Crude Oil and Your LNG Project

Energy Supply

Dec 16, 2014  5

Today's question: Your argument for replacing diesel with LNG was the financial savings. Given the recent drop in the price of crude oil, what does that do to the economics of your LNG project?

Answer: Thanks for your question. It's true that the price of crude oil has dropped, but so has the price of natural gas, by about the same spread. So the fuel savings benefits for the LNG project are virtually unchanged by the latest commodity prices.

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by Sally Wright

I do not understand how YEC can claim that the “spread ” between the price of crude oil and natural gas is the same now as it was when YEC was putting together its economic case for the LNG plant. In mid May 2014 the time when the YUB approved the project with no conditions, the price of oil was $102US / barrel. Now it is below $50US / barrel. The same source (The Markets column in Whitehorse Star) has the price of Natural Gas at $4.10US/mmbtu on May 15, 2014 and now it is $3.90US/mmbtu. Oil has gone down by 50%, Natural Gas has gone down by roughly 25%. This does not take into account the cost for liquefaction, nor the spot price YEC is stuck with when dealing with Fortis, the only supplier of LNG. Now with the recent findings about the Arctic Methane Emergency presented at the UN COP 20 in Lima Peru last month, there is a growing awareness about the dangers of methane to the stability of our climate. Not only is methane a bad choice for backup power, it is an expensive mistake that Yukon ratepayers and taxpayers will be on the hook for generations to come.


by Yukon Energy Corporation

Sally, the barrel price does not translate into the price that Yukon Energy pays for fuel, as there are a number of fixed prices that do not change regardless of the barrel price (things such as transportation, refining, and taxes). Yukon Energy is still paying about $1 a litre for diesel. Based on this, the gap between what we would have to pay for natural gas versus diesel is approximately the same now as it was in 2014.


by Sally Wright

Janet, LNG also has fixed prices that I referred to above. Can you tell me what the spot price for LNG from Fortis is at the moment? The other issue with LNG is that it needs energy to keep it stored in a liquefied state, use it or lose it. That is all very fine this time of year when there are daily peaking needs, but in the hot summer, when the diesels are only used in emergency grid outages, forest fires ect, YEC will need to empty the LNG tanks so they don’t have to keep them cool. Not the greatest option for Emergency Backup. Who pays for the project when we can’t afford to run it? Us. It is time the Yukon divested itself from any further investment in fossil fuels. Whether it is this $42.9 million on the LNG project, or the annual $3 million spent on the Oil and Gas branch of YTG. We need a low carbon future.


by Yukon Energy Corporation

Sally, the current price for LNG has dropped to $3.30 GJ, which is equivalent to 13 cents per litre of diesel.


by Sally Wright

Janet, thank you for the spot price of LNG that Fortis is offering right now. I took the liberty of asking a knowledgeable friend what this actually means and this is what he responded:
“The answer to the question of comparing the cost of diesel generated electricity vs. the cost of gas generated electricity is a bit more complicated than just comparing the cost of gas to refined diesel.  I do not have detailed actual present costs but the following will get you into the ballpark.

If gas now costs $3.30 per GJ that is roughly equivalent to $0.13 per litre of diesel fuel since it takes about 27 litres of diesel to provide 1 GJ of energy.  Simple conversion but not an appropriate comparison.

Oil is presently under $50 US per barrel (159 litres) or about $0.32 per litre. This is a better comparison - energy in oil costs about 2.5 times the cost of energy in gas.

At the time of the LNG hearing oil was about $110 per barrel and gas $5.05 per MMBTU (approx. 1 GJ).  The cost of energy in oil at that time was about 3.7 times the cost of energy in gas.

However, that is not the full comparison of the cost of generating electricity in Yukon. For oil (diesel) you have to add the cost of refining and transport to Yukon, and for gas you have to add the cost for liquefaction and transport to Yukon.  Only with these costs added in can you make a valid comparison of the cost of generating electricity in Yukon.

At the time of the LNG project hearing oil was running at about $110 per barrel ($0.69 per litre) and the delivered cost of diesel was running at about $1.19 per litre. So the cost of refining & transport to Whitehorse was then running at about $0.50 per litre. The refining and transport cost was 45.5% of the delivered cost.

If we add $0.50 per litre to the present cost of oil ($0.32 per litre) the delivered cost of diesel in Whitehorse should be about $0.82 per litre.  New diesel generators produce 4 kWh of electricity per litre, so the fuel cost would be about $0.205 per kWh.  Of this the refining and delivery would be about $0.125 per kWh.

At the time of the hearing the cost of gas at Fortis Tilbury was $5.05 per MMbtu (close to 1 GJ) the liquefaction cost was $4.80 per MMbtu, and the transport by A-train to Whitehorse was estimated at $6.59 per MMbtu. Transport by Tridem transport was $1.85 per MMbtu higher.  So the cost to liquefy the gas and get it to Whitehorse was $11.39 per MMbtu with A-trains and $13.14 per MMbtu with Tridem transport. The liquefaction and transport cost was about 69% (A-train) or 72% (Tridem) of the delivered cost of gas.

The final cost per kWh for fuel (gas) was $0.140 per kWh with A-train transport and $0.156 per kWh with Tridem transport. If the cost of raw gas is now $3.30 per MMbtu rather than $5.05 per MMbtu the fuel cost per kWh would now be $0.125 per kWh with A-trains and $0.141 per kWh with Tridem.  The liquefaction and transport costs range from $0.114 to $0.131 per kWh (roughly the same as diesel.

The cost advantage of gas over diesel is now smaller than it was at the time of the hearing because the cost of oil has declined a much greater percentage than the decline in the cost of gas.

At the time of the hearing the cost of gas was $0.09 to $0.11 per kWh cheaper than diesel.  This has now shrunk to about $0.06 to $0.08 per kWh. “

I think we can both agree Janet, that the price benefit of LNG is not that clear cut and the language is beyond the comprehension of most people. That said, I do believe the massive unprecedented collapse of the price oil has affected the economics of this project. At the very least, a longer payback time.