment vessels in order to minimize evaporation
(boil off) during the voyage. Even so, no insulation is perfect and some of the LNG does
boil off during shipping, resulting in a loss of roughly 0.15170 percent of the total cargo per
day in transit.
Almost all LNG ships use non-pressurized containment vessels, and are classified as Type B
vessels by the International Maritime Organization (IMO). Because the LNG is shipped at
near atmospheric pressures, boil off gas must be either consumed en route (generally as a
supplemental fuel for the ships own engines) or liquefied (in the case of the largest vessels
built for the longest routes). Type B LNG vessels use one of two general designs to contain
the LNG that they carry: independent containment, in which the heavily insulated LNG
containment system is built separate from the ship and is able to maintain structural integrity
on its own, and membrane design, where the LNG containment system is directly supported
by the ships hull and cannot be removed. Vessels with independent containment are almost
entirely spherical (Moss) design although some use a structural prismatic design where the
containment system is shaped to better fit within the ship hull. In the Moss design, half of
each sphere rises above the ships deck giving it the distinctive look that is generally
associated with LNG ships. In the second typical design, known as membrane design, the
LNG containment system is directly supported by the ships hull and cannot be removed.
This style uses a heavily insulated double hull with a thin containment membrane suspended
within to hold the LNG.
While the majority of LNG carriers are non-pressurized, a small number are Type C,
meaning they are certified to transport gases at high pressure. These vessels are generally
small in size and are used to transport a variety of cargoes, including LPG or ethylene. In
these vessels, boil off gas is not released from the containment, and so pressure is allowed to
rise during the ships voyage. This can limit the time (and therefore distance) for each
voyage, limiting these ships to shorter haul routes.
Existing LNG carriers
There were 421 active LNG carriers at the end of 2014, a 93 percent increase since 2006.171
The dramatic increase in global LNG trade over the past decade, and the corresponding rise
in new LNG shipping capacity, means that the majority of the LNG carriers in operation are
very young (see Figure 5.3). The average age across the global LNG fleet is roughly 12 years,
compared to an expected useful life of 30-40 years. Nearly two-thirds of the current fleet is
less than ten years old, and 40 percent is less than 5 years old.
170

Macroeconomic Impacts of LNG Exports from the United States, NERA Economic Consulting, 2012, Page 86.

171

GIIGNL, The LNG Industry Report, 2014, pg 9.

91

Confidential

Figure 5.3: Global LNG Carrier Fleet by Vessel Age (end-2014)

Source: The LNG Industry, 2006 to 2014 publications, http://www.giignl.org/publications, GIIGNL.

The earliest LNG carriers were membrane design. The 75,060 cubic meter capacity Bebatik
built in 1972 is the oldest LNG ship still in service today. Moss design began to replace
membrane design in the late 1970s as ship sizes increased to the 120,000 to 130,000 cubic
meter range, and remained the most popular through the 1980s and 1990s. In the 2000s,
ship sizes grew larger still (averaging between 140,000 and 160,000 cubic meters) and
membrane design once again began to replace Moss design as the primary technology. The
worlds largest LNG carriers, the Q-max class built for long-distance shipping from Qatar,
are membrane design ships and reach as large as 267,000 cubic meters of capacity.
Membrane design remains the most popular technology today, and is the most used design
for new ships.172 Today, roughly two-thirds of the active LNG carrier fleet is membrane
design, one-quarter is Moss design, and the remainder are Type C vessels or other specialized
designs.
Figure 5.4 below shows the distribution of currently operating ships by size. Moss design
ships can be as large as 180,000 cubic meters, although the majority is between 120,000 to
140,000 cubic meters.173 Almost all membrane ships are between 137,000 and 267,000 cubic
meters in size. While there is a wide range of LNG ship sizes in operation, the current
standard size for LNG carriers is considered to be 155,000 cubic meters. Some shipping
companies are looking into a 170,000 cubic meter new standard which would still be able to
traverse the Panama Canal following the planned expansion in 2016.174 The largest ships, the
Q-Max, designed for Qatar with more than 260,000 cubic meter capacity, would still be too
large for the expanded Canal (see Appendix H).

172

The LNG Industry , GIINGL, 2014.

173

The LNG Industry , GIINGL, 2014.

174

Juris Popils, Panama Canal Expansions Impact on LNG Shipping and Trade, presentation Platou LNG at LNG17
Conference, Houston, February 17, 2011.

92

Confidential

Figure 5.4: Global LNG Carrier Fleet by Vessel Size

Source: The LNG Industry, 2014 publications, http://www.giignl.org/publications, GIIGNL.

For most Caribbean markets, ships of this size would be too large, requiring very large
storage systems relative to the market size at the receiving terminals, and resulting in very
few shipments per year. The smaller end of the range is much better suited to the size of the
expected demand in most Caribbean markets. At end-2014, there were 24 LNG vessels with
a capacity of 25,000 cubic meters or less. Figure 5.5 shows the distribution of these smallsized vessels.
Figure 5.5: Distribution of Operating Small-Scale LNG Carriers by Size (end-2014)

Source: The LNG Industry, GIIGNL, 2014.

Moss design carriers have been built as small as 2,500 cubic meters of carrying capacity (such
as the North Pioneer, built in 2005 for service in Norway), but the smallest membrane ship
currently in operation is the 74,130 cubic meter GDF Suez Energy, which entered service in
2006. Type C ships, however, have generally been much smaller with carrying capacity
ranging between 1,000 and 12,000 cubic meters. The worlds smallest operating LNG carrier,
the 1,100 cubic meter Pioneer Knudson, operating in Norway since 2004, is of this design.

93

Confidential

Several other ships in the 1,500 to 3,000 cubic meter size are used in Japan. In addition,
several ships in the 10,000 to 12,000 cubic meter range were delivered for use in Norway in
2011.175
Costs of LNG vessels
Full-scale LNG tankers, those in the range of 90,000 to 260,000 cubic meters, can cost
US$200 million or more to build.176 In the second half of 2014, the average short-term
charter rates for full-sized LNG carriers fell to about US$70,000 per day, from about
US$100,000 per day in 2013.177 In 2013, longer-term contracts (more than 5 years) were
priced close to the net present value of the ships construction costs, and averaged about
US$70,000 to US$80,000 per day.178 Older, less-efficient ships charged lessabout
US$45,000 per day in 2013.179
Type C carriers are based on a modified ethylene carriers, with an estimated construction
cost of US$45 million or more per ship.180 Ethylene and other liquid petroleum gases
(LPGs), such as propane, are heavier than natural gas and can be liquefied at moderate
pressure without the need for cryogenic cooling that natural gas requires. As a result, instead
of the extensive insulation required for LNG ships, standard LPG ships have pressure tanks
to maintain their cargo in liquid form. Adapting this design to carry LNG is mainly a matter
of adding insulation to the tank and changing the loading and unloading equipment.
There is little publicly available information on the costs of small-scale LNG ships.
However, their similarity to LPG ships suggests that short-term charter rates for ethylene
and other sizes of LPG ships (which are available from a number of public sources) could be
indicative of the cost to charter smaller-sized LNG carriers. Table 5.1 shows indicative 2012
monthly charter rates for smaller sized ethylene carriers and other LPG ships as reported in
the 2013 BRS Annual Report on the LPG shipping market. These rates translate to a range
of daily costs per MMBtu shipped. By comparison, the cost per MMBtu per day for full-scale
LNG ships ranges between 1.1 and 2.1 US cents per MMBtu per day.181 However, before the
2014 price decrease the cost for full-scale LNG shipping was about 2.6 US cents per MMBtu
per day or more.182
175

The LNG Industry GIIGNL, 2013.

176

Gauthier van Marcke, LNG Opportunities & Challenges for Caribbean & Central America, (presentation, Wrtsil
2012 LNG Symposium for the Caribbean & Central America, April 19, 2012).

177

2015 Annual Review of World Shipping and Shipbuilding Markets, Barry Rogliano Salles (BRS), accessed 29 April
2015, http://www.brs-paris.com/marketbrs/annual-2013-a.php

178

World LNG Report, 2014 Edition, International Gas Union (IGU).

179

World LNG Report, 2014 Edition, International Gas Union (IGU).

180

Gauthier van Marcke, LNG Opportunities & Challenges for Caribbean & Central America, (presentation, Wrtsil
2012 LNG Symposium for the Caribbean & Central America, April 19, 2012) and 2015 Annual Review of World
Shipping and Shipbuilding Markets, Barry Rogliano Salles (BRS), accessed 29 April 2015, http://www.brsparis.com/marketbrs/annual-2013-a.php

181

The lower bound (US$0.011 per MMBtu per day) was calculated assuming a vessel of 174,000 cubic meters at a charter
rate of US$45,000 per day. The higher bound (US$0.021 per MMBtu per day) was calculated assuming a vessel of
174,000 cubic meters at a charter rate of US$80,000 per day. The following conversions were used in both cases: 600
cubic meters of natural gas per cubic meter of LNG; 0.036263 MMBtu per cubic meter of natural gas.

182

Assuming a vessel of 174,000 cubic meters and a charter rate of US$100,000 per day.

94

Confidential

Table 5.1: LPG Ship Time Charter Hire Basis, 6-18 month duration (Dec. 2012)
Vessel Size
(cubic meters)

Monthly Charter Daily Charter Rates


Rates
(US$ cents per
(US$ per month) MMBtu per day)

Very Large Gas Carrier

65,000 85,000

920,000

1.5 2.0

Large Gas Carrier

52,000 60,000

770,000

1.8 2.1

Midsize

23,000 45,000

785,000

2.5 4.9

Handy Size

13,000 22,000

900,000

5.9 9.9

Small Ethylene

4,000 12,000

545,000

6.5 19.5

Small Semi-Refrigerated

4,000 8,000

530,000

9.5 19.0

Small Pressure

3,500 7,500

275,000

5.2 11.2

Source: 2013 Annual Review of World Shipping and Shipbuilding Markets, Barry Rogliano Salles (BRS),
accessed 29 April 2015, http://www.brs-paris.com/marketbrs/annual-2013-a.php.

Growth in LNG shipping capacity


The global LNG fleet is set to expand significantly in the coming years, including a number
of ships built to spec without a particular project in mind. At the end of 2014, there were
421 ships in operation, 203 more ships than were in operation in 2006. Out of these 421
ships, 24 had a capacity of 25,000 cubic meters or less, in contrast with only 5 ships of
25,000 cubic meters or less in 2006 (see Figure 5.6). By the end of 2014, 163 more ships
were on order and in various stages of construction, an expansion of 39 percent over the
current fleet.183
Figure 5.6: LNG Fleet, 2006-2014

Source: The LNG Industry. 2006 to 2014 publications, http://www.giignl.org/publications, GIIGNL.

183

The LNG Industry in 2014, http://www.giignl.org/publications, GIIGNL.

95

Confidential

In addition, there is a widening range of ship sizes being made available, with a growing
number of small Type C ships as well as the massive Q-flex and Q-Max vessels now entering
service. Each will add to the flexibility of the LNG tanker fleet and enable new contracting
options between sellers and buyers.
A continued surge in new ship building will help Caribbean countries hoping to import LNG
since it will make chartering LNG carriers simpler and cheaper. Conversely, a slowdown in
completing new ships would make it more difficult to find ships available for charter, and
push up the price for long-term charters.
5.1.3 LNG storage and offloading systems
Once the LNG vessel reaches its destination, it offloads the LNG for storage, regasification,
and use. Like LNG shipping, LNG storage, and regasification systems are a mature
technology with an extensive history. The primary technical challenge for LNG storage is
similar to shipping: ensuring the LNG remains in a liquefied state. On-shore storage systems,
particularly those near population centers, have the additional challenge of ensuring any
accidental leak does not result in an explosion. LNG regasification technologies must
convert the LNG back to its gaseous form in a safe and efficient way.
LNG is stored in double-hulled tanks (similar to the containment vessels used onboard LNG
tankers) at atmospheric pressure and at cryogenic temperatures to maintain the natural gas in
a liquefied state. At the end of 2014, there were 112 LNG regasification terminals worldwide
in 30 countries, with a combined processing capacity of 913 million tonnes per year.184
Technology options for regasification and storage include on-shore systems and floating
systems (FSRUs). There is also a single example of an off-shore gravity-based structure
(GBS), consisting of a permanent structure anchored to the seabed. This design is installed in
Italy, but proved to be far more expensive than other options and so has not been used in
other markets. Both on-shore and floating systems can be designed across a range of sizes to
meet the specific needs of each market. The main components that are differentiated by size
are the regasification throughput rate (sized to meet the markets daily supply needs) and the
LNG storage tank (sized to meet the markets needs for supply security and to optimize the
ship size and number of LNG deliveries required to serve the market).
Most countries included in this report have at least one port that has an existing pier or jetty
with sufficient depth to accommodate a full-sized LNG tanker.185 Major exceptions to this
rule include Haiti and St. Lucia (both of which have ports with anchorage sites of sufficient
depth, such that a new jetty could be built) and Guyana and Suriname (neither of which has
even sufficient depth at anchorage sites, requiring dredging to deepen the port or an offshore buoy for off-loading). The ports selected for this study, which could also be used for
delivering compressed natural gas (CNGsee Section 5.2) are shown in Figure 5.7. Ports
were selected based on depth and available services and infrastructure, as explained in Figure
5.7 (See Appendix I).

184
185

The LNG Industry in 2014, http://www.giignl.org/publications, GIIGNL.


World Port Index, National Geospatial-Intelligence Agency, accessed 26 March 2014,
http://msi.nga.mil/NGAPortal/MSI.portal?_nfpb=true&_pageLabel=msi_portal_page_62&pubCode=0015.

96

Confidential

Figure 5.7: Potential ports for LNG or CNG delivery

On-shore storage and regasification


An on-shore LNG receiving terminal consists of a jetty or pier for berthing the LNG carrier
and related pipelines to transfer the LNG in liquid form from the ship to land; storage tanks
to keep the LNG in liquid form until required by the market; and vaporizers to transform
the liquefied natural gas back into a gaseous form for delivery to the local market.
The jetty and related harbor facilities are relatively inexpensive unless significant
modifications are required to accommodate the LNG carriers size or deep draft. Assuming
no marine terminal modifications are required, the storage tanks are generally the largest
single cost component for the regasification plant, accounting for roughly one-third of the
overall cost.
On-shore storage tanks can be one of four distinct designs: single containment, double
containment, full containment, and membrane. Single containment is the least expensive,
consisting of a single, highly insulated steel tank. Double containment tanks add an
additional wall of pre-stressed concrete around the containment tank to protect against any
potential rupture. Full containment tanks add further security by extending the concrete wall
over the top of the tank to essentially create a second, sealed layer completely surrounding
the inner steel tank. This is the most secure storage system, and also the most expensive to
build. Membrane tanks use insulated steel membranes similar to those used in membrane
LNG ships, which are suspended within an external support structure.186
The LNG vaporization process involves heating the liquid at high pressure in order to
maintain a controlled expansion. Three heating methods are generally used in on-shore
receiving terminals: seawater (known as open rack vaporizers (ORV), heated water (known
186

The LNG Industry, GIIGNL, 2014.

97

Confidential

as submerged combustion vaporizer (SCV), and open air (often heated) known as Ambient
Air vaporizer (AAV). ORV systems use the readily available seawater as a heat sink during
the vaporization process, resulting in lower capital and operating costs. SCV systems use
some of the natural gas produced from the LNG in order to heat the water and help speed
up the regasification process. This requires greater capital investment for the water heating
system, as well as higher operating costs as some of the delivered gas is used in the process.
AAV systems can be used if water is not available as a heat sink (generally for smaller
regasification plants located inland, such as those used with satellite LNG facilities in the
United States). This system is less efficient than the water-based technologies, and requires
significantly more space for the vaporization equipment.
Figure 5.8 shows the range of throughput capacity across currently operating regasification
terminals worldwide. These terminals range from very small (less than 100 MMcf per day
capacity) to very large (maximum capacity of nearly 5.5 Bcf per day). The majority of the
worlds terminals have a throughput capacity between 300 MMcf per day and 1.2 Bcf per
day.187
Figure 5.8: Global LNG Regasification Capacity by Terminal Size

Source: The LNG Industry 2014, GIIGNL.

LNG storage capacity is generally in line with the throughput capacity of the receiving
terminal, and also with the size of the receiving market. This is particularly true of smaller
187

The LNG Industry 2014, GIIGNL.

98

Confidential

markets; the two main exceptions to this rule are the United States (where an extensive
pipeline system and substantial domestic gas supply and alternative storage options, such as
underground salt domes, allows LNG terminals to have less storage on site than is typical)
and Japan (where the countrys high dependence on LNG and limited pipeline system to
connect individual receiving terminals has resulted in much higher storage capacity at each
receiving terminal than would typically be expected).
Smaller terminals also tend to have larger storage volume relative to their throughput
capacity than larger terminals. As shown in Figure 5.9, the average storage volume for all
LNG regasification terminals (expressed as the number of days a terminal can sustain
maximum LNG production) is 14.2 days. For small terminals (with capacity between 100
and 500 MMcf per day), the average storage rises to 17.4 days, while for very small terminals
(less than 100 MMcf per day), the average is 69.1 days.
Figure 5.9: LNG Receiving Terminal Storage Volume by Maximum Throughput
Capacity

Source: The LNG Industry 2014, GIIGNL.

The smallest on-shore systems use modular ISO vacuum insulated cryogenic tanks with
AAV regasification. These peak shaving facilities allow pipelines to be sized for the baseload
natural gas demand rather than for peak demand, thereby optimizing pipeline operations and
increasing pipeline utilization rates. Satellite LNG terminals are also used for retail LNG
sales, particularly for vehicular use in fleet operations (such as local buses or delivery
vehicles). In these systems, the natural gas is generally stored as LNG but regasified at the
satellite terminal and provided as compressed natural gas for vehicular use.
LNG is also being developed as a transportation fuel for use in long-haul trucking and for
marine applications (ship propulsion). Each of these applications require micro-scale storage
and regasification systems to enable the LNG to be used directly by individual vehicles or
ships. Ongoing investment in research, development, and deployment of these technologies
is expected to make them increasingly available and cost-effective.

99

Confidential

New importing countries are also entering the market and competing for available supply. At
the end of 2014, 30 countries had regasification capacity with total capacity of just over 1
trillion cubic feet per year, compared with 14 countries and a capacity of 136 billion cubic
feet per year in 2006 (see Figure 5.10).188
Figure 5.10: Regasification Units 2006-2014

Source: The LNG Industry. 2006 to 2014 publications, http://www.giignl.org/publications, GIIGNL

Floating storage and regasification


A floating storage and regasification unit (FSRU) is an LNG tanker with onboard
regasification capabilities. These ships are either converted LNG carriers or purpose-built.
Although more expensive to build than a standard LNG carrier, FSRUs allow a country to
import LNG without building a land-based receiving terminal. Because the ship itself
provides LNG storage and the regasification, all that is needed is a jetty with connections to
a natural gas pipeline. As a result, they are a good alternative for LNG imports in areas with
space constraints. They can also be developed more quickly than land based systems, and
have been used as an initial import option while larger land-based terminals are developed.
FSRUs have a number of constraints as well. FSRUs have higher operating costs than landbased systems, as the on-board regasification systems tend to be less efficient than landbased options. They are also limited to the storage capacity onboard the ship, while landbased LNG storage systems can be tailored to the market needs and are often sufficient to
hold multiple ship-loads of supply. This storage limitation can make FSRU systems more
vulnerable to shipping delays or other disruptions in the supply chain.
The first FSRU is the Teesside GasPort at Middlesbrough, UK which came online in
February 2007. It has 138,000 cubic meters storage capacity and a maximum gas send out

188

The LNG Industry , GIIGNL, 2014, accessed 29 April 2015,


http://www.giignl.org/system/files/giignl_the_lng_industry_2013_0.pdf.

100

Confidential

rate of 600 MMcf per day (400 MMcf per day baseload rate).189 In 2008, FSRUs were added
in Argentina (the Bahia Blanca GasPort) and in the United States (the Northeast Gateway
port near Boston, MA). Four more FSRUs were added in 2009. By the end of 2014, there
were 20 large-scale FSRUs operating worldwide, with plans to expand in 2015.190 Global
FSRU capacity is about 44 mtpa, or roughly 6 percent of global regasification capacity.191
Eight more FSRUs had been ordered by the end of 2014 (three for delivery in 2015),
suggesting the market will continue to grow strongly in the coming decade.192
Most FSRUs are scaled to match LNG ship capacity, ranging from 126,000 to 290,000 cubic
meters.193 Similar to LNG carriers, smaller FSRUs are based on Type C vessel designs.
Costs of LNG storage and regasification facilities
In 2012, the average capital cost to build new on-shore gasification and storage terminals was
US$187 per ton of import capacity. Floating regasification terminals were slightly cheaper,
averaging US$135 per ton of import capacity. However, the cost of both technologies is
expected to increase in the near term, reaching close to US$200 per ton of import capacity in
the next few years.194 Smaller terminals will generally have higher cost per unit of throughput,
although savings can be made by simplifying the overall process and through the use of
ambient air vaporizers. Storage and regasification costs for a small scale land based terminals
are estimated to be higher on a per-unit basis. Table 5.2 shows a range of expected costs for
two terminal sizes.
Table 5.2: Cost Estimates for Small LNG Receiving Terminals
Terminal Storage
Capacity (thousand
cubic meters)

Throughput Rate
(Tonnes of LNG
per hour)

Suitable Range of
Power Generation
Capacity (MW)

Estimated Storage and


Regasification Cost (US$
per MMBtu)

15-30

11-25

100-240

$1.40-$1.90

30-50

21-44

250-500

$0.90-$1.70

Source: Klaus Gerdsmeyer & Michael Haid, LNG Import Schemes for Mediterranean Islands,
(presentation, GasTech 2009).

LNG regasification costs are also highly site specific. These costs are driven by the size of
the facility (there are economies of scale with the regasification process, particularly if it is
coupled with a power plant), the size of the storage tanks, and the regulatory requirements
for the particular host country (for example, receiving terminals in Japan are more expensive
owing to that countrys stringent safety and security requirements).195
189

Teesside GasPort, Excelerate Energy, accessed 29 April 2015, http://excelerateenergy.com/project/teesside-gasport.

190

The LNG Industry, GIIGNL, 2014.

191

World LNG Report 2014, International Gas Union (IGU).

192

The LNG Industry, GIIGNL, 2014.

193

The LNG Industry, GIIGNL, 2014.

194

World LNG Report, 2013 Edition, International Gas Union (IGU).

195

Andrew Inkpen & Michael Moffett, The Global Oil & Gas Industry: Management, Strategy & Finance, Chapter 9.

101

Confidential

Because the capital cost is a major component of the total cost of regasification, the
terminals utilization rate greatly affects the cost per unit of gas that is regasified. The global
average utilization for regasification terminal has historically been below 50 percent, owing
to the seasonal nature of many large LNG importing markets (for example, LNG helps to
serve winter heating demand for natural gas in Europe and North America). In 2014, the
global average utilization rate was consistently less than 50 percent due to the seasonal nature
of the gas market.196 This average hides a wide range in country level utilization, however: in
2013, the United States regasification capacity (120 mtpa, or close to one-fifth of the global
total) saw a utilization rate of just one percent, while the global utilization rate averaged 46
percent. By comparison, Japan averages a utilization rate of at least 48 percent. Japan has the
largest regasification market, at nearly 200 mtpa. Its capacity is growing, with one new
terminal completed in 2014 and four more under construction. China, one of the fastest
growing LNG importers, uses its 32 mtpa capacity 94 percent of the time.197
Caribbean countries can greatly reduce the regasification cost per unit of LNG by operating
their terminals at a high utilization rate. This can be achieved by carefully sizing the terminals
to the markets actual need and focusing natural gas supply on base load power generation
(which has a steady, highly predictable demand). There is a tradeoff, however, as sizing the
plant to minimize costs today may reduce its flexibility to expand and meet growing demand
in the future.
The proposed LNG import project for Martinique and Guadeloupe envisions using 25,000
cubic meter FSRUs to supply a 220 MW power plant on each island. The proposed design
would use two Type C cylinders to contain the LNG and could be permanently moored at a
finger jetty located near the power plant. With a draft of 7 meters (similar to the draft of the
proposed delivery ship), the design would not face the same port limitations as larger scale
ships.198
5.1.4 Cryogenic road tankers
Cryogenic road tankers are an option for distributing LNG to a variety of offtakers, once it
has been imported to the jurisdiction where it will be used. They are highly insulated tanker
trucks designed to transport LNG over land. They require an LNG loading facility which
can be a stand-alone small-scale liquefaction plant or can be incorporated with a larger scale
liquefaction plant or LNG import facility. Like sea-borne shipping, the primary technical
challenge for LNG road tankers is maintaining the LNG in a liquid state. Also similar to
larger scale LNG operations, road-based transportation also requires LNG storage and
regasification at the destination market. These facilities generally use AAV regasification
technologies since they are usually located inland without access to a water heat sink.
Road-based LNG transportation technology was originally developed in order to bring
natural gas to inland markets that were too small to justify construction of a pipeline or to
supplement available pipeline gas in order to meet seasonal or daily demand peaks.

196

World LNG Report, 2014 Edition, International Gas Union (IGU).

197

World LNG Report, 2014 Edition, International Gas Union (IGU).

198

Right Sized LNG: Putting Theory into Practice for the French Antilles, GasFin, (presentation, May/June 2011).

102

Confidential

More recently, intermodal LNG systems have been developed to take advantage of the
widespread availability of intermodal logistics facilities. In this application, LNG tanks are
built within a steel box framework and within the size specifications for 20-foot or 40-foot
containers. For example, a 20-foot version built by Wartsila, a company based in Finland,199
holds roughly 16 cubic meters of LNG, or the equivalent of 340,000 cubic feet of natural
gas. A 40-foot version holds 32 cubic meters, equivalent to 640,000 cubic feet of natural gas
(both at 80 percent of maximum gross capacity).200 These standardized containers can then
be shipped by truck, rail, ship or any combination of the three just like any other
containerized cargo.
Although multiple tanks can be linked for larger storage capacity, these systems are orders of
magnitude smaller than large-scale shipping and storage systems which measure storage
capacity in the thousands of cubic meters of LNG. As such, LNG containers would only be
suitable for the smallest scale power generation. For example, a modern 5 MW reciprocating
engine (the technology used in many of the smaller Caribbean islands), would consume a 40foot container worth of LNG in 16 hours of operations.201 This implies that containerized
LNG would be better suited to distributing natural gas to secondary demand centers, such as
industrial customers, or for transportation over very short distances.
Costs of cryogenic road tankers
Cost for smaller storage options can be substantially more than large scale tanks. Large scale
storage tanks (greater than 40,000 cubic meters) have been estimated to cost about US$600
to US$800 per cubic meter of storage for single wall tanks, rising to US$1,000 to US$1,500
per cubic meter for full containment tanks. Type C ISO vacuum insulated vessels (smaller
than 20,000 cubic meters) were estimated to cost between US$2,000 and US$3,000 per cubic
meter of LNG storage.202 Smaller ISO containers have the advantage of being able to be
moved if needed, and can be modularized to increase capacity steadily to meet growing
demand.
As an example, one project in Norway estimated the cost for a terminal with 9,000 cubic
meter storage capacity and average throughput of 564 cubic meters of LNG per day (such
that the terminal had 16 days of storage capacity) at US$39.7 million. Of this, US$24.1
million was for the terminal, US$2.0 million for the property/land costs, US$11.0 million for
the jetty, and US$2.6 million for permitting, legal, and financial costs.203
A paper written in 2009 suggests that a small satellite regasification and distribution terminal
would cost roughly US$1.92 million to build. The sample station had 500 cubic meters of
199

200

Wartsila Corporation is a company based in Finland that manufactures power generators and engines for marine and
industrial use. Wartsila Corporation, accessed 29 April 2015, http://www.wartsila.com/en/about/companymanagement/overview.
Increasing Flexibility in LNG Fuel Handlingthe LNGPac ISO, Wartsila Technical Journal, February 2013.

201

A 5 MW 8,000 heat rate reciprocating engine would consume 40 MMBtu of natural gas per hour of operation. Assuming
an energy content of the natural gas is 1,024 Btu/cubic feet, this is roughly 39,063 cubic feet of natural gas per hour. At
this rate, 640,000 cubic feet of natural gas is consumed in 16.384 hours.

202

Federico Martinez, Gas & Energy Solutions for the Caribbean: Small LNG Import Terminals. Are they feasible?
(presentation, GasEner, 3 May 2012).

203

Federico Martinez, Gas & Energy Solutions for the Caribbean: Small LNG Import Terminals. Are they feasible?
(presentation, GasEner, 3 May 2012).

103

Confidential

gross storage capacity (480 cubic meters max net), and a maximum send out capacity of
6,000 cubic meters of natural gas per hour (with an expected average send out of 3,200 cubic
meters per hour). The station was supplied by vacuum insulated road tankers, each with net
30 cubic meter capacity. Each truck was estimated to cost US$275,000, of which US$125,000
was for the truck chassis (with an expected useable life of 4 years) and US$150,000 was for
the cryogenic tank (with an expected useable life of 25 years). Operating costs were
estimated to be US$218,000 per year for the satellite regasification plant and US$60,000 per
year for each tanker truck.204 A 2010 study by the U.S. Pacific Northwest National Lab
suggested LNG filling stations cost between US$1 to 4 million, depending on their size.205
Chinese manufacturers currently offer cryogenic trucks for between US$100,000 and
US$150,000 FOB.206
Bringing cryogenic tankers to the Caribbean
Private companies have already been contracted to bring LNG to the Caribbean in ISO
containers. In 2011, Carib Energy LLC (now owned by Crowley Maritime Corporation, a
major shipping and logistics company), was granted authorization to export small amounts
of LNG in ISO containers to Free Trade Agreement countries within the Caribbean, Central
America, and South America. The authorization states Carib Energy would purchase LNG
from existing liquefaction facilities, transport it in containerized ISO vessels via rail or road
to suitable ports along the U.S. Gulf Coast, and export them via container ship. Total
exports were limited to 11.53 Bcf of natural gas per year, equivalent to roughly 17,000 ISO
tanks (at 10,000 gallon gross capacity).207 In 2014, Carib Energy entered into separate
contracts to supply LNG to two companies in Puerto RicoCoca-Cola and the
manufacturing plant for a major pharmaceutical company.208
Cryogenic tankers have the advantage of using existing logistics infrastructure (container
ships and ports, railroads, trucks) to transport LNG. They are also highly modular and so
can be scaled to exactly meet very small levels of demand. This can help increase the
utilization rate of the regasification facilities, helping to mitigate the higher cost per unit.
Their main disadvantage is their small size, making then unsuitable for all but small
distributed power generation plants. As such, they are better suited as an alternative
distribution technology once natural gas has been delivered to the primary market. This use
of the technology is discussed in greater detail in Section 5.4.

204

Enrique Dameno Garcia-Cuerva & Federico Sanz Sobrino, A New Business Approach to Conventional Small Scale
LNG, (presentation, IGU 24th World Gas Conference, Argentina, 2009).

205

GA Whyatt, Issues Affecting Adoption of Natural Gas Fuel in Light- and Heavy-Duty Vehicles, Pacific Northwest
National Lab Report No. PNNL-19745, September 2010.

206

Alibaba Group, accessed 21 January 2014,


http://www.alibaba.com/trade/search?fsb=y&IndexArea=product_en&CatId=&SearchText=cryogenic+tanker+truck.

207
208

FE Docket No. 11-71-LNG, DOE Office of Fossil Energy, 27 July 2011.


Crowley, Crowley Awarded Second Contract to Supply Commercial LNG to Major Pharmaceutical Company in Puerto
Rico. 17 November 2014. http://www.crowley.com/News-and-Media/Press-Releases/Crowley-Awarded-SecondContract-to-Supply-Commercial-LNG-to-Major-Pharmaceutical-Company-in-Puerto-Rico#.dpuf accessed 4 June 2015.

104

Confidential

5.2

Options for Transporting and Storing CNG in the Caribbean

Compressed natural gas (CNG) uses high-pressure pumps to reduce the volume of natural
gas to about 300 times its density under normal pressure,209 while leaving it in a gaseous state.
This technology allows greater volumes of natural gas to be stored and shipped than at
atmospheric pressure, but without the cost and technical challenges of liquefying the gas.
The primary technical challenge is to contain the high-pressure gas, requiring thick-walled
containment vessels built with high strength materials.
Although CNG has been used for decades, seaborne CNG is a much newer concept. The
lure of seaborne CNG is the dramatically lower cost of compressing gas relative to liquefying
it. The low cost of compression and relatively small facilities needed may also mean that
lower cost natural gas supplies may be available for compression than for LNG or pipelines.
For instance, stranded gas210 or some associated gas211 could be purchased by CNG suppliers
at low-cost in places where there are no pipelines or liquefaction capacity (including offshore
gas). The low cost of natural gas could dramatically reduce the delivered price of CNG
compared to other delivery options.
The tradeoff is that CNG ships are likely to be more expensive per unit of gas shipped.
Because shipping is the most expensive component for CNG, shipping distance has a large
impact on the final delivered cost. This suggests that the technology would be best suited for
smaller volumes delivered over shorter distances, making it a potentially suitable technology
for the Caribbean region.
This section describes the proposed technologies for transporting and delivering CNG,
including:
CNG carriers (Section 5.2.1)
CNG storage and off-loading system (Section 5.2.2)
CNG road tankers (Section 5.2.3)
Because there are no commercially operating ships purpose-built to transport CNG, the
analysis below relies extensively on information from the technology developers. The lack of
operational experience also means that there is substantial uncertainty regarding the actual
performance of the technology under real-world conditions.
5.2.1 CNG carriers
Several companies have competing designs for large-scale CNG ships, but none are in
commercial operation to date.212 CNG ships are essentially floating platforms for highpressure pipelines which require thick, high grade steel that is heavy and expensive. Each
209

Mallory, Ian, Natural Gas for the Caribbean: Perspective of a CNG Company. Sea NG. Developing a Caribbean
Region Natural Gas Market: Miami, Florida, June 2014.

210

Natural gas fields that would be inexpensive to produce, but are not close enough to transportation infrastructure or
large consumption markets to be economical.

211

Natural gas that is produced as a byproduct of drilling for oil. In many cases, this gas is flared, or simply burned, because
there is no economical way to transport it to buyers.

212

In a very small number of cases, CNG is transported in containers by ship. However, there are no operational purposebuilt CNG ships

105

Confidential

CNG ship will likely cost more than a typical LNG ship (particularly the first generation of
ships) and will be able to carry much less natural gas. As the technology matures, costs will
likely come down, but much additional investment and development is required before
seaborne CNG will be as readily available as LNG.
The first marine CNG operation, begun in 2014, puts CNG trucks on dedicated ferries. The
ferries move natural gas between two Indonesian islandsfrom Bintan to Batam (see Figure
5.11). A power plant on Batam uses the natural gas for electricity generation.
Figure 5.11: CNG Trucks Transported by Ferry in Indonesia

Source: Nurseffi Dwi Wahyuni

The first purpose-built CNG vessel is scheduled to enter into service in 2016, also in
Indonesia. CNG will be delivered from the island of Gresik to a power plant on the island of
Lombok. The ship will have a capacity of about 23 MMscf213 and is currently under
construction in China, at a cost of about US$200 million.214 CNG will be stored on the vessel
in small bundled bottles, as shown in the design in Figure 5.12.

213
214

OGE, Gresik CNG project kicks off. July 25-August 17, 2014.
World Maritime News, Hantong to build worlds first CNG carrier. 28 October 2014.
http://worldmaritimenews.com/archives/141078/hantong-to-build-worlds-first-cng-carrier/ accessed 5 June 2015

106

Confidential

Figure 5.12: Design of Gresik Marine CNG Vessel

Source: Sea NG

Three other examples of technologies that are being developed for sea-borne CNG are:
SeaNG Corporations Coselle System,215 which uses modules of coiled highpressure pipes to store the CNG for shipping
EnerSea Transport, LLCs VOTRANS (Volume Optimized Transport and
Storage) technology,216 which cools the natural gas to -30 degrees Celsius to allow
a greater compression ratio at lower pressures
Compressed gas liquid (CGL)Sea One Corporations CGL technology mixes
the natural gas to be transported with a liquid hydrocarbon at low temperature
and moderate pressure in order to create a saturated solution.
Below we describe each of these three technologies.
SeaNG Corporations Coselle System
Coselle CNG ships use modules of coiled steel pipes which are used to store the natural gas
at high pressure. Each Coselle module consists of 13 miles of coiled six-inch diameter pipe
that is held within an octagonal frame. Each module can hold the equivalent of four MMscf
of natural gas at ambient pressure.217 These modules can then be permanently mounted
within a ship hull, with the number of modules determining the total capacity of the ship.
215

Coselle System Overview, Sea NG, accessed 29 April 2015, http://www.coselle.com/coselle-system/overview.

216

Cost Effective Technology, EnerSea Transport LLC, accessed 29 April 2015, http://enersea.com/cng-technology/.

217

The Coselle, Sea NG, accessed 29 April 2015, http://www.coselle.com/coselle-system/the-coselle.

107

Confidential

SeaNG has designed ships with between 16 and 128 Coselle modules (total capacity range of
65 to 531 MMcf), the smallest of which has been fully approved for construction by the
American Bureau of Shipping (ABS).218 Table 5.3 shows the technical characteristics of the
range of ships that SeaNG has proposed.
Table 5.3: SeaNG Coselle Ship Characteristics
Ship Type

C16

C20

C25

C30

C36

C42

Gross Capacity
(MMscf)

65

80

100

120

145

170

Number of Coselles

16

20

25

30

36

Length OA (m)

136.5

136.5

155.6

158

Breadth (m)

23.5

23.5

23.5

Load Draft (m)

7.25

C84

C112

C128

350

465

531

42

84

112

128

179.5

201

233.5

257

278.5

28

28.5

29

46

46

48

8.15

8.35

8.7

10.5

10.5

Source: SeaNG (http://www.coselle.com/coselle-system/coselle-ship)

Sea NG is a Canadian company, founded in 2005, specifically to implement international


marine CNG projects using its proprietary Coselle system. It is backed by the Sea NG
Alliance, which includes Enbridge, a Canadian oil and natural gas pipeline and distribution
company; Marubeni, a Japanese trading and investment company; and Teekay, a major oil
and LNG shipping company.219 The Sea NG Alliance is focused on developing marine CNG
projects ranging in size from 20 to 500 MMscf per day and over ocean distances ranging
from 50 to 1,100 nautical miles. The primary target market is stranded small-scale off-shore
natural gas resources that are too small to economically develop and bring to market using
pipelines or a floating liquefaction facility that would allow the gas to be shipped to market
as LNG.
EnerSea Transport LLCs Volume Optimized Transport and Storage Technology
The VOTRANS containment system slightly cools the natural gas (to roughly -30 degrees C)
in order to increase the compression of the gas at lower pressures. The approach uses
roughly half the pressure of standard CNG (1,875 psi or 125 atmospheres), resulting in lower
compression costs during loading and lighter ships as the containment vessels do not have to
be as robust (therefore allowing thinner walls and less steel). The offloading system uses a
liquid to force out the gas. This helps to remove a greater share of the shipped gas (98
percent versus 85 to 90 percent for standard CNG). It also operates at lower pressure,
reducing the need for high-pressure pumps and gas scavenging pumps at the delivery point,
although it does require additional systems to handle the liquid and ensure it is fully removed
once off-loading the natural gas is complete.220 The system uses an array of storage cylinders
linked together in multiple tanks within a common pressure environment and controlled by
218

Coselle CNG Ships, Sea NG, accessed 29 April 2015, http://www.coselle.com/coselle-system/coselle-ship.

219

Press Release: Enbridge joins Marubeni, Teekay and Sea NG, Sea NG, accessed 24 April 2015,
http://www.coselle.com/resources/press-releases/enbridge-joins-marubeni-teekay-and-sea-ng.

220

Gas Containment System, EnerSea Transport LLC, accessed 29 April 2015, http://enersea.com/cng-technology/gascontainment-system/.

108

Confidential

the same valving, and stacked in tiers such that multiple tanks can load and offload together.
The storage cylinders are placed in an insulated cargo hold that is cooled with dry nitrogen
and refrigeration coils. The number of tanks can be tailored to the specific storage capacity
required, making the ship design easily scalable.221
EnerSea Transport LLC,222 a U.S. company based in Texas, suggests the VOTRANS
technology can be used to transport natural gas across distances between 50 and 2,500
nautical miles.223 Two ship sizes are envisioned: a gas carrier with capacity ranging between
75 MMcf to 1.0 Bcf of natural gas with a throughput capacity of 50 to 300 MMcf per day,
and a shuttle barge system with capacity of between 20 and 100 MMcf of natural gas and a
throughput capacity of 7 to 100 MMcf per day. Enersea Transport has received Approval in
Principle from ABS and Lloyds Register, but is still in the process of obtaining final
certification.
Compressed Gas Liquid
The third CNG technology, known as Compressed Gas Liquid (CGL) is a proprietary
process owned by SeaOne Corporation. In this process, hydrocarbon gases are infused into a
liquid hydrocarbon solvent (often other natural gas liquids that can be used for other
purposes at the delivery point). The solution is partially cooled and pressurized to increase
the volume of gas that is absorbed by the liquid solvent (indicative values are cooling to
approximately -40 degrees C and pressurizing to roughly 100 atmospheres [1,400 psig]). This
process allows a greater volume of gas to be shipped without liquefaction or high-pressure
compression, and can save shipping costs by essentially shipping two products (the
hydrocarbon gas and the hydrocarbon liquid) together. However, it does require additional
steps to first infuse the gas within the liquid solvent, and then extract it from the solvent at
the delivery point. Ship-board containment systems are pipe-based, similar to the CNG
systems described above, although they do not have to withstand the higher pressures
required for pure CNG.224 Jamaicas aluminum smelters considered CGLs to deliver natural
gas to the island in the past, though there is no information that they have moved forward
with this project since 2013.225
SeaOne suggests the technology can be used to transport natural gas across virtually any
distance, being most cost effective for distances between 50 and 3,000 nautical miles.226 Two
ship sizes are envisioned: a gas carrier with capacity ranging between 0.5 to 2.2 Bcf of natural
221

Meeting Your Customized Natural Gas Supply and Delivery Needs, EnerSea Transport LLC, accessed 29 April 2015,
http://enersea.com/cng-technology/project-services/.

222

Enersea Transport, LLC is a U.S. company founded in 2001 and based in Houston Texas. Company shareholders and
development partners include Mitsui & Co, a Japanese trade and investment conglomerate; K Line, a Japanese
shipping company, and Tanker Pacific, a Singaporean energy shipping company.

EnerSea Board of Directors, EnerSea Transport LLC, accessed 29 April 2015, http://enersea.com/about/board-ofdirectors/.
223

Meeting Your Customized Natural Gas Supply and Delivery Needs, EnerSea Transport LLC.

224

SeaOne Maritime Corp, accessed 29 April 2015, http://www.seaonecorp.com/.

225

226

Jamaican Alumina Refineries to Shift to Gas, LNG World News, 1 May 2013, accessed 29 April 2015,
http://www.lngworldnews.com/jamaican-alumina-refineries-to-shift-to-gas/.
SeaOne Maritime Corp, accessed 29 April 2015, http://www.seaonecorp.com/.

109

Confidential

gas (the upper range being similar to full scale LNG carriers), and a shuttle barge system with
capacity of between 0.15 and 0.8 Bcf of natural gas. In addition, SeaOne envisions designing
a gas offloading vehicle, similar to an FSRU, which could be used in place of on-shore
facilities. The ship designs would be based on existing hull designs. They have received
Approval in Principle from ABS and Lloyds Register, but are still in the process of obtaining
final certification.227
Cost estimates for these technologies are highly speculative. Sea NG presentations suggest a
350 MMcf carrier (a C84) would cost roughly US$210 million.228 An MIT study of natural gas
export options for an off-shore natural gas field in Cyprus estimated the infrastructure to
compress and ship 300 MMcf per day of gas to Greece using a Sea NG Coselle system
would have a capital cost of US$1.7 billion and operational costs of US$0.45 per MMBtu.229
This translated to US$5.86 per MMBtu delivered price, based on an upstream cost of
US$2.50 per MMBtu. However, the study notes that these costs are based on data provided
by Sea NG and so may be biased.
No commercial ships using any of the three technologies noted above have been built to
date. As a result, there is greater risk to relying on these technologies rather than the more
mature LNG-based technologies. Risks include delays in construction, problems arising from
long-term operations, a limited number of suppliers for technical support, repairs, or
replacement equipment. Any cost savings that may come from using new technologies such
as those noted above should be sufficient to outweigh these additional risks.
5.2.2 CNG storage systems
For the proposed sea-borne CNG technologies noted above, the transportation ship itself
would serve as storage, remaining at dock until its load had been consumed. Unloading
CNG from the Coselle system simply requires a high pressure gas handling system to reduce
the pressure of the outflowing gas to match the requirements of the destination pipeline
system or final consumer. As a result, Coselle CNG ships do not require large shore-based
facilities and can link directly to the final market. VOTRANS and CGL based systems
require additional liquids handling systems to unload the natural gas, but also do not require
high pressure gas handling equipment.
5.2.3 CNG road tankers
CNG road tankers are similar in size to LNG tankers, with standardized 20-foot and 40-foot
sizes. They are used to transport natural gas at high pressure, generally between 200 to 248
bar (atmospheres), or 2,900 to 3,600 pounds per square inch (psi). Compressing natural gas
under high pressure reduces its volume to roughly 1/200th of its original volume at
atmospheric pressure. Liquefying the gas, by comparison, reduces the volume to roughly
1/600th. Therefore, CNG tankers can carry roughly one-third the volume of natural gas that
a similarly-sized LNG tanker can carry. A fully loaded jumbo tube CNG trailer (roughly
equivalent to a 40-foot container) has a gross capacity of 166,000 cubic feet of natural gas,
227

SeaOne Maritime Corp, accessed 29 April 2015, http://www.seaonecorp.com/.

228

Floating CNG: A less expensive way to monetize offshore gas, Presentation, Eastern Mediterranean and North Africa
Forum (Rome, 28 February 2012).

229

Interim Report for the Study Natural Gas Monetization Pathways for Cyprus: Economics of Project Development
Options, MIT Energy Initiative, August 2013.

110

Confidential

although its effective useable capacity is only 140,000 cubic feet.230 This scale is not suitable
for utility scale power generation, even for the smallest Caribbean markets. For example, the
5 MW reciprocating engine used in the LNG example above would consume a trailer of
CNG in just 3.5 hours.
Although not suitable for utility-scale power generation, CNG road tankers could be used to
distribute natural gas to secondary demand centers, such as a filling station for vehicular
natural gas or an industrial customer for on-site use or electricity self-generation. CNG tanks
are better suited for use as a back-up fuel than LNG because CNG can be stored for long
periods while LNG is continually boiling off, limiting the amount of time it can be left in
storage.
Shipping CNG by road follows similar cost dynamics as shipping it via the sea: compression
and decompression stations are less expensive than their LNG analogs, but transportation
vessels are more expensive. CNG compression stations and fueling stations are estimated to
cost between US$400,000 and US$2 million depending on their size and fill-speed (fast fill
versus standard).231 CNG road tankers, however, are more expensive than LNG tankers, with
Chinese manufacturers pricing them at $200,000 to $250,000 per unit FOB.232

5.3

Options for Transporting Natural Gas in Pipelines

Natural gas pipelines are also a well-established technology deployed worldwide with
multiple equipment providers and operators. The main technical challenge to transporting
natural gas via pipeline is to contain the natural gas and induce it to move along the length of
the pipe. This is done with compression stations located along the length of the pipeline and
by constructing the pipelines with high strength steel tubes to manage the pressures
involved. The volume of gas transported is determined by the diameter of the pipeline and
the amount of pressure applieda larger pipe, or higher pressure, can increase the pipelines
throughput.
Natural gas pipelines have the advantage of allowing gas flow to reverse more easily than
with LNG or CNG, but are not as flexible in linking multiple sources of supply with
multiple demand centers. Therefore, pipelines are vulnerable to problems with supply
availability at their point of origin or changes in demand at the point of delivery. In addition,
the capital cost to build a pipeline is largely driven by the pipeline length with relatively little
variation from changes in the pipeline diameter (and, thereby, capacity to move natural gas).
As such, the cost per unit of natural gas transported can increase significantly for smaller
diameter pipelines.
The cost to build on-shore pipelines in the United States is estimated to be US$2.8 million
per mile for large diameter pipelines (20 to 42 inches), US$2.2 million per mile for lateral

230
231

232

Marlin CNG Services, accessed 29 April 2015, www.marlingas.com/faq.html.


