Air Quality — 28 May 2014

28 May 2014. Santiago, Chile.

(The thumbnail photo of a natural gas bus is from Fleets and Fuel.)

Here we draw on conversations with executives in the natural gas business in Chile to explore the natural gas market.

Natural gas is often called the “clean burning fuel.” We will go into the details of what that means in a series of posts, but for today, suffice it to say that natural gas vehicles and natural gas thermoelectric plants emit significantly less particulate material (You can think of that as “soot” or “smog” that is small enough to pass into the lungs.) than those that burn diesel fuel or carbon.

Today, Santiago has declared a “pre-emergency” because of particulate material pollution in parts of the city. It is our view that Chile can greatly improve air quality in Santiago by switching the Transantiago bus fleet and heavy vehicles over to liquid natural gas. Tehran, Iran and Los Angeles are examples of cities with smog problems that already have switched their bus fleet to natural gas to reduce pollution. Tehran has done this for passenger vehicles and trucks as well. It currently has the largest number of natural gas vehicles of any country in the world. Argentina is number two.

Chile is currently writing a new long term plan for improving air quality in Santiago. So we don’t have current data. But the 2010 plan says that buses contribute 8% and heavy vehicles %12 of the PM pollution in the metropolitan region. Together that is 1/5 of the PM air pollution in the city. Changing those vehicles to natural gas will significantly reduce PM pollution.  Soon we will publish an interview with the Ministry of Transportation regarding that.

But if Chile is to use natural gas for heavy vehicles, the country needs a reliable long-term supplier of natural gas, since the country has little or no reserves of their own.

Regarding power plants, energy experts tell us that at current prices, it costs $140 per mhw (megawatt hour) to produce electricity from natural gas and $100 per mhw to produce electricity from coal if one were to build a new plant. So until prices drop, natural gas is too expensive to use to produce electricity, as Chile already has one of the highest prices for electricity in the world.

There are some natural gas thermoelectric power plants in Chile. But those were built when natural gas prices were lower and the power companies were able to obtain long-term contracts for natural gas at a low price.

But the worldwide market for natural gas is changing. In the USA, natural prices have fallen so far, that some drillers are not even bothering to drill for it in locations like Texas, as they are waiting for the price to rise again.  The country literally has no place to store all this gas. The reason for this fall in prices and the surge in supply is a technology called hydraulic fracking.

Fracking has made it inexpensive to tap into natural gas reserves that were previously cost-prohibitive.  Fracking works by pumping sand and chemicals under high pressure up to several thousand meters below the ground to crack open rocks to release the gas there.

It is interesting to note that drillers are now using fracking to drill for natural gas in Pennsylvania, which is where the first oil was discovered in the USA more than 100 years ago. No one has drilled for oil in Pennsylvania in a very long time. The point being that regions which were previously considered exhausted are being drilled again.  Europe is now debating whether to use fracking, especially as they are dependent on Russia for that.

Most of the natural gas obtained from fracking in the USA comes from places like North Dakota.

The USA also is also overflowing with natural gas because of increased production of shale oil. Natural gas is a byproduct of shake oil extraction.

It was only 5 years ago that gas companies in the USA were gearing up to import natural gas to the USA. Now there is so much natural gas that the Americans are building export facilities. But only one facility is under construction so far. It is Cheniere in Louisiana.

Four to five more are in the permitting process. Chilean energy experts say that the USA will begin to export natural gas in 2015 to 2018. That increased supply could drive the global price down, but people in the gas business are not agreed on that.

Chile could have been well-positioned to receive natural gas from the USA, but the market here is not large enough to take advantage of that.

Chile has a free trade agreement with the USA. That means there is no need to obtain an export agreement for American exporters. But Chilean energy experts say that if you add up the demand from all the countries that have a free trade agreement with the USA, their collective demand is not enough to drive producers to focus on that. Instead, those building current LNG (liquid natural gas) export facilities are seeking permits to export to larger countries with which there is no free trade agreement. Obtaining those permits slows down the process.

Unlike oil or coal, transporting natural gas to Chile or anyone else entails special costs. The gas is liquefied in order to be carried in ships to terminals like GNL Chile in Quintero and GNL Mejillones in Mejillones (That is a different company than GNL Chile.). These companies specialize in converting liquid natural gas back to its gaseous form. GNL Chile also is an importer of natural gas. The companies that import natural gas to Chile are E-CL, GNL Chile, ENAP, Metrogas, and ENDESA. Chile has announced that it is building a third LNG terminal.

Currently, natural gas is sold in Asia on the spot market at $15 to $20 mbtu (British Thermal Units). To power a power plant in Chile using diesel fuel on a million-btu (mbtu) basis costs $20-$23. So natural gas is competitive with diesel. But both cost more that coal, which is easy to obtain. Plus the price of natural gas in the USA increases in the winter as it is used to heat homes there.

If one does not have a long-term contract, they buy natural gas on the spot market. The spot market in the USA is referred to as Henry Hub. You can see current prices here.

Here is how to calculate what liquid and gaseous natural gas costs in Chile

Today the Henry Hubb Spot Market price for natural gas is $4-$5 per mbtu. Add to that $1 to transport it to a liquefying facility in the USA. Then add $3-$3.5 to convert the natural gas to liquid by cooling it to −162 ° C. Then add $2 to transport it to Chile by ship. Now the price is $10.5 without adding in any profit margin for anyone in that supply chain.

Experts say you will not find natural gas long term contracts in Chile for less than $12 mbtu. No power company would build a plant based on spot market prices but would require a long-term contract.

Now suppose you want to use this natural gas in its gaseous form. (For heavy vehicles it costs less and is more energy efficient to use it in liquid form [LNG] thus saving $3-$3.5 per mbtu.)

Give the efficiency of the gas conversion process, take the $12 price * 7.5 expansion multiplier = $90 per btu for natural gas.

Chile obviously has two other possible suppliers for natural gas than the world spot market or the USA. This includes Argentina and Peru, both of whom have natural gas. Bolivia has natural gas too. Bolivia currently sells most of its exports to Argentina.


Chileans invested lots of money to build a natural gas pipeline from Argentina to Mejillones in the 1990s. Power plants and others made decisions upon whether to build or not build new facilities that would use natural gas, or that plus coal, based upon a 30 to 40-year window. But after only 5 years or so, Argentina cut off the pipeline in 2006, when domestic demand outstripped supply there. Now Chileans have lost confidence in Argentina.  No company is going to make a long term plan to buy natural gas from Argentina say Chilean energy experts.

Argentina is rich in oil and natural gas, but they are importing lots of liquid natural gas. It could take some years before Argentina is able to use fracking to increase its supply as it calls in international oil companies to help with that.

The country already uses natural gas in its vehicles and has 2.3 million natural gas vehicles on the road.  We wrote about that here.


Peru has a natural gas export facility in Lima. Shell is the largest natural gas producer in Peru. Peru and Chile recently settled their dispute over the maritime border. So can Chile obtain LNG from Peru now?

Experts says relations will Peru improve. Before it was politically impossible that you would have Peruvian LNG coming to Chile or electricity going from Chile to Peru or any exchange of commodities of any kind. The market is now thinking that the relationship will improve. One expert we consulted said he does not know if anyone has had official talks with Peru about buying natural gas there.

So the market for natural gas around the world is changing. The question remains whether prices will fall as hydraulic fracking spreads to Europe, Argentina, and beyond.

In upcoming articles we will look at the price of operating Transantiago buses and heavy trucks in Chile on a LNG versus diesel basis and how much it would reduce vehicle emissions.


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