Tag Archives: LNG

What goes around, comes around…or maybe not.

15 Feb

The industrial or specialty gas business isn’t one that many people often think about, but it provides very important products to a wide swath of the economy. Hospitals, food production, industrial manufacturers, and the oil & gas industry each have specific demands for gases such as pure oxygen, helium, and nitrogen, both in the gaseous and liquid state.

The process to remove or “separate” these gases from the atmosphere was perfected over a century ago as the materials and machines of the industrial revolution developed. They provided the ability to compress, heat, and cool air so as to process it and isolate its various components on an industrial scale.

For example, the need for industrial gas can be found at virtually any liquefied natural gas (LNG) facility. Large quantities of nitrogen are used to cool and purge process equipment, pipelines, and storage tanks. Depending upon the nature and size of the plant, liquid nitrogen is either manufactured on site or delivered to the facility and stored in a cryogenic tank called a dewar. (Named after Sir James Dewar, a Scottish chemist/physicist who invented a special vacuum flask to hold low boiling point liquids.)

Only about a half dozen major companies make up the bulk of the global industrial gas business. Recently, this industry sector has been hit particularly hard by the down-cycle in oil & gas and cost cutting in the health-care industry. This has led to attempts by industry participants to consolidate.

A week before Christmas, two of the larger companies, Linde AG of Germany, and Danbury, CT based, Praxair Inc., announced their intent to execute a “merger of equals.” The combined company reportedly would have a market cap of approximately $64 Billion and annual revenue of over $30 Billion.

Interestingly, if approved, this would close the circle in the life of what was originally part of Linde to begin with. Prior to World War I, Linde formed a US division named, Linde Air Products. The division grew such that, after the war, it dwarfed its Teutonic parent.

Union Carbide eventually purchased the company and ran it until 1992, when it was spun off and renamed Praxair. This deal would bring Linde’s American progeny back into the Linde family. The new company is expected to retain the Linde name.

Of course, there are a number of significant issues outstanding and the world is rapidly changing as both companies work to define the details of the reunion.

  • Where will the new company domicile in the EU?
  • What effect does the current US corporate tax rate have on Linde’s global structure? (In the past, companies engaged in “earning stripping”, loading US operations with debt and deducting interest against the higher US corporate tax bill, essentially shifting US profits overseas.)
  • What happens if the Trump administration revamps the entire US corporate tax code?
  • How might the governmental approval process be impacted by the newly evolving relationship between the EU and the US under an “America First” doctrine?

As a global business with a significant US presence, the new Linde will also run headlong into changing geopolitical relationships driven by the Trump administration’s foreign policies. Although these policies are only now being developed, it’s a safe bet that they will be markedly different than under the previous administration.

Consider this. It was recently reported that meetings have been underway between Linde’s CEO, Aldo Belloni, and Russia’s Gazprom Management Committee Chairman, Alexey Miller, regarding a cooperation agreement in the oil & gas sector. Supposedly it includes various aspects of Russian hydrocarbon processing, natural gas liquefaction, improving process efficiencies, and high-tech manufacturing, training and development.

How will Washington view such cooperation? How much will the diplomatic and intelligence scandal now unfolding within the Trump White House, combined the uncertainty regarding the direction of US – Russian relations (among others), affect the merger? What influence will “America First” have on the deal? Might these exogenous issues become too risky for the merged company and its shareholders?

Time will tell if it is wise to close the circle in the Linde family at this juncture.

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The “LNG Fix” Becomes Law

6 Aug

The federal government’s bureaucratic and sometimes Byzantine procedures for enacting new laws can achieve the proper results. It may not be pretty or swift, but it does work.

Case in point. In the closing days of July, immediately before an existing deadline, both houses of Congress passed and President Obama signed another stopgap highway bill (H.R. 3236) that extended funding for much need highway and transportation projects through October 29th.