Whyatt, GA. Issues Affecting Adoption of Natural Gas Fuel in Light- and Heavy-Duty Vehicles Pacific Northwest
National Lab Report No. PNNL-19745, September 2010
Alibaba Group, accessed on 29 April 2015, http://www.alibaba.com/showroom/cng-tube-trailer.html

111

Confidential

pipelines (6 to 24 inches), and US$100,000 per mile for small diameter gathering pipelines
(0.5 to 6 inches in diameter).233
Undersea pipelines can be far more expensive. A recent study performed by the MIT Energy
Initiative analyzing gas monetization options for Cyprus noted that the cost for recent
undersea pipelines in Europe averaged nearly US$6.6 million per mile.234 The study examined
the cost to build five pipelines in Europe, as shown in Table 5.4 below.
Table 5.4: Undersea Pipeline Costs
Pipeline Name

Date
built

Undersea Diameter Undersea Capacity US$ per US$ per


Cost
mile inch-mile
Length (inches)
(Bcm per
(miles)
year)
(US$ bn)

Trans-Med (2 pipes)

1983
1997

248

2x20

1.5

30.2

6,774,194 338,710

Blue Stream

2002

633.6

24

1.7

16

6,868,687 250,421

Medgaz

2010

336

24

0.882

6,720,000 245,000

South Stream (3 pipes) 2015

1480

3x32

13

63

7,495,495 204,955

Nord stream (3 pipes) 2012

1,955

3x48

11.44

55

4,992,908 91,017

Average

6,570,257 226,020

Source: Interim Report for the Study Natural Gas Monetization Pathways for Cyprus: Economics of Project
Development Options, MIT Energy Initiative, August 2013.

Each of these pipelines is significantly larger than would be built to serve Caribbean markets.
Even so, the data shows a clear trend toward higher costs per inch-mile (that is, per mile of
pipeline length and per inch of pipeline diameter) for smaller diameter and shorter distance
pipelines.
Undersea pipelines also face water depth limitations. Blue Stream is among the deepest
pipelines currently operating, with a maximum depth of roughly 2,200 meters. The deepest
proposed pipeline in the world, is 2,900 meters underwater.235
Water depths in much of the Caribbean ocean are in excess of 4,000 meters and so preclude
the construction of submarine pipelines. Potential pipeline routes that would be technically
feasible include from Florida to The Bahamas, from Trinidad and Tobago or Venezuela to
the smaller islands in the Eastern Caribbean ranging from Grenada to as far as Puerto Rico
and the island of Hispaniola, and between Hispaniola and Jamaica.
Although certain routes would be technically feasible, submarine pipelines would face strong
economic challenges in the Caribbean. For many of the potential routes, several countries
233

Black & Veatch, Jobs & Economic Benefits of Midstream Infrastructure Development: US Economic Impacts
Through 2035, INGAA Foundation, 15 February 2012.

234

Interim Report for the Study Natural Gas Monetization Pathways for Cyprus: Economics of Project Development
Options, MIT Energy Initiative, August 2013.

235

Technip to lay the worlds deepest gas pipeline, for Shell in the Gulf of Mexico, Technip, accessed 12 March 2014,
http://www.technip.com/en/press/technip-lay-world%E2%80%99s-deepest-gas-pipeline-shell-gulf-mexico.

112

Confidential

would need to be linked together in order to reach a sufficient scale to justify the pipelines
capital cost. Developing a complex project with multiple offtakers is more challenging than
one that serves a single market, potentially delaying the projects implementation. Linear
pipelines linking multiple markets are particularly challenging to develop, as each market
relies on the rest to ensure gas supplies are not interrupted. For this reason, pipelines can
provide less security of supply than more flexible technologies, such as LNG.

5.4

Cost Comparison of Delivering LNG, CNG, and Natural Gas by


Pipeline

To compare the cost of delivery for each technology, we assumed a uniform price of natural
gas, and calculated the price of delivery based on each segment in the supply chain (including
a weighted average cost of capital (WACC) of 10 percent. Our cost estimates for each part of
the supply chain were based on data from existing projects and sources for LNG and
pipelines. For CNG, we estimated costs based on projections from CNG shipping
companies, since no ships have been built yet specifically to transport and store CNG. To
compare costs of the delivery technologies from the potential supply points, the upstream
costs are identical regardless of the technology used to transport the gas to market.
These estimates serve to compare costs between the delivery technologies from the potential
supply points, and are not a forecast for the actual final delivered price for natural gas. This
is because the actual final delivered price for natural gas in the Caribbean will depend on
global and local supply and demand for natural gas, as well as regional market trends and
developments in the LNG and CNG markets. There will also be commercial challenges to
securing fuel supply and logistics contracts, particularly for smaller consumers. We explore
these market trends for LNG, which we judge to be the most likely technology for delivering
natural gas in the Caribbean, more in Section 6.
In addition, the cost of all technologies is highly dependent on site and project specific
factors and so any estimate prior to front end engineering studies will have a wide range of
uncertainty. However, the cost differences for these technical reasons across all calculated
routes and technologies are likely within this range of uncertainty.
For each technology, the cost to deliver natural gas to each market is estimated to be the
sum of the cost to acquire and supply the natural gas to the export point (upstream costs),
the cost to prepare the natural gas for export (liquefaction for LNG, compression for CNG,
and no preparation for pipelines), the cost to transport the natural gas (as LNG, CNG, or via
pipeline), and the cost to deliver the natural gas to the destination point (off-loading and
regasification for LNG, off-loading and decompression for CNG, and no special processing
for pipelines).
In most cases LNG is likely to be the least-cost technical option for delivering natural gas
(Table 5.5). The exceptions are some countries where pipelines could be lower cost, and the
Dominican Republic, where CNG could be lower cost. In the Dominican Republic, the
technology and price risk surrounding CNG likely makes LNG a more attractive option.
Pipeline costs are lower than LNG for Grand Bahama only if it is part of a pipeline that
continues to New Providence. However, Grand Bahama would have to coordinate with
New Providence to build the pipeline, and New Providence would likely prefer to use LNG,
its least-cost option, rather than coordinate with Grand Bahama to build a pipeline to both
islands. A pipeline that only reaches Barbados from Trinidad and Tobago would be about

113

Confidential

the same cost as importing natural gas as LNG. However, this option would tie Barbados to
a single supplier with limited natural gas resources, meaning that LNG is likely a better
option. For a pipeline that reaches both Guyana and Suriname, the cost of natural gas would
be about the same delivered as LNG for both countries. However, building a pipeline would
require complex coordination and tie each country to a single supplier and each other. As
such, importing LNG is likely a better option for both.
Table 5.5: Estimated Final Delivered Cost of Natural Gas
Price for LNG
(US$/MMBtu)

Price for CNG


(US$/MMBtu)

Price via pipeline


(US$/MMBtu)

The Bahamas, New Providence

8.7 11.3

9.7 13.4

15.43

The Bahamas, Grand Bahama

10.1 12.6

16.9 19.1

6.6 11.7

Barbados

9.1 12.2

10.9 19.2

10.3

Belize

13.5 17

71.4 73.6

Dominican Republic

8.1 10.6

7.2 10.5

9 12.2

13.3 18.4

Haiti

8.9 11.3

9.2 13.6

Jamaica

8.2 10.7

8.2 11.8

Suriname

8.8 12.0

8.7 18.0

Guyana

Note:

9.4 18.0

8.5 8.7

Costs are the range of estimate costs from the seven supply points: U.S., Sabine Pass; Canada,
Guysborough; U.S., South Florida; Mexico, Altamira; Trinidad, Point Fortin; Venezuela, Guiria;
Colombia, Covena. These costs were calculated assuming that natural gas acquired prices would be
linked to Henry Hub, at a price of US$4.21 per MMBtu in 2018. The acquired prices used for each
point of supply can be found in Appendix J.

Within each transportation technology option, the range of calculated costs to deliver natural
gas from the six potential supply sources does not vary dramatically. The average range from
the most expensive source to the least expensive source for LNG is US$2.85 per MMBtu.
The average range for CNG is US$4.65 per MMBtu. It is wider given the greater influence of
shipping distance on overall costs. This suggests that any supply source within the region
could potentially compete with U.S. Gulf Coast exports, meaning that the timing of available
supplies will play an important role. Out of all the supply points, Canada is the most
expensive source, because of a higher premium over Henry Hub and higher shipping costs.

5.5

Options for Distribution Infrastructure

Natural gas distribution grids connect to consumers underground through short lateral lines
that branch from a main pipeline running underneath the street. Although the pipelines are
small (generally less than 6 inches in diameter) and are not operated at significantly high
pressure levels, they are very time and labor intensive to install. Building underground
pipelines to connect individual natural gas consumers to natural gas supplywhether it be
an industrial site, a retail filling station for vehicular use, or individual households or
businessis therefore prohibitively expensive.

114

Confidential

The difference between average wholesale and retail natural gas prices in the United States
can give a sense of the scale of the costs involved in reaching these consumers. In 2012, the
average wellhead price of natural gas in the United States was US$2.66. The citygate price,
that is, the cost of gas where it leaves the main gas pipeline system and enters a city
distribution grid, was US$4.71. This implies a cost of US$2.05 on average to move the gas
from the point of production to the consuming city via large-scale pipelines. The average
price of natural gas for a residential customer was US$12.09, some US$7.38 greater than the
citygate price and nearly five times the cost at the wellhead.236 The final step of distributing
natural gas to the residential customer is the most expensive stage of all, even in a market
like the United States, where natural gas is used for winter heating and per household
consumption is much higher.
The cost to install distribution lines is highly site specific. A rough proxy is the cost to install
gathering lines in natural gas production fields which connect individual production wells
with larger transportation pipelines. These gathering lines are generally slightly larger
diameter and higher pressure than city distribution grids, and are not required to be built
beneath existing streets and other infrastructure, but they do give an estimate of the related
costs. Gathering lines cost around US$100,000 per mile to install. Per capita residential
consumption will be quite low in the Caribbeanin Florida, annual residential consumption
averaged just 0.8 MMBtu per year in 2009,237 and Caribbean consumption will likely be
lower. The volume throughput of the distribution pipeline will depend on how densely
populated the urban region is, but even if it is able to reach 1,000 households per linear mile,
the total is less than 1 MMcf per year of natural gas consumption. Assuming 1 MMcf per
year of throughput for each mile of distribution pipeline built at a cost of US$100,000, the
tariff just for the distribution system would be roughly US$20 per MMBtu. This cost would
be added onto the cost to transport natural gas to the country.
Examples from other regional countries with similar income levels and climates can also
indicate the likely cost to build distribution grids for residential consumers in the Caribbean.
In Mexico, natural gas distribution companies were granted concessions to build distribution
networks for residential and commercial consumers within exclusive regions for selected
cities in the late 1990s and early 2000s. Distribution charges for these concessions are
regulated to provide an adequate return on the investment incurred to build the network.
Table 5.6 below shows the most recent wholesale cost for natural gas, distribution charge,
and total price to the final consumer for residential consumers in selected distribution zones
in Mexico.

236

EIA Natural gas price data, U.S. Energy Information Administration, January 7, 2014 release,
http://www.eia.gov/dnav/ng/ng_pri_sum_dcu_nus_m.htm.

237

Florida Residential Energy Consumption, US Department of Energy, accessed 24 January 2014


http://apps1.eere.energy.gov/states/residential.cfm/state=FL#ng.

115

Confidential

Table 5.6: Sample Mexico Residential Natural Gas Tariffs (US$ per MMBtu in March,
2014)
Distribution Company
Ecogas Mexico
Gas Natural Mexico
Compaia Nacional de Gas
Ecogas Mexico
Gas Natural Mexico
Gas Natural Mexico
Gas Natural del Noroeste
Gas Natural Mexico
Tamauligas
Compania Mexicana de Gas

Location

Wholesale

Durango
Nuevo Laredo
Piedras Negras
Chihuahua
Toluca
Monterrey
Hermosillo
Saltillo
Northern Tamaulipas
Monterrey

5.91
5.63
5.89
5.91
7.07
5.63
5.61
5.54
5.54
5.54

Distribution
Charge
16.23
13.43
10.65
10.51
9.18
10.28
10.28
10.02
7.89
5.13

Total
22.14
19.06
16.54
16.42
16.25
15.92
15.90
15.56
13.42
10.67

Source: CRE, accessed 27 March 2014, http://www.cre.gob.mx/pagina_a.aspx?id=15.

The distribution charge ranges between US$5 per MMBtu to as high as US$16 per MMBtu,
with the majority of distribution charges near US$10 per MMBtu. This means that roughly
two-thirds of the final cost paid by the end consumer is the distribution charge.
In Colombia, the final price of natural gas for residential customers is calculated as the sum
of the cost of natural gas supply at the wellhead, the cost to transport the natural gas to the
citygate, the cost to distribute the natural gas, and the cost to commercialize the natural gas.
Each of these factors are priced in Colombian pesos per cubic meter, with the exception of
the commercialization charge which is a fixed fee per month. In addition, distribution
charges are adjusted for different consumption classes in such a way that higher income
consumers cross subsidize lower income consumers.
Using reported residential tariffs for January 2014 and average monthly consumption to
convert the fixed charges into an equivalent cost per MMBtu resulted in a total final price to
the consumer that ranged between US$7.40 per MMBtu and $25.40 per MMBtu. Of this
total, the combined distribution and commercialization charges ranged from just under $5
per MMBtu to as much as $20 per MMBtu with an average cost of roughly $10 per
MMBtu.238
In short, pipeline distribution infrastructure will likely be very expensive to build and is
therefore highly unlikely to be built in the Caribbean, except for sufficiently large customers,
such as an industrial site, that are located close to the port through which the natural gas is
imported. As noted earlier, distribution via LNG or CNG is likely to be a more feasible
238

Data is from CREG, the Colombian natural gas regulator. Calculated using data from Colombias Sistema
Unica de Informacion http://www.sui.gov.co/SUIAuth/logon.jsp). The average monthly bill is
calculated based on an average monthly consumption of 20 cubic meters of natural gas (roughly 0.725
MMBtu), as reported by the SUI data. The distribution charge for each consuming class contains a
variable and fixed fee component, but CREG also reports an all-in average distribution charge that
companies must use to calculate variations in the fixed and variable charge. This average distribution
charge set in Colombian pesos per cubic meter was used to calculate the values reported here.

116

Confidential

option for larger secondary customers, and is already being done in the Dominican Republic
(see Appendix D).

5.6

Conclusion: LNG is likely the Best Technical Option for


Delivering Natural Gas to the Caribbean

LNG is the most likely technology to deliver natural gas in the Caribbean because it is a
mature and proven technology, because it is more flexible than either CNG or pipelines, and
because it is likely the cheapest technical option for nearly all countries. However, market
developments, particularly as CNG develops, could make other technical options less
expensive for some countries.
LNG offers greater flexibility than CNG or pipelines
LNG is available in sizes appropriate for the variety of Caribbean markets. Further, LNG
imports can provide greater protection against counter-party risk than either pipelines or
CNG imports because LNG can be shipped from any number of potential suppliers. Should
one supplier or purchaser be unable to meet its obligations, cargoes can easily be redirected
from or to another. Pipelines by definition connect a supply point with a demand point, and
so have much less flexibility. In addition, pipelines that connect multiple markets rely on the
ongoing cooperation of each participant to ensure natural gas supplies continue to flow.
CNG can theoretically be sourced from multiple suppliers, but the higher shipping cost and
lack of other commercial projects limits this flexibility in practice. LNG is a well-established
technology that has been used on a global scale for decades, and so is best able to take
advantage of this flexibility.
LNG-based transportation technologies are more mature at all scales than CNGbased transportation
Technological development and deployment of suitably scaled LNG is far more widespread
than CNG and is developing more rapidly than CNG (particularly in shipping). Using CNG
could pose technology risk as the project would be one of the first commercially deployed in
the world. In addition, a CNG supply chain would require dedicated ships built specifically
for the project. This implies less flexibility in adding or redirecting individual cargoes or in
negotiating shipping rates and supply costs.
LNG is likely the least expensive option for natural gas delivery in the Caribbean
In almost all cases, LNG is projected to be either the least-cost delivery option or
competitive with another delivery option. For Grand Bahama, a pipeline would likely be
cheaper than LNG, but only if it continued to New Providence, and such a project would
not likely be the cheapest option for New Providence. In Guyana, Suriname, and Barbados,
pipelines are estimated to be cost competitive with LNG, but are less flexible and would
require more coordination.
CNG is forecast to be higher cost for every country except for the Dominican Republic, but
cost uncertainty and technology risk is high, since no ship has been purpose-built to
transport CNG. Cost estimates for CNG could rise or fall as the technology and market
develop. For example, as described above, CNG suppliers could offer gas at much lower
price than LNG if they are able to source low-cost gas reserves. This could make it the leastcost option for one or more offtakers, especially if the CNG supplier is supplying gas from a
field close to the offtaker.

117

Confidential

The LNG Supply Chain

Based on our conclusion that LNG is likely to be the best technical option for delivering
natural gas to the Caribbean, we developed a more detailed model of the costs and prices of
delivering LNG under three market scenarios. We then estimated the final delivered cost of
LNG for each country under each market scenario. This analysis is presented in Part III.
This section describes the market players that would be required to deliver LNG to the
Caribbean, for each step in the supply chain (Section 6.1). It also analyzes the likely pricing
mechanism for natural gas, which will depend on the relative bargaining strength of the
buyer and seller, as well as the cost of production (Section 6.2).
Then, this section describes the specific assets and technologies for each link in the LNG
supply chain; some are specific to the project in question and others are shared. For each, we
describe the most appropriate technology for the region, the investment required to build or
acquire the specific assets that are needed, and the likely operating costs associated with each
(Section 6.3).
Finally, this section explains the process that countries should take when making the decision
to import natural gas (Section 6.4). The decision should be made with a methodology that
ensures that countries are receiving natural gas at a price that is lower than that of fuel oil.

6.1

Market Activities and Participants Required for Delivering and


Regasifying LNG in the Caribbean

Delivering LNG to offtakers in the Caribbean (in addition to those with existing LNG
facilities in the Dominican Republic and Puerto Rico), requires market agents that will carry
out the following activities:
(a) Produce natural gas
(b) Transport natural gas to a liquefaction facility
(c) Liquefy natural gas
(d) Ship LNG from the liquefaction facility to the regasification facilities (in most
cases, large scale vessels, with capacity greater than 140,000 cubic meters, would
be used for this activity)
(e) Re-gasify LNG
In addition, one or more entities must take ownership of the LNG. Finally, once the LNG
has been regasified, it can be used as natural gas to generate electricity or other uses.
The first two activities, (a) and (b), will take place independently of the market in the
Caribbean (the market is too small to affect market agents in those activities), so its not
necessary to take into account the investment costs related to these two activities for the
purposes of this report. We assume that these two activities can be contracted at a price per

118

Confidential

MMBtu. It is likely, but not a given, that liquefaction would be performed by an entity that
does not ship LNG from the liquefaction facility to regasification facilities.239
Shipment from liquefaction to regasification and the regasification itself could be performed
by one or more entities. For example, one company could be responsible for purchasing
LNG and shipping it to the regasification facility, with another company (most likely the
offtaker) being responsible for regasification.
Delivering LNG to some offtakers in the Caribbean with relatively small volumes of demand
most likely requires modifying the above-referenced list of activities as follows:
(a) Produce natural gas
(b) Transport natural gas to a liquefaction facility
(c) Liquefy natural gas
(d1) Ship LNG from the liquefaction facility to a transshipment hub (in most
cases, large scale vessels, with capacity greater than 140,000 cubic meters, would
be used for this activity)
(e1) Transship LNG to smaller scale vessels
(f1) Ship LNG from the transshipment hub to the regasification facility (in most
cases, ships with capacity of between about 5,000 and 50,000 cubic meters would
be used for this activity)
(g1) Regasify LNG
As above, it is likely, but not a given, that liquefaction would be performed by an entity that
does not perform activities (d1) to (e1). Furthermore, activities (d1) to (g1) could be
performed by one or more entities.
Fulfilling these activities will involve a number of market agents, each with specific
capabilities and characteristics. These market agents can be a mix of private sector
companies, public sector entities, and public-private partnerships. The market agents
involved in each activity along the commercial chain will in turn be linked through a
combination of relationships defined by ownership and contractual structures, as well as
regulatory and financial structures.
These market agents, and the requirements for each, include:
Wholesaler of natural gas. This agent provides the natural gas that is to be
liquefied and transported to the Caribbean market. Requirements for natural gas
wholesalers include availability of sufficient natural gas volumes within the time
period (both physical availability and contractual availability), authorization to
export to the Caribbean (for any countries with export restrictions), and the ability
and willingness to sell smaller volumes of natural gas on a firm basis for the long
term

239

Liquefaction facilities in the U.S. must have approval from the U.S. Department of Energy to export the LNG. As of
June 2015, nine projects had been given final approval by the DOE to export to non-FTA countries, with the first
scheduled to begin operations by the end of 2015.

119

Confidential

Liquefaction service provider. This agent owns the liquefaction assets that
convert the natural gas into LNG for shipping. The agent may be the operator of
the asset, or may subcontract the terminals operations to a third party. The agent
may also be the natural gas wholesaler, taking ownership of the natural gas prior
to it being liquefied, or it may act solely as a tolling station, providing liquefaction
services without taking ownership of the natural gas as it passes through the
terminal. In order to serve the Caribbean market, these agents must have
sufficient liquefaction capacity available in the required timeframe to meet the
demand of the Caribbean market, have suitable port facilities to accommodate
smaller LNG vessels, and be willing to enter into long-term supply contracts for
smaller volumes of LNG. Appendix K presents existing and planned liquefaction
projects that could supply the Caribbean with LNG
Integrated energy companies and LNG Aggregators: These market agents
play a middle-man role by aggregating LNG supply from multiple sources (also
known as LNG portfolio companies), aggregating demand for LNG from
multiple offtakers, or both. Integrated energy companies may own one or more
liquefaction assets, LNG carriers and, potentially, regasification terminals as well.
Pure aggregators contract for capacity at liquefaction terminals or in regasification
terminals without directly owning either type of asset. In order to play a role in
the Caribbean, these agents must be able and willing to enter into long-term
contracts for LNG supply for relatively small volumes, and be able and willing to
enter into long-term LNG sales contracts with multiple offtakers based in
multiple countries for relatively small individual LNG volumes. Appendix L
presents companies that have expressed interest in the LNG market in the
Caribbean
Large-scale LNG shipping provider. This market agent owns and operates the
LNG vessels used to transport LNG from the liquefaction supply point to the
receiving terminal. This agent must have suitable ships available for long-term
charter in the needed timeframe, be able to operate and maintain the ships on
behalf of the chartering agents, and be willing and able to enter into a long-term
contract with multiple offtakers based in multiple countries in the Caribbean
region
Hub operators. This market agent owns and operates a trans-shipment facility,
allowing LNG shipments to be delivered in full-scale LNG carriers, stored as
LNG at the trans-shipment facility, and then re-loaded onto smaller scale LNG
carriers for delivery to individual markets in the Caribbean. This agent must:
have a port facility and LNG loading jetty that is able to accommodate both
full scale and smaller scale LNG vessels
have LNG offloading and reloading equipment
have sufficient LNG storage capacity to accommodate the required supply for
each final market that is served by the trans-shipment facility
be willing and able to enter into long-term agreements with LNG suppliers and
multiple LNG offtakers

120

Confidential

be able to manage the logistical complexity of coordinating deliveries from the


LNG source and to each destination market.
Appendix M presents existing and planned facilities that could serve as hubs for
transshipping LNG to the Caribbean
Small-scale LNG shipping provider. This market agent owns and operates the
small scale LNG vessels used to transport LNG from the liquefaction supply
point or trans-shipment facility to the receiving terminal. This agent must have
suitable ships available, either under direct ownership or for long-term charter, in
the needed timeframe; be able to operate and maintain the ships on behalf of the
chartering agents; and, be able and willing to enter into a long-term contract with
multiple offtakers based in multiple countries in the Caribbean region.
Developers and operators of regasification terminals. This agent owns the
regasification assets that convert the LNG back into natural gas for consumption
in the destination market. The agent may be the operator of the asset, or may subcontract the terminals operations to a third party. The agent may also be the
natural gas consumer, taking ownership of the natural gas prior to it being
regasified, or it may act solely as a tolling station, providing regasification services
without taking ownership of the natural gas as it passes through the terminal. In
order to serve the Caribbean market, these agents are required to have sufficient
regasification capacity available in the required timeframe to meet the demand of
the individual market in question; have suitable port facilities to accommodate
smaller LNG vessels; and, be willing to enter into long-term supply contracts for
smaller volumes of LNG
Offtakers. These market agents are the final link in the LNG commercial chain,
representing either the ultimate consumer of the LNG or the wholesaler of the
natural gas within the final destination market. As noted in Section 4.4, the
primary offtakers for LNG in the countries of emphasis are assumed to be power
generation companies. These agents include private companies and public utilities.
To fulfill their role in the LNG commercial chain, they are required to have power
generation assets able to consume natural gas in the required timeframe, and to be
willing and able to enter into long-term natural gas purchase agreements.
Appendix E presents the forecast demand for natural gas in each country of
emphasis for this study
Sovereign governments. The governments of the countries in the Caribbean
nations play an important supporting role in establishing an LNG commercial
chain in the region. This can include:
passing and enforcing any necessary legislative or regulatory changes to address
natural gas imports and the creation of a natural gas market
making any related changes to the laws and regulations governing the
electricity sector to enable the conversion from oil to natural gas and allow
suitable cost pass-through or other modifications to the tariffs paid by the final
electricity consumers
authorizing any tax or tariff relief for the import of related equipment and
supplies to build the necessary infrastructure
121

Confidential

providing sovereign guarantees or direct financial support for the required


investment
Financial institutions. Establishing an LNG commercial chain and creating a
new natural gas market in the Caribbean will require extensive financing for the
purchase and construction of new infrastructure, the financial and physical
operations of said infrastructure, and to guarantee performance of the various
long-term contracts linked with each activity along the chain. These agents can
include private financial institutions, public financing arms, multilateral finance
agencies, and export credit agencies. In order to support an LNG commercial
chain in the Caribbean, these agents are required to have sufficient lending or
guarantee capacity available for the region, and must be able to understand the
contracting and guarantee process for each activity and be able to adequately
assess and manage the related risks accompanying each activity.
Having described the activities and participants in the market for delivering and regasifying
LNG in the Caribbean, we now turn to the methodologies for setting LNG prices and the
required assets.

6.2

The Acquired Price of Natural Gas

LNG contracts in the Caribbean will be affected by the relative bargaining strength of each
side of the negotiation, the alternatives that are available to each side should an agreement
not be reached, and the broader context of the global market for LNG in which the
negotiations take place. Experience in international LNG markets shows that there are three
general methodologies that can be used to set the price of LNG in the absence of a marketset price based on gas-on-gas competition: a cost-plus approach, an opportunity cost
approach, or a substitution cost approach. Each of these options, and the global LNG
market drivers that may lead to the adoption of one over the other, are presented in this
section. We conclude that a substitution cost approach is the most likely approach that
Caribbean countries will have available when contracting natural gas, based on trends in the
global and regional LNG trade and the current situation in the Caribbean.
Regardless of the pricing option, the feasibility of using natural gas for electricity generation
depends on the spread between the delivered price of oil products (particularly heavy fuel oil
(HFO), the most commonly used and cheapest fuel in the Caribbean) and the delivered price
of natural gas. The spread is specific to each country due to the effects on costs of volume of
demand and transportation distances. The spread between the delivered prices of the two
fuels must be sufficient to cover the costs of converting from generating electricity with
HFO to natural gas. For natural gas to be feasible, electricity utilities, the largest potential
offtakers of natural gas in the Caribbean, would need the delivered cost of natural gas to be
about 20 percent lower than the delivered cost of fuel oil. Therefore, evaluating the
feasibility of natural gas requires estimating the spread at the time that natural gas would be
imported. It would take 3 to 4 years for Caribbean countries to begin importing natural gas,
so the spread needs to be estimated for 2018
In this section, we explain how natural gas would be priced for Caribbean countries and
present fuel forecasts. We first analyze the drivers of the price of natural gas in international
markets, we then present our forecasts for international prices of fuels and the spread
between HFO and natural gas, and then explain each of the three pricing options and

122

Confidential

provide the reasons why we think the substitution cost approach would be the most likely
approach for the Caribbean.
6.2.1 Pricing of natural gas in international LNG markets
Unlike crude oil and petroleum products, LNG is not yet a tradable commodity where
current and future prices are set continuously by large numbers of buyers and sellers.
Because the LNG market is far smaller and less liquid, the price and terms of sale are
negotiated directly between individual buyers and sellers. The actual price of LNG is
generally set to match the destination market. This most often is either a competitively set
price (such as the UK NBP or the U.S. Henry Hub) or an oil-indexed price.
For much of the industrys history, global LNG markets were split into two major regional
markets: Asia-Pacific, and the Atlantic basin, which focused on supplying Europe and, to a
lesser extent, the United States. These regional markets have become less distinct over the
past decade as a surge of new capacityincluding liquefaction, shipping, and
regasificationhave greatly expanded the volume of globally traded LNG. In 2012, roughly
20 million tonnes of LNG was exported from the Atlantic Basin to the Pacific region,
representing almost 10 percent of total global trade.240
The Regional LNG Market in Asia-Pacific
Asia-Pacific is the largest LNG market, accounting for 75 percent of global demand in
2014.241 The Asia-Pacific market is centered on supplying LNG to Japan, Korea, and Taiwan,
primarily from suppliers in South-East Asia and, to a lesser extent, the Middle East, Australia
and the United States (via Alaska). All three importing countries are resource poor,
importing virtually all of their energy supplies including oil, coal, and natural gas. While some
Asian countries imported LNG as early as 1969, the region saw a surge of investment in
LNG infrastructure during the oil crises of the 1970s and early 1980s as energy importing
countries sought alternatives to replace their increasingly expensive oil imports.
This dynamic played an important role in the development of contract structures and LNG
pricing in the region. As part of the initial wave of investment in LNG infrastructure, early
contracts emphasized long-term arrangements to cover the high capital cost for new
liquefaction and regasification capacity. These tight commercial relationships limited
competition and limited the market to a relatively small number of participants. There were
few spot transactions as most new liquefaction capacity was fully contracted before it was
builtalthough some spot sales did occur as new capacity was coming on stream, or when
existing plants expanded capacity through debottlenecking.242 These arrangements helped to
finance LNG infrastructure and promoted security and predictability of supply, but they also
limited market and price flexibility.
The lack of domestic natural gas supply led to LNG pricing linked to an oil-index. This
allowed importing countries to remove the risk that natural gas prices could become more
expensive than their alternative fuel, namely diesel and fuel oil. The most frequently used
index is the Japan customs-cleared crude price (JCC, also commonly known as the Japan
240

The LNG Industry, GIIGNL, 2014.

241

The LNG Industry, GIIGNL, 2014.

242

Andrew Inkpen & Michael Moffett, The Global Oil & Gas Industry: Management, Strategy & Finance, Chapter 9.

123

Confidential

crude cocktail), which is an average of imported crude oil prices in Japan. This index is
reported monthly by Japanese customs officials, giving it a level of transparency and
consistency. It is used to index LNG imports not only in Japan but also for contracts in
Korea and Taiwan.243
The Asia-Pacific region has also tended to have higher LNG prices than the Atlantic Basin.
This is in part due to the greater shipping distances involved, but is also influenced by the
import-dependent countries prioritizing security of supply over cost competitiveness. Also,
the lack of an integrated market limits price competition in the Asia-Pacific region. LNG is
usually purchased by regional utilities and power generators who hold a monopoly within
their service territory. Without a region-wide pipeline system or other means to foster
competition, there is little incentive to reduce prices or improve operational efficiency. As a
result, security of supply has been prioritized over price, and there is much redundancy in
infrastructure that could be reduced with greater integration.
However, proposals for an Asian natural gas hub may reduce the use of oil-indexed pricing.
Singapore and other countries in the region have taken steps toward developing a natural gas
hub to bring more flexibility to the market. A functioning hub will require multiple sources
of supply, including domestic gas supply, multiple LNG sources and pipeline gas; sufficient
storage, shipping, and other logistical infrastructure to manage a large volume of traded gas;
as well as transparent and stable regulations. Creating such a hub will help establish more
flexible contracting arrangements, as well as a viable price setting alternative to oil-indexation
for countries that depend on gas imports. The obstacles facing the creation of an Asian
trading hub and the structures being proposed to overcome them may have relevant lessons
for the Caribbean, as it is also an import-dependent region. One critical difference, however,
is the size of each market. What is viable for a large and rapidly growing market, such as that
in Asia, may not be applicable to a much smaller market such as the Caribbean. The
feasibility of establishing a Caribbean trading hub is examined in detail through the
commercial scenarios presented in Part III of this report.
The experience of Japan, as an energy-poor island nation, is directly relevant to many
countries in the Caribbean region. Japans experience suggests that efforts should be made to
integrate and coordinate smaller markets in order to improve efficiency and reduce costs.244

243
244

Andrew Inkpen & Michael Moffett, The Global Oil & Gas Industry: Management, Strategy & Finance, Chapter 9.
Smaller Asian markets such as the Philippines, Malaysia, and Indonesia may also be helpful models for developing an
LNG value chain the Caribbean. However, these markets do not have the same history as LNG importers such as Japan
and, therefore, limited information is available. For example, the Philippines are planning multiple LNG import terminals
to come on line before 2020 in order to compensate for expected declines in the Malampaya gas field in Luzon. These
terminals are not yet under construction, however, with many project details remaining undefined (Source:
http://uk.finance.yahoo.com/news/philippines-first-gen-build-1-095027378.html). In Malaysia, the Sungai Udang LNG
Regasification Terminal came online in 2012 and is currently importing LNG from various external suppliers, but is
expected to be fully supplied by domestic Malaysian LNG once the Bintulu Floating Liquefied Natural Gas Plant reaches
full capacity in 2016. At that point, the LNG regasification terminal will act as a virtual pipeline for domestically sourced
gas rather than a point of gas imports (source: http://www.themalaysianinsider.com/business/article/malaysia-to-be-lngimport-free-nation-by-2016-says-petronas). Indonesia also uses LNG liquefaction and regasification plants to transport
domestic natural gas to isolated markets. However, because these projects are internal to the country, little information
on the project costs and operational characteristics are available.

124

Confidential

The Regional LNG Market in the Atlantic Basin


Although the Asia-Pacific market is the largest today, LNG shipments began in the Atlantic
Basin when the UK received the worlds first LNG shipment (equivalent to 35,000 barrels)
from the U.S. in 1959.245 The UK was also the first importer of commercial scale LNG
starting in 1964, with supplies provided by Algeria, the worlds first LNG exporter.246 The
1973 oil crisis spurred development of four LNG receiving terminals in the United States,
although rising domestic U.S. natural gas production caused two to be mothballed by 1980
and the remaining two were only rarely used.
Trinidad & Tobago became an LNG exporter in 1999, when the first train of Atlantic LNG
entered operations. The tightening gas market in the United States caused the two
mothballed receiving terminals to be reopened in 2002 and 2003. A wave of new terminals
was also proposed, and U.S. import capacity grew dramatically over the next five years. At
that time, shale gas production increased dramatically, putting an end to the expected growth
in LNG imports. Many regasification terminals are now investing in liquefaction capacity in
order to switch from LNG import terminals to exporting ones.
Unlike the main demand centers in the Asia-Pacific, natural gas consumers in the Atlantic
Basin already had alternative supply optionsthe United States, UK, and Norway all had
substantial volumes of domestic natural gas production, and continental Europe and the
United States also imported natural gas via pipeline (from Canada to the United States and
from the Soviet Union to continental Europe).
This affected the Atlantic Basin market development in two ways. First, LNG import
volumes were never a significant share of the total market, and so supply security and tight
commercial arrangements were less critical. Second, LNG pricing was generally linked to the
consuming markets established natural gas price setting mechanisma competitive pricesetting hub such as the Henry Hub in the United States or the National Balancing Point
(NBP) in the UK, or linked to the long-term oil-indexed contracts used for pipeline imports
from the Soviet Union.
The Atlantic Basin also had much shorter distances between supply and demand centers for
much of its early history. Imports into the UK and continental Europe were primarily
supplied from Algeria and Libya along the Mediterranean coast.247 Volumes were also
shipped to the United States, but in much smaller quantities than to Europe. In the early
2000s, Trinidad and Tobago became a major supplier to the United States, taking advantage
of its close proximity to that market.
Continued evolution of LNG contracting structures
Global LNG trade has historically been dominated by long-term contracts with close
commercial relationships between LNG suppliers and consumers. LNG sales and purchase
agreements (SPAs) explicitly defined where and how ownership of the gas was transferred
and how the purchase price was set. These agreements were generally for 20 years or more in
order to guarantee sufficient revenues to pay for the large capital costs involved in building
245

Center for Energy Economics, University of Texas at Austin, Introduction to LNG, January 2007.

246

Center for Energy Economics, University of Texas at Austin, Introduction to LNG, January 2007.

247

Inkpen &Moffett, The Global Oil & Gas Industry: Management, Strategy & Finance, Chapter 9.

125

Confidential

the required infrastructure. The agreements generally included dedicated ships to link
supplier and offtaker.
The point of LNG ownership transfer and price setting is typically set in one of three ways:
Free on Board (FOB): Here the purchase price for the LNG covers the cost of
feed gas and liquefaction. In this contractual arrangement, the seller is responsible
for securing feed gas and liquefying it. Ownership of the gas transfers from seller
to buyer at the liquefaction plants loading docks, with the buyer responsible for
shipping the LNG and then regasifying it at its destination. One recent variation
on a FOB arrangement is a tolling contract for liquefaction. In this structure, the
liquefaction plant operator never owns the gasit must be procured by the
ultimate buyer and delivered to the liquefaction plant for processing. The plant
owner then charges a fee for liquefaction services based on the cost of the process
Cargo, Insurance, and Freight (CIF): In this arrangement, the seller is
responsible for securing the feed gas, liquefying it, and shipping the LNG.
Ownership of the gas is transferred from the seller to the buyer at some point
during transit; generally after the ship has left dock and before arriving at its
destination. The buyer is then responsible for regasification at the destination.
This mechanism is helpful for companies wishing to complete the financial
transaction outside of any specific national jurisdiction, but it is rarely used for
LNG
Delivery ex-Ship (DES): Here, the contracted price includes the cost of feed
gas, liquefaction, and shipping. The seller is responsible for securing the feed gas,
liquefying it, and shipping it to its final destination. Ownership of the gas transfers
from the seller to the buyer after the ship reaches its destination. The buyer is
then responsible for regasification. This type of arrangement is often used with
LNG suppliers that also own LNG ships or a portfolio of supply options that can
be optimized to meet their contractual requirements.
Contractual terms are increasing in flexibility as the industry expands. For the first time,
LNG importers in Japan have signed contracts based on a Henry Hub price, rather than an
oil index. Examples include Kensai Electrics 15-year contract with BP Singapore for 0.5
mtpa of LNG linked to Henry Hub prices that was negotiated in late 2012. LNG deliveries
are expected to begin in 2017 and will be supplied from BPs portfolio of LNG liquefaction
facilities, including Egypt and Trinidad and Tobago.248 Osaka Gas and Chubu Electric have
also signed supply agreements with Freeport LNG totaling 4.4 mtpa that are linked to Henry
Hub, and the Japanese power utility Tepco has secured 0.8 mtpa of LNG from Cameron
LNG that will also be linked to Henry Hub.249
An increasing number of shipments are also being made on a spot basis, as growing shipping
and liquefaction capacity make short-term commercial arrangements more feasible, at least
on the margins. Spot market trade has grown rapidly over the past decade: in 2002, total spot
248

Takeo Kumagai, Japan Starts to Break the Oil-index Tie on its LNG Purchases, Platts, 4 December 2012,
http://blogs.platts.com/2012/12/04/japan_lng/.

249

Jared Anderson, Tepcos US LNG Agreement: Small Volumes, Big Deal, Breaking Energy, 19 February 2013,
http://breakingenergy.com/2013/02/19/tepcos-us-lng-agreement-small-volumes-big-deal/.

126

Confidential

or short term contracts accounted for less than 10 million tonnes of LNG, or slightly less
than 10 percent of the total market at that time. In 2014, 69.6 million tonnes of LNG was
traded on a spot or short term contract basis, equal to roughly 29 percent of total LNG trade
that year.250 Figure 6.1 shows the volumes of LNG traded each year in the spot market, and
the percentage of these sales to total LNG trade each year from 2006 to 2014.
Figure 6.1: LNG Traded on Spot or Short Term Contracts, 2006-2014

Source: The LNG Industry. 2006 to 2014 publications, http://www.giignl.org/publications, GIIGNL

One potential downside to the upheaval in contracting is that new liquefaction projects may
be delayed. These capital-intensive projects may have difficulty being financed without longterm contracts. This may limit the expected surge in LNG supply in the near term. The
limited experience with Henry Hub linked supply contracts is also making both buyers and
suppliers more cautious. This suggests both may take a portfolio approach, seeking a range
of different types of contracts and pricing mechanisms where possible rather than a
wholesale switch to Henry Hub based pricing.
6.2.2 Forecasts for HFO and natural gas prices used in this study
What matters in projecting the feasibility of introducing natural gas is the price of natural gas
relative to fuel oil in the futurestarting three years from now, which is the earliest that
Caribbean countries could start importing considerable volumes of natural gas.251 This
requires forecasting the prices for natural gas and HFO. HFO is the least expensive fuel oil
and the fuel oil most commonly used for electricity generation in the Caribbean. In other
words, HFO prices must be significantly higher than natural gas prices for the near and
medium-terms to justify large investments in the infrastructure needed to import natural gas.
Forecasts of natural gas prices
To project the acquired price of natural gas we use the reference case of U.S. EIA forecasts
for prices at Henry Hub (see Figure 6.2).252 According to these projections, Henry Hub is
250

The LNG Industry, GIIGNL, 2014.

251

It would take at least three years to contract for natural gas delivery and build the necessary infrastructure to offtake and
use it for electricity generation. However, this entire process is more likely to take about four or five years, with countries
able to begin receiving shipments of natural gas at the end of 2020.

252

Over the past two years, growth in U.S. crude oil production, along with the late-2014 drop in global crude oil prices,
has altered the economics of the oil market. These new market conditions are assumed to continue in the Reference
case EIA 2015 Annual Energy Outlook, page 4.

127

Confidential

expected to be around US$4.2 per MMbtu in 2018, the year in which countries would start
importing natural gas.
Figure 6.2: Forecast Price of Natural Gas at Henry Hub, in 2013 dollars (2010-2032)

Source: U.S. EIA 2015 Annual Energy Outlook

As Figure 6.3 shows, these forecasts are uncertain. The U.S. EIA projects 3 other scenarios;
one with high oil prices (with prices 23 percent higher on average); one with low oil prices
(with prices 6 percent lower on average); and one with high oil and gas sources (with prices
34 percent lower on average). Three of the scenarios (the reference, high oil price, and low
oil price) have similar projections up to 2022, but by 2032, the high oil price scenario has
forecast prices 40 percent above the reference and low oil price scenarios.
Figure 6.3: EIA Scenarios for Henry Hub Prices 2010-2032

Source: EIA 2015 Annual Energy Outlook

Forecasts of West Texas Intermediate prices


We use projections of West Texas Intermediate (WTI) to forecast the price of delivered
HFO in the Caribbean. Projections for the acquired price of crude are based on the
reference scenario of U.S. EIA forecasts for prices for WTI (see Figure 6.4).

128

Confidential

Figure 6.4: Forecast Price of WTI, in 2013 dollars (2010-2032)

Source: U.S. EIA 2015 Annual Energy Outlook

Oil prices are volatile and uncertain. The ten-year average price for WTI is US$81.9 per
barrel, with a standard deviation of US$19.7 per barrel. Further, the projections for WTI
have a wide range. Scenarios in the 2015 EIA AEO project prices for 2015 that range from
US$46 per barrel in the low oil price, to US$63 per barrel in the reference case, to US$115 in
the high oil price scenario (Figure 6.5).
Figure 6.5: EIA Scenarios for WTI 2010-2032

Source: U.S. EIA 2015 Annual Energy Outlook

Forecast of the price of delivered HFO


To forecast the price of HFO delivered in each country, we indexed current HFO prices in
the Caribbean to the projected price of crude oil. The first step in building this index was to
find current prices for HFO in the Caribbean countries. In countries where current prices
were not available, we used the regional average. We then compared current HFO prices for
129

Confidential

each country to current prices for crude oil (for this we used WTI), to estimate a ratio
between WTI prices and HFO prices in the Caribbean. We then multiplied the ratio between
WTI prices and current HFO prices in the Caribbean by the projected WTI price for each
year until 2032, for each country we analyzed. Figure 6.6 shows this forecast of HFO prices
in the Caribbean.
Figure 6.6: WTI Prices and Caribbean HFO Prices (2013-2032)

Source: WTI forecasts come from the U.S. EIA 2014 Annual Energy Outlook. HFO prices are from JPS
(Jamaica for 2012), BEC (The Bahamas BEC for 2010), (Dominican Republic for 2012), and
Brugman, Alberto, Suriname, Support to the Institutional and Operational Strengthening of the
Energy Sector: (SU-L1022) Technical and Cost-Benefit Assessment of the Power System Expansion.
17 July 2012. (2011 for Suriname).

We indexed current HFO prices in the Caribbean to projected WTI prices because WTI is
the most important benchmark for oil prices in the United States, a large oil market adjacent
to the Caribbean. WTI has largely tracked Brent, the other major international benchmark
for oil prices, since 2014, and the U.S. EIA projects that it will continue to do so in the
future (see Figure 6.7). As such, WTI is seen as an appropriate market for an oil-importing
region subject to global prices, and located near the United States.

130

Confidential

Figure 6.7: WTI and Brent Spot Prices (2012 to 2040)

Source: U.S. EIA Annual Energy Outlook 2015

Forecast spread between oil and natural gas prices


Figure 6.8 compares the current and projected price of natural gas at Henry Hub with the
current and projected price for WTI, with prices for both fuels in MMBtu. It shows that if
Caribbean countries are able to import natural gas economically, there is a large potential for
cost savings compared to the continued use of fuel oil.

131

Confidential

Figure 6.8: Price of Fuel Oil vs. Price of NG at Henry Hub (2014-2032)

Sources: Prices for WTI and natural gas are the same as those used above. WTI prices were converted from
barrels to MMBtu using a rate of 6.287 MMBtu per barrel (from the US EIA,
(http://www.eia.gov/forecasts/aeo/pdf/appg.pdf)

6.2.3 Pricing LNG: cost plus approach


A cost-plus pricing system adds the cost of each segment of the natural gas value chain,
including a reasonable return on investment for each participating agent, to arrive at a fair
price for the natural gas delivered to the consuming market. In the case of LNG imports to
the Caribbean, this would include the cost to procure the natural gas, liquefy it, transport it,
regasify it, and deliver it to the final consumer.
This approach is most applicable to:
LNG that would be sourced from the United States, Mexico, or Canada,
since each country is part of the competitive natural gas market in North America.
Because the market includes a large number of participants in all segments of the
value chain, LNG exporters from any of these countries will either source their
natural gas from the market or have the opportunity to sell the gas domestically,
rather than export it. As a result, any price for LNG exports that diverges from
the domestic market price would expose the LNG exporter to substantial price
risks. This is the main reason why all LNG export projects currently proposed
from the United States and Canada are linked to the U.S. Henry Hub price point
or another local pricing point
A world with an abundant supply of natural gas (in particular, high U.S. export
capacity and natural gas production), abundant shipping capacity, and slower
growth in demand for LNG (for example, a world in which Japan restarts its
nuclear power plants and continues to rely on nuclear power for much of its
future electricity generation needs). In such a scenario, the global LNG market
shifts from the current sellers market to a buyers market, giving buyers of LNG

132

Confidential

much greater leverage in contract negotiationsthis increase in leverage is of


great importance for Caribbean countries which, because of the small size of their
markets, tend to have lower leverage in contract negotiations than other countries.
This scenario corresponds to variations in the NERA Study Update with a high
oil and gas resource base in the United States and high LNG exports (including
modeled scenarios with 12 Bcf per day of export capacity and those that were
unconstrained). In this world, global suppliers of LNG would compete against a
growing supply out of the United States linked to Henry Hub, and so must offer
similar pricing in order to attract buyers.
Given these characteristics, it is most likely that this will not be the pricing mechanism that
will be available to Caribbean countries. The U.S. LNG export terminals that have been
granted permits to export to non-FTA countries have committed virtually all of their
available capacity to specific end consumers (such as GAIL in India, Osaka Gas and Chubu
Electric in Japan, or KOGAS in Korea), or to portfolio companies that blend LNG supply
from a variety of sources to resell to multiple offtakers. As such, U.S. export volumes that
are available to the Caribbean market would come from portfolio companies aiming to earn
a greater profit than simply cost plus, and which also have natural hedges against potential
price changes between Henry Hub natural gas prices and global oil prices.
Furthermore, this pricing option would be preferable for Caribbean buyers only if the plus
part of the formula is small. Because the actual mark up for each segment of the value chain
will depend on the relative negotiating strength of each party, the final delivered price could
be very high even though it is indexed to Henry Hub. The larger the increase, the greater the
risk that future delivered LNG prices could rise above the equivalent price of fuel oil. In
essence, the consumer takes on the risk that natural gas prices will increase relative to oil
prices. As a result, if this mechanism was available, Caribbean offtakers should only accept
Henry Hub linked prices if the final delivered price is well below oil parity, thereby providing
a clear benefit to switching to natural gas as well as a buffer to protect against future prices
of oil and natural gas moving in different directions.
6.2.4 Pricing LNG: opportunity cost approach
An opportunity-cost pricing system explicitly links the price for LNG delivered to a
particular market with the price already being paid for LNG in another market. Any
difference in the cost of shipping natural gas to each market is generally taken into account,
such that the LNG supplier receives the same return regardless of the market to which it
sells. Setting the price of LNG equal to the sellers opportunity cost in this way can help
attract suppliers to a new market while also taking advantage of the price setting mechanism
for natural gas that is already in place in the original market.
Japan is a natural market for comparison since it has generally been the most expensive
LNG destination in the world253 and because it imports more LNG than any other country in
the world (see Section 3.1.6). Prices in Europe, another large potential export market for
LNG from the greater Caribbean region, were 37 percent lower than prices in Japan in
253

Prices in Japan, like elsewhere in the world, dropped sharply between 2014 and 2015. Between April 2014 and April
2015, the delivered price of natural gas fell 29 percent, from US$16.8 per MMBtu to US$11.9 per MMBtu (data from World
Bank Commodity Price Data [The Pink Sheet]). Nonetheless,

133

Confidential

2014.254 As such, Japan is often the market to beat for countries seeking to secure spot
cargoes of LNG, and many smaller LNG importers have seen prices linked to the Japanese
LNG import price in recent years. This pricing option has often been used for spot-market
LNG purchases, or purchases for relatively low volumes of LNG, resulting in relatively high
prices. Figure 6.9 below presents a map of recent prices paid for LNG in a number of global
markets.
Figure 6.9: Global Delivered LNG PricesApril 2015

Source: World LNG Estimated April 2015 Landed Prices, accessed 29 April 2015,
http://www.ferc.gov/market-oversight/mkt-gas/overview/ngas-ovr-lng-wld-pr-est.pdf.

