Substitute Natural Gas Feasibility Study

Abstract

High natural gas prices and domestic energy security concerns have led to a resurgent interest in substitute natural gas (SNG). This technology, which dates back several decades, is currently only utilized in one location in the U.S., though perhaps a dozen more are on the drawing board. This study evaluates the economic climate for plants in the U.S. Major factors of SNG viability such as coal prices, gas prices, and construction costs, are examined to set the stage for the analysis. Current technology and policy is then used to evaluate SNG in the context of recent natural gas prices. Two major viewpoints were considered in this sensitivity analysis – the savings to the end user from locking in the contract price, and the returns to the developer of the plant. In order for an SNG plant to be built, both parties must have a reasonable certainty of economic benefit.

The results indicated a marginal environment for the long-term contracts that are necessary to finance these plants. Consumer savings scenarios changed drastically during the 3-month period of this study. Initial projected savings of over 30% fell to a loss of 9%, far short of the minimum 25% estimated savings required. This was a result of a significant drop in gas prices, and served to illustrate the consumers need for a large discount over spot prices to mitigate their price risk. As far as developers are concerned, an $8 price of gas was determined to be financially marginal, with returns of 8% predicted. Rising plant costs would tend to put upward pressure on this price point, driving even higher minimum selling prices.

In addition, if one adds the consumers need for a 25% discount to the developers minimum price level of $8, it appears that at least $11 gas is required to satisfy both parties. The current climate of $8 gas thus look unfavorable to the development of SNG contracts, with the exception of potential site locations in regions of high gas prices, cheap coal, or more direct access to end users with the increased value capture that entails. While concerns about high gas prices and energy security will not likely go away any time soon, the time is not yet ripe for SNG development.