Included in H.R. 3236 was an obscure revenue provision equalizing excise tax rates for liquefied petroleum gas, liquefied natural gas (“LNG”), and compressed natural gas—the so-called “LNG fix.”

The LNG fix provision, buried among a host of other disparate add-ons, was the culmination of years of effort by the natural gas vehicle industry to eliminate the unfair disadvantage of taxing LNG used as a vehicle fuel. This anomaly placed a significant financial burden on high horsepower vehicle operators (especially long-haul truckers) switching from diesel to LNG.

During the last five years, driven by tighter emission standards and the enormous volumes and lower prices for natural gas produced by hydraulic fracturing, both compressed natural gas (“CNG”) and LNG have made tremendous strides in penetrating the high horsepower engine fuels market. Because LNG burns cleaner, is lower in cost compared to petroleum alternatives, and now reliably produced domestically, it has become an attractive fuel for heavy-duty tucks, rail locomotives, and maritime vessels.

Traditionally, the federal excise tax on liquid fuels is assessed on a “cents per gallon” basis. The federal excise tax for both LNG and diesel is 24.3 cents per gallon. The federal excise tax on CNG is 18.3 cents per energy equivalent of a gallon of gasoline.

Unfortunately, the simplicity of a straight “cents per gallon” tax methodology creates a problem when the energy content of the alternative fuel is significantly different. The fuel containing less energy per gallon is disadvantaged because a greater volume must be used to get the same amount of energy output.

Specifically, LNG has an energy content of about 74,700 Btu per gallon while diesel’s is about 128,700 Btu per gallon. In order to get the same energy output, you use more gallons of LNG in comparison to diesel, hence you pay more in federal excise taxes. For LNG, it means effectively paying what amounts to 41.3 cents per gallon of LNG or nearly 70% more than diesel.

Similarly, propane produces only 72% of the energy output of gasoline, but is taxed at the same 18.3 cents per gallon rate.

The new “LNG fix” tax rate will become effective on January 1, 2016. By taxing the fuels based on an energy equivalent rather than a pure volumetric basis, tax parity is achieved. This then allows both LNG and diesel to be taxed at the same 24.3 cents per gallon, but it’s a diesel gallon equivalent (“DGE”). In other words, the cents per a gallon having the energy equivalent of a gallon of diesel.

The cost difference is not inconsequential. For an LNG fueled truck travelling 100,000 miles each year using 20,000 DGE, the annual fuel tax under the existing code is $8,262. Under the new energy equivalent tax code, the operator will pay $4,860 annually or $3,402 less per year.

As our country takes steps to reduce air emissions from road vehicles, locomotives, and marine vessels and realize the economic advantages of our lower cost, reliable, domestically produced fuels, building tax parity among fuel alternatives is the right thing to do. This change in the tax code doesn’t ensure that LNG will replace petroleum based liquid fuel, it simply levels the playing field.

It also proves that despite what may be a convoluted legislative process, persistence and reason can sometimes overcome Washington’s political partisanship and gridlock to deliver beneficial results for all of us. We will all benefit from the “LNG fix” for years to come.

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2012 – Another Trip Around the Sun

31 Dec

New Year

The year-end is traditionally the time to spend both looking back and thinking about the future. I’m no different than most. I find myself doing much the same, sans resolutions.

I began my adventure into the blogosphere this year, writing about energy issues. So, I’m compelled to close out 2012 with a post listing some of the year’s most significant developments along with a few forward looking comments. No particular order, just some random thoughts over a seasonal glass of eggnog.

Without a doubt, the expanding application of horizontal drilling and hydraulic fracturing unlocking our vast shale reserves was the single most important event of the year and will continue to be so in the foreseeable future. Next year, look for Monterey shale to be added to our lexicon along side Bakken, Eagle Ford, and Marcellus shale. Farewell to the notion of Hubbard’s Peak, LNG imports, and any Oscars for “Promised Land.”