For countries in the Caribbean, a Japan net-back price would be calculated as the price paid
for LNG in Japan (based on a basket of Japan oil prices, called the JCC), minus the cost to
prepare and ship the LNG from the supplier country, plus the cost to prepare and ship the
LNG to the relevant Caribbean market. Because Japan is much farther away from the
regional supply centers that would likely serve the Caribbean, delivered LNG prices in the
Caribbean using a Japan net-back calculation would be lower than the cost of LNG in Japan
itself.
We do not think that this will be the pricing mechanism for countries in the Caribbean for
two reasons. The first reason is that, for long term contracts, suppliers would likely tend to
prefer price setting mechanisms that are more closely linked to local energy markets. For
example, this pricing approach could be used by countries that are not directly linked to a
major natural gas market and so would be more likely to use an external price reference to
set LNG export prices. In the Caribbean, this could include Trinidad & Tobago, Colombia,
and Venezuela.
254

World Bank Commodity Price Data (The Pink Sheet)

134

Confidential

The second reason is that this pricing option represents the likely ceiling for natural gas
prices since it is the method currently used to set spot market pricing. Within Latin America,
Brazil and Argentina currently import LNG via the spot market because their LNG demand
is highly variable and both countries have additional natural gas sources available to them.
Because the markets in the Caribbean will rely entirely on LNG for its natural gas, they
would naturally expect to negotiate a more favorable price than the spot market in return for
entering into a long-term supply agreement. If they were unable to secure a better price, then
they would have little reason to enter a firm agreement at all and would simply rely on the
spot market as Brazil and Argentina do.
Due to these two reasons, we do not think suppliers would be interested in this pricing
mechanism as the best alternative. Furthermore, for long term contracts, Caribbean
countries would not be interested in this option since it could result in prices that are more
expensive than their current fuel oil costs. Therefore, this pricing mechanism should be
avoided when negotiating natural gas contracts in the Caribbean.
6.2.5 Pricing LNG: substitution cost approach
A substitution cost approach links the price of LNG with the fuel that it is replacing in the
destination market. This is the approach that was historically used by Japan for its LNG
imports by linking the price to the cost of importing oil and oil products. The approach has
the benefit of locking in a discount to the cost of the fuel being replaced. The discount can
be fixed or adjustable, depending on the formula being used.
For the Caribbean, LNG prices would be discounted from fuel oil parity, that is, the
equivalent price of fuel oil on a per energy basis. That is because the relevant fuel being
replaced is fuel oil (usually HFO), the main fuel for electricity generation in the countries of
emphasis. While some electricity generators in the region also use more expensive light fuel
oil (LFO), HFO makes up the greater share of oil-based fuels used for electricity generation.
Therefore, in order to achieve the volumes of natural gas demand that are required to
support the related infrastructure investment, natural gas prices must be competitive with the
cost of HFO.
Like the cost-plus pricing system, the key question in determining the pricing with this
mechanism is the relative discount from fuel oil parity and how the link is calculated: too
small of a discount would provide little incentive for the LNG buyer to make the required
investments, while too large of a discount could put the LNG supplier at risk should the
price of HFO decline in the future. Like the opportunity cost based system, this approach is
most likely to be used by LNG suppliers that are not connected to a major natural gas
market, such as Trinidad & Tobago, Colombia, and Venezuela. However, other exporters
from Canada, the United States, or Mexico could also be interested in this option since it
would likely allow a higher pricing than the cost-plus approach, while being linked to world
energy prices (specifically HFO).
With fuel oil parity, the price is not directly related to the costs since it is calculated on the
basis of a discount compared to the price of fuel oil. If the fuel oil parity price is higher than
the net back price of LNG (that is, the cost of each link in the supply chain, including cost of
capital), there is an additional profit margin that will be distributed across the supply chain.

135

Confidential

For example, a supplier in the United States that purchases natural gas for US$5.5 per
MMBtu (Henry Hub price in 2023, plus a margin) could spend about US$5 more to deliver
the natural gas as LNG (a total cost to deliver the LNG of about US$10.5).255 With fuel oil
parity at US$14.0 per MMBtu256, a 20 percent discount to fuel oil parity means that LNG
could be sold for around US$11.2 per MMBtu. This would earn suppliers an additional
US$0.70 per MMBtu in profit margin per MMBtu (US$11.2 sale price minus US$5.5 for
natural gas plus US$5 for delivery), which would be distributed across the supply chain. The
potential margin between the cost of delivery and the potential sale price demonstrates the
opportunity for suppliers to sell LNG in the Caribbean.
Prices linked to fuel oil parity could be driven by the consumers of natural gas, or they could
be imposed by the liquefaction/natural gas supplier:
In the first case, consumers decide that fuel oil parity with a discount is in their
best interest given uncertainties in the relationship between the prices of oil and
of natural gas. With the fuel oil parity price they lock in a discount to their current
cost of fuel, but give up any potential upside should natural gas prices remain well
below oil prices. In other words, with fuel oil parity, they are able to make sure
they get the discount they need on HFO (see Section 6.4).
In the second case, the region goes to prices linked to fuel oil because the LNG
supplier refuses to sell for anything less. This would be the case if suppliers have
the stronger negotiating position and also believe that oil prices will remain high
relative to natural gas prices. The supplier would then take on the risk of oil prices
becoming cheaper relative to natural gas.
This pricing option is more likely in a future world market where there are relatively few
suppliers to the Caribbean, and each has fairly strong bargaining power. This is likely under
the following conditions:
Relatively less abundant LNG supply from the United States
LNG supply available from other countries
Relatively low demand pressure from Japan.
With less U.S. LNG export capacity availablebecause it is not built or it cannot obtain
permits for exportssupply is more likely to come from non-U.S. sources. Because
suppliers would not be facing as much competition from U.S. exports, there would be less
pressure to match Henry Hub pricing, so suppliers would price LNG based on the
alternative fuel in each destination market (in the Caribbeans case, fuel oil).
Given the above characteristics, we believe this is the most likely pricing option for the
Caribbean. We use this mechanism for all the costs calculated in this study. We assume a
discount to actual fuel oil parity would be needed for the importing country to justify the
expense of building the required infrastructure. Even so, suppliers would try to negotiate a
price as close to the upper price parity limit as possible. The magnitude of the discount will

255

The average end of the technical cost to deliver LNG (See Figure 6.7).

256

This is the estimated regional price of HFO in 2018 (See Figure 6.4).

136

Confidential

depend on the amount of natural gas contracted and the strength of the negotiation position
of the Caribbean countries.

6.3

Costs for Assets and Technologies in the LNG Supply Chain

The final delivered price of natural gas includes the price of the fuel at the supply point (as
described in Section 6.2) plus the costs for preparing, shipping, and delivering the natural
gas. In particular, delivering LNG has costs associated with each of the following steps in the
supply chain:
Liquefaction facilities (Section 6.3.1)
Vessels for shipping LNG (Section 6.3.2)
Regasification facilities (Section 6.3.3)
Converting existing generation plants to gas-fired plants (Section 6.3.4)
Building new plants for generating electricity (Section 6.3.5).
Each of these steps has associated capital costs, non-fuel operating expenses, as well as the
cost of the fuel that is used in each step. Figure 6.10 shows the steps in the LNG supply
chain, with cost ranges for each step (costs are in US$ per MMBtu).257
Figure 6.10: LNG Supply Chain

Note:

257

U.S. GC is the United States Gulf Coast


Prices are highs and lows for participating across all three scenarios in this study (see Part III).
Costs are in US$/MMBtu.

Based on 10 percent weighted average cost of capital.

137

Confidential

6.3.1 Liquefaction facilities


Liquefaction is the most capital intensive link in the LNG supply chain, with capital costs
accounting for between 70 to 80 percent of the total liquefaction costs for the supply
sources. It is also the most expensive link, particularly given the short shipping distances
between the proposed supply points and the delivery points within the countries of emphasis
for this report. Excluding the cost to acquire natural gas, liquefaction costs account for
between 53 and 73 percent of the total cost to deliver natural gas to the Caribbean as LNG.
Because of the capital intensive nature of liquefaction, most liquefaction terminals rely on
the support of numerous large companies with strong credit ratings to secure the multibillion dollar financing required for their construction. These companies include not only the
project sponsors, but also multiple LNG customers willing to sign long-term contracts to
help support the financing of the projects. These customers include:
companies that will consume the LNG themselves, such as electricity utilities
companies that will regasify it and sell it in the destination market, such as
regasification operators and natural gas traders
LNG portfolio players who aim to optimize LNG deliveries from multiple
sources and to multiple destinations.
Once a core group of high-quality offtakers is established, many liquefaction projects also
make a small amount of excess capacity available for sale to smaller or less credit worthy
customers.
In each of the most likely countries of supply, namely the United States, Canada, and
Trinidad and Tobago, there are existing and planned liquefaction projects that can make a
portion of their capacity available to the Caribbean market (Appendix K in this report
presents information regarding some existing and planned liquefaction projects that could
supply the Caribbean with LNG). In addition, several LNG portfolio players hold
liquefaction capacity rights in existing and planned projects in each country, and could
potentially sell a portion of their supply to the region as well. Therefore, do not assume that
liquefaction capacity would need to be built and directly financed by Caribbean consumers in
any of the commercial supply scenarios that we present in this report. Nevertheless,
liquefaction is an important share of the total cost to deliver natural gas to the region as
LNG, and so the likely costs involved are described below.
Liquefaction costs depend on the supply point rather than on the selected scenario.
Therefore, liquefaction costs are the same for all projects that secure natural gas contracts
from the same points of supply. Liquefaction costs include a capital cost, non-fuel
operations and maintenance cost, and a fuel cost. We make the following assumptions
regarding each of these costs:
Non-fuel O&M costs: we assume this cost is US$0.16 per MMBtu and is the
same for all supply points258

258

Macroeconomic Impacts of LNG Exports from the United States, NERA, completed for the U.S. DOE to assess the
potential market for U.S. LNG exports, 2012.

138

Confidential

Fuel OPEX: we assume that fuel costs equal the purchase price of the natural gas
to be shipped (set at the wholesale price of natural gas being supplied to the
facility) times 9 percent, to account for the natural gas consumed in the
liquefaction process259
Capital costs: we assume capital costs for liquefaction to be at US$802 million
per MTPA Capacity260 for projects in South America and for greenfield projects in
the United States. We reduce this value to US$544 million per MTPA Capacity261
for brownfield projects in the U.S. Gulf Coast, because some of these investments
had already been made when these sites were planned to be regasification
facilities. To estimate a capital cost value per unit of natural gas, we assume the
capital costs will be amortized over 25 years at a real cost of capital of 10 percent,
and with a utilization factor of 72 percent.262
Based on these assumptions, Table 6.1 shows the calculated cost to liquefy natural gas,
excluding fuel costs, at Sabine Pass. The table excludes fuel costs because those costs depend
on the chosen scenario, the acquired price for natural gas for each year, and the point of
supply. In Appendix J we present total liquefaction costs, including fuel costs, for each of the
scenarios.
Table 6.1: Calculation of Liquefaction Costs (in US$ per MMBtu)
U. S., Sabine Pass

Other Supply
Points in Study

Non-fuel O&M

0.16

0.16

Capital Cost

1.60

2.36

Liquefaction costs excluding fuel costs

1.76

2.52

Difference with Sabine Pass

0.76

The reduced capital cost for brown-field projects on the U.S. Gulf Coast results in a
discount of $0.76 per MMBtu (or 30 percent) from other supply sources. Because
liquefaction is such a large share of the total transportation cost of delivered LNG, the
assumed lower capital cost for liquefaction projects on the Gulf Coast in the U.S. gives these
projects a significant cost advantage over other sources.
The calculated liquefaction costs are very near to the reported LNG prices that Cheniere
Energy contracted for its initial trains at Sabine Pass. Its first contract with British Gas was

259

Macroeconomic Impacts of LNG Exports from the United States, NERA, completed for the U.S. DOE to assess the
potential market for U.S. LNG exports, 2012.

260

Macroeconomic Impacts of LNG Exports from the United States, NERA, completed for the U.S. DOE to assess the
potential market for U.S. LNG exports, 2012.

261

Macroeconomic Impacts of LNG Exports from the United States, NERA, completed for the U.S. DOE to assess the
potential market for U.S. LNG exports, 2012.

262

Macroeconomic Impacts of LNG Exports from the United States, NERA, completed for the U.S. DOE to assess the
potential market for U.S. LNG exports, 2012.

139

Confidential

set at Henry Hub plus 15 percent, plus a charge of US$2.25 per MMBtu for liquefaction.263
Later sales contracts used the same premium over Henry Hub, but increased the liquefaction
charge to US$3.00 per MMBtu.264
6.3.2 Vessels for shipping LNG
There are ships that can meet all demand sizes in the Caribbean. The number of available
vessels for shipping LNG has been increasing at all sizes, particularly at the smallest sizes,
and future production is expected to add to the world fleet.
Size of ships for shipping LNG
The size of the ships required for each of the participating countries varies depending on
their demand. The Dominican Republic and Jamaica would require full-sized vessels with a
capacity of about 149,000 cubic meters. This is within the range of standard sizes for LNG
vessels (at the end of 2014, the fleet of 421 LNG carriers included 320 ships between 90,000
and 170,000 cubic meters).265 Ships within this range are widely available for charter and
multiple shipyards are able to construct additional vessels if they are needed. The other
participating countries would require smaller sized vessels with capacities of 6,000 cubic
meters, 10,000 cubic meters, or 45,000 cubic meters. The smaller sizes of ships are not as
widely available as full-sized LNG carriers (as of end 2014, 24 ships with capacity lower than
25,000 cubic meters were under operation), and all currently operating ships are tied to
specific LNG projects. As a result, these vessels would have to be built specifically for any
proposed project. Section 5.1.2 provides further detail regarding the different sizes and types
of ships that could be used for shipping LNG in the Caribbean.
Cost of ships for shipping LNG
In the scenarios in Part III we assume that offtakers will not own the ships and that the
shipping costs that offtakers pay are based on charter rates. Therefore, the final shipping
costs per MMBtu for offtakers are based on assumptions regarding the daily charter rate per
ship, ship capacity, the ship speed, and the distance between the supply point and the final
delivery (See Appendix J.3). For full-scale LNG ships, several LNG shipping companies
currently operate in this manner, making ships available for long-term charter and operating
the ships on behalf of the chartering company. However, fewer shipping companies have
experience with smaller-scale LNG ships, thereby limiting the options available to a
chartering company and potentially requiring the formation of a new company to own and
manage the small-scale LNG shipping fleet.
In calculating the costs of shipping, we set the daily charter rate and ship speed for full-scale
ships at the average rate for long-term charters as reported in the IGU World LNG Report,
2013 Edition. We estimate the daily charter rates for ships smaller than full scale based on
the daily charter rate for similarly sized LPG ships as reported in the BRS The LPG Shipping
Market, 2013 Annual Review. The ship speed for smaller ships is based on figures reported
263

Edward McAllister, BG Group first to seal US LNG export deal, Reuters, 26 October 2011,
http://www.reuters.com/article/2011/10/26/us-lng-cheniere-idUSTRE79P3DO20111026.

264

US Cheniere finalizes Sabine Pass marketing with KOGAS LNG supply deal, ICIS, 30 January 2012,
http://www.icis.com/resources/news/2012/01/30/9527806/us-cheniere-finalises-sabine-pass-marketing-with-kogaslng-supply-deal/.

265

The LNG Industry, GIINGL, 2014.

140

Confidential

by Anthony Veder, a Dutch shipping company that operates 30 small-scale LPG, LNG, and
multi-fuel carriers. The sizes chosen and the resulting daily charter rate, charter cost per
MMBtu per day of shipping, and ship speed are shown in Table 6.2 below.
Table 6.2: Assumptions for LNG Shipping Costs
Size Category

Applicable Country of Emphasis

Charter Rate LNG Capacity Ship speed


per day (US$) (in cubic meters)
(knots)

Very Small

Belize

17,667

6,000

15.8

Small

The Bahamas (Grand Bahama)

30,000

15,000

15.8

Medium

The Bahamas (New Providence),


Barbados, Guyana, Haiti, Suriname

58,000

45,000

15.8

Full Scale

Dominican Republic, Jamaica

80,000

149,000

19.4

Source: BRS The LPG Shipping Market, 2013 Annual Review, Anthony Veder TEKNA small scale LNG
shipping: Owners and Operators perspective, Oslo 6 June 2013, and NERA Economic Consulting.
Macroeconomic Impacts of LNG Exports from the United States. 2012 and Castalia estimates.

Furthermore, when estimating the cash flows for the companies that provide shipping
services for smaller ships, based on cost estimates provided by TPG and Galway Group, we
assume small scale ships based on LPG/Ethylene designs (Type C containment) cost
roughly US$45 million to build, for sizes ranging from 7,500 cubic meters to 12,000 cubic
meters. We estimated the cost to build the remaining ship sizes to be roughly proportional to
their daily charter rate and the capital cost to build full-scale LNG vessels (US$200 million
per ship).
Using this approach, we estimated the following capital costs for ships:
Smallest size (6,000 cubic meters): US$45 million
Small size (15,000 cubic meters): US$75 million
Medium size (45,000 cubic meters): US$90 million
Full size (149,000 cubic meters): US$200 million.
Appendix J.3.2 provides further detail regarding the costs and characteristics of LNG
shipping vessels.
The actual investment required for shipping vessels is scenario dependent, since each
commercial structure requires different combinations of larger and smaller vessels to serve
each market. Part III of this report provides detail on the specific configuration for each
scenario.
6.3.3 Regasification facilities
LNG storage and regasification systems are a mature technology with an extensive history
(Section 5.1.3 presents detailed information regarding LNG storage and regasification
systems). The primary technical challenge for LNG storage is similar to shipping: ensuring
that the LNG remains in a liquefied state. On-shore storage systems, particularly those near
population centers, have the additional challenge of ensuring that any accidental leak does

141

Confidential

not result in an explosion. LNG regasification technologies must convert the LNG back to
its gaseous form in a safe and efficient way.
Technology options for regasification and storage include on-shore systems and floating
systems (FSRUs). Both on-shore and floating systems can be designed across a range of sizes
to meet the specific needs of each market. The main components that are differentiated by
size are the regasification throughput rate (sized to meet the markets daily supply needs) and
the LNG storage tank (sized to meet the markets needs for supply security and to optimize
the ship size and number of LNG deliveries required to serve the market).
In determining the costs of delivering natural gas to each of the islands, we assumed that onshore facilities would be used. However, FSRUs may be a cheaper or more technically
appealing alternative for some of the countries of emphasis. Deciding the most appropriate
option for each country will require detailed engineering studies. We estimated that the cost
difference between the on-site terminals and FSRUS would not be substantial, based on
available cost data. As such, we only included on-shore terminals in our model for costs.
Size of Regasification Facilities
The size of the regasification facilities will be different for each of the participating countries
depending on their demand. Tailoring throughput capacity and storage to the specific needs
of the market helps to increase the terminals utilization rate, thereby reducing the capital
cost per unit of output.
As a result, weve sized these terminals to meet the expected demand from the initial
conversion of existing oil fired power plants (in 2018), plus the first five years of electricity
demand growth. Additional regasification capacity, in the form of additional storage tanks
and vaporizers, are expected to be added once the initial capacity of the terminals is fully
utilized. Phasing the terminal capacity across multiple stages in this way reduces the initial
investment and better aligns terminal capacity with the markets requirements in the early
years, thereby helping to reduce the cost per MMBtu of natural gas produced.
Table 6.3 shows the size of the units that would be installed in 2018 to meet projected
demand from 2018 to 2023, and then the additional capacity installed in 2023 to meet
demand through 2032.

142

Confidential

Table 6.3: Size of Regasification Units in Each Country (in cubic meters)
Size of Unit in 2018

Size of Unit in 2023

The Bahamas, BEC (NP)

70,000

90,000

The Bahamas, GBPC

20,000

20,000

Barbados, BL&P

35,000

45,000

Belize, BEL

5,000

15,000

Dominican Republic, All

370,000

460,000

Guyana, GPL

35,000

45,000

Haiti, EDH

55,000

225,000

Jamaica, JPS

140,000

155,000

Suriname, EBS

50,000

105,000

Although each facility is a different size, they will all use similar technologies, such as single
containment LNG storage tanks and open rack vaporizers (ORV) to convert the LNG into
natural gas.
Costs of Regasification Facilities
After 2023, the Dominican Republic, Jamaica, The Bahamas, and Suriname are assumed to
have full-scale receiving terminals with costs to build that are on par with international
averages. The estimated capital cost to build regasification terminals of this type is roughly
US$900 per cubic meter of storage capacity (note that the price includes the cost to build the
entire facility, not just the storage tank, but is sized relative to the required storage and
natural gas throughput.) This would set the initial cost of the facility in the Dominican
Republic until 2023 at US$189 million and the cost of the facility in Jamaica until 2023 at
roughly US$182 million. After 2023, the cost of the facility in the Dominican Republic
would be US$270 million and the cost of the facility in Jamaica would be US$197.
The smaller countries of emphasis would use similar single containment storage tanks and
ORV vaporizers. However, the cost per unit to build these facilities will be higher, as many
of the cost components are fixed or do not scale down at the same rate as the terminal
capacity. We estimate the capital cost to build regasification terminals with capacity between
30,000 and 60,000 cubic meters of storage to be US$1,500 per cubic meter of storage
capacity (again, this is the all-in cost for the entire terminal, not just the storage). Also, we
estimate that basic offloading and related infrastructure requires a minimum investment of
US$10 million. Table 6.4 shows the assumptions for the technology used and the cost per
cubic meter of storage for three size ranges.

143

Confidential

Table 6.4: Assumptions for Costs of LNG Regasification


Size
Applicable Country of
Category
Emphasis

Storage
Capacity
(m3)

Capital Cost
per Unit of
Storage
(US$/m3)

Jetty and
Marine
Capital Cost
(US$ million)

Storage
Technology

Small

Belize

< 20,000

2,500

10

ISO Vacuum
Insulated
Cryogenic
Tubes

Midsize

The Bahamas
(GPBC), Barbados,
Guyana, Haiti,
Suriname

20,00060,000

1,500

20

Full
Containment

Full
Scale

The Bahamas (BEC


NP), Dominican
Republic, Haiti (after
2023), Jamaica,
Suriname (after 2023)

900

40

Full
Containment

> 60,000

Using these cost estimates, the total investment to build the relative terminals ranges from
US$52 million for Belize to US$270 million for the Dominican Republic (see Table 6.5).

144

Confidential

Table 6.5: Investment Cost for Regasification Facilities


Offtaker

Initial Capital Cost


(2018 facilities)

Additional Capital Cost


(2023 facilities)

(in US$)

(in US$)

The Bahamas, BEC,


NP

113,300,000

The Bahamas, GBPC

55,000,000

19,800,000
-

Total Capital Cost

(in US$)
133,100,000
55,000,000

Barbados, BL&P

79,750,000

16,500,000

96,250,000

Belize, BEL

24,750,000

27,500,000

52,250,000

189,000,000

81,000,000

270,000,000

79,750,000

16,500,000

96,250,000

Haiti, EDH

112,750,000

154,000,000

266,750,000

Jamaica, JPS

182,600,000

14,850,000

197,450,000

Suriname, EBS

104,500,000

43,450,000

147,950,000

Total

941,400,000

373,600,000

1,315,000,000

Dominican Republic,
All
Guyana, GPL

Note: Costs are in real 2014 US Dollars

In addition, when calculating the costs of regasification we make the following two
assumptions:
Non-fuel operating expenses are $0.20 per MMBtu regardless of the terminals
size
The regasification process consumes roughly 1.5 percent of the delivered gas
which is charged at the delivered price.
Appendix J.3.3 presents detailed regasification costs by point of supply and by destination
country, differentiating non-fuel O&M, fuel, and capital costs.
6.3.4 Converting existing generation plants to gas-fired plants
We assume that by 2018 all participating offtakers266 will convert all installed capacity that
currently burns fuel oil to be able to burn natural gas.267 This is a reasonable initial
assumption, since imported natural gas would have to be cheap enough for converting all
plants to be economical, compared to liquid fuel alternatives, otherwise utilities would not
convert to natural gas. Further, converting all thermal units to use natural gas will maximize
266

Except for Barbados for which we have done a more detailed model to move forward with Natural Gas. For Barbados,
we assume that only 2 of their plants, with a capacity of 60MW would be converted.

267

Except for Barbados, where we assume that some capacity fired by fuel oil will not be converted in 2018. However, we
assume that these remaining fuel oil fired generators will be used only as reserve, and will not generate any electricity.
This assumption follows BL&Ps Integrated Resource Plan dated February 2014.

145

Confidential

demand for natural gas, which could allow offtakers to buy natural gas at a lower price,
maximizing fuel savings.268 Appendix N presents the detailed forecast for electricity supply
for each offtaker. Some countries may have the opportunity to build low-cost hydroelectric
power plants or other alternatives, but most countries will continue to rely on thermal power
plants that use oil products or natural gas, for at least the medium term.
We assume that the capital costs for converting the plants equal US$100,000 per MW
converted. Table 6.6 shows the costs that each offtaker would incur in 2017 if it were to
convert all installed capacity to natural gas by 2018.
Table 6.6: Investment Cost of Converting Existing Plants
Offtaker

Converted
Capacity
(MW)

Capital Cost of
Converting Capacity
(US$)

The Bahamas, BEC, NP

393

39,250,000

The Bahamas, GBPC

240

24,010,000

Barbados, BL&P

60

5,940,000

Belize, BEL

62

6,186,000

1,025

102,459,000

Guyana, GPL

140

14,010,000

Haiti, EDH

238

23,805,000

Jamaica, JPS

621

62,100,000

Suriname, EBS

299

29,911,775

3,07844

307,671,775

Dominican Republic, All

Total
Note: Costs are in real 2014 US Dollars

6.3.5 Building new plants for generating electricity


When assessing the feasibility of increasing the use of natural gas in the Caribbean for
generating electricity, we need to make assumptions regarding the additional generation
capacity to be added and the cost of that generation capacity. Appendix N provides the
detailed forecasts we prepared for estimating the capacity for generating electricity that
would have to be added between now and the year 2032.
268

Conversion of some existing power plants to natural gas may not be economical for old units that are close to being
retired. A more detailed technical analysis of the plants that will be converted must be done in each country. However,
the impact of these particular cases will not impact the capital costs or fuel demand significantly, and will not change the
conclusions of this study.
Some countries have non-thermal generation options, such as hydroelectric power and other renewables that they can
explore. In this study, we have considered the introduction of these other generation options. Appendix N presents the
technologies that will be introduced for each country, according to their expansion plans. As can be seen, no alternative
technologies were introduced for replacing existing capacity, all existing fuel oil-fired capacity was assumed to be
converted to natural gas. Alternative generation options were used for expanding the systems when it was economically
viable.

146

Confidential

We use the following assumptions in calculating the costs of building the new capacity for
generating electricity:
Capital costs of building new gas-fired power plants
Combined cycle plants: US$917 per kW269
Simple cycle plant: US$676 per kW270
Reciprocating engine plant: US$1,130 per kW271
Weighted-average cost of capital (WACC) earned on these investments: 10
percent real return per annum
Useful life of the plants: 25 years.
The specific capital costs for the countries in the Caribbean would vary by site. For example,
estimates for a 100MW plant range from US$875272 to US$2,240.273 As such, the estimates
above are within the range of capital expenditures that will be incurred by utilities and
generators, but actual costs may be higher or lower.
Furthermore, the cost of new electricity generation capacity does not largely affect whether
or not natural gas is the least-cost fuel for electricity generation. First, capital costs of the gas
turbines represent only a small portion of the cost of generating electricity with natural gas
(on average, capital costs of the gas turbines account for around 6 percent of the total cost
of generation per kWh in the scenarios presented in Part III of this report. This means that if
the capital cost was doubled, the impact on total generation prices would be around US$0.7
cents per kWh, which is a small impact when compared to the final price of delivered
electricity). Second, if natural gas were not introduced, the Caribbean countries would still
require new electricity generation capacity to keep up with demand growth. As a result,
utilities and IPPs will need to pay the capital costs for new capacity, regardless of whether
the fuel used is HFO or natural gas.
Based on these assumptions and the forecasts in Section 4.4, Table 6.7 shows our estimates
of the capacity requirements and corresponding capital investments required by each
offtaker.

269

Updated Capital Cost Estimates for Utility Scale Electricity Generating Plants, EIA, April 2013, Table 1, Conventional
CC.

270

Updated Capital Cost Estimates for Utility Scale Electricity Generating Plants, EIA, April 2013, Table 1, Advanced
CT.

271

Technology Characterization: Reciprocating Engines, Prepared for: Environmental Protection Agency, Energy and
Environmental Analysis, Inc. an ICF Company, December 2008, Table 2 System 5.

272

Castalia estimate, adapted from price data in Gas Turbine World, 2013 GTW Handbook. Volume 30. Pequot. MidYear 2013.

273

ETESA Panama, Revisin del plan de Expansin 2013.


http://www.etesa.com.pa/documentos/TOMOII_PLAN_INDICATIVO_DE_GENERACION_2012-2026.pdf
accessed 10 May 2014.

147

Confidential

Table 6.7: Investment Cost of Building New Power Plants


Offtaker

Initial New
Capacity 2018

New Capacity
2019-2023

New Capacity
2024-2032

MW

US$000

MW

US$000

MW

US$000

MW

US$000

40

27,040

80

83,000

200

137,080

320

247,120

62

239,850

30

52,150

152

82,530

245

374,530

Belize, BEL

40

45,200

40

45,200

Dominican Republic,
All

720

660,240

1,080

990,360

1,800

1,650,600

Guyana, GPL

40

45,200

40

45,200

160

73,720

240

164,120

Haiti, EDH

80

54,080

240

239,360

240

146,720

560

440,160

Jamaica, JPS

360

330,120

960

550,200

1,320

880,320

Suriname, EBS

80

73,360

160

146,720

400

293,440

640

514,800

Total

662

769,650

2,274,050

5,165

4,270,370

The Bahamas, BEC


The Bahamas, GBPC
Barbados, BL&P

1,270 1,174,520 3,232

Total New
Capacity

Note: Costs are in real 2014 US Dollars

To estimate the operating and maintenance costs of generating electricity with natural gas we
use the assumptions shown in Table 6.8. Like capital costs, heat rates for Caribbean plants
will vary according to local conditions. The estimated heat rates that we are using, from U.S.
EIA, are close to the heat rates of generation plants that are currently operating in the
Caribbean and higher than heat rates for new plants functioning under ideal conditions. For
example, the U.S. EIA reports an average heat rate of 7,050 for combined cycle plants.
Existing combined cycle plants that use natural gas in Puerto Rico274 and Dominican
Republic275 have heat rates of about 7,500 Btu/kWh. Manufacturers of new 20MW to 30MW
combined cycle plants report that these plants have heat rates just under 7,000 Btu/kWh.276

274

Puerto Rico Electric Power Authority, Rating Agency Presentation. 10 March 2014.
http://www.aeepr.com/investors/DOCS/Financial%20Information/Rating%20Report/PREPA%20Ratings%20Presen
tation%203-2-10%20-%20FINAL.pdf accessed 10 May 2014.

275

AES Dominicana, 2013 Statistical Report.

276

Gas Turbine World, 2013 GTW Handbook. Volume 30. Pequot. Mid-Year 2013.

148

Confidential

Table 6.8: Electricity Operating and Maintenance Assumptions


Utilization
Heat Rates of NG Plants
Combined Cycle plant
Single Cycle plant
Reciprocating Engine plant

90%

Operating Expenses NG Power Plants


O&M variable
Combined Cycle plant
Single Cycle plant
Reciprocating Engine plant
O&M fixed
Combined Cycle plant
Single Cycle plant
Reciprocating Engine plant

Btu/kWh
Btu/kWh
Btu/kWh

7,050
9,750
8,758

US$/kWh
US$/kWh
US$/kWh

0.00
0.01
0.01

US$/kW/year
US$/kW/year
US$/kW/year

13.17
7.04
1.5

Source: EIA AEO2013, Table 1, Conventional CC, EIA AEO2013, Table 1, Advanced CT, catalog_chptech
Report done for the EPA, table 2 system 5

6.4

Making the Decision to Import Natural Gas

The main reason why countries in the Caribbean would switch to natural gas for generating
electricity is to reduce the cost of generating electricity. Therefore, the decision to import
natural gas should be made with a methodology that ensures that countries will receive
natural gas at a price that is lower than that of fuel oil. This methodology starts by ensuring
that, at projected fuel prices, the country is receiving a discount on fuel oil that is high
enough to justify the investment in assets required to deliver natural gas. However, since fuel
prices are uncertain and volatile, countries also need to do a detailed sensitivity analysis of
the level of fuel prices that make natural gas feasible and design contracts that mitigate risks
identified in the sensitivity analysis.
Projected difference between Henry Hub and WTI needs to be enough to justify
investment
As described in Section 6.3, the costs to import natural gas add an average of about US$5
per MMBtu to the cost of the fuel. In comparison, the costs for transporting and delivering
HFO to Caribbean utilities are much lower (around US$0.7 per MMBtu on average). This
means that for natural gas to be financially viable, the expected difference in prices between
Henry Hub and WTI needs to be enough to cover the higher shipping and delivery costs
associated with natural gas as well as to provide a discount that would justify the investment
(see Figure 6.11). Although each country will decide on its own the amount of the discount it
requires, in this study, we assume that this discount should be at least 20 percent for natural
gas to be definitively feasible; lower discounts could be considered by countries since it
means that natural gas would still be cheaper than HFO (see Part III).

149

Confidential

Figure 6.11: Comparing cost of Delivering LNG and HFO

Therefore, the first step in making the decision to import natural gas is to analyze the
projections of Henry Hub and WTI and test if the expected difference is enough to justify
the investment. To test the expected difference, it is important to project in detail each of the
costs of the supply chain. We do this analysis in detail in Part III for three delivery scenarios.
Then, once the feasibility is tested, the difference in cost between delivered natural gas and
delivered HFO (the red block in the figure above) would be distributed between the
suppliers, the utility, and the customers. The split would depend on the approach used for
pricing the fuel. For example, if it is the substitution cost approach, some of the difference
would go to the suppliers so that the delivered price of natural gas would be equal to a
discount on fuel oil (this would mean that the premium over Henry Hub would increase
making the red block smaller). If, on the other hand, the cost plus approach is used, the red
block could be split between the utility and the customers (depending on the applicable
regulatory framework).
Using sensitivity analysis to identify risks
Prices of fuel are uncertain. The forecasts that are available will have errors. Depending on
the magnitude and direction of errors, that could lead to problems in the future (for
example, if the price of WTI falls below projections, locking in a price for natural gas that's
above the future price of WTI could lead to a contract that increases, rather than decreases,
the future cost of generating electricity).
Therefore, the next step in making the decision to import natural gas should be a sensitivity
analysis. In particular, an analysis of those scenarios that would lead to negative outcomes
(increases in the price of HH in combination with decreases in the price of WTI). This will
identify the aspects of the contracts that need to be most carefully considered (for example
duration, initial price, price index, escalation). In Section 16, we conduct this sensitivity
analysis for the delivery Scenarios proposed in Part III.

150

Confidential

This sensitivity analysis should be conducted with the same model used to project the costs
of the supply chain. The model would allow quantifying the risks of making the wrong
decisions and also provide signs of the contracting strategies that could mitigate those risks.
Contracting strategies
The third step is identifying contract strategies that will ensure the expected savings of
switching to natural gas materialize. In addition, the strategies should also mitigate any other
risks identified in the sensitivity analysis. In particular, the contracting strategies must
consider the following aspects:
The approach used for pricing. As described in other sections of this report, it
is likely that the substitution cost approach (based on HFO pricing) will be used
in the first contracts to deliver natural gas to offtakers in the Caribbean other than
those in the Dominican Republic and Puerto Rico. Offtakers should seek to
maximize the discount on HFO they can obtain. The best way to do this will be
by contracting the natural gas through competitive tenders and only accepting an
offer that achieves the minimum discount desired
The index that will be used to update the price of the contract. The suppliers
of natural gas will require that the price paid by offtakers is indexed. This indexing
will allow the suppliers to ensure they achieve the required level of profitability.
Options for indexing include Henry Hub and fuel oil indices (WTI or Brent).
Henry Hub will likely be the underlying price for the natural gas obtained by
suppliers. Therefore, suppliers would assure a level of profitability of providing
the natural gas by using an index based on Henry Hub (for example, Henry Hub
plus 20 percent). Offtakers will have to consider whether they want to index to
Henry Hub (such that the price they pay does not exceed the price of the
commodity by a certain percent) or to a fuel oil index. The advantage of indexing
to a fuel oil index, say WTI, is that offtakers can ensure that the price they pay for
natural gas is always below the price they would have paid for HFO. In doing so,
offtakers may forego lower prices they would have faced with a Henry Hub index
Using mechanisms to hedge. Assuming they have the required financial
capacity (which may not be the case for a number of offtakers and countries in
the Caribbean), offtakers could consider using mechanisms to hedge against
changes in the price of natural gas or fuel oil that would lead to losses. For
example, utilities could purchase financial options that would pay off if the price
of oil fell before a certain price during the period of the contract for natural gas.
When considering these hedging mechanisms, offtakers must take into account
the availability of such instruments, the cost of the mechanisms, and the amount
of risk they are willing to cover with the hedge (for example, 70 percent of
expected losses)
The duration of the contract for natural gas. As described earlier in this
section, the suppliers of natural gas will have to make substantial capital
investments to deliver natural gas to new offtakers in the Caribbean. These capital
investments will create assets with minimum amortization periods of about 10
years. Therefore, the initial contracts are expected to be for periods no less than
10 years. However, with expected increases in the liquidity of the LNG market (as
seen in the growing proportion of spot market sales of LNG) and the availability

151

Confidential

of assets that are able to service smaller markets, in the future, offtakers will have
options to sign shorter term contracts. For now, offtakers should seek to sign
contracts that match the duration of their assets. This will likely mean initial
contracts of about 10 to 15 years.
As described above, structuring, negotiating, and signing a successful contract requires a
methodology that analyzes the potential impact of changes in the price of fuel oil and natural
gas during the life of the contract, and identifies and implements contracting strategies
consistent with the offtaker's capacity, requirements and risk profile, and considers the
potential changes. A well-structured approach for designing a competitive tender and a
disciplined approach to negotiating a contract will be essential for securing natural gas at a
price and on terms that ensure the contract reduces the cost of generating electricity during
the life of the contract.

152

Confidential

Challenges of Buying, Shipping, and Using LNG in


the Caribbean

In addition to the risk that the delivered price of natural gas may rise above the delivered
price of fuel oil in the future, introducing LNG in more countries of the Caribbean poses a
number of risks and complexities. Some of these risks are inherent to any change in the main
fuel for electricity generation, while others are specific to LNG. The effective development
and establishment of a commercial chain for buying, transporting, and using LNG in more
countries of the Caribbean must adequately address the challenges related to financing
(Section 7.1), the legal and regulatory framework (Section 7.2), commercial arrangements
(Section 7.3), and technical and environmental aspects of using LNG (Section 7.4).

7.1

Financing Challenges

One challenge the region must overcome to establish an LNG supply chain will be securing
sufficient financing to backstop the LNG supply contract, as well as to build the required
infrastructure to transport and deliver the LNG to each destination market. This will be
especially difficult for the region because many Caribbean countries have high levels of
sovereign debt (as described in Section 2.1). Also, many of the regions utilities (which, as the
primary offtakers, will ultimately be responsible for paying for the new infrastructure) have
poor credit ratings.
The question of financing involves two separate but related requirements: securing the actual
funds to pay for the needed investment, whether through capital or debt; and, providing the
necessary financial guarantees and assurances that the companies that enter into long-term
natural gas supply contracts will need to cover the agreements costs for its entire duration.
Each of these aspects is reviewed in detail below.
Financing to cover capital costs
The capital cost for any natural gas transportation infrastructure is high and adds
substantially to the final delivered cost of natural gas. Financing this capital requirement, and
the cost to do so, is a critical component to establishing a viable natural gas supply chain in
the region.
Depending on the arrangements, parts of the project would need to be financed by the
offtakers (for example regasification facilities). The type of financing available to each
offtaker would depend on its financial capacity as well as any support the host government
may be able to provide. Other segments, such as the construction of appropriate
transportation vessels, can be financed by the private companies that make the vessels
available for hire and operate them on behalf of the chartering client.
While multilateral banks can support a portion of the project, funding from private financial
institutions and the project sponsors themselves will also be required. This allocation of the
funding requirement across the various participants has implications for the ultimate
ownership and contractual structure of the commercial chain.
Credit required to enter into long-term gas supply agreements
Due in part to the capital intensity of new LNG infrastructure, LNG purchase and sale
contracts tend to have 15-20 year duration. These contracts in turn require a guarantee of

153

Confidential

payment for the length of the contract to allow the seller to secure the financing it would
require to build the necessary infrastructure.
This long-term take-or-pay requirement, and the related guarantee, is very different from
contracts to buy fuel oil, where a liquid and fungible global market helps protect sellers from
any default by their buyer. A private company, Gunvor, has indicated it would require a
guarantee that covered 1 to 2 years of costs of natural gas delivered in each country. This
suggests a required guarantee of about US$70 million to US$140 million for the smaller
countries in the region, such as Barbados, to as much as US$0.7 billion to US$1.4 billion for
the larger countries, such as the Dominican Republic. Securing this type of guarantee will be
difficult, given the poor credit ratings of most offtakers and governments in the region.
Table 7.1 shows the credit rating given by Moodys and S&Ps to sovereign debt in the
countries of emphasis. The table also shows a default spread associated with the credit
ratings. To allow for comparison, sovereign debt ratings and default spreads are also shown
for other countries in the Caribbean Basin, and average default spreads are given for regions
around the world. Although utilities can have different credit risk than that of the countries
where they are, sovereign credit risk is one of the parameters that shows perceived credit risk
for a company in a specific country.

154

Confidential

Table 7.1: Sovereign Credit Rating of Countries of Emphasis


Moodys Sovereign
Credit Rating

S&P Sovereign
Credit Rating

Rating-based
Default Spread*

N.A.
A
B
BBBBBB
N.A.
N.A.

1.9%
1.6%
6.5%
3.6%
4.5%
9.0%
10.0%
N.A.
N.A.

A
BBB
BBB+
B+

1.2%
1.9%
1.9%
3.6%

0.00%
1.25%
1.50%
1.59%
2.49%
2.88%
3.62%

4.28%
5.30%

Countries of Emphasis
The Bahamas
Baa2
Trinidad and Tobago
Baa2
Barbados
B3
Suriname
Ba3
Dominican Republic
B1
Belize
Caa2
Jamaica
Caa3
Guyana
N.A.
Haiti
N.A.
Other Countries in the Caribbean Basin
Mexico
A3
Panama
Baa2
Colombia
Baa2
El Salvador
Ba3
Regions
North America
Western Europe
Australia & New Zealand
Middle East
Asia
Eastern Europe & Russia
Central and South
America
Africa
Caribbean Countries of
Emphasis **

Source: S&P: Standard & Poors Sovereign Rating List, Retrieved 3 June 2015 from
http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/us/
Moodys Sovereign Ratings List, Retrieved 3 June 2015 from
http://v2.moodys.com/moodys/cust/content/loadcontent.aspx?source=staticcontent/businesslines
/sovereign-subsovereign/ratingslistgbr.htm&param=all
Note: N.A.: Not available
*Rating-based Default Spread shows the spread over a risk free bond due to default risk for each rating, as
calculated by Professor Aswath Damodaran in his data set Country Default Spreads and Risk
Premiums, retrieved 3 June 2015
**Simple average of the default spread of the countries of emphasis

Managing this disconnect between the financial guarantees required by infrastructure


developers and the credit capacity of the ultimate natural gas offtakers will require careful

155

Confidential

financial planning and coordination among buyers, sellers, financing providers, multilateral
lenders, and governments. Potential options to explore include:
Reduced take or pay levels. Discussions with private sector players held with
the Caribbean natural gas working group, coordinated by the Inter-American
Development Bank and the United States Department of Energy, have suggested
that the take-or-pay and related contract guarantees are the greatest stumbling
block for them to enter into an LNG purchase agreement. One suggestion is to
approach LNG providers with depreciated assets and negotiate lower take-or-pay
requirements, as these operators have already paid off the original investment in
the liquefaction plant. It is not clear, however, if this approach would be
welcomed by LNG providers
Official debt relief or dispensation on debt ceilings. The Caribbean countries'
high level of official debt is another limitation. Most multilateral lending agencies
are restricted in the amount of additional debt or credit guarantees that they can
offer to these highly indebted countries. Reducing the countries debt load via
debt forgiveness, or waiving the current limitations on new debt that they can take
on, could help reduce this barrier. It is not clear, however, if lender countries and
institutions would be willing to write down their debts to the region to support
this project
Support from external public utilities. The proposed natural gas supply project
linking Trinidad with Martinique and Guadeloupe benefits from the support of
EDF, the French electricity utility, as both islands are part of France. In this case,
the full financial capacity and support of a large, investment grade utility is a
critical part of moving the project financing forward. Securing a similar external
champion for other utilities in the region could unlock further lending and
investment capacity for the region. For example, the large international
corporations that own JPS in Jamaica (jointly owned by Marubeni and Korea
Electric Power Corporation), BLPC in Barbados, and GBPC in Grand Bahama
(both owned by Emera, Inc.) could provide the backing required to obtain project
financing
Trade higher returns and prices for greater private sector involvement. In
most commercial transactions, risks of almost any kind can be overcome if there
is sufficient profit incentive for a private company to take them on. In a similar
way, an external private investor that was able to make a sufficient profit on the
operations of the regional LNG commercial chain may be persuaded to make the
necessary investments to develop it.

7.2

Legal and Regulatory Challenges

The legal and regulatory framework in most countries in the Caribbean will have to be
adjusted for effectively importing LNG for generating electricity and other uses. Initially,
these adjustments will be related to the incentives electricity utilities have for switching from
fuel oil to natural gas for generating electricity. Once contracts are in place for using natural
gas for electricity generation, it will be important to develop the legal framework for using
natural gas for other uses such as transportation. Also, consideration must be given to
reduce any negative effects of contracting LNG supply through a single monopoly supplier.

156

Confidential

Providing incentives for utilities to switch from fuel oil to natural gas for generating
electricity
Utilities must be involved in the decision to import natural gas, even if the difference in
pricing between fuel options makes sense and there are ways to mitigate risks of the gap
closing. A utility would decide to import natural gas because it had the right incentives to do
so, for example, if it could keep part of the savings produced by generating electricity with
natural gas rather than fuel oil. Currently, the regulatory frameworks applicable to most
Caribbean utilities do not have these kinds of incentives.
Tariff schemes in the Caribbean allow utilities to charge the fuel through a direct passthrough to utility customers. Pass-throughs are an essential component of the tariff structure
because they allow a utility to pass on the risk of changes in the cost of fuel to the customer.
If a utility had to bear the risk of changes in the cost of fuel, which is volatile and
unpredictable, it could greatly harm the utilitys financial position.
However, most regulatory frameworks in the Caribbean do not have incentives for the utility
to generate electricity with the lowest cost source. In some cases, regulatory frameworks do
not even allow for the pass-through of fuels other than diesel or HFO. In other words,
although utilities are allowed to pass through the cost of fuel they currently use for
generation to customers, the regulator should also establish mechanisms that provide the
utility with incentives to incur the cost of fuel efficiently.
Bringing LNG to Caribbean countries could reduce the costs of generating electricity, but it
has an associated risk to utilities because they have to make sure the assets to do so are in
place. This means that if the utility sees no gains in bringing a cheaper fuel, and instead
perceives higher risks, it will decide not to change from its existing fuel. Therefore, at the
very least, regulators should allow for pass-through for viable fossil fuels such as HFO,
natural gas, and coal. Such flexibility would provide the utility with a mechanism to cover the
costs to generate with lower cost sources if they exist.
It is also important to analyze if it makes sense to include more incentives for the utilities.
For example, if the costs of fuel decrease by 20 percent because of a change of fuel, then the
utility could be able to keep some of this for some period of time. Another mechanism,
which would work in larger countries in the Caribbean, would be to procure new projects
competitively. That way, the bidder with the lowest price of generation would be selected,
thereby incentivizing bidders to bid with the lowest cost fuel. These solutions are particular
to each country and should be analyzed taking into consideration the regulatory framework
in place in each country.
Developing the legal and regulatory framework for using natural gas for uses other
than generating electricity
The offtakers would purchase the natural gas directly from a private company. Therefore, we
expect that no major legal and regulatory changes would be required for this initial phase.
Many of the countries in the region would require additional legal and regulatory changes to
enable the creation of a natural gas market beyond the initial offtakers. However, it may be
beneficial to first establish a viable commercial LNG chain with a single main offtaker before
developing the secondary market.
The countries of emphasis, with the exception of the Dominican Republic (and, to a much
smaller extent, Haiti), do not currently have a domestic natural gas market. Creating this new

157

Confidential

market will require a large amount of planning, investment, and coordination on its own;
further complicating the process by introducing regulations and requirements for a market
that does not yet exist could significantly slow the process and potentially reduce investor
interest. As described in Section 4.4, taking a phased approach in which the initial market is
established for a single major sector (power generation), and then expanded to others at a
later date, can ensure the market is not stifled before the first gas flows.
Minimizing impact of contracting LNG supply to a single monopoly supplier
A related issue concerns the risk of contracting LNG supply to a single monopoly supplier.
An open tender process and sufficiently attractive market, legal, and regulatory regime can
help ensure that the largest possible number of suppliers compete in the tender. This
approach would limit the competition for market access to a single point in timethe
moment in which the gas supply contract is tenderedbut would also establish the most
attractive opportunity possible for the region, thereby potentially increasing the level of
competition at that point.
A key aspect in ensuring the market does eventually become more competitive would be to
limit the contract period to a relatively short length (15 years). This would allow further
competitive elements to be introduced as quickly as possible without scaring off initial
investors.

7.3

Commercial Arrangements

The commercial arrangements should seek to mitigate known project risks and allocate them
to those entities that are best able to manage or bear them. In each case, the shifting of risk
from one entity to another will likely have an impact on the final price to be negotiated
between buyer and seller.
A critical risk facing Caribbean countries is the limited size of each individual market.
Countries with the smallest potential natural gas demand also faced the highest costs in
delivering the gas, as the cost to build many components along the supply chain are relatively
insensitive to the size of the project.
In addition to the risk of higher costs, the total natural gas demand may be insufficient to
attract suppliers attention in order for Caribbean consumers to directly access the LNG
market. Based on our estimates, the maximum volume of natural gas that the countries of
emphasis would buy in 2018 is approximately 427 MMcfd. This would increase to about 502
MMcfd in 2023, and 586 MMcfd in 2028 (see Section 4.4.1). The challenges with these
smaller volumes of demand are:
Securing long-term gas supply agreements. Much of the time and cost related
to negotiating and closing a long-term gas supply agreement is also independent
of the volume of LNG involved. This means that owners of liquefaction terminals
have a strong incentive to sign a few supply contracts with a small number of
large, credit worthy offtakers rather than spend the greater amount of time and
expense required to negotiate a much greater number of supply contracts with
small offtakers. As a result, small consumers may have difficulty securing longterm gas supply agreements
Added complexity of coordinating infrastructure and services across
multiple countries. One way to overcome these difficulties is for a number of
small offtakers to jointly negotiate a single contract for the sum total of their
158

Confidential

individual requirements. This approach, however, may in turn create additional


difficulties. Projects involving multiple countries have experienced delays in their
implementation. For example, the Eastern Caribbean Pipeline that would bring
natural gas to Barbados, Martinique, Guadeloupe, and St. Lucia, was first
proposed in 2002. The added complexity of negotiating supply agreements with
multiple customers, as well as managing government relations and regulatory
compliance with multiple jurisdictions, can slow down the development process
significantly. Projects involving more than a single country, therefore, must show
a clear economic benefit from involving multiple countries to justify the increased
project complexity. A project that is economically viable serving a single country
may be better phased to serve that single customer first before expanding to
include additional countries. For projects that are not economically feasible
without including multiple countries, or are very difficult to increase in scale once
built (such as for undersea pipelines), this suggests that the project development
process will be slow, taking many years to manage the resulting complexity.

7.4

Technical Aspects of Using LNG

Creating a new natural gas market can present a number of technical challenges as well. Most
importantly, electricity generation capacity in the destination markets has to be converted in
order to burn natural gas. Each of these technical aspects is discussed in detail below.
Transporting small volumes of LNG
Smaller volumes of demand in the Caribbean impose challenges to the physical access to
standard terminals. Not all LNG export terminals are able to accommodate small-scale LNG
carriers. Potential constraints can include the height of the jetty, the size and positioning of
the LNG loading arms, and the flow volume and configuration of off-loading pumps and
connectors. Even terminals that are physically able to accommodate smaller ships may be
unwilling to do so. Much of the time required to load an LNG carrier is taken up by moving
the ship into position for loading and connecting the ship to the loading arms, then reversing
both processes once loading is completed. This time is largely independent on the ships size,
such that a small ship can take almost the same amount of time to complete the full loading
cycle as a full-scale ship. A liquefaction facility that has been optimized to serve full-scale
ships could therefore face operational challenges supplying smaller ships that could only take
on a fraction of the expected supply in each loading cycle.
Changing electricity generation technologies
The Caribbean regions current fuel oil fired electricity generation technologies are generally
amenable to conversion to burn natural gas, although the specific cost to convert each unit
will depend greatly on the specific manufacturer and model. In general, however, this is a
question of the relative cost to make the conversion, rather than the technical ability to do
so.
We expect the conversion process to allow the units to burn both fuel oil and natural gas.
This flexibility will allow the units to switch to liquid fuels as a back-up should there be any
disruption in natural gas supply. It can also provide a hedge against changes in the relative
delivered price of natural gas and liquid fuels, as the generators could readily switch to
whichever fuel was cheapest. This capability can also help introduce a level of competition to
the natural gas market once the initial supply contracts mature.

159

Confidential

Natural Gas Liquids as Alternatives to Fuel Oil

Liquid petroleum gases (LPG) and ethane are two natural gas liquids (NGLs) that could be
used for electricity generation in the Caribbean. Both LPG and ethane are byproducts of oil
and gas production that are not typically used for power generation. Ethane is largely used as
a feedstock for petrochemical crackers, or as additives to fuels. LPG is mostly used by
households for cooking, heating, and other purposes, and it is also commonly used in
industry and transportation.
In recent years, excess supply from the U.S. has driven down prices for these fuels, and has
led to proposals for using LPG and ethane for electricity generation in the Caribbean. Using
these fuels for electricity generation would require new infrastructure to import and store
them, and would require conversion of existing thermal generation capacity. The market for
NGLs is substantially smaller than the markets for oil and natural gas; LPG production was
only 8 percent of natural gas production in the United States in 2014, and ethane production
as only 4 percent of natural gas production.277
Figure 8.1 shows the range of natural gases. Ethane (C2H6) is considered a natural gas liquid,
but is sometimes sold together with methane as natural gas. LPG is a mixture of propane
(C3H8), butane (C4H10), and isobutane (C4H10)the ratio of each varies.
Figure 8.1: Natural Gas Liquids

Source: EIA. Natural Gas Liquids - Supply Outlook 2008-2015, International Energy Administration

Price fluctuations make it difficult to forecast the attractiveness of LPG and ethane
compared to natural gas or HFO. As of June 2015, both fuels are cost competitive with
natural gasat the Mont Belvieu, Texas trading hub in the United States, LPG costs about
US$3.9 per MMBtu, and ethane prices are slightly lower than the US$2.9 for natural gas at
277

Comparison of marketed natural gas production (production less producers own use and vented and flared gas) and
propane, butane, and isobutane production for LPG, and ethane production (United States Energy Information
Administration).

160

Confidential

Henry Hub. Further, the infrastructure to receive either LPG or ethane would likely be
cheaper that the infrastructure to receive natural gas. Nonetheless, the outlook for LPG and
ethane is uncertain. Neither is traditionally used for power generation, and markets are
changing rapidlythe spot price of LPG fell 67 percent between 9 September 2014 and 6
June 2015, from US$11.8 per MMBtu to US$3.9 per MMBtu.
Recent long-term estimates project that LPG will sell for similar prices to HFO. As such, we
expect that LPG will likely not be an attractive option for Caribbean countries, since
infrastructure for LPG cannot be re-used for LNG. Section 8.1 describes the global market
for LPG, its use for electricity generation, and the supply chain for using it for electricity
generation.
Ethane prices may also rise over the medium term as petrochemical crackers, the main
consumers of ethane, take on more of it as a feedstock. However, Caribbean countries could
use ethane as a transitional fuel until they can contract for natural gas, since much of the
receiving infrastructure for ethane could be re-purposed to receive natural gas. Given the
potential difficulties in contracting for LNG in the near term (as described above in Section
7), a combination of ethane in the near term and LNG in the longer term could provide an
attractive discount to fuel oil for some Caribbean countries. Section 8.2 describes markets
for ethane and the necessary supply chain to use in for electricity generation.
Section 8.3 provides an outlook of the use of LPG or ethane for electricity generation in the
Caribbean.

8.1

Liquefied Petroleum Gas (LPG) as an Alternative to Fuel Oil

Liquefied petroleum gases (LPG) are a group of hydrocarbon gases, primarily propane
(C3H8) and butane (C4H10). LPG is a gas at standard temperature and pressure, but may be
compressed or cooled to a liquid state for easier transportation and storage.278 LPG is easier
and cheaper to liquefy than natural gas or ethanedepending on the mix of propane and
butane, LPG will liquefy at less than 0.5 to -42.5 degrees Celsius, compared to about -89
degrees Celsius for ethane and -160 degrees Celsius for natural gas. LPGs are produced as a
byproduct of natural gas (which is primarily methane, CH4) and crude oil extraction.
8.1.1 Global market for LPG
Global production of LPG rose from just over 200 million tonnes in 2002 to more than 250
million tonnes in 2012 (see Figure 8.2). Of that, 81 million tonnes were exported in 2012.
Producers in the Middle East made up about one-quarter of production, and 40 percent of
exports.

278

United States Energy Information Administration, Glossary. http://www.eia.gov/tools/glossary/index.cfm?id=L


accessed 10 June 2015

161

Confidential

Figure 8.2: LPG Production by Region (2002 to 2012, million tonnes)

Source: Argus, Statistical Review of Global LP Gas

Globally, the Asia and Pacific region is the largest market for LPG, consuming nearly 35
percent of the world total in 2012 (see Figure 8.3). North America and Europe are the two
other largest markets for LPG consumption.
Figure 8.3: LPG Consumption by Region (2002 to 2012, million tonnes)

Source: Argus, Statistical Review of Global LP Gas

Final consumption of LPG was about 220 million tonnes in 2012 (Table 8.1). Globally,
households accounted for about half of this use, for cooking and other domestic needs.
162

Confidential

Industrial uses, including in the iron and steel industry as well as manufacturing,
construction, and mining, were the next biggest users. Transport made up about 10 percent
of LPG consumption.
Table 8.1: Global Use of LPG by Sector
Sector

Note:

Percent of World Total

Households

50%

Iron and steel industry

11%

Transport

10%

Manufacturing, construction and non-fuel mining industry

10%

Road

9%

Other

3%

Chem and petrochem

3%

Agriculture, forestry and fishing

1%

Energy industry own use

1%

Electricity generation

1%

Domestic navigation

<1%

Rail

<1%

Domestic aviation

<1%

Due to rounding, totals may not add to 100 percent.

Source: Castalia calculations from UN Data

Increasing production and exports from the United States have added to global LPG
supplies in recent years. Production of propane and butane from U.S. gas plants rose from
270 million barrels in 2010 to 452 million barrels in 2014, an increase of 67 percent. This
increase in production has not been met by an increase in domestic demanddemand in
2014 for propane and propylene was 1 percent lower than the average demand from 2009 to
2013.279 As a result, the spot price of propane at Mont Belvieu, Texas (the main trading hub
in the United States) fell 67 percent between 9 September 2014 and 15 June 2015, from
US$11.8 per MMBtu to US$3.9 per MMBtu.280
In late 2014 and early 2015, oversupply of propane in the United States has led to a large
accumulation of inventory along the U.S. Gulf Coast. The stock of propane and propylene in
the U.S. was 81,000 barrels for the week ending 13 June 2015, 59 percent higher than the
same week in 2014.281
279

Average demand from 2009 to 2013 was 1.17 million barrels per day, compared with demand in 2014 of 1.16 million
barrels per day (United States Energy Information Administration).

280

United States Energy Information Administration

281

United States Energy Information Administration

163

Confidential

Much of the supply excess from the United States has been exported, making the U.S. the
worlds largest exporter of propane in 2014.282 As recently as 2008, the country was a net
propane importer, but exports have risen rapidly since. Exports rose from an average of
131,000 barrels per day in 2010 to 496,000 barrels per day in 2014. Exports continued to rise
in the first half of 2015, reaching a peak rate of 719,000 barrels per day in February 2015 (see
Figure 8.4).
Figure 8.4: United States LPG Exports (2006 to 2015)

Note:

Combined exports of propane, propylene, butane, and butylene

Source: United States Energy Information Administration

8.1.2 Current use of LPG in the Caribbean


The nine countries of emphasis use about 931,000 tonnes of LPG, mostly for residential
purposes (see Table 8.2). Transportation is the next biggest use of LPG in the region, at
nearly one-third of total consumption. The Dominican Republic is by far the biggest LPG
market, accounting for 81 percent of overall use and all use in the transportation sector.

282

Farquharson, Alan, Upstream Developments Generate Growing Hydrocarbon Gas Liquids Supply. Range Resources.
Presentation at the U.S. EIA Energy Conference, Washington, DC, June 2015.

164

Confidential

Table 8.2: LPG Consumption by Sector and Country (thousand tonnes, 2012)
Residential

Transport

Commercial
and public
services

Industrial

Other or
unspecified

Total

The
Bahamas

Barbados

Belize

11

Dominican
Republic

393

Guyana

15

Haiti

11

13

Jamaica

45

38

85

Suriname

14

Trinidad
and Tobago

14

Total

520

1
294

36

13

32

755
16

2
1
294

77

36

16
15

931

Source: UN Data, Energy Statistics Database

None of the countries of emphasis use LPG to generate electricity. Assuming a 90 percent
utilization rate and 32 percent efficiency rate283, a single 100MW power plant would need
about 192,000 tonnes of LPG per yearmore than double the consumption of every
Caribbean country except for the Dominican Republic.
8.1.3 Using LPG for electricity generation
Globally, LPG is burned to generate electricity by self-producers, refineries, hydrocarbon
extraction facilities, but rarely by utilities. Japan is the only country that burns LPG to
generate electricity at utility scale, producing about 6,200MWh284 of electricity in 2012. This
electricity is almost entirely generated at the Anegasaki Power Station in Ichihara, Japan,
where about 1,200MW of the installed capacity can use LPG.285 TEPCO, the plants owner,
typically purchases LPG to meet high demand over sustained periods.286
283

Hitachi cites an efficiency of 34.3 percent for a new gas turbine using LPG. Kuba, Shunichi, LPG burning gas turbine
for power generation. Hitachi, Ltd. Presentation at WLPGA Regional Summit on Exceptional Energy for the Andes.
January 2014.

284

Converted from 1,511 metric tonnes of LPG transformed into electricity, assuming an efficiency of 32 percent. Data
from UN Data, Energy Statistics Database.

285

Federation of Electric Power Companies of Japan, Electricity Review Japan, 2013.


http://www.fepc.or.jp/english/library/electricity_eview_japan/__icsFiles/afieldfile/2013/08/12/2013ERJ_full_1.pdf
accessed 10 June 2015

286

Kumagai, Takeo and Ramthan Hussain, Japan's Tepco buys 100,000 mt LPG in August due to heat wave: source. 22
August 2013. http://www.platts.com/latest-news/oil/tokyo/japans-tepco-bu ys-100000-mt-lpg-in-august-due27326676 accessed 10 June 2015

165

Confidential

Globally, large-scale self-producers in four countries generated about 1,200MWh287 of


electricity using LPG in 2012. Smaller-scale self-producers are not included in this total
there were 121 units of LPG-burning gas turbines in more than ten countries 2013, in
addition to other types of LPG-burning generators.288 Refineries and hydrocarbon extraction
facilities often burn LPG for power generation, rather than invest in the infrastructure to
separate it from other hydrocarbons and market it.
One Caribbean utility, the US Virgin Islands Water and Power Authority (WAPA), is
converting its generators and building the necessary infrastructure to receive and use LPG.
WAPA has contracted with Vitol, a fuel supplier and logistics company, to build the
infrastructure and supply the LPG for electricity generation on the two separate electricity
systems in the U.S. Virgin Islands, one on the islands of St. Thomas and St. John, and the
other on the island of St. Croix. The first shipment of LPG to the utility is expected in July
2015.289
Under its contract with WAPA, Vitol is:
Installing the infrastructure needed to deliver and use LPG. This includes two
terminals for receiving LPG, 18 LPG storage tanks, and vaporizers to re-convert
the LPG to gas
Converting about 286MW of thermal capacity to be able to use LPG or natural
gas. This is all of WAPAs thermal capacity, which currently runs on ultra-lowsulfur diesel. The ability to use natural gas as well as LPG will give WAPA fuel
flexibility once its current ten-year offtake agreement for LPG runs out
Supply WAPA with LPG for a period of 10 years. LPG will be supplied at a price
indexed to the price at Mont Belvieu. Two purpose-built vessels were constructed
to deliver LPG from the mainland United States to the U.S. Virgin Islands.
The expected total cost of the infrastructure to receive and use LPG is about US$150
million, all of which will be paid by Vitol. WAPA will re-pay Vitol over ten years, with
payments included in the delivered cost of fuel. Most of the infrastructure is specific to LPG.
The generators have the flexibility to burn natural gas as well, but the receiving and storage
infrastructure for LPG could not be re-used to receive LNG.
WAPA expects to reduce its fuel cost by about 30 percent by switching to LPG, from about
US$0.36 per kWh sold in 2014.290 However, other Caribbean utilities could likely not expect
287

Converted from 302 metric tonnes of LPG transformed into electricity, assuming an efficiency of 30 percent. Data from
UN Data, Energy Statistics Database.

288

Kuba, Shunichi, LPG burning gas turbine for power generation. Hitachi, Ltd. Presentation at WLPGA Regional
Summit on Exceptional Energy for the Andes. January 2014.

289

Virgin Islands Water and Power Authority, WAPA Receives much anticipated Army Corps of Engineers permit for
Propane Project on St. Croix. 18 May 2015. http://www.viwapa.vi/News/PressReleases/15-0518/WAPA_Receives_much_anticipated_Army_Corps_of_Engineers_permit_for_Propane_Project_on_St_Croix.aspx
accessed 19 June 2015

290

This is a sharp reduction from the average fuel cost of US$0.40 per kWh in 2013, when oil prices were higher.
Information from 2013 from Hodge, Hugo, Propane for Power Generation: Virgin Islands Water and Power
Authority. Presentation at Platts Caribbean Energy Conference, January 2014. Information from 2014 from Hodge,
Hugo, Progress on the USVI Propane Project. Presentation at Platts Caribbean Energy Conference, January 2015.

166

Confidential

the same savings under the terms that WAPA received, because WAPA pays a higher price
than the regional average for fuel oil. In 2012, WAPAs average fuel cost was US$0.35 per
kWh sold291, about 50 percent higher than the average of US$0.23 per kWh sold for a sample
of six other Caribbean utilities292. WAPAs fuel costs made up 96 percent of operating costs,
and 90 percent or more in 2013 and 2014. By contrast, fuel costs made up an average of 73
percent of operating costs for six other Caribbean utilities. As such, a 30 percent reduction in
fuel costs would bring WAPAs costs in line with other Caribbean utilities.
WAPAs fuel costs are higher than those for other Caribbean utilities because WAPA burns
ultra-low sulfur no. 2 diesel to comply with United States emissions regulations. Ultra-low
sulfur no. 2 diesel burns cleaner than HFO, but is more expensive. The average price of
HFO was 73 percent of the average price of ultra-low sulfur no. 2 diesel between 2010 and
2015. There was an average monthly spread between these two of US$6.1 per MMBtu and a
minimum monthly spread of US$4.6 per MMBtu over this period (see Figure 8.5).
Figure 8.5: Prices for HFO and Ultra-Low Sulfur No. Diesel (2010 to 2015)

Note:

Monthly average for April 2010 to March 2015. Average prices in the United States paid by endconsumers to retailers. ULS=ultra-low sulfur

Source: United States Energy Information Administration

8.1.4 Supply chain for delivering LPG for electricity generation


Figure 8.6 shows the supply chain for delivering LPG to the Caribbean. After propane and
butane are extracted along with crude oil and natural gas, they are transported to refining
facilities. Here they are separated from the crude oil and natural gas, and marketed as a

291

292

United States Virgin Islands Water and Power Authority, Electric System of the Virgin Islands Water and Power
Authority, Financial Statements and Supplemental Schedule, Years Ended June 30, 2014 and 2013.
http://www.viwapa.vi/Libraries/PDFs/Electric_FS_2014_FINAL.sflb.ashx accessed 11 June 2015
JPS, BLPC, GPL, DOMLEC, GRENLEC, and LUCELEC. Data from the utilities annual reports.

167

Confidential

mixture or separately (either as pure propane or pure butane). The LPG is then stored before
being transported to the market where it will be used.
The two options for transporting LPG to the Caribbean are through a pipeline and by ship.
Similarly to the case for natural gas, deep seas in the region and relatively small demand
mean that pipelines are not likely to be economical. By ship, LPG can be transported in
purpose-built carriers with built-in pressurized or refrigerated storage, or it can be
transported in pressurized bottles loaded onto a standard cargo vessel. If the LPG is shipped
in a purpose-built carrier, additional storage capacity is needed after the LPG is offloaded.
The three main options for storage are in a floating storage vessel, in a refrigerated storage
tank, or in a pressurized storage tank.
From the local storage site, LPG can be transported to the end user by truck or by pipeline.
Potential end users include electricity generators; industrial, commercial, and residential
users; and vehicles.
Figure 8.6: LPG Supply Chain

8.2

Ethane as an Alternative to Fuel Oil

Ethane (C2) is an odorless gas at standard temperature and pressure, but may be compressed
or cooled to a liquid state for transportation and storage. Ethane is a byproduct of oil
refining and natural gas production.293 As a fuel, ethane can be burned in purity form (100
percent) in gas turbines and internal combustion engines, and it can be added to existing
natural gas streams to increase the volume and heat content of the natural gas delivered to
consumers and power plants.294 However, ethane extracted from natural gas processing
plants is mostly used as petrochemical feedstock for ethylene production.295
8.2.1 Global market for ethane
Global ethane production more than doubled between 2003 and 2012 (see Figure 8.7).
During this period, production rose from about 19,000 tonnes to more than 46,000 tonnes.

293

United States Energy Information Administration, Glossary. http://www.eia.gov/tools/glossary/index.cfm?id=E


accessed 10 June 2015

294

American Ethane Company

295

EIA. Ethane

168

Confidential

The United States is the largest global producer, at 45 percent of the world total in 2012.
Saudi Arabia is the second-largest producer, at 25 percent of the world total.
Figure 8.7: Global Ethane Production (2003 to 2012)

Source: UN Data

169

Confidential

The expansion of drilling programs in the US shale gas plays has boosted the production of
NGLs that are extracted from the natural gas production stream.296 Ethane is typically the
largest component of NGL production, and historically it accounted for more than 40
percent of the raw un-fractioned NGL mix.297 Also, more efficient gas processing
technologies increase the share of ethane in NGL production. Therefore, ethane production
growth is especially pronounced compared to other NGLs (see Figure 8.8).
Figure 8.8: U.S. Gas Plant Production of Ethane-Ethylene

Source: United States Energy Information Administration. Natural Gas Plant Field Production available at:
http://www.eia.gov/dnav/pet/pet_pnp_gp_dc_nus_mbbl_m.htm

Demand for ethane comes almost exclusively from the petrochemical industry. In contrast
to the rapid growth in supply, demand for ethane has remained relatively flat. At the
moment, current and projected potential ethane production exceeds the needs of the
petrochemical industry.298 This has resulted in falling ethane prices: spot prices were below
the 2010-to-2012 range for every trading day in 2013 and 2014 (see Figure 8.9).299 Also, since
March of 2014 ethane prices at Mont Belvieu have been lower than natural gas prices at
Henry Hub on an energy equivalent basis.300

296

EIA. Ethane prices trail other natural gas liquids available at: http://www.eia.gov/todayinenergy/detail.cfm?id=1170

297

Lloyds Register Marine. Seaborne ethane. A report into the commercial need and technical requirements for very large
ethane carriers. August 2014

298

RBN Energy. Available at:https://rbnenergy.com/you-ain-t-seen-nethane-yet-ethane-exports-will-rise-but-will-they-soar


Accessed June 11 2015

299

EIA. Ethane prices trail other NGLs Available at: http://www.eia.gov/todayinenergy/detail.cfm?id=1170 Accessed
June 11 2015

300

RBN Energy. Available at:https://rbnenergy.com/back-to-the-ethane-asylum-recovering-ethane-when-it-is-worth-moreas-natural-gas Accessed June 11 2015

170

Confidential

Figure 8.9: Spot propane and ethane prices (US$/MMbtu)

Source: United States Energy Information Administration. Available at


http://www.eia.gov/todayinenergy/images/2014.10.09/chart2.png.

Ethane price trends will become increasingly important for natural gas processors in the
main shale producing regions in the US.301 The fractionation or Frac spread is the
difference between the price of natural gas and the weighted average price of the NGL barrel
on a BTU basis. A wider spread results in a more profitable operation for natural gas
processors.302 If ethane prices are low, or the frac spread is too narrow, it is uneconomic to
recover ethane from the raw natural gas stream, leading to ethane rejection which is the
decision to leave ethane in the natural gas stream.
In the past five years, the average frac spread has declined sharply: from $12/MMbtu in
2011, to $6/MMbtu in 2012, and $5.50/MMbtu in 2013. In November 2014, the Frac
Spread dropped below $4.00/MMbtu, and by January 2015 the spread was below
$2.00/MMbtu. Even under narrow frac spreads, technical and market characteristics of
ethane do not allow for total ethane rejection, for two main reasons. First, ethane-infused
natural gas from some of the main shale producing regions in the US does not meet the
standards of pipelines intended to transport dry gas,303 and may not be suitable for some
natural gas consumers. Therefore, ethane has to be removed if the gas is to be marketable.
Second, contracting terms in the ethane market impose ethane production volumes that limit
the possibility to completely reject ethane. Most of the natural gas processing plants built in
the US have been developed by Master Limited Partnerships (MLPs), and were supported by
customer commitments. MLPs and other midstream companies invest in the infrastructure
with long-term contracts with customers (often producers) that back those investments. As a
result, some contracts in the ethane market have throughput volumes or impose large
301

Vivec Chandra, Fundamentals of Natural Gas: An international perspective. 2006

302

Rbn Energy. Spotcheck: Gas processing Frac Spread. Available at: https://rbnenergy.com/spotcheck/frac-spread

303

Nick Butler. Ethane the next challenge for the energy market available at: http://blogs.ft.com/nickbutler/2015/01/18/ethane-the-next-challenge-for-the-energy-market/

171

Confidential

penalties (deficiency payments) if throughput volumes are not delivered. As a result, ethane
is recovered even if market conditions favor ethane rejection.304
8.2.2 Ethane trade in the US and the Caribbean
There is essentially no local market for surplus ethane in the US (as there is for propane,
butane, and other liquid hydrocarbons), or pipeline infrastructure to transport the ethane to
petrochemical markets located predominantly along the Gulf Coast.305 As a result, the surplus
of ethane should be met by increased exports.
At this point, there are no facilities operating in the U.S. for exporting ethane that could be
used for shipping ethane to the Caribbean. However, the potential deals and projects in place
for expanding operations to Europe and Canada are likely to develop the infrastructure and
market characteristics necessary to set an ethane export operation to other markets (see
Table 8.3).306

304
305

306

Rbn Energy https://rbnenergy.com/back-to-the-ethane-asylum-recovering-ethane-when-it-is-worth-more-as-natural-gas


EIA. Natural Liquids gases trend down since 2012. Available at:
http://www.eia.gov/todayinenergy/detail.cfm?id=12291
https://rbnenergy.com/changes-in-longitudes-an-update-on-ethane-exports

172

Confidential

Table 8.3: Example of potential deals and developments of infrastructure to export


ethane
Company

Description

Supplier

Year

INEOS
Olefins &
Polymers
Europe

Contract for US- Marcellus/Utica-sourced ethane that would Range


run through the Mariner East pipeline to Sunoco Logistics
Resources,
(SNX) NGL terminal in Marcus Hook, PA
Consol
Energy

2012

INEOS
Olefins &
Polymers
Europe

15-year deal to deliver ethane by ship to steam crackers in


Grangemouth, Scotland and Rafnes, Norway. In 2014
INEOS signed a deal to buy eight new Dragon Class
carriers for the operation.

Evergas

2013

Borealis
(Australia)

10-year agreement with Antero Resources to supply ethane


from the Marcellus/Utica to Borealiss flexible steam cracker
in Stenungsund, Sweden

Antero
Resources

2014

Saudi Basic
Industries
Corporation

The corporation will modify its naphtha-based steam cracker


in Wilton, England,and building a cryogenic tank and an
ethane import terminal so it can start using imported ethane
(likely sourced from the US)

Reliance
Industries

Petchem giant, in July 2014 ordered six Very Large Ethane


Carriers (VLECs) from South Koreas Samsung Heavy
Industries (deliveries of the 85,000 cubic meteror 540
MBblVLECs start in late 2016).

joint ventures 2016


in the
Marcellus
with Chevron
and Carrizo
Oil & Gas

United Ethane UEC is a joint venture between Jaccar Holdings of


Carriers
Luxemburg and Hartmann Group of Leer, Germany based
(UEC)
in Singapore, for the commercial management of ethane
carriers. Its purpose is to develop the ethane business,
focusing on commercial management of ethane carriers
internationally

2014

2016

Source: Rbn Energy available at: https://rbnenergy.com/you-ain-t-seen-nethane-yet-ethane-exports-will-risebut-will-they-soar and Jaccar Holdings available at:http://www.jaccar.net/en/jaccar-holdings-andhartmann-group-establish-joint-venture-united-ethane-carriers

Exporting ethane requires dedicated facilities, including ships capable of transporting


supplies at near cryogenic temperatures. Ethane demand comes almost exclusively from
petrochemical plants, which have significant capital costs and take several years to build.
Pipelines or liquefaction facilities to export ethane also face time and cost constraints, but
there are projects underway to send ethane to the Gulf Coast to be processed, to export it to
Canada, and to liquefy it and export it to Europe. Recently, the U.S. began exporting ethane
from the Marcellus shale play to Canada.307 Figure 8.10 shows that exports of ethane more
than doubled between February 2014 and March 2015.
307

EIA. Natural Liquids gases trend down since 2012. Available at:
http://www.eia.gov/todayinenergy/detail.cfm?id=12291

173

Confidential

Figure 8.10: Ethane and Ethylene Exports

Source: United States Energy Information Administration. Available at:


http://www.eia.gov/dnav/pet/pet_move_exp_dc_NUS-Z00_mbbl_m.htm

The surplus of ethane is fostering new investments in exporting facilities. American Ethane,
Enterprise Product Partners (EPD), Royal Dutch Shell and Reliance Industries are
companies that are reportedly considering entering into the export business in the U.S., with
the prospect of selling ethane directly to markets in Europe and India.308 For example, in
April 2014, EPD announced plans to construct a fully refrigerated ethane export facility on
the Houston Ship Channel. The new facility, located near La Porte, Texas, is expected to
have an aggregate loading rate of approximately 10,000 barrels per hour and is supported by
long-term contracts. The ethane export facility will be integrated with the Mont Belvieu
NGL fractionation and storage complex. EPD expects that the ethane export facility will
begin operations in the third quarter of 2016.309
8.2.3 Using Ethane for Electricity Generation
Ethane is a clean burning fuel with characteristics between methane and propane with an
energy content of 1,783 Btu/scf. Ethane has a fast flame front and produces high exhaust
temperatures. With an average market price in the first quarter of 2015 at $0.23/gallon
(equivalent to $3.45 per MMBTU), ethane is on par with the price of natural gas (with an

308
309

Americane Ethane, and Enterprise Product Partners Websites.


Enterprise Products Partners LP. 2014- 10-k Form. Available at: http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9NTcxNTI1fENoaWxkSUQ9MjcyOTc5fFR5cGU9MQ==&t=1

174

Confidential

average price of $2.93/MMBtu310), making it attractive for use as a fuel for electricity
generation.311
Ethane could be burned to generate electricity by utilities, self-producers, refineries and
hydrocarbon extraction facilities. According to American Ethane, a company headquartered
in Houston312, the advantages of using ethane for electricity generation compared to other
NGLs and to LNG are:
Ethane infrastructure is less expensive throughout the delivery chain
The time required to build upstream liquefaction is shorter; 2 years for ethane
compared to more than 4 years for LNG
Downstream receiving facilities can be built faster with lower capital investments
than LNG receiving terminals of approximately $140 million versus $400 million
for LNG
Pipeline costs for ethane are lower than those for natural gas pipelines.
Currently, there are no examples of utilities burning ethane for utility generation in North
America or the Caribbean. However, Moundsville Power LLC recently received a siting
certificate to construct a 549-MW combined cycle natural gas power plant in Marshall
County in West Virginia; construction is scheduled to begin in late 2015. The power plant
will be the first to burn ethane and natural gas sourced from West Virginia producers and
processors.313 Black & Veatch will design and build the plant, and General Electric will
provide the natural gas and steam turbines. The plant will use GE 7F.04 gas turbines in a 2x1
configuration.314
According to Edward Woods, writing in the Oil and Gas Financial Journal, companies in the
Marcellus shale basin with excess production of ethane are considering the following options
to burn ethane to produce power and heat:315

Reciprocating enginesGaseous-fueled reciprocating engines are built in a wide


range of power outputs, making them easy to size for the power demand. The difficulty with
this type of technology is that high compression ratios of reciprocating engines and internal
components such as pistons, valves, and heads would rapidly wear down due to high
combustion and exhaust gas temperatures associated with using ethane as a fuel
310

EIA. Natural Gas Weekly Update available at: http://www.eia.gov/naturalgas/weekly/ Accessed 22 June 2015

311

Edward Woods Using ethane on site can avoid poor transport options Oil and Gas Financial Journal.
http://www.ogfj.com/articles/print/volume-11/issue-10/features/stranded-ethane-can-power-gas-turbines.html
Accessed 12 June 2015

312

Americane Ethane. Firm Company. Availabe at: http://www.americanethane.com/company-profile/ Accessed June


2015

313

Power. Bussines and Technology for the Energy Sector. Available at: http://www.powermag.com/west-virginiacombined-cycle-plant-will-be-first-to-burn-ethane-and-natural-gas/ Accessed 12 June 2015

314

Power. Bussines and Technology for the Energy Sector. Available at: http://www.powermag.com/west-virginiacombined-cycle-plant-will-be-first-to-burn-ethane-and-natural-gas/ Accessed 12 June 2015

315

Edward Woods Using ethane on site can avoid poor transport options Oil and Gas Financial Journal.
http://www.ogfj.com/articles/print/volume-11/issue-10/features/stranded-ethane-can-power-gas-turbines.html
Accessed June 2015

175

Confidential

Combustion turbinesCombustion turbines are ideally suited for powering gas


processing plants. The majority of combustion turbines configured for oil and gas
applications are simple-cycle machines with high pressure ratios between incoming air and
the combustion stage. However, the use of high-energy fuels, such as ethane, can rapidly
damage combustion components within the turbine

Developments in combustion turbine technologyLow pressure ratio


turbines are able to operate on a wide range of fuels up to 1,900 BTU/scf. The limitation
with this technology is their poor efficiency. However, recent developments with low pressure
ratio turbines include the use of a recuperator to improve thermal efficiency. A recuperator
is a heat exchanger mounted in the exhaust stream that transfers heat energy to combustion
intake air. Efficiencies of low pressure ratio turbines with recuperators rival that of high
pressure ratio turbines and are considered a proven technology. These technological
developments result in a low pressure ratio turbine with a recuperator can operate on ethane
or natural gas, whichever is more economical with the efficiency of their high pressure ratio
counterparts. These turbines can be fueled with ethane, allowing them to be a power source
at gas processing facilities. Two turbine platforms that utilize these technologies are the
FlexEnergy MT and Dresser-Rand KG2.
Ethane can be used in many existing generation plants (with required upgrades) including
LNG, No. 2, & No. 6 fired power plants. Recently, Wartsila company that provides
complete lifecycle power solutions, announced that the Wartsila 50DF engines will be able to
use ethane boil-off gas as a fuel. Also, the company announced that after testing the new
Wartsila 50DF engine has the capability to switch between LNG, ethane, LFO and HFO.316
8.2.4 Supply chain for delivering ethane for electricity generation
Figure 8.11 describes the supply chain for delivering ethane for electricity generation. First,
ethane is extracted along with crude oil and natural gas; it can be marketed separately or as a
mix in natural gas. For transportation and storage, it is necessary to hold ethane under
pressure or at near-cryogenic temperatures. At standard atmospheric pressure, ethane will
remain in gaseous form (ethane boils off at -89 degrees Celsius), and an economically viable
way to hold liquid ethane in aboveground storage (or in ships) is at near-cryogenic
temperatures.
The two options for transporting ethane to the Caribbean are by ship or pipeline. In the
U.S., ethane is transported by highly pressurized pipelines and stored in underground salt
caverns, where large quantities can be held under pressure without the need to keep the
product at near-cryogenic temperatures. As mentioned in Section 8.1, pipelines are not likely
to be economical to transport NLGs, including ethane, to the Caribbean. By ship, ethane can
be transported in purpose-built carriers with built-in pressurized or refrigerated storage. As is
the case for other NGLs, ethane can be stored in floating storage vessels, refrigerated storage
tanks, or in a pressurized storage tank.

316

Wrtsil. News available at: http://www.wartsila.com/media/news/04-05-2015-wartsila-50df-engine-successfullydemonstrates-its-capability-to-operate-on-ethane-gas Accessed June 18 2015

176

Confidential

Figure 8.11: Ethane Supply Chain

For the petrochemical industry, ethane has been transported in small liquefied
ethane/ethylene carriers (LECs) designed to carry ethylene, ethane, and other LPG cargoes.
The vessels to transport ethane have type C containment systems. The maximum feasible
size of ships with type C cargo tanks is around 40,000 cubic meters. In 2014 there were 29
vessels larger than 10,000 cubic meters, with the largest having a capacity of 22,000 cubic
meters.317

8.3

NGLs could be delivered at lower cost or more quickly than LNG


in some cases, but price and supply chain uncertainty are high

LPG and ethane could be used in some Caribbean markets as lower-cost alternative to fuel
oil, but price volatility and supply chain uncertainty mean that LNG is a more likely longterm solution for the region. The three main potential advantages to LPG and ethane,
compared to LNG, are that they:
May be cheaper than LNG, though price uncertainty is high. As mentioned
above, propane at Mont Belvieu was trading at US$1 per MMBtu higher than
natural gas at Henry Hub,318 but infrastructure to import LPG would likely be
much cheaper than the infrastructure to import LNGmore than enough to
offset the difference in fuel prices. Ethane at Mont Belvieu was trading slightly
below natural gas at Henry Hub in June 2015, and infrastructure to receive ethane
would likely be cheaper than the infrastructure to receive LNG
Are likely easier to procure for Caribbean markets, given offtakers credit
limitations. The market is changing rapidly, so conditions are difficult to predict,
but LPG and ethane suppliers do not appear to require large take-or-pay
agreements from offtakersthese requirements can be a barrier to Caribbean
offtakers looking to procure LNG
May be available more quickly than LNG. The infrastructure to receive ethane
and LPG could likely be built more quickly than the infrastructure to receive
317

Lloyds Register Marine. Seaborne ethane. A report into the commercial need and technical requirements for very large
ethane carriers. August 2014

318

US$3.9 per MMBtu for propane, compared to US$2.9 per MMBtu for natural gas on 15 June 2015 (United States
Energy Information Administration).

177

Confidential

LNG. Further, market research suggests that, as of June 2015, LPG and ethane
suppliers in the United States are actively courting Caribbean utilities. The U.S.
Virgin Islands nearly completed conversion to LPG took only 2 years from
contract signing in July 2013 to the expected first delivery in July 2015.
Despite these advantages, we expect that LNG will be a better long-term option for most
markets.
LPG prices are likely to rise
LPG prices have historically been comparable to heavy fuel oil (HFO) prices, and are likely
to continue to be. This means that utilities with the option to burn HFO would be unlikely
to save by switching to LPG. Figure 8.12 shows that LPG in the United States has usually
been slightly more expensive than HFO over the past three years, and is projected to be only
slightly cheaper until 2020. The projected average spread is US$1.6 per MMBtu between
2015 and 2020. This spread would not be enough to cover the cost of investments to receive
LPG.
Figure 8.12: Historical and Projected Prices of No. 2 Diesel, LPG, HFO, and Natural
Gas in the United States (2000 to 2020)

Source: United States Energy Information Administration

LPG is also be more vulnerable to demand shocks than natural gas. LPG production in the
United States was only 8 percent of volumes for natural gas in 2014, on a per energy basis.319
As a result, a spike in demand, such as a cold winter and high demand for propane for
heating in the United States, could have a dramatic effect on prices for Caribbean offtakers.
Ethane markets are uncertain
Ethane has not been used for power generation by utilities anywhere in the world, creating
some technology risk and cost uncertainty. Market research suggests that only a few
319

Comparison of marketed natural gas production (production less producers own use and vented and flared gas) and
propane, butane, and isobutane production (United States Energy Information Administration).

178

Confidential

generator manufacturers offer conversions to use ethane, though the number may be
increasing. This limits the countries that could convert their assets to use ethane, and may
drive up costs for those that do have the option to convert, since the service is rarely
offered. Costs for other infrastructure to transport and receive ethane are also uncertain, and
ships to transport the ethane would likely need to be newly built.
Although current projections are for ethane prices to remain low over the medium term,
ethane prices are unlikely to stay below natural gas prices. In many cases, ethane can simply
be sold mixed with methane and sold as natural gas (that is, not separated from methane
during processing) when the price of natural gas is higher than that of ethane. This is called
rejecting the ethane. There are limits to suppliers and processors capacity to reject
ethanesome contracting arrangements require upstream suppliers to pay for processing
capacity to separate ethane whether they use it or not, and natural gas with too much ethane
may not meet some specifications set by suppliers and pipelines. Nonetheless, the ability to
reject ethane puts a soft price floor at the price of natural gas.
Like LPG, ethane production is much lower than natural gas production, making prices
more vulnerable to demand shocks. Ethane production was only 4 percent320 of natural gas
production in the United States in 2014 on a per energy basis. As petrochemical crackers
capacity expands in the United States, the current oversupply could disappear quickly,
leading to a price increase.
NGLs could be used as bridge fuels until LNG comes available
Offtakers that invest in infrastructure to receive and use NGLs could re-use some
infrastructure to receive and use LNG. Infrastructure to receive ethane is similar to the
infrastructure needed for LNG, which may create options for re-use and fuel switching as
markets evolve. Ships, storage tanks, and re-gasification facilities for ethane could be built
with the capacity to also accept LNG, which must be stored at lower temperatures. This
would allow Caribbean countries to procure ethane in the short term, and switch to LNG
once it becomes available. In this scenario, generators should be converted to use ethane or
natural gas from the outset.
Generators that are converted to burn LPG can be converted to burn natural gas as well. In
the U.S. Virgin Islands, the utility found that adding the capacity to burn natural gas when
converting their generators added slightly to the cost of the conversion, but made the
investment to increase their flexibility for fuel use. However, infrastructure to receive LPG
cannot be re-used for LNG, likely making LPG less attractive as a bridge fuel than ethane.

320

Comparison of marketed natural gas production (production less producers own use and vented and flared gas) and
ethane production (United States Energy Information Administration).

179

Confidential

Part III: Three Scenarios for a Competitive


Regional Market for Natural Gas
Based on the findings above, we have designed three scenarios that provide different
commercial solutions for supplying natural gas to the Caribbean. Figure III.1 below shows
the key differences between the scenarios, which are described in more detail below.
Figure III.1: Comparison of the Three Scenarios

In the first scenario, The Hub and Spoke (Section 9), a private company in a
country in the Caribbean acts as a hub for purchasing large shipments of LNG.
This LNG is then redistributed by the same company that purchased the large
volume of LNG, or by another private company, in smaller ships to offtakers in
other countries. The volume of gas demanded in this model could be sufficiently
large for the company purchasing the LNG to access full-sized LNG terminals in
the Gulf Coast of the United States or at Atlantic LNG in Trinidad and Tobago
In the second scenario, the Virtual Hub (Section 10), a single private company
provides LNG directly to all countries with interested offtakers. The single
supplier of natural gas acts as a virtual hub that allows all interested countries to
be part of the same arrangement and obtain the natural gas at a feasible price.
This supplier would deliver the gas directly from the supply point to each of the
offtakers. Since there would be no facilities for transferring LNG once it is

180

Confidential

purchased from the supply point, this model would require LNG terminals that
could provide access to smaller sized vessels
In the third scenario, Individual Contracts (Section 11), each country that finds
it economically viable to do so contracts to buy the natural gas on its own. This
scenario would only be viable for larger countries that can individually and directly
negotiate natural gas contracts at prices at least 20 percent lower than what they
pay for fuel oil.
After describing the scenarios, we compare the results for each scenario, including the
delivered price of natural gas of each country, risks, and ease of implementation (Section 12).
We then evaluate the impact of introducing natural gas on the electricity sector in each
country of emphasis (Section 13), and carry out a cost benefit analysis that finds that all three
scenarios would bring large benefits compared to the current situation, but that aggregating
demand would bring the largest benefit to the region (Section 14). Finally, we carry out a
sensitivity analysis of the results

181

Confidential

General Assumptions for All Scenarios

For all of the scenarios presented we use the following assumptions:


Natural gas is the fuel chosen for all thermal electricity generation,
including conversions of existing fuel oil-fired thermal plants and construction of
new thermal plants. Other fossil fuels, such as coal, will only be used in already
planned expansions (Dominican Republic). Renewable energy technologies will be
used where they contribute to the least-cost generation mixsee Section 13 for
an analysis of the effect of introducing natural gas on uptake of renewable energy
and energy efficiency technologies and Section 13.2 for a forecast of the
generation technologies that we have assumed will be installed in each of the
countries
Acquired price of natural gas. We assume that natural gas is priced based on
the substitution cost approach (Section 6.2.5)
Feasibility of importing natural gas. We assume that switching from fuel oil to
natural gas for electricity generation is economically viable and worth the
transition costs if the offtakers can sign a long-term contract for natural gas at a
price that is at least 20 percent below fuel oil parity.321 Based on this, in each
scenario, we include all offtakers that would receive at least a 20 percent discount
on average during the life of the contract. However, we also show the results and
include the volumes for offtakers that would get lower but still positive discounts
on HFO. This is because countries might consider lower discounts on HFO
viable
The electricity utilities in each country would be the offtakers of the natural
gas contracts. Natural gas should first be introduced for generating electricity,
and then it could be used for other economic activities (such as transportation).
The electricity utilities in most of the participating countries are fully integrated
and have the exclusive right to generate electricity. Therefore, the electricity
utilities are the natural offtakers for any contracts to purchase natural gas. The
volume of natural gas demanded for electricity generation is presented in Section
4.4 and Appendix E.1
The most feasible supply points are Canada, Colombia, the United States,
and Trinidad and Tobago (Appendix K presents information on some existing
and planned liquefaction projects that could supply the Caribbean with LNG). We
use the facility in U.S. Sabine Pass for our cost calculations322
The expansion of the Panama Canal will be completed by the time any
contracts for supplying natural gas to the Caribbean would be signed. (See
Appendix H)

321

Fuel oil parity is the price of natural gas delivered to the liquefaction facility that, after adding all other costs, results in a
price per MMBtu delivered to the power plant equal to the price per MMBtu of fuel oil delivered to the power plant.