Politics seemed to overshadow virtually everything this year, including energy. Thankfully, we all survived the Presidential silly season. Neither candidate offered much new with respect to energy policy or ideas for the next four years. We’ll likely continue to do much the same…blunder along with a purported strategy of, “all of the above,” and an unhelpful dose of regulatory intrigue and interference.

In the competition to fuel power generation in 2012, coal was displaced in ever increasing proportions by lower priced natural gas. In addition to market forces, newly proposed regulations by this administration and the environmental lobby’s “war on coal” took a toll on King Coal.

Emissions of CO2 in the United States fell this year to levels not seen since 1992. Much of this drop is directly attributable to the increased use of cleaner burning natural gas in power generation as well as depressed economic activity leading to lower energy demand.

In 2012, Keystone XL was the first oil pipeline to become a household name. After years of intensive regulatory review and on the eve of final State Department approval of the Canadian border crossing, the administration took the bold political move to further study it. The southern leg was subsequently approved while the Chinese entered preliminary agreements with Canada to buy the Alberta produced oil instead. A Pyrrhic victory at best for environmentalists with an economics lesson that oil is a global commodity that will flow to willing buyers.

Intermittent renewable wind projects once again teeter on the brink of intermittent profitability with the looming loss of the Production Tax Credit. Even if the wind subsidies are eventually reinstated, 2013 looks to be a difficult year for wind promoters because of the uncertain political landscape.

Oddly enough, shortly after nixing leases to explore for oil and gas in the Atlantic Outer Continental Shelf (“OCS”), the administration made plans for an OCS renewable energy lease sale (primarily for offshore wind that is even more expensive than onshore). Talk about a party that no one attends.

It’s not inconceivable that if we fall off the fiscal cliff tomorrow, less federal money flowing to the states in 2013 could prompt state legislators to reconsider all measures impacting their state’s economy. The high cost of renewable energy mandates may well lead some states to some repeal their REM’s.

A DOE sponsored study by independent consultant, NERA Economic Consulting, was released this month. In examining the economic impacts of U.S. exports of liquefied natural gas (“LNG”), it found that some increases in the price of domestic natural gas will occur, but there will be net economic benefits from allowing LNG exports. There are 15 pending applications seeking a license from DOE to export LNG to non-FTA countries. While DOE now has an independent analysis of the impacts, the question remains, “what is this administration’s position on exporting LNG?” Stay tuned.

Internationally, Japan is once again looking to restart its nuclear power generation. All nuclear power generation in Japan was shut down following the Fukushima incident, forcing Japanese utilities to rely primarily on power produced from imported LNG. As expected, the cost of LNG in Japan has skyrocketed forcing the new government to reconsider the nuclear ban. I trust this event is in the risk register of those looking to export LNG from the U.S.

The Chinese were successful in buying into the North American oil and gas industry this year. The Canadian government approved Chinese National Offshore Oil Company’s (“CNOOC”) purchase of Calgary-based petroleum company, Nexen, for $15 Billion. In 2005, CNOOC attempted an $18.5 Billion purchase of Unocal, but political tensions over China-U.S. trade relations ended that deal.

Finally, recent reports indicate the western hemisphere’s most notorious dictator, Venezuela’s Hugo Chavez, is suffering from complications after cancer surgery in Cuba. His condition is described as “delicate.” When Mr. Chavez no longer rules Venezuela, there will be a scramble to control Venezuela’s petroleum resources. The country is estimated to have oil reserves that exceed Saudi Arabia’s. In addition, Venezuela delivers approximately 9 million Bbls of crude oil per day to the U.S. making it our fourth largest crude oil supplier. This situation is definitely a vital strategic interest for the U.S.

While there are numerous other significant events in energy not listed here, this is only a mere blog post. Besides, I’ve finished my eggnog and there’s New Year’s Eve celebrating yet to do.

For those of you who have followed my blog this inaugural year…a big THANK YOU!  To everyone else, I hope you find it worth your time to visit throughout the coming year.

Happy New Year!  May it be a healthy, fulfilling, and prosperous one.

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