322

It is feasible that LNG could be available from Angola or Nigeria on a spot basis. Our cost calculations do not take this
possibility into account. However, we do note it as a possibility that suppliers could use in particular situations.

182

Confidential

Rates of return for investors are 10 percent in real terms for all market
segments and for any operator. A 10 percent real discount rate is the
reasonable return that a power company in the Caribbean could getestimated
using the weighted average cost of capital.323
Fuel price projections. For the Scenarios, we use the reference case projections
of oil and natural gas prices as published by the EIA in its 2015 Annual Energy
Outlook.

323

A 10 percent real discount rate is equal to around 12.4 percent nominal discount rate, if we assume inflation will be
around 2.22 percent in 2018 as projected by the IMF in the World Economic Outlook 2013. A 12 percent discount rate
would be a reasonable return if companies are financed with 50 percent equity at a cost of equity of 15.3 percent
(estimated by Castalia using the CAPM model) and 50 percent debt at a cost of debt of 9 percent. In practice, if the IDB
provides guarantees on the debt, the cost of debt should be lower than 9 percent

183

Confidential

10

Scenario 1: Hub and Spoke

In Scenario 1, a private investor in a country in the Caribbean develops a hub for purchasing
large shipments of LNG and then redistributes LNG in smaller ships to other countries.
Table 10.1 illustrates the supply chain of natural gas from acquiring the natural gas to
bringing it to the power plant. The figure includes costs for each segment for Barbados in
2023 (in this case, the total cost of natural gas delivered to the power plant would be
US$11.68 per MMBtu).
Figure 10.1: Scenario 1: Hub and SpokeExample of Barbados (2023)

Note:

Costs in the figure may not add up to the total due to rounding.

The Dominican Republic may be the best option for a physical hub in the Caribbean
because it is centrally located and AES Dominicana already has LNG facilities and
operations in place there (see Appendix M.1). If AES Dominicana, a company with an
existing contract for purchasing LNG and the infrastructure to use the LNG for electricity
generation, were involved in this scenario (for example, by arranging the market and acting
as the owner and operator of the hub) there would be two additional advantages for
choosing the Dominican Republic and the hub for this scenario:
AES Dominicana already imports LNG and has facilities that can be used for the
new supply chain. Therefore, the investment required to build a hub would be
lower in the Dominican Republic
AES Dominicana has sufficient demand already to secure a long term contract for
LNG. This existing demand added to the demand of any other countries in the
region allows for stronger bargaining power to negotiate the price of the contract.
Colombia, Panama, Puerto Rico, and Trinidad and Tobago are other places that could
potentially serve as a hub for distributing LNG in the Caribbean (Appendices F and G
provide information on the planned projects in each of these places that could be used as a
184

Confidential

hub for transshipping LNG). However, each of these places has disadvantages in
comparison with the Dominican Republic:
The Jones Act and FERC permitting would make Puerto Rico a higher cost
location than the Dominican Republic
Colombia is not as well located as the Dominican Republic. Also, it is not clear
that the projects being developed in Colombia will allow for firm export contract.
Even if those contracts allowed for exports, the natural gas coming from
Colombia would probably not be enough for the region. This means that if
Colombia were the hub, additional capacity would have to be built for storage and
loading at one or both of the current LNG sites, and natural gas would probably
have to be shipped from other sites to ensure supply for the Caribbean region
Panama is not as well located as the Dominican Republic
LNG from Trinidad and Tobago would be supplied by Atlantic LNG, which
owns and operates the four liquefaction trains in the country. However, the
companies that own Atlantic LNG have established different ownership
structures for each liquefaction train, which would make it difficult to negotiate
supply for the entire Caribbean region. In addition, it is unlikely that Atlantic
LNG would agree to load the small-scale ships that would be needed to deliver
LNG to some markets. Atlantic LNGs export facilities are set up to serve large
ships and large markets. As such, there would be a large opportunity cost to
loading small-scale ships.
This scenario is designed to make sure that the region is in a strong position to secure a longterm contract and to negotiate the price at which interested offtakers in the region will buy
natural gas. Therefore, for the base case in this scenario, we assume AES Dominicana would
arrange this market. In this way, this scenario allows the region to buy larger quantities of
natural gas than they could buy if each country bought gas on an individual basis, and as
such, would increase the possibility of getting better prices. Because all the existing demand
for natural gas from the Dominican Republic is part of this scenario, the contract for natural
gas would be the largest possible in the region, and therefore should allow for the best
pricing option.
One disadvantage of this scenario is that it would be more difficult to implement because it
requires a great amount of coordination among the potential offtakers. To achieve the best
price of natural gas for the particular countries, all the natural gas must be purchased by one
company. That gas would then be redistributed to all the offtakers. Therefore, all offtakers
would have to agree to buy it from the same supplier and to sign the contract at the same
time.
Below we present the main attributes, market structure, estimated investment and operating
costs, and cash flow projections for Scenario 1.

10.1

Scenario 1: Required Assets, Offtakers Involved, Suppliers, and


Volume of LNG Contracted

In Section 9 we present the general assumptions that apply for all scenarios. To fully describe
this scenario, we complement those general assumptions by identifying the attributes of this

185

Confidential

scenario regarding assets used for delivering and regasifying LNG, the offtakers involved in
the scenario, and the volume of LNG contracted in this scenario.
10.1.1 Assets used for delivering and regasifying LNG
After the gas is liquefied at the supply point, this scenario requires the following assets to
deliver the natural gas for direct use by the electricity generation plant:
Full-sized LNG vessels that would transport the natural gas from the supply
point to the hub. We assume the LNG vessels used to ship LNG from the supply
point to the transshipment facility would have a capacity of 149,000 cubic meters.
We assume that these ships can be contracted through term charters
Transshipment facilities to transfer the LNG from storage in the hub onto
smaller vessels for shipment to the regional markets. We assume that the
transshipment facility would be co-located with the existing LNG receiving
terminal in the Dominican Republic. As a result, the required marine
infrastructure, such as a loading jetty with sufficient water depth for large-scale
LNG ships, is already in place. Converting the terminal to act as a transshipment
facility would require additional storage capacity and higher capacity pumps
within the facility to allow for reversible flow at a suitable rate (that is, to unload
LNG ships as they arrive, and re-load ships for re-export).
For this scenario, we calculate two additional single-wall containment storage
tanks of 205,000 cubic meters each will be sufficient to meet the incremental
storage needs for the transshipment facility for the projected demand during the
first 5 years (2018 to 2022). After that, additional storage tanks of 145,000 cubic
meters would be added. These sizes of tanks are relatively standard for LNG
liquefaction and regasification terminals, and can be built by a large number of
international EPC contractors
Smaller vessels to transport the LNG from the Dominican Republic to other
countries. The size of these vessels could be different for each of the participating
countries depending on their demand. For example, Jamaica would require fullsized vessels with capacity of 149,000 cubic meters, which is similar to the ships
used to transport LNG from the liquefaction point to the transshipment facility.
We assume that these ships can also be contracted through term charters. The
other participating countries would require medium sized vessels with capacity of
45,000 cubic meters each. This size of ship is not as widely available as full-sized
LNG carriers, and all currently operating ships are tied to specific LNG projects.
As a result, these vessels would have to be built specifically for the proposed
project and would likely be owned and operated by either the hub operator or the
owner of the regasification terminals that they would serve
Regasification facilities in each of the countries. The size of these differs for
each of the participating countries depending on their demand. Section 6.3.3 of
this report presents our assumptions regarding the size and cost of these facilities
for each country.
10.1.2 Pricing for this scenario
We assume that, as long as the delivered price of natural gas included a premium of at least
20 percent over Henry Hub, offtakers in this scenario would buy natural gas at 30 percent
186

Confidential

below the price of delivered HFO. This is because natural gas would be priced based on the
substitution cost approach (with a 30 percent discount), as long as this approach covered all
costs. In other words, offtakers would buy natural gas at the maximum between Henry Hub,
plus 20 percent, plus delivery costs (cost plus); and HFO minus 30 percent (substitution
cost).
With current price forecasts, the difference between the prices of WTI and Henry Hub is
tight. Therefore, natural gas delivered at a price of 30 percent below the price of HFO would
not necessarily cover the premium of at least 20 percent over Henry Hub. This means that
with current price forecast, offtakers might not be able to buy natural gas at 30 percent
below the price of delivered HFO. Instead, offtakers would buy natural gas at Henry Hub
plus a premium of 20 percent. With a broader difference between the prices of WTI and
Henry Hub, this would be the scenario with the highest discount on Henry Hub, because it
is the scenario with the highest volume and best negotiating power.
10.1.3 The offtakers involved in this scenario
All utilities from IDB member countries in the Caribbean, except for Belize Electricity
Limited (BEL) in Belize and Grand Bahama Power Company (GBPC) in The Bahamas
could be part of this scenario. The offtakers can be divided into three groups, of which the
first two groups include offtakers for which this scenario is definitely viable (Figure 10.2):

Offtakers that would receive an average discount on HFO of 30 percent or more


these are the countries that would benefit the most from this scenario, as they would
benefit from pricing at HFO minus the 30 percent discount. This group includes the
Dominican Republic, Jamaica, and Barbados

Offtakers that would receive an average discount between 20 percent and 30


percentthese are the offtakers that would not receive the 30 percent discount
associated with this scenario but for which the scenario would still be feasible. This
group includes The Bahamas, BEC.

Offtakers that would receive an average discount between 0 percent and 20


percentwhich would still get discount, but below the 20 percent that we assume is
needed to make natural gas feasible. In this group, it is up to each country to decide
if the discount is enough. This group includes Guyana, Suriname, and Haiti.

187

Confidential

Figure 10.2: Average Discount of HFO 2018-2032

We exclude BEL in Belize because, due to the small size of its market, the price required for
natural gas to be attractive (a price of delivered natural gas equal to a 30 percent discount on
fuel oil parity) would require an acquired price of natural gas equal to about 30 percent
below Henry Hub. An acquired price of natural gas equal to Henry Hub minus a 30 percent
discount is not commercially viable. As described in Section 6.2, the minimum price available
from Sabine Pass would be around Henry Hub plus 15 percent. In other words, the small
size of the market in Belize would mean that the regasification costs and the cost associated
with shipping LNG from the hub to Belize would be very high. Therefore, the price of
delivered natural gas would be too high for it to be possible to obtain a delivered price that
makes sense while still having a contract that is commercially viable.
We exclude GBPC in The Bahamas because this would be the only offtaker, due to the small
demand volume, for whom it would only make sense to use small vessels. All other offtakers
would use medium or full sized vessels. Therefore, it would not be financially feasible for a
company to build a small sized vessel to supply GBPC. One option would be for GBPC to
receive LNG in medium sized vessels that would also supply the Bahamas Electricity
Corporations facility on the island of New Providence. However, we have excluded this
option from this scenario.
10.1.4 Suppliers of LNG
There would be one sole supplier of LNG. There is a risk that the supplier would be a
monopoly supplier. As discussed in Section 7.2, this risk can be reduced by contracting with
a supplier after an open tender process. Suppliers would then be forced to offer a
competitive price to win the tender. A drawback in this approach is that it would limit the
competition for market access to a single point in time. Limiting the contract period to a
relatively short length (15 years) would allow further competitive elements to be introduced
as quickly as possible, without scaring off initial investors.
10.1.5 The volume of LNG contracted in this scenario
In this scenario, the total volume of LNG contracted would increase from 417 million cubic
feet per day in 2018 to 700 million cubic feet per day in 2032 (see Figure 10.3). Of this total,

188

Confidential

the Dominican Republic and Jamaica would account for more than half the volume
contracted. Appendix E in this report presents the detailed calculations we made to forecast
the demand for LNG by each offtaker.
Figure 10.3: Volumes Contracted under Scenario 1, by Offtaker, 2018-2032

10.2 Scenario 1: Market Structure


Table 10.1 shows the options for structuring the market for this scenario. Each of the letters
in the table refers to a different entity. For example, in the base case, company A would
liquefy the gas and deliver it to the hub before the regasification process. Company B would
own the hub used for transferring the LNG and would ship the LNG to the offtakers.
Company C, the offtakers, would be responsible for regasifying the LNG and for
generating the electricity. In other words, under this scenario, company B would buy LNG
from company A delivered to the Hub. Companies C would then buy natural gas, in the
form of LNG, from company B.
Table 10.1: Options for Structuring the Market in Scenario 1
Liquefaction

Shipping to
the Hub

Transfer

Shipping to
offtakers

Regasification

Generation

Base Case

C(s)

C(s)

Option 2

B (BOT)

C(s)

Option 3

C(s)

C(s)

C(s)

Note: We use the base case for estimating the cash flows
Each of the letters in the table refers to a different entity. C(s) denotes that multiple entities would carry out
that activity. For example, each offtaker would be responsible for generation.

Option 2, in which the regasification facilities are developed and operated on a BOT basis,
would provide an alternative for reducing the investment costs faced by the offtakers.

189

Confidential

In practice, due to the number of companies interested in the market for providing natural
gas to the Caribbean, there are many more alternatives than those shown in Table 10.1 and
the exact structure that gets implemented will depend on the market. What is important to
show here is that as long as costing per MMBtu makes sense (and it does as shown below),
and as long as a market player is interested in each of the segments, then the ownership of
each segment is less relevant. For example, some offtakers may not want to own the
regasification units and may prefer to pay a tariff for a third party to regasify the gas. As long
as a market player is interested in regasifying the gas for the return assumed when estimating
the costs (10 percent), then the price of natural gas will be the same as the one assumed in
the projections, what will change is the composition of the cash flows of the offtakers.

10.3 Scenario 1: Estimated Investment and Operating Costs


In this section we present the estimated investment and operating costs for delivering natural
gas, via LNG, and then using that natural gas to produce electricity for each offtaker under
Scenario 1. We begin by presenting the investment costs related to each of the segments for
delivering LNG. We also show how these investment costs would be distributed by market
player if we used our base case market structure. We then show how these investment costs
plus other costs result in final costs of delivered LNG and costs of electricity. These costs of
electricity are the same regardless of who owns the assetsthe cost estimates are based on
levelized tariffs for capital costs, plus operating and maintenance expenses, which should be
the same for all market structuresassuming any market player would require similar
returns10 percent.
Scenario 1: estimated investment costs
Figure 10.4 shows the investment costs that would be required to make sure that all the
assets for delivering natural gas to the power plants are in place. The figure shows that
investment costs of about US$1.7 billion would be required over an eight-year period (from
2015 to 2022). Of these investments, regasification facilities would represent the highest
capital cost (representing 71 percent of these costs), with a total capital investment of about
US$1.2 billion dollars. The cost of the hub and regasification facilities is divided evenly over
the three years needed to build these facilities (from 2015 to 2017) and expand the facilities
(from 2020 to 2022).

190

Confidential

Figure 10.4: Investment Costs for Scenario 1 by Activity, Excluding Investments in


Power Plants

Figure 10.5 adds the capital costs related to power plants to the capital costs presented in
Figure 10.4 to show total capital costs required for this scenario. The investments in power
plants are divided into costs of converting existing power plants and costs of new power
plants. The costs of converting power plants are a cost directly associated with introducing a
natural gas market in the region (these costs total US$282 million, about 7 percent of total
investment costs). However, the investments in power plants (which make up the largest
investment cost at nearly US$2 billion, or about 50 percent of the costs) would have to be
made even without introducing natural gas into the market. In other words, the investment
in new power plants relates to the investment in power expansion plans for each countryif
these investments are not made for developing natural gas fired generation plants, they
would have to be made for developing other types of generation capacity, most likely fuel oil
fired power plants (depending on the technology chosen, the costs would vary somewhat but
would be of the same magnitude).

191

Confidential

Figure 10.5: Investment Costs for Scenario 1 by Activity, Including Investments in


Power Plants

Note:

After 2022 we have included additional investment costs related to new power plants. Section 6.3.5
shows the amount of these investments

To illustrate the distribution of these investment costs across the market participants, Figure
10.6 shows the investment costs by market player (according to our base case for market
structure described in Section 10.2). The figure shows that the offtakers as a group would be
making the highest investment, accounting for US$3.5 billion, or 87 percent of the
investments. However, these investments would be done by seven offtakers. Of these seven
offtakers, only Jamaica, the Dominican Republic, and Haiti would make investments larger
than those made by the private company that invests in the ships and the hub.
Figure 10.6: Investment Costs for Scenario 1 by Market Player, Including Investments
in Power Plants

Note: B and C indicate the involved company, as described in Table 10.1

192

Confidential

We estimated these investment costs using the assumptions we present in Section 6.3 of this
report. In particular:
Hub: We assumed the transshipment facility would share jetty and port facilities
with the existing AES regasification facility. We also assumed that the storage for
the Dominican Republic natural gas demand would be covered in the
regasification costs for the Dominican Republic (so there would be no
transshipment cost for DR gas volumes). We used US$470 per cubic meter of
tank size as the cost for the required additional tanks alone, plus US$2 million for
higher capacity pumps for reloading the LNG324
Small ships. Since only medium-size vessels would be purchased, each
vessel is estimated to cost US$90 million to build (see Section 6.3.2 for further
detail). The initial phase of operations could be managed with as little as two ships
if the shipment schedules to the various receiving countries were optimized. This
implies an initial investment of US$180 million
The investments in regasification facilities and costs related to the power plants
are described in Sections 6.3.3, 6.3.4, and 6.3.5.
Scenario 1: estimated cost of delivered natural gas
For each offtaker and year, Figure 10.7 shows the cost of each of the segments for delivering
natural gas. In general, natural gas prices are expected to rise, but, in some cases, they are
expected to drop.325 For instance, the forecast fall in the Henry Hub price from 2029 to 2030
temporarily decreases the cost of delivered natural gas, before prices rise again in 2031.

324

325

These cost estimates to convert an existing LNG regasification terminal for use as a trans-shipment facility are based on
conversations with major EPC companies that are active in constructing LNG terminals worldwide.
Price forecasts are from the US Energy Information Administration, Annual Energy Outlook: 2015.

193

Confidential

Figure 10.7: Cost of Delivered Natural Gas for Scenario 1, 2018-2032

194

Confidential

195

Confidential

Note:

In all cases except for the Dominican Republic, the cost of handling natural gas at the Hub is
estimated to be US$0.43 per kWh. The Dominican Republic has no costs for handling natural gas at
the Hub or shipping it to the offtaker.
To estimate liquefaction costs, we use the capital costs and non-fuel OPEX described in Table 6.1. An
additional 9 percent of fuel costs is added to liquefaction costs for the natural gas that is burned off
during liquefaction (see Section 6.3.2).
The acquired price of natural gas is assumed to be Henry Hub plus 20 percent (see below).
Prices are in constant 2013 US dollars.

These costs of delivered natural gas provide an attractive discount on fuel oil prices.326 Under
this scenario, Dominican Republic, Jamaica, and Barbados, would get natural gas delivered at
an average cost ranging from 30 to 32 percent lower than the cost of fuel oil. A discount on
fuel oil that is above 30 percent makes bringing natural gas feasible (it is above the minimum
discount required by offtakersSection 6.4). Bahamas, BEC, would not receive the 30
percent discount associated with this scenario, but it would get natural gas delivered at an
average cost of 24 percent lower than the cost of fuel oil which would still make the scenario
feasible.
As Figure 10.8 shows, Suriname would get the lowest discount, with an average discount of
14 percent. Suriname would be followed by Guyana and Haiti, with an average discount of
19 percent each. This means that these three countries would still get a discount, but the
discount is below the minimum discount required. Therefore, it would be up to Suriname,
Guyana and Haiti to decide if the discount is enough.

326

Price forecasts for HFO are based on current prices in each country (for countries where no data was available, the
regional average was used), indexed to the U.S. EIAs forecast for WTI prices (from U.S. Energy Information
Administration, Annual Energy Outlook: 2015). Section 6.2.1 shows the price forecasts for HFO and explains the
methodology for forecasting HFO prices in more detail.

196

Confidential

Figure 10.8: Scenario 1: Discount on Fuel Oil Prices

Assuming non-fuel operating costs and capital costs are similar for fuel oil and natural gas
plants, these reductions in the prices of fuel oil will translate into discounts in the cost of
generating electricity. Below, we provide further detail regarding our calculations of the costs
of each of the segments for delivering natural gas, with particular emphasis on the acquired
price of natural gas and the cost of transshipping LNG. We then provide the estimated cost
of generating electricity with natural gas for each country.

Scenario 1: estimated acquired price of natural gas


Because Scenario 1 should yield lower prices for the offtakers, we assume that natural gas
could be purchased at around fuel oil parity minus 30 percent for all offtakers involved, but
only if this means that the delivered price of natural gas included a premium of at least 20
percent over Henry Hub. With current prices forecast, an acquired price of natural gas
resulting from fuel oil parity minus 30 percent is less than Henry Hub plus 20 percent. This
means, that to secure potential suppliers, offtakes would need to buy natural gas at a lower
discount than the 30 percent initially assumed.
Figure 10.9 compares Henry Hub projections with the acquired price of natural gas assumed
for this scenario.327 The figure also shows the premium on Henry Hub that would be paid
each year. It shows that the premium on Henry Hub would always be 20 percent, which we
consider commercially viable given the volumes that would be contracted under this
scenario.

327

Price forecasts are from the US Energy Information Administration, Annual Energy Outlook: 2015.

197

Confidential

Figure 10.9: Henry Hub v Acquired Price of Natural Gas for Scenario 1

Source: Henry Hub projections are based on EIA 2015

Scenario 1: estimated costs of transshipping LNG


We estimate that the levelized cost of developing and operating the transshipment hub is
approximately US$0.43 per MMBtu. This cost is estimated with the following assumptions:
An investment cost of US$312 million as shown in Figure 10.5, a 10 percent rate
of return on the investment, and a useful life of 15 years. These assumptions yield
a levelized capital cost of US$0.38 per MMBtu
An operating cost of approximately US$0.05 per MMBtu. This is a rough estimate
of the cost of unloading (to storage) the ship that brings LNG from the point of
supply and then reloading (from storage) to the smaller vessels that will distribute
the LNG to the offtakers. We derive this estimate assuming that 20 percent of the
operating costs of liquefaction is in the loading process. Based on an estimated
cost of US$0.16 per MMBtu for liquefaction, the estimated cost for reloading is
about US$0.03 per MMBtu. We then assume a cost for unloading (US$0.02 per
MMBtu) that is lower than the cost of reloading, owing to the greater in-tank
pumping capacity required to move the LNG from storage to the ship. Adding
the cost of unloading (US$0.02 per MMBtu) to the cost of reloading (US$0.03 per
MMBtu) results in our estimated operating cost of US$0.05 per MMBtu.

Scenario 1: estimated cost of generating electricity with natural gas


For each electricity utility, we estimate the cost of generating electricity with natural gas by
calculating a levelized tariff that would cover the capital costs related to investing in power
198

Confidential

plants, including a return on investments of 10 percent over a 25 years for power plants, and
adding the assumptions regarding operating costs identified in Table 6.8, Figure 10.10 shows
the resulting costs for each of the countries in the study.
Figure 10.10: Costs of Generating Electricity with Natural Gas, Scenario 1

199

Confidential

200

Confidential

201

Confidential

Note:

Prices are in constant 2013 US dollars.

10.4 Scenario 1: Cash Flow Projections


Using the capital costs and operating costs described in Section 10.3, Table 10.2 shows the
projected cash flows for each of the participating companies in the market. All market
participants (except for the shipping company) would get a return on their investments equal
to the 10 percent cost of capital, except for the small shipping company, which would earn a
12 return. These returns assume that the terminal value of each of the companies after 15
years of operations would be equal to the remaining useful life of the assets. Since the hub
and the regasification investments will be made in two periods, the investments made in the
period from 2020 to 2022 expanding the transshipment hub that will begin operations in
2023 will still have five years of useful life after the contracts ends.

202

Confidential

Table 10.2: Scenario 1: Cash Flows for Each of the Companies


US$ million
Hub Company
Revenue (assuming this company gets paid for NG after
transhipment)
O&M costs
O&M for hub operations
Cost of LNG delivered to hub
Total O&M
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Small Shipping Company
Revenue (assuming this company gets paid for charter
fees plus gas boiled off)
O&M costs
Cost of boiled-off fuel
O&M of ships
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
The Bahamas, BEC, NP
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR

2015

2016

2017

64

64

64

(64)
10%

(64)

(64)

2018

2019

2020

2021

2022

2023

2024

1,214

1,311

1,448

1,533

1,600

1,680

1,718

4
1,181
1,185
29

4
1,278
1,282
29

4
1,413
1,417
31
40

4
1,495
1,500
33
40

5
1,561
1,566
35
40

5
1,639
1,644
36

29

29

(9)

(7)

(5)

22

22

24

25

1
3
14
180

1
3
14

2
3
15

2
3
16

(166)

14

15

169
20
120
29

181
20
130
30

192
21
140
31
34

29

30

(3)

96
6
57
35

99
6
60
35
6

123
7
74
43
6

35

29

38

2025

2026

2027

2028

1,783

1,890

1,975

2,075

5
1,678
1,682
36

5
1,741
1,746
37

5
1,847
1,852
38

5
1,929
1,934
41

36

36

37

38

27

26

26

27

2
3
17

2
3
17

2
3
17

2
3
18

16

17

17

17

199
20
147
32
7

206
20
153
33
63

198
19
147
32

2029

2030

2031

2032

2,197

2,303

2,501

2,696

6
2,026
2,031
44

6
2,143
2,150
47

7
2,246
2,253
50

7
2,440
2,447
54

8
2,630
2,638
58

41

44

47

50

54

58

29

31

34

37

40

44

47

2
3
19

2
3
21

2
3
23

3
3
25

3
3
27

3
3
30

3
3
33

18

19

21

23

25

27

30

33

206
20
153
33

214
21
159
34
27

228
20
172
35

234
21
177
36
27

244
20
186
38
56

255
20
196
39

261
21
200
40
27

278
20
215
42

291
22
226
43

32

33

35

39

13

42

43

123
7
75
43
6

120
7
73
42

121
7
74
42
28

145
9
88
50

147
9
91
50
28

156
9
95
54
28

157
9
96
55

161
9
99
56

164
9
101
57

170
10
105
57

174
10
109
58

38

42

15

50

23

26

55

56

57

57

58

TV

72

138

11%

38

38

104

(38)
10%

(38)

(104)

25

(30)

(18)

250

The Bahamas, GBPC


Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Barbados, BL&P
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR

27

27

33

94
6
54
35
292

(27)
10%

(27)

(33)

(257)

203

325

Confidential

US$ million

2015

Dominican Republic, All


Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Guyana, GPL
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Haiti, EDH
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Jamaica, JPS
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Suriname, EBS
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR

Notes:

2016

2017

2018

2019

838
73
654
111
110

2020

2021

2022

918
79
722
117
137

949
82
747
120
137

973
85
765
123
137

2023

2024

1,009
89
795
125
110

1,040
92
819
129
110

2025

2026

2027

2028

1,073
95
846
132
110

1,121
99
887
135
110

1,150
103
909
138
110

1,180
106
932
142

2029

1,215
109
961
146
330

2030

2031

2032

1,246
115
982
149
110

1,309
120
1,037
153

1,367
122
1,087
157

63

63

165

783
69
608
106
220

(63)
10%

(63)

(165)

(114)

(20)

(17)

(15)

15

18

22

25

28

142

(185)

39

153

157

89
8
60
21

96
9
66
22
45

102
8
71
23
6

108
9
76
23
6

113
9
80
24
6

119
10
84
25
20

108
8
75
24

114
9
80
25

122
10
86
27
27

123
9
86
27

128
10
90
28

134
10
95
30
27

139
11
98
31

148
11
105
32

156
11
111
33

27

28

31

32

33

27

27

86

(27)
10%

(27)

(86)

21

(24)

17

18

19

24

25

138
13
93
32

157
15
108
35
125

172
15
118
39
88

195
16
135
44
125

223
18
155
50
37

256
21
178
57
73

294
24
205
65
37

338
27
238
73

382
29
270
83

441
35
311
94

510
42
361
108

585
49
413
122

683
58
486
139

793
68
568
157

(0)

38

38

115

135
13
91
31
56

(38)
10%

(38)

(115)

(25)

32

(90)

(49)

(80)

14

(16)

28

73

83

94

108

122

139

157

344
33
236
75

369
34
257
77

395
36
280
80
5

415
37
296
82
5

433
39
310
85
5

455
40
328
87
110

431
36
308
86

451
38
325
89
110

444
36
319
89
110

456
38
327
91

466
39
334
93

478
39
343
95

487
40
350
98
110

511
43
369
100
110

532
45
385
102

61

61

453

(61)
10%

(61)

(453)

75

77

75

77

80

(23)

86

(21)

(21)

91

93

95

(13)

(10)

102

114
13
70
31
37

129
15
80
34

149
17
95
38
51

165
18
105
42
51

180
20
115
46
51

199
22
127
50
37

220
24
141
55

173
19
112
43

200
21
130
48

225
24
147
55
73

253
27
164
61
37

283
30
184
68
37

313
33
204
76
73

353
37
232
84
37

394
41
261
92

34

(13)

13

55

43

48

(19)

25

32

47

92

35

35

142

(35)
10%

(35)

(142)

(6)

(9)

(5)

EBITDA is Earnings before Interest, Taxes, Amortization, and Depreciation. CAPEX is Capital Expenses. FCFF is Free cash flow to the firm. IRR is
Internal Rate of Return. Prices are in constant 2012 US dollars.

204

TV

1,470

171

444

800

446

Confidential

11

Scenario 2: Virtual Hub

In Scenario 2, a single private company purchases LNG from a supply point and provides it
directly to all interested offtakers in the region. This is similar to the business model that
Gasfin is proposing to develop with a smaller-scale liquefaction facility in Trinidad and
Tobago (see Caribbean LNG Liquefaction Project in Section 4.5.3). In this scenario, there is
no physical hub except for the supply point. However, the single supplier of natural gas acts
as a virtual hub which allows all countries to be part of the same arrangement and, therefore,
demand large enough volumes of natural gas to obtain feasible pricing.
Figure 11.1 illustrates the supply chain of natural gas from acquiring the gas to bringing it to
the power plant. This figure includes costs for each segment for Barbados in 2023 (in this
case, the total cost of natural gas delivered to the power plant would be US$11.43 per
MMBtu).
Figure 11.1: Scenario 2: Virtual HubExample of Barbados (2023)

Note:

Costs in the figure may not add up to the total due to rounding.

Because all countries will use the same supplier, they will be in a better position to negotiate
the price of natural gas and might get better prices than if each country were to negotiate
separately. Since the Dominican Republic already has contracts for natural gas for its existing
power plants, it is possible that this natural gas already under contract would not form part
of this scenario. However, additional demand from the Dominican Republic that would
come from new generation capacity or from reconverting the existing fuel oil facilities could
be a part of this contract. By not including all the demand from the Dominican Republic, the
demand for natural gas would be lower than in the first scenario (by around 16 percent in
2023) and this could mean that the price of natural gas would be higher. However, the price
would still be low enough to make this scenario financially feasible.

205

Confidential

On the other hand, this scenario also requires coordination, since all countries need to be
willing to sign a long term contract with the same supplier. However, since no physical hub
would need to be built, the required degree of coordination is lower than in the first
scenario.
Below we present the main attributes, market structure, estimated investment and operating
costs, and cash flow projections for Scenario 2.

11.1

Scenario 2: Required Assets, Offtakers Involved, Suppliers, and


Volume of LNG Contracted

In Section 9 we presented the general assumptions that apply for all scenarios. To fully
describe this scenario, we complement those general assumptions by identifying the
attributes of this scenario regarding assets used for delivering and regasifying LNG, the
offtakers involved in the scenario, and the volume of LNG contracted in this scenario.
11.1.1 Assets used for delivering and regasifying LNG
After the gas is liquefied at the supply point, this scenario requires the following assets to
deliver the natural gas for direct use by the electricity generation plant:
Vessels to transport the LNG from the Supply Point to other countries. The
size of these vessels would be different for each of the participating countries
depending on their demand. For example, as described in Section 6.3.2, the
Dominican Republic and Jamaica would require full sized vessels with capacity of
149,000 cubic meters and the other participating countries would require medium
sized vessels with capacity of 45,000 cubic meters. As in Scenario 1, we assume
that the full sized ships can be contracted through term charters with the medium
sized vessels would have to be built specifically for the proposed project. In this
scenario, the ships travel greater distances (linking each receiving country with the
liquefaction plant in the country with the source of the natural gaswere
assuming the United States). However, the initial phase of operations would
require the same 2 ships as Scenario 1, only the utilization factor of these ships
would be higher. In this Scenario, an additional ship would have to be added in
2031
Regasification facilities in each of the countries. The size of these differs for
each of the participating countries depending on their demand. Section 6.3.3 of
this report presents our assumptions regarding the size and cost of these facilities
for each country
11.1.2 Pricing for this scenario
Pricing used for this scenario is the same as in scenario 1 (see Section 10.1.2 for further
reference). We assume that, as long as the delivered price of natural gas included a premium
of at least 20 percent over Henry Hub, offtakers in this scenario would buy natural gas at 25
percent below the price of delivered HFO. This is because natural gas would be priced based
on the substitution cost approach (with a 25 percent discount), as long as this approach
covered all costs. In other words, offtakers would buy natural gas at the maximum between
Henry Hub, plus 20 percent, plus delivery costs (cost plus); and HFO minus 25 percent
(substitution cost).

206

Confidential

With current price forecasts, the difference between the prices of WTI and Henry Hub is
tight. Therefore, natural gas delivered at a price of 25 percent below the price of HFO would
not necessarily cover the premium of at least 20 percent over Henry Hub. This means that
with current price forecast, offtakers might not be able to buy natural gas at 25 percent
below the price of delivered HFO. Instead, offtakers would buy natural gas at Henry Hub
plus a premium of 20 percent.
With a broader difference between the prices of WTI and Henry Hub, prices at origin for
natural gas would be higher for this scenario as compared to scenario 1. However, with
current price forecasts, both scenarios have the same price of natural at origin. Scenario 2
requires less investment in infrastructure since there is no hub, which means that under
current circumstances, this would be the scenario with the highest discount on Henry Hub.
11.1.3 The offtakers involved in this scenario
All utilities from IDB member countries in the Caribbean, except for BEL in Belize and
GBPC in The Bahamas, would be part of the base case for this scenario (the reasons for
excluding these offtakers are the same reasons we excluded them from Scenario 1see
Section 10.1 for further reference). Furthermore, the natural gas required for running the
existing plants in the Dominican Republic would not be part of this scenario (the future
plants could be part of this scenario if those were not built by AES).
The offtakers can be divided into three groups, of which the first two groups include
offtakers for which this scenario is definitely viable (Figure 11.2):

Offtakers that would receive an average discount on HFO of 25 percent or more


these are the countries that would benefit the most from this scenario, as they would
benefit from pricing at HFO minus the 25 percent discount. This group includes
Jamaica, Barbados, Bahamas, BEC, and the Dominican Republic

Offtakers that would receive an average discount between 20 percent and 25


percentthese are the offtakers that would not receive the 25 percent discount
associated with this scenario but for which the scenario would still be feasible. This
group includes Haiti and Guyana

Offtakers that would receive an average discount between 0 percent and 20


percentwhich would still be a discount, but below the 20 percent that we assume is
needed to make natural gas feasible. In this group, it is up to each country to decide
if the discount is enough. This group includes Suriname.

207

Confidential

Figure 11.2: Average Discount of HFO 2018-2032

11.1.4 Suppliers of LNG


There would be one sole supplier of LNG. As in Scenario 1, there is a risk that the supplier
would be a monopoly supplier. As discussed in Section 7.2, this risk can be reduced by
contracting with a supplier after an open tender process.
11.1.5 The volume of LNG contracted in this scenario
In Scenario 2, the total volume of LNG contracted would be around 304 million cubic feet
per day in 2018 (see Figure 11.3), which is about 113 million cubic feet per day or 26 percent
lower than the volume for Scenario 1. The difference between Scenarios 1 and 2 is equal to
the natural gas that is expected to be consumed by existing facilities in the Dominican
Republic. Appendix E in this report presents the detailed calculations we made to forecast
the demand for LNG by each offtaker.

208

Confidential

Figure 11.3: Volumes Contracted under Scenario 2, by Offtaker, 2018-2032

11.2

Scenario 2: Market Structure

Table 11.1 shows the options for structuring the market for this scenario. Each of the letters
in the table refers to a different entity. For example, in the base case, company A would
liquefy the gas, company B would own the smaller ships and be in charge of shipping the
natural gas to the offtakers. Company C, the offtakers, would be responsible for regasifying
the gas and generating the electricity. In other words, the offtakers (companies C) would
buy natural gas, in the form of the LNG, from company B.
Table 11.1: Options for Structuring the Market in Scenario 2
Liquefaction

Shipping

Regasification

Generation

Base Case

C(s)

C(s)

Option 2

A/B

A/B (BOT)

C(s)

Note: We use the base case for estimating the cash flows
Each of the letters in the table refers to a different entity. C(s) denotes that multiple entities would carry out
that activity. For example, each offtaker would be responsible for generation.

11.3

Scenario 2: Estimated Investment and Operating Costs

In this section we present the estimated investment and operating costs for delivering natural
gas, via LNG, and then using that natural gas to produce electricity for each offtaker under
Scenario 2. We begin by presenting the investment costs related to each of the segments for
delivering natural gas in the form of LNG. We then show how these investment costs plus
other costs result in final costs of delivered natural gas and the cost of generating electricity.
These costs of generating electricity are the same regardless of who owns the assetsthe
cost estimates are based on levelized tariffs for capital costs, plus operating and maintenance
expenses, which should be the same for all market structuresassuming any market player
would require similar returns (10 percent).

209

Confidential

Scenario 2: estimated investment costs


Figure 11.4 shows the investment costs that would be required to make sure that all the
assets for delivering natural gas to the power plants are in place. The figure shows that
investment costs of about US$1.6 billion would be required during the eight-year period
from 2015 to 2022. Of these investments, regasification facilities would represent the highest
capital cost (representing 83 percent of these costs), with a total capital investment of US$1.3
billion.
Figure 11.4: Investment Costs for Scenario 2 by Activity, Excluding Investments in
Power Plants

Note: In this Scenario, another ship would have to be purchased in 2031 with an investment cost of $US90
million.

Figure 11.5 adds the capital costs related to power plants to the capital costs presented in
Figure 11.4 to show total capital costs required for this scenario. The investments in power
plants are divided into costs of converting existing power plants and costs of new power
plants. The costs of converting power plants are directly associated with introducing a
natural gas market in the region (these costs total US$282 million, around 7 percent of total
investment costs). The cost of new power plants is the largest investment cost at US$2
billion, or about 52 percent of the costs. As mentioned in Section 10.3, these costs in new
power plants would have to be made even without introducing natural gas into the market.

210

Confidential

Figure 11.5: Investment Costs for Scenario 2 by Activity, Including Investments in


Power Plants

Note:

After 2022 we have included additional investment costs related to new power plants. Section 6.3.5

shows the amount of these investments

To illustrate the distribution of these investment costs across the market participants, Figure
11.6 shows the investment costs by market player (according to our base case for market
structure described in Section 10.2). The figure shows that the offtakers as a group would be
making the highest investment accounting for US$3.6 billion, or 93 percent of the
investments. However, these investments would be made by seven offtakers.
Figure 11.6: Investment Costs for Scenario 2 by Market Player, Including Investments
in Power Plants

Note:

B and C indicate the involved company, as described in Table 11.1

211

Confidential

Scenario 2: estimated cost of delivered natural gas


For each offtaker, Figure 11.7 shows the cost per year of each of the segments for delivering
natural gas by year, and the total cost of delivered natural gas.
Figure 11.7: Cost of Delivered Natural Gas by Offtaker for Scenario 2, 2018-2032

212

Confidential

213

Confidential
Note:

Cost of electricity generated with natural gas includes O&M and capital costs of electricity generation.
To estimate liquefaction costs, we use the capital costs and non-fuel OPEX described in Table 6.1.
An additional 9 percent of fuel costs is added to liquefaction costs for the natural gas that is burned
off during liquefaction (see Section 6.3).
The acquired price of natural gas is assumed to be determined by a substitution approach, which
means that all countries will get a delivered price equal to HFO minus 20 percent (see below).
Prices are in constant 2012 US dollars.

These costs of delivered natural gas provide an attractive discount on fuel oil prices. Under
this scenario, Jamaica, Barbados, Bahamas, BEC, and the Dominican Republic, would get
natural gas delivered at an average cost ranging from 26 to 30 percent lower than the cost of
fuel oil. A discount on fuel oil that is above 25 percent makes bringing natural gas definitely
feasible on this scenario. Haiti and Guyana would not receive the 25 percent discount
associated with this scenario, but they would get natural gas delivered at an average cost
ranging from 20 to 21 percent lower than the cost of fuel oil which would still make the
scenario feasible (it is above the minimum discount required by offtakersSection 6.4).
As Figure 11.8 shows, Suriname would get the lowest discount. It would get an average
discount of 16 percent, which means that it would still get discount, but the discount is
below the minimum discount required. Therefore, it would be up to Suriname to decide if
the discount is enough.
Figure 11.8: Scenario 2: Discount on Fuel Oil prices

Assuming non-fuel operating costs and capital costs are similar for fuel oil and natural gas
plants, these reductions in the prices of fuel oil will translate into discounts in the cost of
generating electricity. Below, we provide further detail regarding our calculations of the costs
of each of the segments for delivering natural gas, with particular emphasis on the acquired
price of natural gas. We then provide the estimated cost of generating electricity with natural
gas for each country.

Scenario 2: estimated acquired price of natural gas


Because this scenario should allow for prices that would make it attractive for the offtakers
to switch to natural gas, but prices that are higher than those in Scenario 1, we assume that

214

Confidential

natural gas could be purchased at around fuel oil parity minus 25 percent for all offtakers
involved, but only if this means that the delivered price of natural gas included a premium of
at least 20 percent over Henry Hub. At recent forecasts for prices, an acquired price of
natural gas resulting from fuel oil parity minus 25 percent is less than Henry Hub plus 20
percent. This means, that to secure potential suppliers and make the pricing commercially
viable, offtakers would need to buy natural gas at a lower discount than the 25 percent
initially assumed.
Figure 11.9 compares Henry Hub projections with the acquired price of natural gas assumed
for this scenario. The figure also shows the premium on Henry Hub that would be paid each
year. It shows that the premium on Henry Hub would always be 20 percent for the first
years and 22 and 24 percent for 2031 and 2032 respectively, with an average premium over
the life of the contract of 20.4 percentwhich we consider commercially viable given the
volumes that would be contracted under this scenario.
Figure 11.9: Henry Hub v Acquired Price of Natural Gas for Scenario 2

Source: Henry Hub projections are based on EIA 2015

Scenario 2: estimated cost of generating electricity with natural gas


For each electricity utility, we estimate the cost of generating electricity with natural gas by
calculating a levelized tariff that would cover the capital costs related to investing in power
plants, including a return on investments of 10 percent over a 25 years for power plants, and
adding the assumptions regarding operating costs identified in Table 6.8, Figure 11.10 shows
the resulting costs for each of the participating offtakers.

215

Confidential

Figure 11.10: Costs of Generating Electricity with Natural Gas, Scenario 2

216

Confidential

217

Confidential

218

Confidential

11.4

Scenario 2: Cash Flow Projections

Using the capital costs and operating costs described in Section 11.3, Table 11.2 shows the
projected cash flows for each of the participating companies in the market. As the table
shows, all market participants (except for the shipping company) would receive a return on
their investments equal to the 10 percent cost of capital (identified in the line named IRR
for each company). These returns assume that the terminal value of each of the companies
after 15 years of operations would be equal to the remaining useful life of the assets. The real
return for the shipping company would be higher than the 10 percent in this scenario
because the ships would have high utilization rates.

219

Confidential

Table 11.2: Scenario 2: Cash Flows for Each of the Companies


US$ million

2015

2016

2017

2018

2019

2020

Small Shipping Company


Revenue (assuming this company gets paid for charter fees plus38
gas boiled
39 off)
O&M costs
Cost of boiled-off fuel
3
3
O&M of ships
3
3
EBITDA
28
28
CAPEX
180
Taxes?
Working Capital?
FCFF
(152)
28
IRR
17%
The Bahamas, BEC, NP
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
38
38
104
Taxes?
Working Capital?
FCFF
(38)
(38)
(104)
IRR
10%
Barbados, BL&P
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
27
27
33
Taxes?
Working Capital?
FCFF
(27)
(27)
(33)
IRR
10%
Dominican Republic, All
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
97
97
200
Taxes?
Working Capital?
FCFF
(97)
(97)
(200)
IRR
10%

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

41

45

48

45

47

49

51

56

60

67

72

79

86

3
3
30

4
3
33

4
4
34
90

4
3
33
(90)

4
4
33
90

4
4
34

5
4
36

5
4
40

6
4
43

6
4
49

7
5
52
90

7
5
57

8
5
63

30

33

(56)

123

(57)

34

36

40

43

49

(38)

57

63

182
21
130
31
34

188
20
137
32
7

195
20
142
33
63

188
19
137
32

195
20
142
33

203
20
149
34
27

217
20
161
35

222
21
165
36
27

231
20
174
38
56

242
20
183
39

248
20
187
40
27

266
20
204
42

282
22
217
43

(18)

39

13

42

43

160
19
111
29

171
20
121
30

29

30

(3)

25

(30)

32

33

35

93
6
54
35
292

96
6
57
35

98
6
59
35
6

122
7
73
43
6

123
7
74
43
6

119
7
71
42

119
7
73
42
28

143
9
87
50

145
9
89
50
28

153
9
93
54
28

155
9
94
55

158
9
96
56

162
9
99
57

168
10
104
57

175
10
110
58

(257)

35

29

38

38

42

15

50

23

26

55

56

57

57

58

408
37
288
83
220

609
53
433
123
110

676
58
486
132
140

700
61
504
135
140

720
64
517
139
140

751
67
541
144
110

781
70
562
148
110

810
74
584
153
110

853
77
617
158
110

884
81
639
164
110

916
84
662
170

952
87
689
176
330

986
93
711
182
110

1,050
98
765
188

1,117
100
822
194

(137)

12

34

38

43

48

54

170

(154)

72

188

194

(8)

(4)

(1)

220

TV

262

250

325

1,475

Confidential

US$ million
2015
2016
2017
Guyana, GPL
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
27
27
86
Taxes?
Working Capital?
FCFF
(27)
(27)
(86)
IRR
10%
Haiti, EDH
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
38
38
115
Taxes?
Working Capital?
FCFF
(38)
(38)
(115)
IRR
10%
Jamaica, JPS
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
61
61
453
Taxes?
Working Capital?
FCFF
(61)
(61)
(453)
IRR
10%
Suriname, EBS
Revenue (cost of electricity times sales of electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
35
35
142
Taxes?
Working Capital?
FCFF
(35)
(35)
(142)
IRR
10%

Notes:

2018

2019

88
8
59
21

95
9
64
22
45

21

(24)

131
13
87
31
56

(25)

133
13
88
32

32

2020

2021

2022

2025

107
9
75
23
6

112
9
78
24
6

116
10
81
25
20

106
8
73
24

112
9
78
25

17

18

19

24

25

153
15
103
35
125

166
15
113
39
88

189
16
129
44
125

217
18
148
50
37

248
21
171
57
73

285
24
197
65
37

(90)

(49)

(80)

350
34
239
77

376
35
261
80
5

395
37
276
82
5

413
38
290
85
5

75

77

75

77

80

111
13
68
31
37

127
15
78
34

147
17
92
38
51

162
18
102
42
51

177
20
112
46
51

34

2024

101
8
70
23
6

326
33
218
75

(6)

2023

(13)

(9)

(5)

14

434
40
307
87
110

(23)

(16)

411
36
288
86

86

2026
120
10
84
27
27

2027

2028

2029

2030

2031

2032

121
9
84
27

125
10
87
28

132
10
92
30
27

136
11
95
31

146
11
103
32

156
11
111
33

27

28

31

32

33

328
27
228
73

371
29
259
83

428
35
299
94

496
42
346
108

568
49
396
122

668
58
472
139

784
67
560
157

28

73

83

94

108

122

139

157

431
38
304
89
110

424
36
299
89
110

436
38
307
91

445
38
313
93

457
39
322
95

466
40
328
98
110

492
42
350
100
110

519
45
373
102

(21)

(21)

91

93

95

(13)

(10)

102

222
24
143
55
73

249
27
160
61
37

278
30
180
68
37

308
33
199
76
73

349
37
228
84
37

394
41
261
92

25

32

47

92

(0)

196
22
124
50
37

216
24
137
55

170
19
109
43

196
21
127
48

13

55

43

48

(19)

EBITDA is Earnings before Interest, Taxes, Amortization, and Depreciation. CAPEX is Capital Expenses. FCFF is free cash flow to the firm. IRR is
Internal Rate of Return
Prices are in constant 2012 US dollars.

221

TV

171

444

800

446

Confidential

12

Scenario 3: Individual Contracts

In Scenario 3, each country that finds it economically viable to buy the natural gas on its own
contracts individually for natural gas (such as AES Dominicana has done in the Dominican
Republic). We assume that this scenario would only be viable for larger countries that can
negotiate natural gas contracts at prices at least 20 percent lower than what they pay for fuel
oil. Because the volumes of natural gas that would be bought in this scenario would be
smaller than in Scenario 1 and Scenario 2 (there would not be one contract for all the gas
demanded in the region like in the other two scenarios) it is possible that the best prices the
offtakers could obtain would be fuel oil parity minus 20 percent. This discount on fuel oil
means that this scenario is financially feasible for the participating countries. However, it is
possible that countries with relative small demand would only be able to negotiate contract
at prices between 0 and 20 percent lower than what they pay for fuel oil. In this case, it
would be up to each country to decide if the discount is enough. The benefit of this scenario
is that it would require less coordination among different countries and could be
implemented more quickly. For example, Jamaica has recently been working to secure such a
deal (See Appendix C.2).
Figure 12.1 shows that prices would be highest for Barbados in Scenario 3. The estimated
delivered price of natural gas in 2023 is US$12.63.
Figure 12.1: Scenario 3: Individual ContractsExample of Barbados (2023)

Note:

Costs in the figure may not add up to the total due to rounding.

Below we present the main attributes, market structure, estimated investment and operating
costs, and cash flow projections for Scenario 3.

222

Confidential

12.1

Scenario 3: Required Assets, Offtakers Involved, Suppliers, and


Volume of LNG Contracted

In Section 9 we present the general assumptions that apply for all scenarios. To fully describe
this scenario, we complement those general assumptions by identifying the attributes of this
scenario regarding assets used for delivering and regasifying LNG, the offtakers involved in
the scenario, and the volume of LNG contracted in this scenario.
12.1.1 Assets used for delivering and regasifying LNG
After the gas is liquefied at the supply point, this scenario requires the following assets to
deliver the natural gas for direct use by the electricity generation plant:
Vessels to transport the LNG from the Supply Points to participating
countries. The size of these vessels would be different for each of the
participating countries depending on their demand. For example, as described in
Section 6.3.2, the Dominican Republic and Jamaica would require full sized
vessels with capacity of 149,000 cubic meters and the other participating countries
would require medium sized vessels with capacity of 45,000 cubic meters. As in
Scenario 1, we assume that the full sized ships could be contracted through term
charters. Furthermore, in this scenario we assume that the offtakers that require
medium vessels would also be able to contract those through term charters. Even
though these vessels are not available in the market, and would have to be built
for specific projects, we find that it is not financially feasible for a company to
build a medium sized vessel to supply one single offtaker. Therefore, we assume
that for individual contracts to be feasible for the smaller countries, a company
would have to own medium size vessels and provide services at charter rates to
offtakers with different contracts
Regasification facilities in each of the countries. The size of these differs for
each of the participating countries depending on their demand. Section 6.3.3 of
this report presents our assumptions regarding the size and cost of these facilities
for each country.
12.1.2 Pricing for this scenario
Pricing used for this scenario is similar to Scenario 1 and Scenario 2 (see Section 10.1.2). We
assume that, as long as the delivered price of natural gas included a premium of at least 20
percent over Henry Hub, offtakers in this scenario would buy natural gas at 20 percent
below the price of delivered HFO. This is because natural gas would be priced based on the
substitution cost approach (with a 20 percent discount), as long as this approach covered all
costs. In other words, offtakers would buy natural gas at the maximum between Henry Hub,
plus 20 percent, plus delivery costs (cost plus); and HFO minus 20 percent (substitution
cost).
With current price forecasts, the difference between the prices of WTI and Henry Hub is
tight. Therefore, natural gas delivered at a price of 20 percent below the price of HFO would
not necessarily cover the premium of at least 20 percent over Henry Hub for all offtakers.
This means that with current price forecasts, some offtakers might not be able to buy natural
gas at 20 percent below the price of delivered HFO and would instead buy natural gas at
Henry Hub plus a premium of 20 percent.

223

Confidential

12.1.3 The offtakers involved in this scenario


All utilities from IDB member countries in the Caribbean would participate in this scenario,
except for BEL in Belize and GBPC in The Bahamas. The reasons for excluding BEL and
GBPC are because demand for natural gas would be too small to justify investments in the
necessary infrastructure, and would also likely be too small to attract suppliers. We have
included all other offtakers that have relatively small markets (BEC in The Bahamas, BL&P
in Barbados, GPL in Guyana, EDH in Haiti, and EBS in Suriname) in this scenario.
However, due to the small size of these markets, prices that would be available for these
offtakers to contract individually need to be tested on the market.
The offtakers can be divided into two groups, of which the first group includes offtakers that
if able to negotiate the small quantities they require at the prices we forecastthis
scenario would be definitely viable. The second group includes offtakers, thatif able to
negotiate the small quantities they require at the prices we forecaststill need to decide if
the discount they get is enough (Figure 12.2):
Offtakers that would receive an average discount on HFO of 20 percent or
morethese are the countries that would benefit the most from this scenario, as
they would benefit from pricing at HFO minus the 20 percent discount. This
group includes The Bahamas (BEC), Barbados, Jamaica, and the Dominican
Republic
Offtakers that would receive an average discount between 0 percent and 20
percentwhich would still get discount, but below the 20 percent that we assume
is needed to make natural gas feasible. In this group, it is up to each country to
decide if the discount is enough. This group includes Haiti, Guyana, and
Suriname.
Figure 12.2: Average Discount of HFO 2018-2032

224

Confidential

12.1.4 Suppliers
There would be one supplier of natural gas for each country. It might be that two or more
countries have the same supplier, but not under the same contract.
12.1.5 The volume of LNG contracted in this scenario
Under this scenario, natural gas would be contracted separately by each offtaker, so contracts
would range from about 19 MMcfd in 2018 in Guyana (growing to 27 MMcfd in 2032) to
215 MMcfd in 2018 in the Dominican Republic (growing to 289 MMcfd in 2032) (see Figure
12.3). Appendix E in this report presents the detailed calculations we made to forecast the
demand for LNG by each offtaker.
Figure 12.3: Volumes Contracted under Scenario 3, by Offtaker in 2018, 2023, and 2032

12.2 Scenario 3: Market Structure


Table 12.1 shows the options for structuring the market for this scenario. Each of the letters
in the table refers to a different entity. For example, in the base case, company A would
liquefy the gas, company B would own the smaller ships and be in charge of shipping the
natural gas to the offtakers. Company C, the offtakers, would be responsible for regasifying
the gas and generating the electricity. In other words, under this scenario, companies C
would buy natural gas in the form of LNG from companies B.
Table 12.1: Options for Structuring the Market in Scenario 3
Liquefaction

Shipping

Regasification

Generation

Base Case

A(s)

B(s)

C(s)

C(s)

Option 2

A(s)

A(s)

A (s) (BOT)

C(s)

Note: We use the base case for estimating the cash flows
Each of the letters in the table refers to a different entity. C(s) denotes that multiple entities would carry out
that activity. For example, each offtaker would be responsible for generation.

In theory, this scenario could have many shipping companies involved. However, for the
investment in smaller ships to be financially viable, each shipping company would have to
ship to more than one offtaker. Investing in a ship for only one offtaker is not financially
viable. This means that for this scenario to be viable, some level of aggregation would be
required to make sure the smaller ships (used for all countries except for Jamaica and the

225

Confidential

Dominican Republic) would be available at the charter rates used in Section 6.3.2 of this
report to estimate shipping costs.

12.3 Scenario 3: Estimated Investment and Operating Costs


In this section we present the estimated investment and operating costs for delivering natural
gas, via LNG, and then using that natural gas to produce electricity for each offtaker under
Scenario 3. We begin by presenting the investment costs related to each of the segments for
delivering LNG for each of the six individual contracts we have considered. We then show
how these investment costs plus other costs result in final costs of delivered natural gas and
the cost of generating electricity. These costs of generating electricity are the same regardless
of who own the assetsthe cost estimates are based on levelized tariffs for capital costs,
plus operating and maintenance expenses, which should be the same for all market
structuresassuming any market player would require similar returns (10 percent).
Scenario 3: estimated investment costs
Figure 12.4 shows the investment costs that would be required to make sure that all the
assets for generating electricity with natural gas are in place for each of the seven individual
contracts in this Scenario. The figure shows that the Dominican Republic would require the
highest investments. The figure also shows that the investments in power plants would be
the highest investments for all participating offtakers.

226

Confidential

Figure 12.4: Investment Costs for Scenario 3 by Activity, Including Investments in


Power Plants

Note:

After 2022 we have included additional investment costs related to new power plants. Section 6.3.5
shows the amount of these investments

227

Confidential

Scenario 3: estimated cost of delivered natural gas


For each offtaker and year, Figure 12.5 shows the cost of each of the segments for delivering
natural gas, and the total cost of delivered gas.
Figure 12.5: Cost of Delivered Natural Gas by Offtaker for Scenario 3, 2018-2032

228

Confidential

229

Confidential

Note:

Cost of electricity generated with natural gas includes O&M and capital costs of electricity generation.
To estimate liquefaction costs, we use the capital costs and non-fuel OPEX described in Table 6.1.
An additional 9 percent of fuel costs is added to liquefaction costs for the natural gas that is burned
off during liquefaction (see Section 6.1).
The acquired price of natural gas is assumed to be determined by a substitution approach, which
means that all countries will get a delivered price equal to HFO minus 20 percent (see below).
Prices are in constant 2012 US dollars.

These costs of delivered natural gas provide an attractive discount on fuel oil prices. Under
this scenario, offtakers would get natural gas delivered at a cost between 14 and 20 percent
lower than the cost of fuel oil, depending on the offtaker. As such, offtakers that pay more
for fuel oil would pay more for natural gas, regardless of the volume of natural gas supplied.
Unlike the other two scenarios, where there is one acquired price of natural gas for all
offtakers (because there is one contract for supply of natural gas) and some offtakers achieve
higher discounts on fuel oil, in this Scenario all offtakers have different prices for natural gas,
and we assume those prices equal a 20 percent discount on each offtakers cost of fuel oil.
Assuming non-fuel operating costs and capital costs are similar for fuel oil and natural gas
plants, these reductions in the prices of fuel oil will translate into discounts in the cost of
generating electricity. Electricity costs will also drop in some years as new generating units
increase efficiency. Below, we provide further detail regarding our calculations of the costs of
each of the segments for delivering natural gas, with particular emphasis on the acquired
price of natural gas.

Scenario 3: estimated acquired price of natural gas


Figure 12.6 compares Henry Hub projections with the acquired price of natural gas for each
of the seven contracts assumed for this scenario. The figure also shows the premium on
Henry Hub that would be paid each year by each for the seven contracts. The figure shows
that the premium on Henry Hub would always be 20 percent or higher for all contracts.

230

Confidential

Figure 12.6: Henry Hub v Acquired Price of Natural Gas for each Contract in Scenario
3

Source: Henry Hub projections are based on EIA 2014

The reason why the acquired price of natural gas would be highest for Jamaica, which has
the second largest demand, is that Jamaica currently has the highest fuel oil prices. Therefore,
if we assume that contracts under this Scenario would be negotiated at a 20 percent discount
over the fuel oil price, Jamaica would end up with the highest acquired price of natural gas.
In other words, our pricing mechanism assumes that each country will negotiate on an
individual basis and will be able to secure a contract at a price exactly equal to fuel oil parity
minus 20 percent. Under this assumption, because Jamaica currently has the highest fuel oil
prices, it will also get the highest natural gas prices. In practice, it might be possible that
because Jamaica has a higher demand for natural gas, it might be able to negotiate at, for
example, fuel oil parity minus 25 or 30 percent, in which case the price of electricity
generation will be lower for Jamaica.
To estimate these prices, we assume that natural gas could be purchased at fuel oil parity
minus 20 percent, but only if this means that the delivered price of natural gas included a
premium of at least 20 percent over Henry Hub. It would not be feasible for offtakers with
volumes lower than what is required to secure these prices to be part of this scenario. Figure
12.7 shows that discount that each offtaker would receive each year. For the cases of

231

Confidential

Guyana, Haiti, and Suriname, an acquired price of natural gas resulting from fuel oil parity
minus 20 percent is less than Henry Hub plus 20 percent for some years. This means, that to
secure potential suppliers and make the pricing commercially viable, Guyana, Haiti, and
Suriname would need to purchase natural gas at a lower discount on fuel oil (as shown in the
picture). Each country would need to decide if purchasing natural gas at a lower discount
than the 20 percent initially assumed is attractive or not.
Figure 12.7: Discount on fuel Oil for each Country in Scenario 3

Scenario 3: estimated cost of generating electricity with natural gas


For each electricity utility, we estimate the cost of generating electricity with natural gas by
calculating a levelized tariff that would cover all of the above capital costs, including a real
return on investments of 10 percent over a 15 year period (25 years for power plants), and
adding the assumptions regarding operating costs identified in Table 6.8. Figure 12.8 shows
the resulting costs for each of the participating offtakers for 2023.

232

Confidential

Figure 12.8: Costs of Generating Electricity with Natural Gas, Scenario 3

233

Confidential

234

Confidential

235

Confidential

Note:

Prices are in constant 2012 US dollars.

12.4 Scenario 3: Cash Flow Projections


Using the capital costs and operating costs described in Section 11.3, Table 12.2 shows the
projected cash flows for each of the participating companies in the market. As the table
shows, all market participants would get a real return on their investments equal to 10
percent cost of capital (identified in the line named IRR for each company). These returns
assume that the terminal value of each of the companies after 15 years of operations would
be equal to the remaining useful life of the assets.

236

Confidential

Table 12.2: Scenario 3: Cash Flows for Each of the Companies


US$ million
The Bahamas, BEC, NP
Revenue (cost of electricity times sales of
electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Barbados, BL&P
Revenue (cost of electricity times sales of
electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Dominican Republic, All
Revenue (cost of electricity times sales of
electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Guyana, GPL
Revenue (cost of electricity times sales of
electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

168
20
119
29

176
20
126
30

184
21
132
31
34

192
20
140
32
7

202
20
149
33
63

197
19
146
32

208
20
155
33

32

2025

2026

2027

2028

219
21
165
34
27

236
20
180
35

249
21
191
36
27

266
20
208
38
56

33

35

2029

2030

2031

2032

286
20
226
39

301
21
240
40
27

323
21
260
42

341
23
276
43

39

13

42

43

38

38

104

(38)
10%

(38)

(104)

29

30

98
6
60
34

100
6
61
34
6

125
7
77
42
6

127
7
80
42
6

126
7
80
41

129
7
83
41
28

156
9
101
49

160
9
105
49
28

173
9
114
53
28

179
9
119
53

187
10
126
54

195
10
133
55

204
10
141
56

212
11
148
57

(3)

25

(30)

(18)

27

27

33

97
6
59
34
292

(27)
10%

(27)

(33)

(258)

34

29

37

37

41

14

49

21

25

53

54

55

56

57

890
74
705
111
110

951
79
754
117
137

990
83
787
120
137

1,033
86
824
123
137

1,081
90
865
125
110

1,131
93
909
129
110

1,182
97
953
132
110

1,239
101
1,003
135
110

1,306
105
1,063
138
110

1,378
109
1,127
142

1,451
112
1,193
146
330

1,532
120
1,263
149
110

1,615
124
1,337
153

1,701
127
1,416
157

(20)

(17)

(15)

15

18

22

25

28

142

(185)

39

153

157

120
10
84
27
27

124
9
88
27

133
10
95
28

142
10
103
30
27

152
11
111
31

163
11
120
32

174
12
129
33

27

28

31

32

33

63

63

165

855
70
679
106
220

(63)
10%

(63)

(165)

(114)

88
8
59
21

95
9
64
22
45

101
8
70
23
6

107
9
75
23
6

112
9
78
24
6

116
10
81
25
20

106
8
73
24

112
9
78
25

21

(24)

17

18

19

24

25

27

27

86

(27)
10%

(27)

(86)

237

(0)

TV

250

360

1,470

171

Confidential

US$ million
Haiti, EDH
Revenue (cost of electricity times sales of
electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Jamaica, JPS
Revenue (cost of electricity times sales of
electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR
Suriname, EBS
Revenue (cost of electricity times sales of
electricity)
O&M costs (regas+power)
Cost of LNG delivered to regas facility
EBITDA
CAPEX
Taxes?
Working Capital?
FCFF
IRR

Notes:

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

133
13
88
32

153
15
103
35
125

166
15
113
39
88

189
16
129
44
125

217
18
148
50
37

248
21
171
57
73

2025

2026

2027

2028

286
24
197
65
37

332
27
232
73

384
30
272
83

455
35
325
94

2029

2030

2031

2032

538
42
388
108

634
50
462
122

746
59
548
139

876
69
649
157

38

38

115

131
13
87
31
56

(38)
10%

(38)

(115)

(25)

32

(90)

(49)

(80)

14

(16)

28

73

83

94

108

122

139

157

379
33
270
75

398
35
286
77

418
36
303
80
5

443
37
324
82
5

471
39
348
85
5

501
41
373
87
110

480
37
357
86

511
39
383
89
110

505
37
379
89
110

532
39
401
91

558
40
424
93

585
41
449
95

614
42
475
98
110

647
45
503
100
110

681
47
532
102

61

61

453

(61)
10%

(61)

(453)

75

77

75

77

80

(23)

86

(21)

(21)

91

93

95

(13)

(10)

102

111
13
68
31
37

127
15
78
34

147
17
92
38
51

162
18
102
42
51

177
20
112
46
51

196
22
124
50
37

216
24
137
55

170
19
109
43

196
21
127
48

222
24
143
55
73

249
27
161
61
37

285
30
186
68
37

324
34
214
76
73

367
37
246
84
37

414
41
281
92

34

(13)

13

55

43

48

(19)

25

32

47

92

35

35

142

(35)
10%

(35)

(142)

(6)

(9)

(5)

EBITDA is Earnings before Interest, Taxes, Amortization, and Depreciation. CAPEX is Capital Expenses. FCFF is free cash flow to the firm. IRR is
Internal Rate of Return
Prices are in constant 2012 US dollars.

238

TV

444

800

446

Confidential

13

Comparison of the Three Scenarios

Determining the preferred scenario includes analyzing the forecasted prices, the negotiating
power of the countries, and the commercial viability of the scenario. Commercial viability is
the potential to successfully complete a public tender that would result in natural gas being
delivered to the countries.
With a wide difference between prices of HFO and prices of natural gas, Scenario 1 is the
preferred scenario since it would provide offtakers with the best pricing (since the volume
negotiated would be the highestaround 490 MMcfd in 2023). Additionally, a higher
volume negotiated and the use of a physical hub mean that commercial viability in Scenario 1
would be easier to arrange than in other scenarios. In this scenario, we assume offtakers
would be able to purchase natural gas at a price equal to fuel oil parity minus 30 percent, as
long as the delivered price of natural gas included a premium of at least 20 percent over
Henry Hub.
In Scenario 2, offtakers could still benefit from lower prices by aggregating demand;
although not as much as in Scenario 1, since the demand for natural gas from existing plants
in the Dominican Republic would not be part of this scenario (this scenario would contract
volumes of around 414 MMcfd in 2023). This scenario might be less commercially viable
than Scenario 1, but requires less physical infrastructure because no hub is needed. For
Scenario 2, we assume offtakers could purchase natural gas at a price equal to fuel oil parity
minus 25 percent, as long as the delivered price of natural gas included a premium of at least
20 percent over Henry Hub.
Scenario 3 would be the easiest to implement, but it would have the highest prices for
offtakers, and it would also be the least commercially viable, especially for smaller countries.
The largest volume contracted would be that of the Dominican Republic, with around 238
MMcfd in 2023. In this scenario, we assume that the delivered price of natural gas for each
offtaker would be gas at a price equal to fuel oil parity minus 20 percent, as long as the
delivered price of natural gas included a premium of at least 20 percent over Henry Hub.
With current price forecasts, the difference between the price of natural gas and HFO is
tight and offtakers may negotiate a price equal to Henry Hub plus a premium. Under these
circumstances, Scenario 2 would be the cheapest. In Scenario 2 the price at origin of natural
gas is the same as in Scenario 1 but the required investment is lower because Scenario 2 does
not require a physical hub to be built. The price at origin of the natural gas is the same in
Scenario 1 and Scenario 2 because the spread between oil and gas prices is so low in the
reference case that suppliers would not offer a larger discount than 25 percent, the assumed
discount in Scenario 2. As such, additional demand aggregation through a physical hub in
Scenario 1 would not allow offtakers to negotiate a lower price than in Scenario 2. Scenario 1
is still an attractive scenario for offtakers, but not as much as Scenario 2 (since both have the
same price of natural gas at origin, but Scenario 1 requires higher investment to build the
hub). With current price forecast, Scenario 3 is still the most expensive.
Figure 13.1 compares the commercial viability of the scenarios with the delivered price of
natural gas in 2023 using current price forecasts. It shows that even though Scenario 0
(business as usual) is the most commercially viable (since countries would not need to make

239

Confidential

any effort on importing natural gas as they would continue using fuel oil), it is also the most
expensive (except for Suriname328).
Figure 13.1: Scenarios: Commercial Viability vs. Delivered Price of Natural Gas

Note:

The range of prices of delivered natural gas for each scenario (and delivered fuel oil for the Business
as usual case) is an estimate of the price of the fuel delivered in each country in 2023.

In this section we compare the three scenarios in terms of the size of the market (Section
13.1), pricing (Section 13.2), commercial viability (Section 13.3), risks (Section 13.4), and the
IDBs priority areas (Section 13.5).
Table 13.1 shows that, although prices in Scenario 1 are slightly higher than in Scenario 2, it
would probably be more commercially viable and would also be the scenario with the highest
benefits in terms of other considerationsthe IDBs objectives and priorities for the
regiondescribed in Section 13.5. Therefore, we select Scenario 1 as the preferred scenario.

328

It is more expensive for Suriname under the three scenarios for 2023. This is because, although the costs of the fuel are
cheaper in the natural gas scenario, the cost of converting and building new plants offsets the difference in fuels.
However, this is only true during the first seven years. Over the 15 year projection period, electricity generated with
natural gas is cheaper than HFO.

240

Confidential

Table 13.1: Comparing the Three Scenarios


Pricing (in
US$/MMBtu
in 2023)
3
($9.6 11.8)

Commercial
Viability

Size of Market
(in 2023)

Risks

Covers IDB
Priorities

4
(490 MMcfd)

Scenario 2

4
($10.0 - 11.5)

3
(414 MMcfd)

Scenario 3

2
($10.4 16.1)

1
(20-234 MMcfd)

Scenario 1

Note: The Harvey Balls indicate the attractiveness of each Scenario for each comparator. A 4 indicates the
highest level of attractiveness and a 0 the lowest level.

Based on the level of interest of potential suppliers and other market participants, we believe
that it is likely that some of the individual contracts that would form part of Scenario 3 will
be secured without any intervention in the market. Due to the level of additional
coordination and complexity required for Scenarios 1 and 2, external assistancefor
example, from an entity like the IDBwould be essential for bringing all the parties together
at the right time. This external assistance would greatly contribute to generating the
additional benefits that would arise from an outcome similar to Scenario 1 or Scenario 2.

13.1

Market Size

Based on our forecasts of demand for natural gas in each country (see Section 4.4), Figure
13.2 shows the volumes that would be contracted under each of the scenarios. Scenario 1
would be the scenario with the largest volume contracted, followed by Scenario 2, and then
an individual contract in the Dominican Republic in Scenario 3 would be the third largest
contract by volume.
Figure 13.2: Volumes by Scenario, 2023

A larger market would be beneficial because it would allow more countries to access natural
gas and, therefore, benefit from lower electricity prices. For example, without a multi-

241

Confidential

country contract, similar to what is assumed for Scenarios 1 and 2, the smaller countries
would not have access to the market. A larger market would also contribute to the faster
development of the natural gas market in the region.

13.2 Fuel Prices


Figure 12.3 compares the acquired price of natural gas in 2023 for the offtakers. Scenario 1
and Scenario 2 would be the scenarios that would allow offtakers to contract natural gas at
the best price (US$6.3 per MMBtu in 2023 which implies a premium of US$1.05 over Henry
Hub, or 20 percent). Under these scenarios, all offtakers would be part of the same contract
and would have the same acquired price. Scenario 3 would result in the highest acquired
prices of natural gas. These prices would be different for each country. Acquired prices of
natural gas for this scenario would range from US$6.30 per MMBtu in Guyana, Haiti and
Suriname to US$8.0 per MMBtu in Jamaica.
Figure 13.3: Acquired Price of Natural Gas and HH Price, 2023

Adding delivery costs to the acquired prices of natural gas shown above, Figure 12.4 shows
the prices of delivered natural gas for each country under each scenario in 2023. The figure
also shows the prices of delivered natural gas in each country and the percentage discount
that each country would achieve under each scenario. The figure shows that Scenario 2
would allow offtakers to achieve the highest savings in cost of fuel for generating electricity
for all countries except for the Dominican Republic and Guyana.

242

Confidential

Figure 13.4: Price of Delivered Natural Gas by Scenario and Offtaker, 2023

13.3 Commercial Viability


Commercial viability is an evaluation of the possibility of successfully completing a public
tender that would result in natural gas being delivered to the countries. We measure three
characteristics when measuring commercial viability:
Demand aggregation: a scenario with higher demand will attract more interest
from suppliers
Availability in global markets: this assesses if the required contracts and quantities
are available in the market
Ease of implementation.
Scenario 1 would be the most commercially viable scenario. It is the scenario where the
volume negotiated would be the highest and also a scenario that would be available in
current global markets. It might be the hardest to implement, but with proper coordination,
this should not affect its commercial viability after a public tender has been issued. Scenario
2 also brings benefits by aggregating demand into a single contractalthough demand
would be lower than in Scenario 1. But, without a unified physical supply chain, securing
access to LNG suppliers would be more challenging. This scenario also requires
coordination between countries. Scenario 3, in which each country negotiates its own supply
agreement, presents the greatest difficulty for countries in the Caribbean because demand
would be smaller, which may reduce suppliers interest. However, for large countries with big

243

Confidential

demand (only the Dominican Republic and Jamaica) it may be the most commercially viable.
These countries could likely attract suppliers on their own, and they would not have to
coordinate with other countries. Table 13.2 compares the commercial viability of the three
scenarios. It shows that Scenario 3 would be commercially viable for large countries, but
Scenario 1 would be the most commercially viable for the Caribbean market as a whole.
Table 13.2: Commercial Viability of the Three Scenarios
Scenario 1

Scenario 2

Scenario 3
Small

Large

All

Demand aggregation

Availability in global market

Ease of Implementation

Total Score

Note: The Harvey Balls indicate the commercial viability of each Scenario for each characteristic. A 4
indicates the highest level of viability and a 0 the lowest level.

Demand Aggregation
A scenario with higher demand would attract more interest from suppliers. In Scenario 1,
since the demand of all the offtakers would be aggregated into one contract, the volume
negotiated would be the highestaround 490 MMcfd in 2023. This means, that Scenario 1
would potentially be more attractive to suppliers. In Scenario 2, offtakers could still benefit
from demand aggregation; although not as much as in the first scenario since the demand of
natural gas from existing plants in the Dominican Republic would not be part of this
scenario (this scenario would contract volumes of around 414 MMcfd in 2023).
In, Scenario 3 offtakers would contract individually. This means that there is no demand
aggregation. The largest countries with big demand could likely attract suppliers on their own
because their individual demand would be relatively high. The largest volume contracted
would be that of the Dominican Republic, with around 238 MMcfd in 2023, followed by
Jamaica with around 92 MMcfd in 2023. However, for countries with small demand it might
be challenging to find suppliers interested in supplying the volume they require. This would
be the case of all others offtakers apart from the Dominican Republic and Jamaica.
Availability in global markets
In Scenario 1 LNG would be transported to a hub in the region in full sized vessels, which
means that this scenario would not require suppliers willing to ship in smaller sized vessels.
With current market conditions, where demand for LNG is high, suppliers prefer selling
LNG in full sized vessels. This is because it takes almost the same amount of time to load
and unload a full sized vessel and a smaller vessel. Therefore, by loading a smaller sized
vessel, suppliers have an opportunity cost of not supplying more gas. This means that in
Scenario 1 it would be feasible to secure access to all LNG suppliers.
In, Scenario 3 offtakers would contract individually. This means that the size of the vessels
to transport LNG would vary depending on the demand of each offtaker. The largest
countries with big demand would require full sized vessels. Since suppliers prefer selling
LNG in full sized vessels, it would be easier for these countries to secure access to all LNG

244

Confidential

suppliers. This is the case of the Dominican Republic and Jamaica. However, countries with
small demand would need small sized vessels, which means that it would be challenging for
them secure access to all LNG suppliers.
In Scenario 2, access to LNG suppliers is the hardest to secure. Even though demand is
aggregated, there is not a unified physical hub and LNG is shipped from the supply point to
each offtaker in separate vessels. As in Scenario 3, the size of each of the vessels would
depend on the demand of each of the offtaker. Bigger countries like the Dominican Republic
and Jamaica would need full sized vessels, while smaller countries would need smaller sized
vessels. Under this scenario, offtakers would all negotiate under the same contract, which
means that to secure access to LNG, they would need to find the same supplier willing to
sell LNG in both, large and small vessels.
Ease of Implementation
Even though Scenario 3 might not be commercially viable for some of the offtakers with
relative small demands, it would be the easiest to implement. It is the scenario that would
naturally evolve from the interaction of demand with supply. In contrast with Scenarios 1
and 2, Scenario 3 does not require any coordination of logistics, agreements, or infrastructure
across multiple countries. In fact, based on current activity in the market, we believe that
several of the individual contracts that form part of Scenario 3 will materialize within the
next few years.
Table 13.3 shows the market structure for two to three options within each scenario
(denoted as S1, S2, and S3). In practice, given the interest and capabilities on the supply
side, there are many more variants that could emerge in this market. This table illustrates the
possibilities for vertical integration within the marketfor example, in S1 (Option 2), one
single contract would be responsible for transfer, shipping to offtakers, and regasification
and the number of contracts required to fulfill each scenario. Scenarios 1 and 2 would lead to
fewer participants in the markets and fewer contracts. However, this would require
synchronizing the timing, pricing, volumes, and logistics for delivering natural gas to all of
the involved offtakers. In contrast, in Scenario 3 the suppliers and offtakers would have
much greater flexibility since the timing, volumes, pricing, and logistics could be tailored to
each individual offtaker.

245

Confidential

Table 13.3: Comparing Market Structures


Transport
Liquefaction

Shipping to
Transfer
the Hub

Shipping to
Regasification Generation
offtakers

S1 (Base Case)

C(s)

C(s)

S1 (Option 2)

B (BOT)

C(s)

S1 (Option 3)

C(s)

C(s)

C(s)

S2 (Base Case)

C(s)

C(s)

S2 (Option 2)

A/B

A/B (BOT)

C(s)

S3 (Base Case)

A(s)

B(s)

C(s)

C(s)

S3 (Option 2)

A(s)

A(s)

A(s) (BOT)

C(s)

Each of the letters in the table refers to a different entity. C(s) denotes that multiple entities would
carry out that activity. For example, each offtaker would be responsible for generation.

Another aspect of ease of implementation is capital costs. The costs of capital investments
for Scenario 1 and 2 are fairly similar (see Table 13.4). The higher investment in
regasification in Scenario 2 is due to the assumed difference in the costs for the Dominican
Republic. In Scenario 1 we assume AES Dominicana would build the additional capacity to
supply conversion of plants and new plants in the already existing site. In Scenario 2 we
assume that another party would build a new facility to supply conversion of plants and new
plants. The cost of building the new facility is higher than the cost of AES Dominicana
expanding the existing one.
Table 13.4: Capital Costs by Activity and Scenario, 2015-2022
Scenario 1
(US$ million)

Scenario 2
(US$ million)

Hub

312

Small Ships

180

270

1,208

1,318

282

282

New Power Plants

1,996

1,996

Total

3,978

3,867

Regasification
Conversion of Power Plants

We do not present the capital costs for Scenario 3 in Table 13.4 because they cannot be
aggregated. This is because Scenario 3 is made up of seven different contracts. However, the
total capital costs in Scenario 3 equal the capital costs in Scenario 2.

13.4 Risk Matrix


Table 13.5 below compares the relative risks facing the development of an LNG commercial
chain under the three scenarios. These risks are divided into four broad groups: contracting

246

Confidential

risks, operational risks, financial risks, and governmental risks. These risks were assessed in
the context of the Caribbean region, such that an average risk ranking was calibrated to
match the average risks facing similar sized investments in the region.
The ranking symbols used in the table are consistent with those used elsewhere in this
report; a full circle represents the most favorable ranking (in this case, the lowest risk), while
an empty circle represents the least favorable ranking (in this case, the highest risk). In
addition to ranking each category across the three scenarios, we also assessed the relative
importance of each category to the overall success of the LNG commercial chain. Those
categories shown to have a High importance are most critical to the projects success,
while those with a Low importance are less relevant or less likely to pose a constraint on
the project.

247

Confidential

Table 13.5: Risk Matrix


Importance
Contract Risks
Contracting Risk
Participation Risk
Supply Risk
Demand Risk
Price Risk
Overall Contract Risk
Operational Risks
Technology Risk
Construction Risk
Timing Risk
Operations Risk
Coordination Risk
Overall Operational Risks
Financial Risks
Capital Required
Lending Risk
Guarantees Risk
Liquidity Risk
Currency Risk
Overall Financial Risks
Government Risk
Legal and Regulatory Risk
Political and Sovereign Risk
Overall Government Risk
Total

Scenario 1

Scenario 2

Scenario 3

High
High
Low
Medium
Medium
Medium

4
4
4
3
2
4

3
4
2
4
2
3

0
0
1
2
2
2

Low
Medium
Medium
Low
Medium
Low

4
2
0
3
2
2

4
2
2
2
3
3

4
2
4
2
4
3

Medium
High
High
Medium
Medium
High

1
2
0
1
1
1

2
2
0
1
1
1

2
2
2
2
2
2

Medium
Medium
Medium

2
2
2
2

2
2
2
2

2
2
2
2

Note: The Harvey Balls indicate the attractiveness of each Scenario for each comparator. A 4 indicates the
highest level of attractiveness and therefore the lowest risk, while a 0 indicates the lowest level of
attractiveness, or the highest level of risk.

Within the group of contracting risks, five specific risks were assessed:
Contracting risk. Assesses the risk that individual countries within the Caribbean
will be unable to secure a long-term contract for LNG
Participation risk. Assesses the risk that not all countries in the region will be
able to secure access to LNG supply, in particular the risk that smaller countries
will be left out. A more favorable ranking indicates a greater number of countries
participating

248

Confidential

Supply risk. Assesses the risk that natural gas supply will be unavailable in the
volumes that are contracted for the long-term. It is a measure of the reliability of
potential natural gas suppliers to the region
Demand risk. Assesses the risk that natural gas demand in the receiving
countries will be lower than the volumes contracted. It is a measure of the risk
that natural gas demand may not grow as quickly as anticipated (for example,
alternative electricity generation options, including renewable resources, become
more attractive relative to natural gas)
Price risk. Assesses the risk that delivered natural gas prices will move higher
than alternative fuels.
Within the group of operational risks, five specific risks were assessed:
Technology risk. Assesses the risk that critical technologies within the
commercial chain will fail to be developed or prove to be unviable
Construction risk. Assesses the risk that the construction of new infrastructure
and assets required for the commercial chain will be delayed or cost well above
expectations
Timing risk. Assesses the risk that some segments of the commercial chain are
delayed, impacting the financial performance of the already completed assets
Operations risk. Assesses the risk that the assets will not be operated properly,
leading to an extended shut down or shortened lifespan for the assets
Coordination risk. Assesses the risk that a failure to coordinate each stage of the
commercial chain would result in delayed deliveries or other shortfall in available
natural gas for the final consumers.
Within the group of financial risks, five specific risks were assessed:
Capital required. Indicates the relative amount of capital required to build the
assets and infrastructure required to implement the scenario
Lending risk. Assesses the relative risk to financial institutions that are directly
lending funds in order to build the required assets and infrastructure
Guarantees risk. Assesses the relative risk to financial institutions that are
providing financial guarantees and credit enhancements in order to back stop the
natural gas contracts signed between consumers and suppliers
Liquidity risk. Assesses the need for liquidity instruments or working capital to
manage delays in payments along the commercial chain
Currency risk. Assesses the risk of foreign exchange variations. This is of
particular importance for large capital intensive projects such as this as the
investments are being made in U.S. dollars or other hard currency while the
offtakers revenue stream is based in local currency.
Within the group of government risks, two broad areas were assessed:

249

Confidential

Legal and Regulatory risk. This is a broad measure of the relative legal and
regulatory stability and preparedness of the countries receiving the LNG
deliveries
Political and Sovereign risk. This is a broad measure of the relative political
stability and government support for the project by the countries receiving the
LNG deliveries.
As shown in Table 13.5, many of the risks are shared across all scenarios, although some are
more acutely felt in some scenarios than others. Those risk categories that exhibited the
greater variation across scenarios, and the drivers behind those variations, are described
below.
Contracting risk. Scenario 1, using a Hub and Spoke model to aggregate regional
demand, offers the greatest opportunity for countries of all sizes in the region to
secure access to LNG supplies. Scenario 2 also brings benefits by aggregating
demand into a single contract, but without the backing of a unified physical
supply chain. In contrast, Scenario 3 in which each country negotiates its own
supply agreement, presents the greatest difficulty for countries in the Caribbean,
the smaller ones in particular, to secure natural gas supply owing to the lack of
scale
Participation risk. Owing to the contracting difficulties noted under Contracting
Risks above, Scenario 3 are expected to have fewer countries participating in any
natural gas supply arrangement. Under each of these scenarios, the smaller
countries are most vulnerable to being left out
Demand risk. Given current price forecasts, Scenario 2 is expected to result in
the greatest price discount relative to fuel oil given the lower requirements in
infrastructure in comparison to Scenario 1. Scenario3 is expected to have a
smaller price discount, thereby reducing the barrier to entry for other power
generation technologies. This, in turn, increases the risk that demand for natural
gas may be smaller than anticipated in each of these scenarios
Price risk. The risk that natural gas prices could move unfavorably relative to
alternative fuels is the same for the three scenarios
Timing risk. The greater interdependence of the development of each countrys
assets, in addition to the development of the trans-shipment hub infrastructure,
greatly increases the risk that variations in the development of individual assets
could affect the overall projects success in Scenario 1. Scenario 2 also requires
greater coordination of development schedules, although not to the same degree
as Scenario 1
Operations risk. The addition of a trans-shipment center in Scenario 1 requires a
company with deep expertise in LNG operations to manage the LNG shipments
in and out of the transshipment center, leading to a slightly lower risk of an
accident or extended shut down relative to the other scenarios. Scenario 3, with
each country contracting its own supply and transportation, has a slightly higher
risk of a less experienced company operating assets at some link in the chain

250

Confidential

Coordination risk. As was noted in the timing risk assessment above, Scenario 1
requires far more complicated coordination of activities in order to manage the
supply of LNG to the transshipment center and the re-shipment to each
participating country. This coordination challenge is avoided in Scenarios 2 and 3
where LNG shipping is managed independently for each participating country
Capital required. The addition of a transshipment center in Scenario 1 increases
the capital requirements for that scenario relative to the other two. This additional
capital is minimal if an existing LNG receiving terminal is adapted to be used as a
trans-shipment center, but could be significant if an entire new facility must be
built
Guarantees risk. In Scenario 3, only the larger consuming markets would
participate in the LNG commercial chain, thereby reducing the total volume of
natural gas to be contracted as well as potentially reducing the level of guarantees
that the participants would need
Liquidity risk. The addition of a central aggregator in Scenario 1 (with the
physical hub) and Scenario 2 (with the virtual hub) adds an additional point in
which mistiming of payments between each link in the chain can create liquidity
issues. In each of these scenarios, the aggregator will take on a certain amount of
risk that each final consumer will remain up to date on their payments, and so will
want to have sufficient working capital to cover any potential payment delays
Currency risk. As in the liquidity risk noted above, the central aggregator in
Scenarios 1 and 2 will also take on any currency risk, as the main supply
agreement with the LNG provider will likely be in U.S. dollars or other hard
currency. In this case, the aggregator will also likely require guarantees or similar
support to manage this risk.
Having compared the risks of each scenario, we now turn to other issues that should be
considered when evaluating the scenarios.

13.5 Meeting IDB priorities


In the Ninth General Capital Increase (GI-9), the Board of Governors set the IDBs
objectives, strategic goals, and sector priorities. These definitions result in the following main
areas of action:
Reducing poverty and social inequalities
Addressing the needs of small and vulnerable countries
Fostering development through the private sector
Addressing climate change, renewable energy and environmental sustainability
Promoting regional cooperation and integration.329

329

Our Priorities and Areas of Action, IDB, accessed 15 June 2015, http://www.iadb.org/en/about-us/our-prioritiesand-areas-of-action,6007.html.

251

Confidential

In this section we show that Scenarios 1 and 2 are the ones that would allow the region to
achieve the highest results in the five areas of action (see Table 13.6).
Table 13.6: Comparing the Scenarios: The IDBs Priority Areas
Scenario1

Scenario 2

Scenario3

Reducing poverty and social inequalities

Addressing the needs of small and vulnerable countries

Fostering development through the private sector

Addressing climate change, renewable energy and


environmental sustainability

Promoting regional cooperation and integration

Overall

Note: The Harvey Balls indicate the attractiveness of each Scenario for each comparator. A 4 indicates the
highest level of attractiveness and a 0 the lowest level.

We reach these conclusions because:


Reducing poverty and social inequalities. GI-9 specifies that at least 50
percent of lending will be directed to poverty reduction.330The three scenarios
would contribute to this priority area because the three scenarios would allow
involved offtakers to buy fuel at costs at least 20 percent lower than what they
currently pay. The reductions in costs (and in the bills faced by the customers of
the utilities) would contribute to reducing poverty and social inequalities. Scenario
1 would contribute the most since it includes more volumes, followed by Scenario
2 and then 3.
Addressing the needs of small and vulnerable countries. Vulnerable countries
are those with smaller and less developed economies. In practice this means
grouping countries with GDPs less than US$55 billion. GI-9 specifies that at least
35 percent of lending will be directed to less developed and smaller countries
Small and vulnerable countries are: The Bahamas, Barbados, Belize, Bolivia,
Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala,
Guyana, Haiti, Honduras, Jamaica, Nicaragua, Panama, Paraguay, Suriname,
Trinidad and Tobago, and Uruguay.331 This means that all the countries of
emphasis in this study are considered Small and Vulnerable countries. Since
Scenario 1 is the one with the highest demand and offatkers, it is the Scenario that
addresses this need the most.
Fostering development through the private sector. The three scenarios would
have private participation. Most likely, private companies would own and operate
the vessels in all scenarios and the hub in Scenario 1. Also, some of the utilities
330
331

IDB Results Framework 2012-2015, Inter-American Development Bank, 2010, p.3.


Our Priorities and Areas of Action, IDB, accessed 31 March 2014, http://www.iadb.org/en/about-us/our-prioritiesand-areas-of-action,6007.html.

252

Confidential

are private companies; private investment in regasification facilities and power


plants would be required in those utilities. Since Scenario 1 would require the
highest capital investments (mainly because of the investment in the hub), we
think Scenario 1 would be the one that contribute the most towards this priority
area
Addressing climate change, renewable energy and environmental
sustainability. GI-9 specifies that at least 25 percent of lending will be directed
to climate change.332 One of the advantages of replacing fuel oil with natural gas
for the generation of electricity is that natural gas power plants have lower carbon
dioxide (CO2) emissions. A diesel-fired power plant emits 0.79 tonnes per MWh,
and a gas-fired power plant emits 0.49 tonnes per MWh.333 Therefore, because
Scenarios 1 are 2 are the scenarios where more electricity generation is generated
with natural gas (instead of fuel oil), these two scenarios contribute the most to
this priority area
Promoting regional cooperation and integration. GI-9 specifies that at least
15 percent of lending will be directed to regional integration.334 By including one
contract for natural gas supply in the region, Scenarios 1 and 2 would have high
regional cooperation. Scenario 3 would have no regional cooperation as each
offtaker would negotiate its own contract.

332
333

334

IDB Results Framework 2012-2015, Inter-American Development Bank, 2010, p.3.


Based on carbon content data from the Intergovernmental Panel on Climate Change (IPCC) and Castalia assumptions.
IPCC reports carbon contents of 25 kg/GJ for coal, 13.8 for natural gas, and 20 for HFO. We then used the following
points to estimate CO2 emissions for each fuel a) thermal efficiencies of 35 percent for HFO and 39 percent for natural
gas b) an oxidization factor of 99 percent for all fuels c) we convert carbon into CO2 by a factor of 3.67 to account for
the higher molecular weight of CO2 after oxidation of carbon (44/12 is the ratio between the molecular weights of
carbon and oxygen).
IDB Results Framework 2012-2015, Inter-American Development Bank, 2010, p.3.

253

Confidential

14

Impact of Introducing Natural Gas in the


Caribbean

In this section, we show the impact that introducing natural gas would have on the cost of
electricity in the Caribbean. We also show how introducing natural gas into the generation
matrices of the countries in the Caribbean would affect the renewable energy (RE) and
energy efficiency (EE) technologies that are economically viable. We begin by showing that
replacing fuel oil with natural gas would reduce the costs of generating electricity in
Caribbean countries (Section 14.1). We then present the impact of introducing natural gas on
RE curves (Section 14.2) and EE curves (Section 14.3).
We use the term Scenario 0 to refer to the business as usual scenario. This scenario
assumes that natural gas is not introduced in the countries in this study. Rather, under
Scenario 0 these countries continue using fuel oil as their major source of generation for the
period 2018 to 2032. As we explain in detail in this section and in Section 14 below, Scenario
0 is the costliest scenario (economically and financially). Because Scenario 0 represents the
current situation in the Caribbean, we use it as a basis against which we present cost savings
and economic benefits that the countries in this study could achieve by using natural gas
instead of fuel oil.

14.1

Replacing Fuel Oil with Natural Gas Will Reduce the Cost of
Generating Electricity

Introducing natural gas into the energy matrices of the Caribbean would reduce the cost of
generating electricity. The main reason for this is that the expected delivered price of natural
gas is lower than the price of fuel oilwe estimate that using natural gas instead of fuel oil
could reduce generation costs by as much as 26 percent, depending on the country and the
scenario.335 Therefore, introducing natural gas will lead to the following results:
The cost of electricity generated with natural gas will be lower than the cost of
electricity generated with fuel oil
The average cost of generation of each system will decrease by replacing fuel oil
fired power plants with natural gas fired power plants
Fuel costs will account for a lower percentage of the all-in costs of generation.
We explain each of these points in more detail below.
The cost of electricity generated with natural gas will be lower than the cost of
electricity generated with fuel oil
The all-in cost of generation is the long-run marginal cost of building, operating, and
maintaining a power plant. Thus, the components of all-in cost are a power plants unit
capital costs, variable and fixed operating and maintenance costs, and fuel costs. In this
analysis, we use the all-in cost to compare the costs of generating electricity with fuel oil

335

The minimum and maximum savings in all scenarios in year 2023, for all countries excluding Suriname. From 2018 to
2024 the cost of electricity generated with natural gas would not be lower for Suriname. However, after 2024 it would be
able to get a discount of up to 14 percent.

254

Confidential

plants and natural gas plants over the period from 2018 to 2032 in each of the countries in
this study.
The all-in cost for fuel oil plants (Scenario 0) is higher than the all-in cost for natural gas
plants in all countries, except for Suriname, under any of the natural gas scenarios (Scenarios
1, 2, and 3).336 Of the three natural gas scenarios, the all-in costs in Scenario 2 prove to be the
lowest for all countries. In year 2023, for the three natural gas scenarios, the all-in costs of
generation vary between US$0.09 per kWh and US$0.14 per kWh, while the all-in cost for
the fuel oil scenario ranges between US$0.11 per kWh and US$0.14 per kWh. Figure 14.1
below presents the savings that each country could benefit from by using natural gas instead
of fuel oil. Generation costs could decrease as much as 26 percent, depending on the
country, for Scenarios 1, 2, and 3. These savings in electricity are slightly lower than the
savings in fuel prices presented in Section 13.2. This is because capital costs are higher in the
natural gas scenariossince those include the conversion of existing plants to natural gas.

336

Natural gas is more expensive than fuel oil for Suriname under the three scenarios in 2023. This is because, although the
costs of the fuel are cheaper in the natural gas scenario, the cost of converting and building new plants offsets the
difference in fuels. However, this is only true during the first six years. Over the 15 year projection period, electricity
generated with natural gas is cheaper than HFO.

255

Confidential

Figure 14.1: Comparing Cost of Generating with Natural Gas with the Cost of
Generating with Fuel Oil (2023)

1 The

all-in costs for natural gas and fuel oil plants were calculated using the model Castalia prepared for this
study. The all-in cost for fuel oil plants in each country is presented in Appendix Q. The all-in cost for
natural gas plants are presented in Section 14.1.

2 Generation

forecast for the period 2014-2032 is based on the generation expansion plans for each country, as
well as assumptions that we used to determine the net generation required. The net generation required was
calculated based on assumptions for growth in sales of electricity, savings due to use of EE technologies,
and a certain level of system losses.

256

Confidential
Natural gas is more expensive than fuel oil for Suriname under the three scenarios in 2023. This is because,
although the costs of the fuel are cheaper in the natural gas scenario, the cost of converting and building
new plants offsets the difference in fuels. However, this is only true during the first six years. Over the 15
year projection period, electricity generated with natural gas is cheaper than HFO

The average cost of generation of each system will decrease by replacing fuel oil
power plants with natural gas plants
The average cost of generation for a system is calculated by considering all technologies used
for generating electricity. Essentially, the average cost of generation is the weighted average
of the all-in costs of all the technologies that generate electricity in a system. The formula
used to calculate the average cost of generation is:
Average cost of generation = (All-in cost of source1 x % generated with source1) + (All-in cost of
source2 x % generated with source2) ++ (All-in cost of sourcen x % generated with sourcen)
Table 14.1 presents the forecasts for electricity generation in each country for the period
2014 to 2032. This generation matrix was used to calculate the average cost of generation for
each country in the year 2023.
Table 14.1: Percentage of Electricity Generated with each Source (2023)
Offtaker

Fuel Oil

The Bahamas, BEC, NP


Barbados, BL&P

13.5%

Gas

Coal

Wind

Solar

Biomass

98.5%

0.7%

0.9%

0%

81.8%

1.4%

3.3%

0%

8.9%

2.0%

0.8%

0.8%

Dominican Republic, All

61.2%

Guyana, GPL

93.9%

0%

0.2%

0.3%

5.6%

Haiti, EDH

83%

13%

1.8%

2.5%

0.0%

Jamaica, JPS

86.4%

3.4%

2.1%

0.0%

8.2%

55%

45%

0.0%

0.0%

Suriname, EBS
Note:

26.4%

Hydro

In Scenario 0 we assume that the amount of electricity generated with fuel oil is the same as the
amount of electricity generated with natural gas in Scenarios 1, 2, and 3. In other words, the column
labeled gas in the table above should be considered fuel oil in Scenario 0.
Totals may not equal 100 percent in all cases due to rounding.

As shown in Table 14.1 above, all electricity generation systems in the countries of emphasis
will have sources other than fossil fuels in their generation matrices. However, because a
large percentage of the electricity in most of those systems is generated using fuel oilwhich
would be substituted for natural gasthe average cost of generation in each country
presented in Figure 14.2 below, approximates the all-in costs presented in Figure 14.1 above.
Figure 14.2 shows how the average cost of generation for each system would change by
introducing natural gas as a generation source, and using it instead of fuel oil.

257

Confidential

Figure 14.2: Average Generation Cost of Systems with Natural Gas (2023)

Note: Generating electricity with fuel oil is more expensive for Suriname under the three scenarios for 2023.
This is because, although the costs of the fuel are cheaper in the natural gas scenario, the cost of
converting and building new plants offsets the difference in fuels. However, this is only true during
the first six years. Over the 15 year projection period, electricity generated with natural gas is cheaper
than HFO
Source: The all-in costs for natural gas and fuel oil plants were calculated using the model Castalia prepared
for this study. The all-in cost for fuel oil plants in each country is presented in Appendix Q. The all-in
cost for natural gas plants are presented in Section 6.3.
Generation forecast for the period 2014-2032 is based on the generation expansion plans for each
country, as well as assumptions that we used to determine the net generation required. The net
generation required was calculated based on assumptions for growth in sales of electricity, savings due
to use of EE technologies, and a certain level of system losses.
2

By switching to natural gas, the countries of emphasis could reduce their average cost of
generation by between US$0.005 per kWh and US$0.03 per kWh in 2023.337 This is a
reduction of between 4 percent and 23 percent.
Although the price of natural gas would be highest in Scenario 3 for all countries, it would
still reduce the average cost of generation for all systems. The average cost in Scenario 3
tends to be about US$0.01 per kWh higher than in Scenarios 1 and 2. Individual natural gas
supply contracts would reduce the average costs compared to fuel oil by between US$0.01
per kWh and US$0.03 per kWh for all countries that would participate in Scenario 3.
Fuel costs will account for a lower percentage of generation costs
When fuel oil is substituted with natural gas, fuel cost as a percent of total all-in costs will
decrease. This is because the price of natural gas is lower than that of fuel oil, for all
337

The values are calculated using average cost of generation for participating countries using fuel oil compared to the
average cost of generation using natural gas in 2023.

258

Confidential

countries in this study. By switching to natural gas, fuel costs will make up between 72
percent and 86 percent of the cost of generation, whereas fuel oil makes up between 86
percent and 89 percent of the cost of generation. An all-in cost that consists relatively more
of capital and non-fuel operational costs (which are predictable and paid off over time) is
less volatile than one that consists relatively more of fuel costs (which vary according to
world markets).
Because fuel prices would be lower and less volatile, electricity prices would also be less
volatile, and would likely be lower than in the fuel oil scenario (Scenario 0).338 Figure 14.3
below presents the price of fuel as a percentage of all-in costs for each country for Scenarios
0, 1, 2, and 3.

338

Electricity prices would be less volatile and might decrease by using natural gas because most utilities in this studywith
the exception of utilities in the Dominican Republic and Haitiare allowed to pass on fuel costs to their customers.
Furthermore, because most of the utilities in this study generate a large portion of the electricity with fuel oil (which has
high and volatile prices), the fuel surcharge component of electricity bills can constitute high portions of the customers
bills, and can vary considerably during the year.

259

Confidential

Figure 14.3: All-in Costs of Generation of Natural Gas Plants v. Fuel Oil Plants (2023)

Source: The all-in costs for natural gas and fuel oil plants were calculated using the model Castalia prepared
for this study. The all-in cost for fuel oil plants in each country is presented in Appendix Q. The all-in
cost for natural gas plants are presented in Section 14.1.
2

Generation forecast for the period 2014-2032 is based on the generation expansion plans for each country, as
well as assumptions that we used to determine the net generation required. The net generation
required was calculated based on assumptions for growth in sales of electricity, savings due to use of
EE technologies, and a certain level of system losses.

260

Confidential

14.2 Biomass, Hydro, and Wind Technologies Might be Viable in


Scenarios Where Natural Gas Replaces Fuel Oil
Introducing natural gas would affect the economic viability of some RE technologies that are
viable in Scenario 0. RE Technologies that are economically viable are those that reduce the
cost of electricity to a country as a whole. Given this definition, to assess the economic
viability of RE technologies we:
Estimate the avoided cost benchmarks, that is the cost of generating with fossil
fuelsthe avoided cost benchmarks differ depending on the type of RE
technologies:
For firm technologies (such as hydro and biomass) the avoided cost
benchmark is the all-in cost of a fuel oil plant in Scenario 0 or of a natural gas
plant in Scenarios 1, 2, and 3. This is because firm options do not require
backup capacity and can therefore offset the all-in costoperating and
maintenance cost, fuel cost, and capital coststhat the utility would incur in
building new capacity
Non-firm technologies (such as wind and solar) require backup capacity for
when their primary source of energy is not available. Therefore, non-firm
technologies only offset variable operating and maintenance costs, and fuel
costs (we will refer to these as variable costs in this section). For this reason,
the avoided cost benchmark for non-firm technologies are the variable costs of
a fuel oil plant in Scenario 0 or of a natural gas plant in Scenarios 1, 2, and 3
Estimate costs for RE technologiesthis is done by calculating the all-in cost of
generation in US Dollars per kWh for each of the available RE technologies (see
Appendix O)
Compare the all-in cost of the RE technologies with the avoided costs
benchmarks to understand which RE technologies are economically viable.
Section 14.1 provides the variable costs and the all-in costs for fuel oil and natural gas
plants in each country for all scenarios.
The economic viability of RE technologies in each scenario is assessed based on the all-in
cost for each technology versus the all-in cost of electricity generation from natural gas.
Table 14.2 below presents the range of all-in costs for firm and non-firm RE technologies. It
then scores the viability of these RE technologies in each country, based on the avoided cost
benchmarks for Scenario 0 (as presented in Figure 14.3, above, in Section 14.1). Firm
technologies are displayed with black font in the table, while non-firm technologies are
displayed in red font.

261

Confidential

Table 14.2: Economic Viability of RE Technologies in Scenario 0


Technology

All-in
cost US$
per kWh

The
Barbados Dominican Guyana
Bahamas 0.15
0.14
Republic
0.10
0.13

Jamaica
0.14

Haiti

0.11

Suriname
0.11

Large Scale
Solar PV

0.05 to
0.36

Small Scale
Solar PV

0.19 to
0.55

Concentrated
Solar Power

0.16 to
0.37

Biomass

0.09 to
0.32

Onshore
wind

0.04 to
0.17

Large Hydro

0.02 to
0.13

Small Hydro

0.03 to
0.25

Source: The range of all-in costs for each RE technology is based on the Renewable Power Generation Costs
in 2014 Report by the International Renewable Energy Agency (IRENA), Lazards Levelized Costs of
Energy Analysis (Version 8.0), and Barbados BL&P IRP
Note:

0 means that given the range of the all-in cost of the RE technology, it would not be viable in that
country. 1, 2, and 3 mean that the RE technology might be viable in that country in some cases.
4 means that given the range of the all-in cost of the RE technology, it would be viable in that
country.

If natural gas were to replace fuel oil, only some of the RE technologies that proved
economically viable under Scenario 0 would continue to be viable under the natural gas
scenarios. Figure 14.4 below shows the RE cost curve for Scenarios 0, 1, 2, and 3. The figure
shows that, by applying the methodology presented above, we find that all RE
technologiesBiomass, Small Hydro, and Large Hydrocould be economically viable
under Scenario 0. In contrast, when comparing the all-in cost of non-firm technologies to
the variable costs of fuel oil plants in each country, we find that, for Scenario 0, only some
technologies are economically viable.

262

Confidential

Figure 14.4: RE Cost Curves with Natural Gas, 2023


Scenario 0 Cost Curve

263

Confidential

Scenario 1 Cost Curve

264

Confidential

Scenario 2 Cost Curve

265

Confidential

Scenario 3 Cost Curve

Note: Variable cost is the sum of the variable operating and maintenance cost, and the fuel cost.
Sources: The range of all-in costs for each RE technology is based on the Renewable Power Generation Costs in 2014 Report by the International Renewable Energy
Agency (IRENA), Lazards Levelized Costs of Energy Analysis (Version 8.0), and Barbados BL&P IR. The range of all-in costs for each scenario is based on
calculations for each country presented in Section 14.1 of this report.

266

Confidential

We conclude the following regarding the economic viability of RE technologies when


compared to the three natural gas scenarios:
Biomass, hydro, and wind technologies could be viable. Biomass and hydro
technologies (firm technology) have all-in costs that range from US$0.09 per kWh
to US$0.32 per kWh, and US$0.02 per kWh to US$0.13 per kWh, respectively.
The range of all-in costs for these technologies falls mostly below the range of allin costs of natural gas plants, from US$0.09 per kWh to US$0.14 per kWh.
Therefore, in most cases, biomass and hydro would be economically viable.
Likewise, we find that in some cases wind technologies (non-firm technology) can
also be viable. Wind technologieswhich can have an all-in cost between
US$0.04 per kWh and US$0.17 per kWhwill be viable in the cases where the
all-in cost is less than the variable cost of natural gas plants
Large scale Solar PV is the only solar technology that might be viable. The
variable costs of natural gas fired plants for all countries in the three scenarios
range from US$0.08 per kWh to US$0.13 per kWh. The only solar technology
that falls in this range is large scale Solar PV, which has a minimum cost of
US$0.05 per kWh and a maximum cost of US$0.36 per kWh. Though the
methodology we used to determine the economic viability of RE technologies
serves as a useful tool in deciding the viability of RE technologies, their viability
should be considered on a case-by-case basis. A detailed analysis should consider
the all-in cost of the RE technology in that case. This value should then be
compared to the cost of generating electricity with the fuel oil or natural gas
plants in that country.

14.3 At Least Eight Energy Efficiency Initiatives are Viable in


Scenarios where Natural Gas Replaces Fuel Oil
Introducing natural gas would also impact the viability of EE initiativesincluding using
specific energy efficiency technologies, and taking other actions to increase energy efficiency
(such as painting walls a different color). To determine the economic viability of EE
initiatives, the cost of each initiative is compared to the all-in cost of natural gas plants (the
avoided cost benchmarks). Because increasing energy efficiency reduces peak demand, these
EE initiatives offset the all-in costoperating and maintenance costs, fuels costs, and capital
coststhat the utility would incur in building new capacity. Appendix P presents detailed
cost estimates and yearly energy savings for each EE initiative.
Figure 14.5 below shows the EE cost curve in Scenario 0 and in the three scenarios where
natural gas substitutes fuel oil. As the all-in cost of generation increases from Scenario 1 to
Scenario 3, more EE options become viable. In Scenario 0, where generation costs are
highest because fuel oil is used, the most EE options are expected to be viable. Though the
upper limit of all-in costs in Scenario 0 is the same as in Scenario 3 (US$0.14 per kWh), the
lower limit of all-in costs is US$0.02 higher per kWh in Scenario 0, meaning that more EE
options are more likely to be viable. The actual cost of all EE initiatives will vary on a caseby-case basis, and should be assessed for each country for its individual situation.

267

Confidential

Figure 14.5: Energy Efficiency Cost Curve with Natural Gas, 2023

Source: Sustainable Energy Framework for Barbados, July 2010 (and subsequent updates under the same
assignment)
**The range of all-in costs for each scenario is based on calculations for each country presented in Section 14.1.

The figure shows that EE technologies with costs of US$0.09 per kWh or less are
economically viable in all natural gas scenarios (Scenarios 1, 2, and 3) and in Scenario 0.
Eight of the 25 EE technologies have a cost US$0.09 per kWh or less:
Coolingreduce infiltration on louvered windows (or leaky doors/windows)
Premium efficiency transformers
Retrofit existing windows with low SHGC film
Refrigerationthermosyphon oil cooling for screw compressors
Chain drive to synchronous belt drives
Refrigeration2-stage compressor retrofit

268

Confidential

Power factor correction


Refrigerationliquid pressure amplification on compressors.
Seven additional EE initiatives might be viable in the natural gas scenarios because they fall
within the range of all-in costs of natural gas plants (US$0.09 per kWh to US$0.14 per kWh).
These EE initiatives are:
Paint concrete walls with beige or yellow (Abs. = 0.55)
Compact fluorescent lamps (CFLs)
Premium efficiency motors
Efficient residential refrigerators
Replace split AC units with inverters at EOL
Replace MH/HPS high bay lamps with LED
Install roof insulation (blown cellulose R30).
The remaining ten EE options have costs that exceed US$0.14 per kWh, which is the highest
all-in cost of a natural gas fired plant in all three scenarios, and in the fuel oil scenario.
Therefore, these ten EE initiatives are not viable in any of the scenarios.

269

Confidential

15

Cost Benefit Analysis

To compare the implications of introducing natural gas in the Caribbean, in this section we
analyze the costs and benefits of the three scenarios for a competitive regional market for
natural gas. Net benefits for each scenario equal the difference between total benefits and
total costs. The net economic benefits of each scenario were estimated as total economic
costs of Scenario 0, less total economic costs of the scenario.
We assume that all scenarios will generate the same quantity of electricity each year. Based
on this assumption, we do not estimate the benefits from generating electricity for each
scenario, because all benefits would be the same and the incremental benefits for any
scenario would be zero. Furthermore, for each scenario, we calculate total costs for each year
as the sum of the cost of generation and the cost of carbon dioxide (CO2) emissions.
Because the difference in benefits between scenarios is zero, we derive the savings in net
benefits for each scenario by subtracting the total costs of each scenario from the total costs
of Scenario 0. We do this for every country in this study and for each year from 2018 to
2032.
Under the reference case, Scenario 2 has the highest net benefits for most countries, except
for the Dominican Republic, as shown in Table 15.1.
Table 15.1: Net Benefits of Scenarios (NPV in 2018)
Net Benefit
Scenario 1: Hub
and Spoke
(US$ million)

Net Benefit
Scenario 2: Virtual
Hub
(US$ million)

Net Benefit
Scenario 3:
Individual
Contracts
( US$ million)

The Bahamas, BEC, NP

623

704

575

Barbados, BL&P

215

224

138

Dominican Republic, All

2,764

2,468

2,167

Guyana, GPL

236

248

227

Haiti, EDH

647

706

614

Jamaica, JPS

1,454

1,603

1,029

421

443

427

Suriname, EBS

For each scenario we also estimate the financial savings. Financial savings only consider the
cost of generation and exclude the costs of CO2 emissions, since these are not financial costs
but economic costs. The financial savings are calculated for each natural gas scenario by
subtracting the cost of generating electricity in that scenario from the cost of generating
electricity in Scenario 0.
The financial savings follow the same patterns as the savings in net benefitsScenario 2
generates the highest financial savings for most countries, except for the Dominican
Republic. We present the financial savings for Scenarios 1, 2, and 3 in Sections 15.2, 15.3,
and 15.4, respectively.

270

Confidential

In estimating the economic and financial, costs and benefits, we have used the following
assumptions for all scenarios:
CO2 emissions are economic costs
The cost of CO2 emissions is US$41 per tonne339
A coal-fired power plant emits .99 tonnes of CO2 per MWh, a diesel-fired power
plant emits 0.79 tonnes of CO2 per MWh, and a natural gas fired power plant
emits 0.49 tonnes of CO2 per MWh340
The total electricity generated for all scenarios between 2018 and 2032 is the
same, and is based on the demand for electricity presented in Section 4.4that is,
demand for electricity was considered price inelastic. Therefore we exclude
demand benefits from this analysis
The average cost of generation for each system, for each year, is calculated by
using the weighted average of the all-in cost of each energy source, multiplied by
the percent of electricity that is generated with each source. The calculation for
that is:
Average cost of generation = (All-in cost of source1 x % generated with source1)
+ (All-in cost of source2 x % generated with source2) + (All-in cost of sourcen x
% generated with sourcen)
The generation costs, CO2 emission costs, and the sum of these costs (we will
refer to it as the cost of each scenario) are presented in net present value (NPV)
terms. The NPV for each of these costs is based on the costs in each year over
the period 2018-2032, discounted to the year 2018 at a real 10 percent discount
rate
The financial savings are also presented as NPVit is calculated as the NPV of
total costs of generation in each year over the period 2018-2032, discounted to
the year 2018 at a 10 percent discount rate.
Below, we explain in more detail the costs associated with each scenario. First, we present
the cost of Scenario 0, which is the scenario where no natural gas is used in the Caribbean
(Section 15.1). Secondly, we present the costs and net benefits of the three scenarios where
natural gas is used in the Caribbean (Section 15.2 to Section 15.4).

339

The average of short-term traded carbon prices for 2013 to 2030. For 2013 to 2020, prices are based on futures prices
for European Union Allowances. For 2020 to 2030, prices are based on a linear extension of prices to reach the price
needed to achive the UNFCCC long-term goal of limiting global temperature increases to 2 degrees Celcius above perindustrial levels. 2013: Updated Short-term Traded Carbon Values, United Kingdom Department of Energy and
Climate Change, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/240095/shortterm_traded_carbon_values_used_for_UK_policy_appraisal_2013_FINAL_URN.pdf .

340

Figures for CO2 are based on natural gas vs. HFO. They are Castalia calculations based on carbon content data from the
Intergovernmental Panel on Climate Change (IPCC) and Castalia assumptions. The IPCC reports carbon contents of 25
kg/GJ for coal, 13.8 for natural gas, and 20 for HFO. We then used the following points to estimate CO2 emissions for
each fuel a) thermal efficiencies of 35 percent for HFO and 39 percent for natural gas b) an oxidization factor of 99
percent for all fuels c) we convert carbon into CO2 by a factor of 3.67 to account for the higher molecular weight of CO2
after oxidation of carbon (44/12 is the ratio between the molecular weights of carbon and oxygen).

271

Confidential

15.1

Scenario 0: Business as Usual (No Natural Gas)

In Scenario 0, we assume that natural gas will not be introduced in the countries where it
does not already existthe only country in this study that already uses natural gas to
generate electricity is the Dominican Republic.
Table 15.2 presents the NPV calculations for this scenario for each country. The NPV is
calculated based on the cost of generating electricity as well as the cost of CO 2 emissions.
These costs are calculated by using the electricity demand forecast for each country in the
period 2018 to 2032 (See Appendix N).
Table 15.2: Costs of Scenario 0: Business as Usual (2018-2032)
Item

B1

C2

D3

E4

F5

Total
generation
(GWh)

Average cost
of generation
(US$/kWh)

NPV of
generation
costs
(US$ million)

CO2
emissions
(Million

NPV of
CO2
emissions
costs
(US$
million)

NPV of
Scenario
(US$ million)

Tonnes)

Formula

A.0

B.0

C.0

D.0

E.0

F.0=C.0+E.0

The Bahamas,
BEC, NP

31,701

0.14

2,083

24.6

487

2,571

Barbados,
BL&P

17,162

0.16

1,277

13.2

264

1,542

Dominican
Republic, All

296,922

0.11

15,005

204.7

4,101

19,106

Guyana, GPL

17,571

0.13

1,083

13.1

254

1,336

Haiti, EDH

58,716

0.13

3,093

39.6

666

3,759

Jamaica, JPS

76,303

0.14

5,079

52.1

1,039

6,118

Suriname,
EBS

51,028

0.12

2,703

26.4

485

3,188

1 Average

of the average cost of generation for all years over the period 2018-2032.
present value of the costs of generation in each year over the period 2018-2032, discounted to the year
2018 at a 10 percent discount rate.
2 Net

3 Calculated

by multiplying the GWh generated with fuel oil, coal, and natural gas, by the tonnes of
CO2 that each of the technologies emits.
4 Net

present value of the costs of CO2 emissions in each year over the period 2018-2032, discounted to the
year 2018 at a 10 percent discount rate.
5 Net present value of the total costs of generation and total costs of CO emissions in each year over the
2
period 2018-2032, discounted to the year 2018 at a 10 percent discount rate.

The NPV of Scenario 0 is used to calculate the net benefits of Scenarios 1, 2, and 3 by using
the formula:
NPV of Scenario 0 NPV of Scenario x = Net benefits of Scenario x
272

Confidential

The following sections present the net economic benefits and financial savings for each
scenario with natural gas.

15.2 Scenario 1: Hub and Spoke (Natural Gas)


Scenario 1 assumes that natural gas will fully replace all fuel oil used in generating electricity,
starting in 2018. Replacing fuel oil with natural gas, results in a lower average cost of
generation and less CO2 emissions for all countries and all years. As a result, the NPV of
generation costs and the NPV of CO2 emission costs for Scenario 1 are lower than those in
Scenario 0. Table 15.3 below presents the financial and economic costs of Scenario 1.
Table 15.3: Costs of Scenario 1: Hub and Spoke (2018-2032)
Item

A
Total
generation
(GWh)

B1
Average cost
of generation
(US$/kWh)

C2
NPV of
generation
costs
(US$ million)

D3
CO2
emissions
(Million
Tonnes)

E4
F5
NPV of CO2
NPV of
emissions
Scenario
costs
(US$ million)
(US$ million)

Formula

A.1

B.1

C.1

D.1

E.1

F.1=C.1+E.1

`The Bahamas,
BEC, NP

31,701

0.11

1,645

15.3

302

1,948

Barbados,
BL&P

17,162

0.14

1,151

8.6

175

1,326

Dominican
Republic, All

296,922

0.09

13,002

165.1

3,340

16,342

Guyana, GPL

17,571

0.11

943

8.1

157

1,100

Haiti, EDH

58,716

0.11

2,700

24.6

413

3,113

Jamaica, JPS

76,303

0.11

4,019

32.3

644

4,663

Suriname, EBS

51,028

0.11

2,498

14.7

270

2,767

1 Average

of the average cost of generation in each year over the period 2018-2032.
2 Net present value of the cost of generation in each year over the period 2018-2032, discounted to the year
2018 at a 10 percent discount rate.
3 Calculated by multiplying the GWh generated with fuel oil, coal, and natural gas, by the tonnes of CO that
2
each of the technologies emits.
4 Net present value of the cost of CO emissions in each year over the period 2018-2032, discounted to the year
2
2018 at a 10 percent discount rate.
5 Net present value of the total cost of generation and total costs of CO 2 emissions in each year over the period
2018-2032, discounted to the year 2018 at a 10 percent discount rate.

The NPV of total costs for Scenario 1 is lower than the NPV of total costs for Scenario 0
for all countries. Therefore, all countries would benefit from this Scenario. This means that
Scenario 1 is favorable to Scenario 0, because it has lower economic and financial costs,
which in turn create economic benefits. Table 15.4 below presents the net economic benefits
and financial savings that each country would obtain under this Scenario.

273

Confidential

Table 15.4: Economic Benefits and Financial Savings of Scenario 1: Hub and Spoke
H

Country

Net Benefit
(US$ millions)

Financial Savings
(US$ millions)

Formula

H.1=F.0-F.1

I.1=C.0-C.1

The Bahamas, BEC, NP

623

438

Barbados, BL&P

215

126

Dominican Republic, All

2,764

2,002

Guyana, GPL

236

140

Haiti, EDH

647

394

Jamaica, JPS

1,454

1,060

421

205

Suriname, EBS

Source: The economic benefits and financial savings are calculated based on the values presented in Table
15.2 and Table 15.3

The net benefits for each country vary considerablybetween US$215 million and
US$2,764 million. The financial savings range from US$126 million to US$2 billion. The
Dominican Republic would see the highest financial savings (US$2,002 million) and net
economic benefits (US$2.8 billion). Jamaica would have the second highest financial savings
(US$1.1 billion) and net economic benefits (US$1.5 billion).
Although the average cost of generating electricity in the Dominican Republic would fall by
only US$0.01 per kWh, the large size of the Dominican electricity system means that
financial and economic savings would be quite large. The Dominican Republic generates 4
times more GWh than the second largest system (Jamaica), and 17 times more than the
smallest system (Barbados) in this study.341 Jamaica has the second largest system of the
countries in this scenario, and would see a US$0.02 per kWh reduction in the average cost of
electricity generation.
With current price forecasts, the all-in costs for natural gas plants are slightly higher in
Scenario 1 than in Scenario 2because of higher capital costs due to the construction of the
hub. This leads to a higher average cost of generation for Scenario 1 compared to Scenario 2.

15.3 Scenario 2: Virtual Hub (Natural Gas)


In Scenario 2, we also assume that natural gas will fully replace all fuel oil used in generating
electricity, starting in 2018. Like Scenario 1, under this scenario countries would have a lower
average cost of generation, and would emit less CO2, than in Scenario 0. However, the all-in
costs for natural gas plants are slightly lower in Scenario 2 than in Scenario 1because in
Scenario 2 capital costs are lower since there is no physical hub. This leads to a lower average
cost of generation for Scenario 2 compared to Scenario 1. The cost of CO2 emissions in this
341

Calculated using the total GWh that the Dominican Republic, Jamaica, and Guyana will generate over the period 20182032.

274

Confidential

scenario is the same as in Scenario 1, because we assume that the amount of electricity
generated with natural gas plants and coal plants is equal to the amount assumed in Scenario
1. Table 15.5 below presents the financial and economic costs of Scenario 2.
Table 15.5: Costs of Scenario 2: Virtual Hub (2018-2032)
A
Total
generation
(GWh)

B1
Average cost
of generation
(US$/kWh)

C2
NPV of
generation
costs
(US$ million)

D3
CO2
emissions
(Million

A.2

B.2

C.2

D.2

E.2

F.2=C.2+E.2

The Bahamas,
BEC, NP

31,701

0.10

1,564

15.3

302

1,867

Barbados,
BL&P

17,162

0.14

1,142

8.6

175

1,317

Dominican
Republic, All

296,922

0.09

13,297

165.1

3,340

16,637

Guyana, GPL

17,571

0.11

930

8.1

157

1,088

Haiti, EDH

58,716

0.11

2,640

24.6

413

3,053

Jamaica, JPS

76,303

0.10

3,870

32.3

644

4,515

Suriname, EBS

51,028

0.11

2,475

14.7

270

2,745

Item

Formula

Tonnes)

E4
F5
NPV of CO2
NPV of
emissions
Scenario
costs
(US$ million)
(US$ million)

1 Average

of the average cost of generation in each year over the period 2018-2032.
present value of the costs of generation in each year over the period 2018-2032, discounted to the year
2018 at a 10 percent discount rate.
3 Calculated by multiplying the GWh generated with fuel oil, coal, and natural gas, by the tonnes of CO that
2
each of the technologies emits.
4 Net present value of the costs of CO emissions in each year over the period 2018-2032, discounted to the
2
year 2018 at a 10 percent discount rate.
5 Net present value of the total costs of generation and total costs of CO emissions in each year over the
2
period 2018-2032, discounted to the year 2018 at a 10 percent discount rate.
2 Net

The NPV of total costs in Scenario 2 is lower than the NPV of total costs in Scenario 0 for
all countries, and lower than the NPV of Scenario 1 for almost all countrieswith the
exception of the Dominican Republic. As a result, all countries would have higher net
benefits under Scenario 2 than under Scenario 0 (see Table 15.6). Therefore, Scenario 2
makes more sense than Scenario 0, in economic and financial terms.

275

Confidential

Table 15.6: Economic Benefits and Financial Savings of Scenario 2: Virtual Hub
H

Country

Net Benefit (US$


millions)

Financial Savings (US$


millions)

Formula

H.2=F.0-F.2

I.2=C.0-C.2

The Bahamas, BEC, NP

704

519

Barbados, BL&P

224

135

Dominican Republic,
All

2,468

1,707

Guyana, GPL

248

152

Haiti, EDH

706

453

Jamaica, JPS

1,603

1,208

Suriname, EBS

443

228

Source: The economic benefits and financial savings are calculated based on the values presented in Table
15.2 and Table 15.5

The net benefits for all countries range between US$224 million and US$2.5 billion. The
financial savings range from US$135 million to US$1.7 billion. Net financial benefits are
higher for most countries in Scenario 2 than in Scenario 1, except for the Dominican
Republic.342 However, either scenario would allow all countries to achieve large economic
benefits and financial savings compared to Scenario 0.

15.4 Scenario 3: Individual Contracts (Natural Gas)


Similar to Scenarios 1 and 2, Scenario 3 assumes that natural gas will fully replace all fuel oil
used in generating electricity, starting in 2018. Under this scenario, most countries have a
lower average cost of generation and emit less CO2 than in Scenario 0. But, all-in costs of
natural gas plants are higher than in Scenarios 1 and 2. Therefore, Scenario 3 has the highest
average cost of generation of the three natural gas scenarios. Again, the cost of CO 2
emissions in this scenario is the same as in Scenarios 1 and 2, because we assume that the
amount of electricity generated with natural gas plants and coal plants is equal to the amount
assumed in the other natural gas scenarios. Table 15.7 below presents the financial and
economic costs of Scenario 3.

342

There is no difference between financial net economic benefits in Scenario 1 compared to Scenario 2 because nonfinancial benefits are assumed to be the same. Because we assumed the same quantity of electricity would be generated
from natural gas rather than fuel oil in both scenarios, the benefit of reduced carbon dioxide emissions is the same.

276

Confidential

Table 15.7: Costs of Scenario 3: Individual Contracts (2018-2032)


Item

A
Total
generation
(GWh)

B1
C2
Average
NPV of
cost of the generation
system
costs
(US$/kWh) (US$ million)

D3
CO2
emissions
(Million
Tonnes)

E4
F5
NPV of
NPV of
CO2
Scenario
emissions (US$ million)
costs
(US$
million)

Formula

A.3

B.3

C.3

D.3

E.3

F.3=C.3+E.3

The Bahamas,
BEC, NP

31,701

0.11

1,694

15.3

302

1,996

Barbados,
BL&P

17,162

0.15

1,228

8.6

175

1,403

Dominican
Republic, All

296,922

0.10

13,599

165.1

3,340

16,939

Guyana, GPL

17,571

0.11

951

8.1

157

1,109

Haiti, EDH

58,716

0.11

2,732

24.6

413

3,145

Jamaica, JPS

76,303

0.12

4,444

32.3

644

5,088

Suriname, EBS

51,028

2,491

15

270

2,761

1 Average

of the average cost of generation in each year over the period 2018-2032.
present value of the costs of generation in each year over the period 2018-2032, discounted to the year
2018 at a 10 percent discount rate.
3 Calculated by multiplying the GWh generated with fuel oil, coal, and natural gas, by the tonnes of CO that
2
each of the technologies emits.
4 Net present value of the costs of CO emissions in each year over the period 2018-2032, discounted to the
2
year 2018 at a 10 percent discount rate.
5 Net present value of the total costs of generation and total costs of CO 2 emissions in each year over the
period 2018-2032, discounted to the year 2018 at a 10 percent discount rate.
2 Net

The net benefits for all countries range between US$138 million and US$2.2 billion. The
financial savings vary from US$49 million to US$1.4 billion (see Table 15.8). Relative to
Scenario 1 and 2, this Scenario would produce less net economic benefits and financial
savings for the countries that would import natural gas. As a result, this Scenario is the least
favorable economic choice among the three natural gas scenarios.
However, Scenario 3 does provide the countries in this study with economic benefits and
financial savings relative to Scenario 0. In the event that the countries in this study do not
agree on regional natural gas supply arrangements (Scenarios 1 and 2), then we recommend
they enter into individual natural gas supply contracts (Scenario 3).

277

Confidential

Table 15.8: Economic Benefits and Financial Savings of Scenario 3: Individual


Contracts
H

Country

Net Benefit (US$ millions)

Financial Savings (US$


millions)

Formula

H.3=F.0-F.3

I.3=C.0-C.3

The Bahamas, BEC, NP

575

390

Barbados, BL&P

138

49

2,167

1,406

Guyana, GPL

227

131

Haiti, EDH

614

362

Jamaica, JPS

1,029

635

427

212

Dominican Republic, All

Suriname, EBS

Source: The economic benefits and financial savings are calculated based on the values presented in Table 15.2
and Table 15.7.

278

Confidential

16

Sensitivity Analysis

Future prices for oil and natural gas are highly uncertain.343 Although oil prices have dropped
recently, past price changes and current projections show that prices are uncertain and
volatile. When assessing the feasibility of natural gas in the Caribbean, the two key data
points are the spot price of oil at the time gas will be imported, and the spread between the
prices of oil and natural gas.
In this section we test the feasibility of importing natural gas to the Caribbean under three
different cases for future oil prices. These three cases are different from the price projections
used for Sections 9 to 15 of this reportfor those sections, we used the reference case
projections. The reference case projections are the projections of oil and natural gas prices as
published by the EIA in its 2015 Annual Energy Outlook. The three cases used are two
other oil and natural gas price forecasts published by the EIA in 2015 (the Low Oil price,
and Hi Oil Price, and the reference case projections published by the EIA in its 2014 Annual
Energy Outlook. For each of the three cases of fuel oil prices, Table 16.1 shows the price
reduction relative to the price of fuel oil in the reference case.
Table 16.1: Three Cases for Future Oil Prices
Case

Price of Oil 2023

Change in price of oil


forecast compared to
the reference case

Low Oil Price Case EIA Annual Energy Outlook 2015


(US$56.1 per barrel)

-30%

High Oil Price Case EIA Annual Energy Outlook 2015


(US$154 per barrel)

+92%

(US$102 per barrel) Reference Case EIA Annual Energy


Outlook forecast for 2014

+28%

Source: United States Energy Information Administration

Figure 16.1 shows the forecast of WTI prices under each of the cases. The broad differences
between the cases demonstrate that future prices for oil are highly uncertain. Though prices
dropped from mid-2014 to mid-2015, projections show that they are likely to increase over
the medium term.

343

Durden, Tyler, Oil Jumps on El-Badris $200 a Barrel Sometime Comments. 26 January 2015. Talk
Markets. http://www.talkmarkets.com/content/commodities/oil-jumps-on-opecs-el-badris-200-a-barrelsometime-comments?post=57378 accessed 17 February 2015.

279

Confidential

Figure 16.1: WTI Forecast in Three Cases, 2018-2032

Source: United States Energy Information Administration

We analyze the cases of natural gas and HFO prices that would make importing natural gas
feasible. To do this, in Section 16.1 we calculate the maximum price at which natural gas is
feasible in Scenario 3, for each oil price case. We find that if the price of oil remains below
US$56 for the next 10 years it will not be feasible for the countries of emphasis to switch
from fuel oil to natural gas. For prices above US$80 per barrel (the price of oil for 2023
projected by the U.S. EIA in the 2015 Annual Energy Outlook), natural gas would be
feasible.
We also analyze how the scenarios compare in terms of pricing under each price case. To do
so, we compare the price of delivered natural gas that each offtaker would receive in each of
the market scenarios and for each price case (Section 16.2). We find that with a wider fuel
price differential, like the one in Cases 2 and 3, Scenario 1 would allow offtakers to contract
natural gas at a cheaper price than Scenarios 2 or 3.
Finally, we show the viability of a variety of renewable energy technologies under each case
(Section 16.3). At current oil prices, only the cheapest renewable energy projects would be
economically viable. More renewable energy technologies will be economically viable if oil
prices rise.
The sensitivity analysis assumes that non-fuel costs of delivering natural gassuch as
liquefaction, shipping, and regasificationare constant. If oil prices remain low for an
extended time, these costs are likely to decrease. This is because most non-fuel costs consist
of costs for fixed capital that are paid off over time. The fixed capital takes years to develop,
meaning that supply does not respond quickly to demand. As such, if demand drops, supply
of liquefaction, shipping, and regasification capacity will remain relatively constant, meaning
that prices for these services will go down. So, by leaving these costs constant we are
presenting the most conservative option for the feasibility of natural gas for each case.
If non-fuel costs do decrease, natural gas is viable at slightly smaller spreads in each case.
That is, the cost of delivering natural gas would decrease. Therefore, the difference between
280

Confidential

the acquired fuel price of natural gas and fuel oil could be slightly less than in each of the
cases below (in Section 16.1) and still be viable.

16.1

Maximum Viable Natural Gas Prices for Each Case

By comparing the maximum price of natural gas that would be feasible under each case with
projected prices of Henry Hub we conclude that if fuel oil is below US$56 per barrel in
2023, natural gas would not be feasible. If prices of fuel oil are at or above the EIAs
reference case (US$80 dollars per barrel), importing natural gas would be feasible.
Table 16.2 shows the maximum price at which natural gas would be viable for each country
in each oil price case, and at the oil prices in the reference case.
Table 16.2: Maximum Viable Price of Natural Gas in Each Case in 2023 (US$ per
MMBtu)
Reference Case Case 1 Case 2 Case 3
Price of WTI 2018 (US$/barrel)

US$80

US$56 US$152 US$102

Bahamas (BEC)

5.7

3.2

13.4

8.0

Barbados (BLPC)

6.1

3.3

14.8

8.8

Dominican Republic (All)

4.9

2.7

11.4

6.8

Guyana (GPL)

4.9

2.5

12.5

7.2

Haiti (EDH)

5.0

2.6

12.3

7.2

Jamaica (JPS)

6.7

4.0

15.0

9.2

Suriname (EBS)

4.4

2.1

11.5

6.5

Source: Castalia calculations, based on projections from the United States Energy Information Administration

To test the feasibility of natural gas, we compare these prices with four possible natural gas
prices at Henry Hub in 2023. The four possible prices for natural gas at Henry Hub that we
consider are:
Reference Case: US$5.25 per MMBtu
Case 1: US$6.02 per MMBtu (the U.S. EIAs 2015 Annual Energy Outlook High
Oil Price Case)
Case 2: US$4.66per MMBtu (the U.S. EIAs 2015 Annual Energy Outlook Low
Oil Price Case)
Case 3: US$3.33 per MMBtu (the U.S. EIAs 2015 Annual Energy Outlook High
Oil and Gas Resource Case).
At the reference price of natural gas of US$5.25 per MMBtu, natural gas would be feasible
for all countries in Cases 2 and 3, but would not be feasible for any country in Case 1. The
same conclusions apply for the second and third cases of prices of natural gas (US$6.02 per
MMBtu and US$4.66 per MMBtu).

281

Confidential

However, if prices of natural gas are US$3.33 per MMBtu in 2023, as forecast in Case 1,
natural gas could be feasible for Jamaica and potentially Barbados, but not for the other
countries of emphasis. Table 16.2 shows that with prices around US$56 per barrel in 2023,
natural gas would not be feasible for the entire region unless prices of natural gas were below
US$2.00 per MMBtu in 2023, which is not likely.
Figure 16.2 shows the maximum delivered price of natural gas in each country for natural gas
to be feasible in each of the three cases. These delivered prices include the costs for
liquefaction, shipping, and re-gasification. These maximum delivered prices equal the cost of
delivered HFO minus a 20 percent discount. The figure compares these maximum prices
with the Henry Hub prices for the reference case. The figure reinforces the conclusion that
for Case 1 natural gas would not be feasible. The prices of natural gas at henry hub are
higher than the maximum of delivered prices for all countries. For Cases 2 and 3, natural gas
would be feasible since the difference between HFO and natural gas would cover the
delivery costs of natural gas.

282

Confidential

Figure 16.2: Maximum Delivered Price of NG for it to be Feasible in Three Cases

283

Confidential

16.2 Scenario 1 has the lowest pricing and highest economic benefits in
most cases
In Sections 9 to 15 we compare the three natural gas market scenarios using fuel prices from
the reference case. We conclude that under those prices, Scenario 2 would provide least-cost
natural gas for most countries. However, these results on pricing do not hold when fuel oil
prices are higher than in the reference case.
Below we compare the three scenarios using fuel prices from Case 2 (High Oil Price Case at
US$152) and Case 3 (Reference Case for 2014 at US$102). We then compare these results
with the results presented in Sections 9 to 15 using the reference case. We exclude Case 1
from this analysis because, as explained in Section 16.1, natural gas would not be feasible
with those prices.
Table 16.3 shows the delivered price of natural gas in 2023 for each scenario and case. As
explained before, in the reference case with the price of oil at US$80 per barrel, the scenario
with the lowest pricing of delivered natural gas would be Scenario 2 for most countries.
However, if oil prices are higher than the reference case and the difference between fuel oil
and natural gas is wider (as it would be in Case 2 and 3), Scenario 1 always has the best
pricing of delivered natural gas.

284

Confidential

Table 16.3: Delivered Price of Natural Gas in 2023 for each Scenario and Case
CASE
Reference
Scenario
1

Scenario
2

Price of
WTI, 2023
($/bbl)
Bahamas
(BEC)

$11.22

$10.54

Barbados
(BLPC)

$11.68

Dominican
Republic
(All)
Guyana
(GPL)
Haiti
(EDH)
Jamaica
(JPS)
Suriname
(EBS)

2
Scenario
3

Scenario
1

Scenario
2

3
Scenario
3

Scenario
1

Scenario
2

Scenario
3

US$152 (High Oil Price Case)

US$102 (Reference Case for


2014)

$11.15

$16.82

$17.61

$21.45

$11.22

$11.45

$14.27

$11.43

$12.63

$17.27

$18.53

$24.26

$11.68

$12.34

$16.15

$9.62

$10.06

$10.42

$15.21

$17.14

$20.01

$9.62

$10.96

$13.32

$11.76

$11.48

$11.48

$17.36

$18.57

$21.24

$11.76

$12.38

$14.14

$11.39

$10.97

$10.97

$16.99

$18.05

$20.39

$11.40

$11.87

$13.57

$10.67

$10.05

$11.98

$16.27

$17.12

$23.01

$10.68

$10.95

$15.32

$11.69

$11.42

$11.42

$17.29

$18.53

$19.76

$11.69

$12.33

$13.15

US$80 (Reference Case)

Note: Figures in green show the cases where natural gas would be feasible.
Source: Castalia calculations, based on projections from the United States Energy Information Administration

As Figure 16.3 shows, a lower price of delivered natural gas in Scenario 1 for Cases 2 and 3
translates into lower costs of electricity. That is why, for all offtakers and for both Cases, the
cost of electricity is lower in Scenario 1 than in Scenarios 2 and 3.

285

Confidential

Figure 16.3: Price of Delivered Natural Gas by Scenario and Offtaker, 2023
Case 2

Case 3

The lower costs of electricity translate to higher net benefits. Net economic benefits are
calculated using the same methodology explained in Section 15. Under the reference case,
Scenario 2 has the highest net benefits for most countries, except for the Dominican
Republic. For Cases 2 and 3, Scenario 1 has the highest net benefits for all countries, as
shown in Table 16.4.

286

Confidential

Table 16.4: Net Benefits of Scenarios (NPV in 2018)


Reference Case
US$80

Net Benefit Scenario


1: Hub and Spoke
(US$ million)

Net Benefit Scenario


2: Virtual Hub
(US$ million)

Net Benefit Scenario


3: Individual
Contracts
( US$ million)

The Bahamas, BEC, NP

623

704

575

Barbados, BL&P

215

224

138

Dominican Republic, All

2,764

2,468

2,167

Guyana, GPL

236

248

227

Haiti, EDH

647

706

614

Jamaica, JPS

1,454

1,603

1,029

421

443

427

Net Benefit Scenario


1: Hub and Spoke
(US$ million)

Net Benefit Scenario


2: Virtual Hub
(US$ million)

Net Benefit Scenario


3: Individual
Contracts
( US$ million)

1,484

1,383

899

729

648

315

5,686

4,806

3,350

657

577

417

Haiti, EDH

1,598

1,422

1,042

Jamaica, JPS

3,417

3,199

1,724

Suriname, EBS

1,125

1,001

876

Case 3
US$102 (Reference Case
for 2014)

Net Benefit Scenario


1: Hub and Spoke
(US$ million)

Net Benefit Scenario


2: Virtual Hub
(US$ million)

Net Benefit Scenario


3: Individual
Contracts
( US$ million)

The Bahamas, BEC, NP

1,040

1,012

661

441

397

186

4,260

3,557

2,488

442

400

300

Haiti, EDH

1,098

1,010

744

Jamaica, JPS

2,362

2,294

1,220

746

681

600

Suriname, EBS

Case 2
US$152 (High Oil Price
Case)
The Bahamas, BEC, NP
Barbados, BL&P
Dominican Republic, All
Guyana, GPL

Barbados, BL&P
Dominican Republic, All
Guyana, GPL

Suriname, EBS

287

Confidential

16.3 Feasibility of Renewable Energy Technologies in three Price


Cases
Changes in the price of fuel oil would have an impact on the feasibility of renewable energy
in the Caribbean. In this section, we test the feasibility of different renewable technologies
under four cases of future oil prices. As explained in above, given the projected prices of
Henry Hub we conclude that if fuel oil is below US$56 per barrel in 2023 (Case 1), natural
gas would not be feasible. To test the feasibility of renewable energy technologies in Case 1
we compare the costs of generating electricity with renewable energy technologies with the
costs of generating electricity with fuel oil. For Case 1, Case 2, and Case 3, we assume that
natural gas is imported into the Caribbean under Scenario 1 (in Section 16.2 we show that
this is the cheapest scenario for Cases 2 and 3).
In Figure 16.3, firm technologies (such as hydro and biomass) are viable if they are cheaper
than the all-in cost of electricity generated with fuel oil or natural gas for each case. Nonfirm technologies (such as onshore wind, solar CSP, and solar PV) are viable if they are
cheaper than the variable cost of generating electricity with fuel oil for each case.
As the price of fuel oil increases, the variable and all-in costs of generating electricity increase
as well. In Case 1, when the price of fuel oil is the cheapest, only hydro is feasible. In Case 2,
when the price of fuel oil is the highest, generating electricity with most of the firm and nonfirm technologies is feasible and sometimes cheaper than generating with natural gas.
Therefore, with fuel oil prices above US$152 most renewable energy technologies are
feasible. In Case 3, oil prices are in between the prices of Case 1 and 2, and only some of the
renewable energy technologies are feasible. Among the firm technologies, most hydro
projects and the cheapest biomass projects are feasible. Among the non-firm technologies,
some onshore wind projects would be feasible, but the expensive ones would not be.
Additionally, most of solar projects are not feasible, except for the cheapest large-scale solar
projects.

288

Confidential

Figure 16.4: Feasible RE Technologies in Four Fuel Price Scenarios


Case 1

Case 2

289

Confidential

Case 3

Source: Castalia calculations, based on fuel price projections from the U.S. EIA and renewable energy costs
from the International Renewable Energy Agency

290

Confidential

17

Scenario 1 is the Preferred Scenario for the


Caribbean

The comparison above shows that Scenario 1 is the preferred scenario for the Caribbean. It
offers the maximum potential to aggregate demand, it provides a logistical solution that
allows smaller countries to access supply of natural gas, anddepending on the spread
between fuel pricesit could result in the lowest cost of generation. However, if Scenario 1
is not possible, other market scenarios with aggregated demand are preferable to an
individual contracts scenario (such as Scenario 2). Finally, in the case that no coordination is
possible, some of the countries of emphasis could still benefit by contracting for natural gas
individually with suppliers (Scenario 3), compared to the business as usual scenario.
Scenario 1 is the preferred scenario for all countries of emphasis
Scenario 1 is the preferred scenario because:
Regional demand for natural gas is the highest
It would be the most commercially viable
It would allow for better pricing in cases where the spread between natural gas
and fuel oil is larger than the projections in the reference case. In these cases, this
scenario would maximize the environmental benefits and reduction in electricity
prices for all countries.
Private sector operators are likely to be attracted to the profit opportunity in developing
Scenario 1. The potential benefits have led AES Dominicana to explore turning their existing
LNG-import facilities into a regional LNG hub. AES is working with LNG suppliers, local
partners, and multilateral development banks to structure the project, and to ensure that all
firms and offtaking countries would benefit. Barriers that AES has identified to developing
the project include:
The need for credit requirements to buy LNG through long-term contracts
Financing for infrastructure to import and use the natural gas
Improving the regulatory and fiscal framework in countries around the region.344
In general, aggregating demand leads to higher benefits
Scenarios with aggregate demand (Scenarios 1 and 2) would likely lead to lower natural gas
prices than Scenario 3, where there is no demand aggregation. This is a strong incentive to
coordinate. If Scenario 1 is not possible, due to political or timing issues, or because not all
countries wish to participate, offtakers should look to coordinate to aggregate demand in any
way possiblefor example by implementing Scenario 2.
Scenario 2 would require slightly less coordination, and also has large benefits compared to
Scenario 3 or business as usual. In addition, Scenario 2 would likely lead to the lowest natural
gas prices for all offtakers in the reference case.
344

Gluski, Andres, U.S. Dominican Republic Relations: Bolstering Economic Growth and Independence. Testimony
before the House Committee on Foreign Affairs; Subcommittee on the Western Hemisphere. President and CEO of
AES Corporation. Wednesday, July 23, 2014.

291

Confidential

Aligning offtakers incentives (as in Scenarios 1 or 2) can make it possible to coordinate


timing and reach the agreements necessary to develop a regional hub and sign a contract for
regional natural gas supply. However, these steps will still be difficult even if incentives are
aligned. Indeed, political, financial, and commercial realities may make it impossible to
include every country of emphasis in either Scenario 1 or Scenario 2.
If all countries do not wish to participate in a regional market, interested countries can still
see large cost reductions in their fuel import bills and electricity prices by aggregating their
natural gas demand. For example, a regional hub (either virtual or physical) that serves five
or six countries, rather than eight, would almost certainly lead to lower fuel costs and
electricity prices for participating countries than an individual contracts scenario.
Even if no coordination is possible, most countries can benefit by contracting for
LNG individually
Even if countries are not able to coordinate to aggregate natural gas demand at all, our
analysis shows that seven countries would still be able to benefit from Scenario 3, in which
each country contracts separately with a natural gas supplier. Fuel and electricity prices
would still be lower than in the business as usual scenario, as would the environmental
impact of electricity generation.

292

Confidential

Part IV: Socio-Environmental Impact and


Risk Analysis
This part of the report identifies the potential socio-environmental impact and risks of
introducing natural gas in the Caribbean, and identifies possible options for mitigating those
risks. We conduct a high-level regional analysis, rather than a project-level analysis. This is
because the proposed developments are not at the project stage, but still at the feasibility
study stage. We considered that the general framework for an Environmental and Social
Analysis (ESA) was appropriate, and adapted it for the needs of a regional study, rather than
a project-level analysis. Appendix R presents a generic framework for an ESA.
Following this framework, we first consider the regulatory framework related to
environmental protections and regulation on the construction of infrastructure (Section 18).
We also analyze the relevant IDB policies that provide a framework for evaluating the
environmental and social impacts and risks of IDB-funded projects. We describe the
infrastructure needed for the natural gas scenarios (Section 19). Then, in Sections 20 and 21,
we describe the environmental and social settings in the countries that will import natural gas
in the preferred scenario, and analyze the impact and risks of:
Constructing the infrastructure needed to import and use natural gas
The operations required to import and use natural gas, including importing
natural gas by ship and burning natural gas to generate electricity.
With adequate precautions, importing, storing, and using LNG can have lower risks than
handling liquid fuels. LNG is not flammable in its liquid state. It also reverts to gaseous form
under ambient temperatures and pressures and quickly dissipates, so a major leak or accident
does not create the same long-term localized environmental damage as would a spill of liquid
fuels. The history of spills of oil products in the Caribbean indicates that there are potential
positive impacts from reducing the use of fuel oil and diesel.345 However, natural gas that
flows out of a leak is extremely flammable, and vapor clouds can explode. As such, proper
safety precautions are required to protect on-site personnel and the immediate environment.
The most important social impact of introducing natural gas for electricity generation in the
Caribbean will be a reduction in the cost of electricity generation of between 4 percent and
26 percent. These savings can be passed on to residential, commercial, and industrial
electricity consumers, reducing the burden of high electricity tariffs across the region.
In general, all three scenarios require similar infrastructure and would have similar
environmental and social impacts. Our analysis for this section focuses on Scenario 1: Hub
and Spoke because it would require a regional hub for natural gas, and it would have the
largest volumes of any scenario. As such, it is considered to have the largest environmental
and social impact (including positive and negative effects). By analyzing Scenario 1,
345

The Wider Caribbean Region (WCR) is considered to be a highly ecologically sensitive area and is classified as high-risk
due to a history of major oil spills and chemical spill incidents, partly correlated to the relatively high concentrations of
oil refineries, offshore installations, and chemical plants, as well as numerous navigational hazards and a high volume of
tanker traffic. UNDP (2012) Oil Spills: How Caribbean Disaster Managers Can Prepare and Respond. United Nations
Development Programme, Barbados and the OECS

293

Confidential

conclusions can also be drawn for the other two scenarios, in which the environmental and
social impacts would be slightly reduced.

294

Confidential

18

Legal and Regulatory Framework

The legal and regulatory framework for each country includes national laws, policies, and
institutions, as well as regional and international treaties and conventions. National laws set
out processes for approving infrastructure development based on the expected
environmental impact, and allow for development approval with conditions for mitigating
expected negative impacts. National energy and development policies also guide energy
development efforts in the region. International treaties and conventions complete the
regulatory framework, and national institutions have responsibility for enforcing regulations
at the country level. Finally, IDB policies clearly define the IDBs social and environmental
goals, and the sort of negative social and environmental impacts that could prevent projects
from receiving IDB funds if they are not adequately mitigated.
Appendix B includes details for each country of emphasis on the laws, institutions, and
policies relevant to environmental and social approvals for infrastructure development.

18.1

Summary of Country-Level Policies and Laws

Laws and regulations in the countries of emphasis set out different legal frameworks for the
environmental and social approvals needed for infrastructure development. However, all
countries that would import natural gas in Scenario 1 require an assessment of the
environmental and social impacts of projects, as well as planning or land-use approval for
the site where the project is built. Regulations on the safe handling, storage, and use of LNG
often consist of regulations that protect on-site employees and other people, and regulations
that protect the environment.
Table 18.1 lists the laws that provide the legal basis for environmental assessments and
planning or land use in the countries of emphasis.

295

Confidential

Table 18.1: Laws and Regulations Relevant to Infrastructure Development in the


Caribbean
Country

Legal basis for


environmental
assessment

Law regulating
planning or land
use

Law regulating the safe use of


hazardous materials

The
Bahamas

Planning and Subdivision


Act (2010)

Planning and
Subdivision Act
(2010)

Environmental Health Services


Act (1987) and Health and Safety
at Work Act (2002)

Barbados

Town and Country


Planning Act (1985)
Coastal Zone Management
Act (1998)

Town and Country


Planning Act (1985)

Safety and Health at Work Act


(2005)

Dominican General Law on the


Republic
Environment and Natural
Resources, No.64-00

Law No. 675 on


Urbanization, Public
Structures, and
Infrastructure

General Law on the


Environment and Natural
Resources, No.64-00

Guyana

Environmental Protection
Act (1996)

Town and Country


Planning Act
Chapter (2001)

Environmental Guidelines for


Transportation, Storage, and
Occupational Handling of
Chemical/Hazardous Waste
(2011)

Haiti

General Decree on
Environment (Dcret portant
sur la gestion de lenvironnement
et la rgulation de la conduite des
citoyens et citoyennes pour un
dveloppement durable) (2005)

National
Infrastructure Code
(Code National du
Btiment dHati)
(2012)

General Decree on Environment


(Dcret portant sur la gestion de
lenvironnement et la rgulation de la
conduite des citoyens et citoyennes pour
un dveloppement durable) (2005)
and Decree of 24 February 1984
updating the Labor Code of 12
September 1961 (Dcret du 24
fvrier 1984 actualisant le code du
travail du 12 septembre 1961)

Jamaica

Natural Resources
Town and Country
Conservation Authority Act Planning Act (1958)
(1991)

Regulated under the Natural


Resources Conservation
Authority Act (1991)

Suriname

None. EIA guidelines are


Planning Law
set by the National Institute (Planwet)
for Environment and
G.B. 1973 no. 89
Development in Suriname
(NIMOSNationaal
Instituut voor Milieu &
Ontiwikkeling in Suriname).

Regulated by NIMOS

National development plans, national energy policies, and other national policy documents
in the countries of emphasis prioritize reducing energy costs, reducing the environmental
impact of the energy sector, increasing access to electricity and other forms of modern

296

Confidential

energy, and diversifying energy sources. Table 18.2 shows the countries where policy
documents set out these national goals.
Table 18.2: National Policies Relevant to LNG in the Caribbean
Country

Reducing energy
costs

Reducing the
environmental
impact of the
energy sector

Increasing
access to
electricity and
modern energy

Using more
diverse energy
sources

The Bahamas

Barbados

Dominican
Republic

Guyana

Haiti

Jamaica

Suriname

18.2 Summary of Country-Level Institutions


National institutions have responsibility for enforcing national laws and international
agreements, and are also guided by national and regional policies. Table 18.3 shows the
institutions in each country of emphasis that oversee the process for approving
infrastructure development based on projects expected environmental impact and planning
laws and regulations.

297

Confidential

Table 18.3: Institutions with Responsibility for Environmental Assessments and


Planning
Country

Agency responsible for environmental


assessments

Agency responsible for planning or


land use

The
Bahamas

The Bahamas Environment, Science and


Technology (BEST) Commission

Department of Physical Planning

Barbados

Environmental Protection Department

Town and Country Development


Planning Office

Dominican Ministry of Environment and Natural


Republic
Resources (Ministerio del medio ambiente y recursos
naturales)

Ministry of Public Works and


Communications (Ministerio de obras
pblicas y comunicaciones)

Guyana

Environmental Protection Agency (EPA)

Guyana Lands and Surveys


Commission

Haiti

Ministry of Environment (Ministre de


lenvironnement)

Department of Public Works


(Dpartement des Travaux Publics)

Jamaica

National Environment and Planning Agency


(NEPA)

National Environment and Planning


Agency (NEPA)

Suriname

The National Institute for Environment and


Development in Suriname (NIMOS
Nationaal Instituut voor Milieu & Ontiwikkeling in
Suriname)

Ministry of Physical Planning, Land,


and Forestry Management (Ministerie van
Ruimtelijke ordening, Grond- en Bosbeheer)

18.3 International Agreements


All of the countries of emphasis in this study participate in various international treaties and
conventions that set out safety and environmental regulations related to shipping and
infrastructure development. The agreements that apply to shipping will be relevant to any
LNG project. Other agreements will apply to some of the infrastructure to import and use
LNG for electricity generation, depending on the type of infrastructure and where it is built.
For example, some agreements are specific to wetlands or coastal areas. Table 16.4 describes
some key international treaties and conventions that some of the countries of emphasis are
party to. Treaties include environmental treaties and conventions, infrastructure codes,
human rights agreements, and regional policy documents.

298

Confidential

Table 18.4: Relevant International Treaties and Conventions


Environmental
Treaties
Protocol Concerning
Co-Operation In
Combating Oil Spills
In The
Wider Caribbean
Region
Convention for the
Protection and
Development of the
Marine Environment
of the Wider
Caribbean Region
Convention on
Biological Diversity
(CBD)

Function
The Contracting Parties shall, within their capabilities, cooperate in taking all necessary measures, both preventive
and remedial, for the protection of the marine and coastal
environment of the Wider Caribbean Region, particularly
the coastal areas of the islands of the region, from oil spill
incidents346
Compels countries to abide by international maritime law
and prevent, reduce and control pollution in the marine
environment of the Gulf of Mexico, the Caribbean Sea
and the adjacent areas of the Atlantic Ocean.347 All
coastal infrastructure projects will be subject to sound
environment management as stipulated in this
Convention.
Aims to preserve biological diversity and ecosystems.348
All development projects are subject to the conditions of
this Convention.

Protocol on Specially Imposes measures to protect, preserve, and manage


Protected Areas and vulnerable environments and threatened or endangered
Wildlife (SPAW)
flora and fauna in a sustainable way.349 Any infrastructure
projects located in areas considered vulnerable or hosting
endangered species must follow this protocol.
Convention on the
International
Regulations for
Preventing Collisions
at Sea

346

Sets the technical requirements for ships operating in


maritime territory.350 All ships used for the transportation
of natural gas must follow the technical specificities in
this Convention.

Participating
Countries
The Bahamas
Barbados
Dominican Republic
Guyana
Jamaica
Trinidad and Tobago
The Bahamas
Barbados
Dominican Republic
Guyana
Haiti
Jamaica
Suriname
The Bahamas
Barbados
Dominican Republic
Guyana
Haiti
Jamaica
Suriname
The Bahamas
Barbados
Dominican Republic
Guyana
Haiti
Jamaica
Suriname
The Bahamas
Barbados
Dominican Republic
Guyana
Jamaica351

The Caribbean Environment Program. http://www.cep.unep.org/cartagena-convention/oil-spills-protocol/oil-spillsprotocol-en.pdf/view

347

Cartagena Convention on Protection of the Marine Environment of the Wider Caribbean.


http://www.cep.unep.org/cartagena-convention/cartagena-convention.pdf
348
Convention on Biological Diversity (CBD). Preamble. http://www.cbd.int/convention/articles/default.shtml?a=cbd-00
349
Protocol on Specially Protected Areas and Wildlife (SPAW). http://www.cep.unep.org/about-cep/spaw
350
Convention on the International Regulations for Preventing Collisions at Sea.
http://www.admiraltylawguide.com/conven/collisions1972.html
351
Status of multilateral Conventions and instruments in respect of which the International Maritime Organization or its
Secretary-General performs depositary or other functions. International Maritime Organization. 31 May 2014.
http://www.imo.org/About/Conventions/StatusOfConventions/Documents/Status%20-%202014.pdf 11 June 2014.

299

Confidential

Environmental
Treaties
International
Convention for the
Safety of Life At Sea

United Nations
Convention on the
Law of the Sea

Function
The Convention is the International Maritime
Organizations main international convention on the
safety of merchant ships. It sets forth the technical
provisions and standards for the safe operation of
ships.352 All ships involved in the transportation of natural
gas will follow the rules in this Convention.
Regulates all maritime activity of signatory countries, so as
to protect and preserve the maritime environment and
ecosystem.354 All ships involved in the transportation of
natural gas will follow the rules in this Convention.

Ramsar Convention
on Wetlands

Provides a framework for the conservation of sustainable


use of the wetlands in signatory countries, including the
protection of their biodiversity and controlling
pollution.355 Any coastal projects that develop on or near
a wetland will follow the Convention.
International
The MARPOL, the International Maritime Organizations
Convention for the
main international convention on the prevention of
Prevention of
marine pollution by ships from operational or accidental
Pollution from Ships causes.356 This Convention must be followed during the
(MARPOL)
projects operating phase in all matters involving the
transportation and distribution of natural gas.
Convention on the
The Convention is the International Maritime
Prevention of Marine Organizations agreement to control marine pollution by
Pollution by
prohibiting the dumping of waste and other materials
Dumping of Wastes within the boundaries of signatory countries.357 This
and Other Matter
Convention must be followed during the projects
operating phase in all matters involving the transportation
and distribution of natural gas.

Participating
Countries
The Bahamas
Barbados
Guyana
Haiti
Jamaica
Suriname353
The Bahamas
Barbados
Dominican Republic
Guyana
Haiti
Jamaica
Suriname
The Bahamas
Barbados
Dominican Republic
Jamaica
Suriname
The Bahamas
Barbados
Dominican Republic
Guyana
Jamaica
Suriname
Barbados
Dominican Republic
Haiti
Jamaica
Suriname

International Convention for the Safety of Life At Sea.


http://www.imo.org/About/Conventions/ListOfConventions/Pages/International-Convention-for-the-Safety-of-Lifeat-Sea-(SOLAS),-1974.aspx
353
Status of multilateral Conventions and instruments in respect of which the International Maritime Organization or its
Secretary-General performs depositary or other functions. International Maritime Organization. 31 May 2014.
http://www.imo.org/About/Conventions/StatusOfConventions/Documents/Status%20-%202014.pdf 11 June 2014.
352

354

United Nations Convention on the Law of the Sea.


http://www.un.org/depts/los/convention_agreements/texts/unclos/unclos_e.pdf
355
Ramsar Convention on Wetlands. http://www.ramsar.org/cda/en/ramsar-documents-texts-conventionon/main/ramsar/1-31-38%5E20671_4000_0__
356
International Convention for the Prevention of Pollution from Ships.
http://www.imo.org/About/Conventions/ListOfConventions/Pages/International-Convention-for-the-Prevention-ofPollution-from-Ships-(MARPOL).aspx
357
Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter.
http://www.iaea.org/Publications/Documents/Infcircs/Others/inf205.shtml

300

Confidential

Infrastructure
Codes

Function

Caribbean Uniform Institutionalizes rules for construction given the


Building Code
environmental challenges and disaster-prone nature of
Caribbean islands. It covers structure design;
occupancy, fire safety and public health requirements;
services, equipment and systems; and small buildings.358
It covers all technical matters that impact the safety of
infrastructure, including seismic codes, which all
development projects must follow.
Human Rights
Agreements
International
Covenant on
Economic, Social
and Cultural Rights

Barbados
The Bahamas359
Jamaica*
Guyana*

Content

Participating
Countries

A multilateral treaty adopted by the UN General


Assembly to work toward the granting of economic,
social and cultural rights to individuals in member
countries.360 The provisions in this Covenant must be
taken into account if the project is developed in areas of
cultural significance for any social group in a signatory
country.

The Bahamas
Barbados
Dominican Republic
Guyana
Haiti
Jamaica
Suriname361

Regional Policy
Content
Documents
CARICOM Energy Sets out CARICOM member states objectives to
Policy
ensure energy access from diverse and affordable
sources. The Policy emphasizes the importance of
developing local renewable energy sources, and
reducing the regional dependence on oil products over
time. The Policy also identifies a regional need to
increase efficiency in the energy sector. Member states
aim to improve regional coordination on standards, and
to increase regional trade in energy.
Note:

Participating
Countries

Signatory
Countries
The Bahamas
Barbados
Guyana
Haiti
Jamaica
Suriname362

*Country does not use Caribbean Uniform Building Code, but plans to adopt the updated Caribbean
Uniform Building Standards after they are completed. The updated Caribbean standards will be based
on the International Building Code. Jamaica already uses the international building code.

358

World Bank ECCR Workshop in St. Vincent. http://siteresources.worldbank.org/INTLACREGTOPURBDEV/Resources/8403431328045087175/02_GIBBS_CUBiC_Wind_Loading_SLU.pdf

359

Gibbs, Tony, Overview of building codes and CUBiC, National adoptions in the Eastern Caribbean, Discussion
of wind loading in St Lucia. 26 January 2012. World Bank ECCR Workshop: St. Vincent and the Grenadines.
http://siteresources.worldbank.org/INTLACREGTOPURBDEV/Resources/8403431328045087175/02_GIBBS_CUBiC_Wind_Loading_SLU.pdf accessed 11 June 2014.

360

International Covenant on Economic, Social and Cultural Rights. http://www.ohchr.org/EN/ProfessionalInterest/Pages/CESCR.aspx

361

United Nations, Status of the International Covenant on Economic, Social, and Cultural Rights. 11 June 2014.
https://treaties.un.org/Pages/ViewDetails.aspx?chapter=4&lang=en&mtdsg_no=IV-3&src=TREATY

362

United Nations, Status of the International Covenant on Economic, Social, and Cultural Rights. 11 June 2014.
https://treaties.un.org/Pages/ViewDetails.aspx?chapter=4&lang=en&mtdsg_no=IV-3&src=TREATY

301

Confidential

18.4 IDB Policies


IDB policies provide a framework for evaluating the environmental and social impacts and
risks of IDB projects. We referred to these policies in analyzing the potential impacts and
risks of developing a regional supply chain for natural gas in the Caribbean, and using natural
gas for electricity generation and to meet other energy needs.
In general, IDB policy establishes the need for social and economic progress that is
environmentally and financially sustainable. As such, environmental concerns must be
considered in all proposed development, as set out in the Environment and Safeguards
Compliance Policy and in the Implementation Guidelines for the Environment and
Safeguards Compliance Policy.
IDB policies on energy, electric energy, and public utilities provide details on the IDBs
general environmental and social policies that are relevant to the Feasibility Studies for
Natural Gas in the Caribbean. The IDB aims to expand access to electricity service, which is
an important part of economic growth and poverty reduction. Electricity service should be
delivered efficiently, and users should generally pay the cost of service provision (although
some subsidies may be desired to promote access). Electricity service must also be
sustainable, meaning that its environmental impact should be minimized.
Below we describe the IDBs general environmental and social policies and those directly
relevant to this Feasibility Study in more detail.363
Environment and Safeguards Compliance Policy
Aims to identify environmental risks early in a projects life cycle so that they can be
effectively managed.
The two major categories of policy directives are 1) environmental mainstreaming and 2)
environmental safeguards. Environmental mainstreaming means that environmental issues
will be addressed as a cross-cutting issue of development, to enhance quality of life within
the country and preserve natural resources.
Environmental safeguards will be incorporated at all stages of a project cycle to ensure that
all IDB-financed projects are environmentally sustainable. Any unavoidable negative impacts
from IDB-financed projects should be appropriately mitigated or offset. IDB-financed
projects must also comply with all country laws. Projects with high environmental risk will
be categorized separately from projects with lower risk, and projects with higher risk will
usually need an Environmental Impact Assessment. IDB-financed projects also aim to
reduce or eliminate pollution, including local pollutants and greenhouse gases.
Implementation Guidelines for the Environment and Safeguards Compliance Policy
These guidelines provide further guidance for IDB project teams and staff in the
interpretation and implementation of the Environment and Safeguards Compliance
Policyincluding in environmental mainstreaming and environmental safeguards. It
specifies terms in the Environment and Safeguards Compliance Policy and sets out
363

In preparing this section, we consulted the following IDB documents: Environment and Safeguards Compliance
Policy, Implementation Guidelines for the Environment and Safeguards Compliance Policy, Operational Policy on
Indigenous Peoples, Policy on Involuntary Re-settlement, Operational Policy on Gender Equality in Development,
Policy on Electric Energy, Policy on Energy, Policy on Public Utilities

302

Confidential

processes for evaluating projects and carrying out environmental assessments, including
Environmental Impact Assessments, Strategic Environmental Assessments, and
Environmental and Social Management Plans.
Operational Policy on Indigenous Peoples
This Policy sets out the IDBs understanding of the need for development to include the
social, cultural, and environmental needs of indigenous peoples. Indigenous peoples are
often vulnerable populations, and their needs are unique. The Policy aims to support the
development of indigenous peoples, and to safeguard indigenous peoples from negative
effects and exclusion in IDB-funded development projects.
Policy on Involuntary Resettlement
IDB-funded projects must make every effort to prevent involuntary resettlement. Where
resettlement is unavoidable, a resettlement plan must provide for fair compensation and
rehabilitation for anyone that is resettled.
Policy on Energy
The IDBs three principal goals in energy are to:
Efficiently meet the energy requirements of its member countries derived by the
process of socioeconomic development
Accelerate growth and diversification of the energy supply
Foster energy conservation.
Policy on Electric Energy
The IDB aims to increase the availability and reliability of electric energy for social
development. Advancement in electric energy should promote environmental conservation,
energy efficiency (on both the supply and demand sides), and economic and social
advancement. Generation projects should be the least-cost alternative in the long term.
Tariffs should reflect costs, with some consideration given for access and equity issues.
Policy on Public Utilities
The IDB aims to promote public utilities that expand access to the services, deliver highquality services, and deliver services efficiently. Affordability is also desirable, since access to
public services is often a key element to poverty reduction.
The IDB promotes efficient incentives for demand for services. Utilities should be
financially, socially, and environmentally sustainable.

303

Confidential

19

Infrastructure Needed for the Scenarios

The infrastructure needed to import and use LNG for electricity generation is explained in
detail in Section 6.3. This section evaluates the environmental and social impacts and risks
for each country if that country imports natural gas. Belize is excluded from the analysis,
because importing natural gas is not feasible in any scenario.
The analysis in this section includes the regional hub that would be needed in Scenario 1 and
infrastructure needed in each country to import and use natural gas in all scenarios. Total gas
volumes are less in Scenarios 2 and 3 than in Scenario 1.
In addition to the infrastructure described in Section 6.3, the following other infrastructure
may be needed in some cases:
LPG removal facilities to remove propane, butane and other gases from the
LNG. Removed gases will need to be stored as well until they can be shipped out
to markets
Desalination plant for production of process water supply if seawater is used in
the cooling process. Desalination will result in production of brine that will need
to be disposed of
Housing for workers, either temporary or permanent, if there is no appropriate
housing at the project site
Dredging, if channels, berths, or a turning basin need to be deepened to
accommodate LNG ships
Fueling facilities for ships and support vessels at the LNG terminal if there are no
such facilities currently near or at the project site
Shoreline protection, such as jetties and seawalls to protect LNG terminal and
project facilities at the terminal, if these do not already exist at the project site
Stormwater, wastewater and solid waste management processes during
construction and operation of the LNG facilities.

304

Confidential

20

Environmental Impact of Introducing Natural Gas

In this section, we show the environmental impact of introducing natural gas in the
Caribbean. First, we present the environmental setting of each country (Section 20.1).
Second, we describe the environmental impact of the business as usual scenario, in which
natural gas is not introduced in countries that do not already import it (Section 20.2).
Infrastructure development always carries environmental impacts and risks, but the facilities
needed to import, store, and use LNG would not have an excessive impact compared to
other similar development (Section 20.3). Risks of handling and using LNG for electricity
generation can be lower than risks with liquid fuels, and emissions from burning natural gas
for electricity generation are lower than those from burning fuel oil (Section 20.4). A
combination of standard precautions and best practices and special precautions for handling
LNG can adequately protect the environment during the construction and operation of
LNG facilities (Section 20.5).

20.1 Environmental Setting


The environmental setting of each country is comprised of the geography, topography, and
flora and fauna that characterize it. Appendix S presents a detailed description of the
environmental setting of each country.
The countries that could import natural gas have similar environmental characteristics due to
their proximity. All of the island states have tropical climates with one rainy season per year,
while Suriname and Guyana (both located in northern South America) have equatorial
climates with a higher level of annual rainfall and two rainy seasons. The countries also share
similar biological resources, such as mangroves, coral reefs, wetlands and coastal marine
ecosystems.
The countries that would import natural gas differ with regard to their surface area and the
available sources of freshwater. The surface areas range from 83,000 square miles (Guyana)
to 432 square miles (The Bahamas). While most of the island states have limited freshwater
resources (with some exceptions, such as Jamaica), both Suriname and Guyana have plentiful
surface and groundwater resources and extensive freshwater ecosystems. Table 20.1
describes some key characteristics of the environmental setting of the countries that would
import natural gas in Scenario 1.

305

Confidential

Table 20.1: Environmental Characteristics by Country


Country
The
Bahamas

Barbados

Dominican
Republic

Guyana

Haiti

Surface Area
Protected
(Square
Areas (Square
Miles)
Miles)
22,6321

432

18,791

83,000

10,810

2,896

46

17,760

1,432

347

Biological Resources
Coral reefs
Coastal wetlands
Mangroves
Coastal wetlands and
woodlands
Mangroves forests
Undercliff woods
Coastal marine
ecosystems
Seasonally flooded
forests, scrub and
wetlands
Tropical and rain
forests
Mangroves and
swamps
Freshwater
ecosystems
Forests
Freshwater
ecosystems
Wetlands
Estuaries
Coral reefs
Seagrass beds

Climate and
Rainy Seasons

Freshwater Sources

CO2
Emissions
Megagrams

Sub-tropical
May to October

Three-dimensional
groundwater lenses

2,197,200 (equivalent
in 1994)
6.8 mtpc

Mild-subtropical
June to December

Deep river bed gullies


No permanent rivers

4,045,440
(equivalent in 1997)
5.36 mtpc

Tropical
May to November

Rivers, lakes, and lagoons.

7,639,140 (equivalent
in 2000)
2.09 mtpc

Equatorial
April to August and
November to
January

Complex system of rivers,


creeks, lakes, waterfalls, and
other water bodies

- 54,589,040
(equivalent in 2004)
2.16 mtpc

Tropical
April to October

150-kilometre long river,


limited groundwater resources

7,832,320 (equivalent
in 2000)
0.21 mtpc

306

Confidential

Country

Jamaica

Suriname

Surface Area
Protected
(Square
Areas (Square
Miles)
Miles)

4,181

63,251

1,236

8,256

Biological Resources
Mangroves
Closed broadleaved,
and dry open forests
Estuaries
Wetlands
Coral reefs
Seagrass beds
Tropical and rain
forests
Freshwater
ecosystems
Mangroves
Dry land and savanna
forests

Climate and
Rainy Seasons
Tropical
Annual rainfall of
200 centimeters

Tropical
April to August and
November to
February

Freshwater Sources

CO2
Emissions
Megagrams

Limestone aquifers
Surface drainers
Streams and rivers,
subterranean waterways,
ponds, springs

116,147,202.79
(equivalent in 1994)

Surface water and


groundwater

4,870,730 equivalent
in 2003

2.66 mtpc

4.54 mtpc

Note: Total CO2 emissions include land use, land-use change and forestry (LULUCF) defined by the United Nations Climate Change Secretariat as "A greenhouse gas
inventory sector that covers emissions and removals of greenhouse gases resulting from direct human-induced land use, land-use change and forestry
activities."
mtpc= metric tonnes per capita.
Protected areas for the Dominican Republic and Jamaica include surface and marine areas.
Source: Moss, S. and Moultrie, S. (2014) Ecological Gap Analysis. BEST Commission: Nassau, The Bahamas. Ministry of Physical Development and Environment.
(2002). A National Biodiversity Strategy and Action Plan for Barbados to the Convention on Biological Diversity. Government of Barbados. Reynoso, O. (2011). Ministry
of Environment and Natural Resources. Retrieved from https://www.cbd.int/doc/meetings/mar/rwebsa-wcar-01/other/rwebsa-wcar-01-dominica-02en.pdf . Environmental Protection Agency. (2007). Guyana National Biodiversity Action Plan II. Georgetown: Government of Guyana. Toussaint, J. (2000). Profile
of the Haiti National Biodiversity Strategy and Action Plan with implications for binational actions with Dominican Republic. Haiti: Ministry of Environment and NEAP
Secretariat. National Environment and Planning Agency (NEPA). (2003). National Strategy and Action Plan on Biological Diversity in Jamaica. Kingston: NEPA.
Ministry of Labour, Technological Development and Environment. (2012). The Fourth National Report to the Convention on Biological Diversity. Paramaribo:
Ministry of Labour, Technological Development and Environment.. World Bank, DataBank Retrieved from
http://data.worldbank.org/indicator/EN.ATM.CO2E.PC/countries?display=default

307

Confidential

The potential gas-importing countries have higher average per capita carbon dioxide
emissions (3.4 metric tonnes) than the regional average for Latin America (2.9 metric
tonnes). This is also the case when comparing the average carbon dioxide per capita
emissions of all the Caribbean small states (9.8 metric tonnes) to the per capita carbon
dioxide emissions of Latin America.364 However, the average per capita carbon dioxide
emissions of the countries that would import natural gas are still very low compared to those
of high-income countries (11.5 metric tonnes). In absolute terms, among the potential gasimporting countries Jamaica has the highest carbon dioxide emissions, followed by
Dominican Republic, while Guyana has the lowest carbon dioxide emissions.
Potential gas-importing countries have thousands of endemic and endangered species, most
of which are in forests and in the different bodies of water prevalent in each country. All of
the countries have protected areas to preserve irreplaceable habitats and species. However,
there are significant differences in the percentage of protected areas among the countries.
The Bahamas and Haiti have less than 2.5 percent of their surface areas protected, while
Jamaica and Dominican Republic have around 25 percent of their surface areas protected.
The predominantly tropical climates of the countries that would import natural gas and their
large coastal areas are vulnerable to natural and anthropogenic disasters. All of the island
states are vulnerable to hurricanes, and the northern island states are also vulnerable to
earthquakes. Climate change is a common threat for all the countries, due to its potential
impact on the water cycle and the possible intensification of flooding and droughts. For
countries with low-lying coastal areas, rising sea levels are also a concern. The most prevalent
environmental threats among the countries are biodiversity loss, erosion of coastal lines, and
deforestation. These threats could be intensified due to poor coastal planning and
overexploitation of natural resources by the poor with limited access to sustainable sources
of fuels, food, or water. Table 20.2 summarizes key environmental threats and vulnerabilities
in the countries of emphasis.

364

World Bank. World Development Indicators Database retrieved from


http://data.worldbank.org/indicator/EN.ATM.CO2E.PC

308

Confidential

Table 20.2: Environmental Vulnerabilities and Risks by Country

Biodiversity conservation due to resource extraction, sugar cane


agriculture, and tourism development
Habitat loss and fragmentation
Invasive alien species

Barbados

Dominican
Republic

Guyana

Haiti

Jamaica

Suriname

Threats

The Bahamas

Earthquakes

Hurricane

Drought

Country

Flooding

Vulnerabilities

Depletion of ecosystems
Depletion of commercial fish and coppice forest species
Damage or fragmentation of natural habitats
Endangered and endemic species
Invasive alien species

Biodiversity loss
Deforestation
Invasive alien species
Overexploitation of forest and marine resources
Pollution
Threatened and endangered species
Erosion of coastal lines and biodiversity
Invasive alien species
Overexploitation, poorly planned coastal development
Pollution
Biodiversity loss
Forest degradation
Lack of potable water
Invasive alien species
Severe deforestation due to human activities reliant on wood
Soil erosion

Invasive alien species


Overexploitation of marine resources
Pollution
Biodiversity loss
Deforestation
Invasive alien species
Threatened and endangered species

Source: Moss, S. and Moultrie, S. (2014) Ecological Gap Analysis. BEST Commission: Nassau, The Bahamas.
Ministry of Physical Development and Environment. (2002). A National Biodiversity Strategy and Action
Plan for Barbados to the Convention on Biological Diversity. Government of Barbados. Reynoso, O. (2011).
Ministry of Environment and Natural Resources. Retrieved from
https://www.cbd.int/doc/meetings/mar/rwebsa-wcar-01/other/rwebsa-wcar-01-dominica-02en.pdf . Environmental Protection Agency. (2007). Guyana National Biodiversity Action Plan II.
Georgetown: Government of Guyana. Toussaint, J. (2000). Profile of the Haiti National Biodiversity
Strategy and Action Plan with implications for binational actions with Dominican Republic. Haiti: Ministry of

309

Confidential
Environment and NEAP Secretariat. National Environment and Planning Agency (NEPA). (2003).
National Strategy and Action Plan on Biological Diversity in Jamaica. Kingston: NEPA. Ministry of Labour,
Technological Development and Environment. (2012). The Fourth National Report to the Convention on
Biological Diversity. Paramaribo: Ministry of Labour, Technological Development and Environment.

20.2 Business as Usual


If natural gas is not introduced in the countries where it does not already exist, they will
continue to depend on fuel oil for electricity generation in the short and medium terms. This
will have impacts and risks for the local and global environments.
Spills resulting from ships carrying oil products or from storage facilities can endanger local
wildlife and ecosystems. Past oil spills in the Caribbean have resulted from oil tankers
colliding with each other and from failures in oil drilling equipment. Most recently, there
were 11 oil spill incidents in December 2013 in Trinidad and Tobago as a result of failure in
the operations of the government-owned oil company, Petrotrin.365 The spills affected air
quality for local residents, at least temporarily366, and caused at least US$2.6 million in
economic damages for fishermen in the area.367 In the cleanup effort, Petrotrin collected
1,300 m3 of contaminated sand and oily waste, and 1,000 m3 of debris.368
There have been at least two other major oil spills in the Caribbean that have caused
substantial effects on the environment. In 1991, the oil tanker Vistabella sank 15 km off the
coast of Nevis while carrying 2,000 tonnes of heavy fuel oil. Pollution from the spill affected
Saint Kitts and Nevis, Saba, Saint Martin, Saint Bartholomew, the British Virgin Islands, the
American Virgin Islands, and Puerto Rico. Damages cost millions of U.S. dollars, but no
overall incident report was ever compiled.369 In 1979, two oil tankers exploded off the coast
of Trinidad and Tobago, killing 26 crew members and catching both on fire. The fire on one
of the ships, the Atlantic Empress, could not be extinguished, and multiple explosions
eventually sank the ship, spilling 276,000 tonnes of crude oil into the Caribbean Sea.370
Countries in the Caribbean recognize the potential risks of oil spills, and the regional Oil
Spills Protocol has been in force since 1986. The Oil Spills Protocol establishes a principle of

365

Trinidad and Tobago Energy Conference 2014. National Oil Spill Plan in Action. Petrotrin:From Impact to Recovery.
Available at http://www.petrotrin.com/Petrotrin2007/PetrotrinOilSpillPresentation2014FebEnergyConference.pdf

366

Ragoonath, Reshma, Petrotin oil spill spreads to La Brea. The Guardian. 19 December 2013.
http://www.guardian.co.tt/news/2013-12-19/petrotrin-oil-spill-spreads-la-brea accessed 14 August 2014.

367

Ragoonath, Reshma, Claxton Bay fisherman join call for $$: No fish in the Gulf. The Guardian. 15 January 2014.
http://www.guardian.co.tt/news/2014-01-15/claxton-bay-fishermen-join-call-no-fish-gulf accessed 14 August 2014.

368

Trinidad and Tobago Energy Conference 2014. National Oil Spill Plan in Action. Petrotrin:From Impact to Recovery.
Available at http://www.petrotrin.com/Petrotrin2007/PetrotrinOilSpillPresentation2014FebEnergyConference.pdf

369

Centre of Documentation, Research, and Experimentation on Accidental Water Pollution, Vistabella.


http://www.cedre.fr/en/spill/vistabella/vistabella.php accessed 14 August 2014.

370

Centre of Documentation, Research, and Experimentation on Accidental Water Pollution, Atlantic Empress.
http://www.cedre.fr/en/spill/atlantic/atlantic.php accessed 14 August 2014.

310

Confidential

regional cooperation in managing threats from oil spills and responding to oil spills.371 The
Assessment and Management of Environmental Pollution (AMEP) Sub-Programme of the
Caribbean Environment Programme coordinates regional preparedness initiatives and
response to oil spills, in collaboration with the Regional Marine Pollution Emergency,
Information and Training Centre (REMPEITC-Carib), an International Maritime
Organization agency located in Curaao.
Using HFO for electricity generation emits about 60 percent more carbon dioxide (CO2) per
MWh than using natural gas, and using coal emits about twice as much CO2though
performance varies on a case-by-case basis, depending on plant efficiency and other factors.
HFO-fired plants emit about 0.79 tonnes of CO2 per MWh. In comparison, natural gas-fired
plants emit about 0.49 tonnes of CO2 per MWh. Coal-fired power plants (only used in the
Dominican Republic, among the countries of emphasis) emit about 0.99 tonnes per MWh.372
Figure 20.1 shows that the potential gas-importing countries will generate about 18.4 million
tonnes of CO2 in 2018 from using fossil fuels for electricity generation in the Business as
Usual Scenario. This will rise to 27 million tonnes in 2028 and 31.9 million tonnes in 2032.
The Dominican Republic will have the highest emissions in the region, at nearly 60 percent
of the regional total in 2018. This will fall to just under 49 percent by 2032, as generation and
emissions from other countriesespecially Haitirise at a faster rate than in the Dominican
Republic.

371

United Nations Environment Programme, Caribbean Environmenta Programme, Protocol Concerning Co-Operation
in Combating Oil Spills in the Wider Caribbean Region. Cartagena de Indias, 24 March 1983.
http://www.cep.unep.org/cartagena-convention/oil-spills-protocol/oil-spills-protocol-en.pdf/view accessed 14 August
2014.

372

Figures for CO2 are based on natural gas vs. HFO. They are Castalia calculations based on carbon content data from the
Intergovernmental Panel on Climate Change (IPCC) and Castalia assumptions. IPCC reports carbon contents of 25
kg/GJ for coal, 13.8 for natural gas, and 20 for HFO. We then used the following points to estimate CO 2 emissions for
each fuel a) thermal efficiencies of 35 percent for HFO and 39 percent for natural gas b) an oxidization factor of 99
percent for all fuels c) we convert carbon into CO2 by a factor of 3.67 to account for the higher molecular weight of CO2
after oxidation of carbon (44/12 is the ratio between the molecular weights of carbon and oxygen).

311

Confidential

Figure 20.1: Carbon Dioxide Emissions from Thermal Electricity Generation in


Business as Usual Scenario (even years from 2018 to 2032)

Note:

Thermal electricity generation includes HFO in all countries, forecasted coal use in the Dominican
Republic, and natural gas use from plants already installed in the Dominican Republic.

20.3 Positive Impacts


The introduction of natural gas in the Caribbean can have significant positive environmental
impacts. Carbon dioxide emissions from thermal electricity generation would be reduced by
an estimated 30 percent across the region in 2032 compared to the Business as Usual
Scenario. Infrastructure development to import and distribute natural gas has the potential to
reduce poverty-related environmental problems and support sustainability and development
plans in each country. The use of LNG can reduce the risk of potential oil spills since LNG
carriers are inherently more robust than typical, crude, fuel and chemical tankers.373 Finally,
operating LNG storage and regasification facilities can have lower environmental risks than
facilities for storing liquid fuels.
From construction of infrastructure
The main positive impacts from construction and infrastructure are:
Application of additional taxes, fees, royalties, or revenues to implement National
Environmental Plans or Strategies, to effectively manage existing protected areas,
and to establish and effectively manage new protected areas
Mitigation measures such as restoration of impacted protected areas or sensitive
habitats or assistance to natural resources and protected area management
agencies to preserve critical ecosystems and endangered or threatened species
373

Quillen Report. Chevron Texaco Corp. Investment in a Healthy US Energy Future. Retrieved from
http://www.netl.doe.gov/publications/proceedings/02/ngt/Quillen.pdf

312

Confidential

Implementation of environmental monitoring protocols for important ecosystems


and species that may not exist prior to project initiation. These monitoring
activities will be important for the long-term health of these ecosystems and
species and can aid in their conservation and management
Poverty reduction through LNG industry job creation and increased revenues for
governments, regional, and local businesses can reduce the negative impacts
associated with poverty. Negative environmental impacts associated with poverty
include improper sanitation that pollutes water resources, habitat degradation for
sub-standard housing construction, and overexploitation of forestry and fishery
resources using unsustainable practices.
From operations of supply chain and power plant
LNG is not flammable in its liquid state, and so can actually be less dangerous to transport
and store than many liquid fuels. In addition, because LNG reverts to gaseous form under
ambient temperatures and pressures and quickly dissipates, a major leak or accident does not
create the same long-term localized environmental damage as would a spill of liquid fuels.
This reduces the risk of groundwater and soil contamination, pollution of critical ecosystems,
and contamination and possible death of plant and animal life.
The LNG industry has an exceptional marine and land safety record. In the last three
decades there have not been reported LNG releases from a ships cargo tank. LNG tankers
have experienced groundings and collisions during this period, but none has resulted in a
major spill. For example, Japan, which imports more LNG than any other country in the
world, has not reported any major accidentssuch as explosions or severe leakagesin the
transportation or unloading of LNG in the past thirty years.374 Some accidents have occurred
at on-shore facilities, though they have been rare. Worldwide, there has been only one LNGrelated accident since 1980 at onshore facilities that has resulted in fatalities. In the 2004
incident, an LNG leak at a liquefaction train in Algeria led to an explosion that killed 27 onsite personnel.375
In addition to reduced fuel transportation risks, natural gas introduction reduces carbon
dioxide emissions compared to the continued use of fuel. In Scenario 1, CO2 emissions from
electricity generation are reduced by about 38 percent in all countries, except for the
Dominican Republic, where they are cut by between 12 percent and 22 percent over the
period from 2018 to 2032. On a regional level, emissions are reduced by 23 percent in 2018,
rising gradually to 30 percent in 2032.

374

ioMosaic Corporation. (2006) Managing LNG Risks: Separating the Facts from the Myths. Available at
http://www.iomosaic.com/docs/training/Managing_LNG_Risks.pdf

375

Melhem, G.A. et al. Managing LNG Risks: Separating the Myths from the Facts. ioMosaic.
http://www.iomosaic.com/docs/training/Managing_LNG_Risks.pdf accessed 4 August 2014.

313

Confidential

Figure 20.2: Carbon Dioxide Emissions from Thermal Electricity Generation in


Scenario 1 v Business as Usual Scenario (million tonnes, in even years)

20.4 Negative Impacts


Introducing natural gas in the Caribbean would likely have relatively low negative
environmental impacts in the countries that would import natural gas. There are
environmental risks associated with infrastructure development and with operating power
plants with natural gas, but they are lower than the risks to importing and using fuel oil for
electricity generation.
From construction of infrastructure
The risks and impact of constructing the infrastructure to import and use LNG are relatively
low, as long as appropriate locations are chosen for development. However, all infrastructure
development carries some risk. Possible impacts and risks of developing the infrastructure
required for these scenarios are:
Development of land resources to accommodate LNG facilities
Site of LNG facilities on or near critical habitat including protected areas
Modification of coastlines to install coastal protection structures
Dredging to accommodate ships. Dredging results in increased turbidity in the
marine environment which can destroy marine biological resources including
corals, sponges, seagrasses, and tunicates
Construction of shoreline protection structures can impact marine habitats, such
as seagrass beds, as well as coastal habitats, such as beach dunes and mangroves.

314

Confidential

From operations of supply chain and power plant


Because LNG is not flammable in its liquid state, and can only burn once it has gasified and
mixed with sufficient amounts of oxygen, LNG facilities are generally safer than liquid fuel
facilities under normal operating conditions. However, like any hydrocarbon fuel, the
transportation, storage, and use of LNG can pose a number of environmental and physical
risks if not properly managed. In particular, an LNG leak can present substantial risks as the
liquid spreads and evaporates, since natural gas is highly flammable once it returns to its
gaseous state.
The National Fire Protection Association gives natural gas the highest hazard ranking for
flammability, while diesel is ranked as moderately flammable.376 Diesel is less flammable
because it usually does not form ignitable mixtures unless it is heated. LNG vapor is only
flammable or explosive when there is a mixture of 5 to 15 percent of natural gas in air. If the
percentage of natural gas is below this range, it is not enough to burn. If the percentage is
more than this, there is too much natural gas and not enough oxygen for it to burn.
Other potential negative environmental impacts can result from operations through:
Increased marine traffic that can increase risk of accidents at sea, including
collisions with marine mammals and sea turtles and destruction of marine
ecosystems
Ship anchoring or groundings that disturb or destroy coral reefs and seagrass beds
Destruction of marine life (namely corals and fish) through release of cold water
into the ocean if seawater is used for heat exchange during regasification of LNG.
Corals, in particular, have a very narrow temperature range in which they can
survive. Water temperatures that are too cold will result in corals expelling their
zooxanthellae and dying. Marine organisms can also be trapped against screens on
intake pumps and some may die
Emissions from facilities that impair air quality. Although emissions from natural
gas are reduced compared to fuel oil, natural gas still releases pollutants, including
nitrous oxides (NOx), carbon monoxide (CO), particulate matter (PM-10), volatile
organic compounds (VOCs), sulfur dioxide (SO2) and lead (Pb)
Greenhouse gas (GHG) emissions in the form of carbon dioxide (CO2) and
methane (CH4), though emissions are reduced compared to fuel oil, as described
above
Noise pollution impacting wildlife, particularly marine mammals
There is some risk of spills of hazardous chemicals stored at LNG facilities that
could impact groundwater resources, fishery resources, and natural habitat. Such
chemicals include cleaning chemicals and lubricants
Impairment of aesthetic values.

376

National Fire Protection Association, http://www.nfpa.org/ accessed 1 August 2014.

315

Confidential

20.5 Options for Mitigating Environmental Risks


Environmental risks will be different for each country depending on the locations that are
selected for development. It is important that a full Environmental Impact Assessment
(EIA) and Environmental Management Plan (EMP) be developed for each country, in
accordance with national laws and processes for environmental and planning approval, as
outlined in Section 16. The full EIA will describe environmental concerns specific to each
countrys project site or sites, and recommend mitigation measures for each site. The EMP
will outline construction and operation procedures that incorporate mitigation measures to
guide these phases throughout the project sites development and operation. Components of
the EMP will include plans for natural hazards preparedness, spill contingency, and
hazardous materials storage, handling, and waste management.
While LNG is safe when managed properly, precautions are