Assessing PGW's liquid natural gas future

The gritty Port Richmond waterfront - home to tank farms, wharves and many vacant lots - seems an unlikely location for one of city government's most valuable assets.

But the Philadelphia Gas Works' Richmond processing plant, beside a sewage treatment plant and a strip club, is the crown jewel of the city-owned utility, whose future is the subject of a study to be released this week on the feasibility of selling PGW.

The 40-year-old processing plant - itself an ugly duckling of concrete, gravel, and steel - produces liquefied natural gas (LNG), which is stored in two 120-foot-high white-domed tanks on Delaware Avenue. On the coldest winter days, when transcontinental pipelines cannot deliver enough natural gas to meet the city's needs, PGW draws upon the stored LNG fuel to keep its customers warm. The city owns the biggest LNG plant in the East.

Because of population decline and more efficient energy use by PGW customers, the plant is larger than the city now needs - PGW requires less than 60 percent of the storage capacity.

Therein lies an opportunity.

PGW officials say they would like to use the plant to produce and sell LNG, which experts say has a promising future to replace diesel in long-haul trucks. LNG is cleaner than diesel, which is largely refined from imported oil. And because of an abundance of newly discovered natural gas, LNG is also cheaper.

President Obama cast a spotlight on LNG vehicles in January when he visited a fueling station in Las Vegas a few days after singing the praises of natural gas in his State of the Union speech.

"This could be a sizable market opportunity," PGW chief executive officer Craig White said in an interview last week. He said LNG production could generate tens of millions of dollars in additional earnings, which could reduce rates for the utility's 500,000 customers, now the highest in the state.

The prospects for expanding the LNG business may also make the utility more attractive to private buyers, who have expressed an aversion to acquiring PGW because of its aging infrastructure and high social costs associated with a large low-income population.

The LNG plant is likely to loom large in a report scheduled for release this week by Lazard Freres & Co. L.L.C., which was commissioned by the city in 2010 to assess the feasibility of privatizing PGW.

For three decades various consultants have suggested the city would be better off selling PGW, but political leaders have been reluctant to cut the cord because the utility provides some revenue to the cash-strapped city as well as a safety net to low-income customers.

A 2008 study by the Economy League of Philadelphia suggested the city might carve out "certain nonoperating assets" to sell separately to a strategic buyer "with the knowledge and financial wherewithal to better utilize them." The study said the LNG plant was among the utility's assets that "are not crucial to PGW operations and may be more valuable under a different or enhanced use."

PGW's White might argue about the importance of the LNG plant. He said it has saved the company $2 billion in its lifetime, and that if the city sells the plant it would have to guarantee that PGW could continue to draw on its stored fuel to assure uninterrupted service.

Selling the LNG plant alone would take away PGW's option of producing income from the facility, White said. A sale would also generate income for the city, rather than the utility's customers.

"Since the ratepayer is our investor, they would lose the opportunity costs associated with that facility," he said.

Converting natural gas into a liquid is not a simple process. Gas must be purified by removing any water, carbon dioxide, and dust and then condensed into a liquid by refrigerating it to -260 degrees.

The supercooled liquid is stored in the huge tanks, which each hold about 25 million gallons of LNG. Altogether, the city can store the equivalent of about four billion cubic feet of natural gas.

The tanks are essentially giant Thermos containers. They are lined with stainless steel because the LNG would crack other metals at such a low temperature. The walls contain four feet of perlite insulation and 10 feet of steel-reinforced concrete.

Without additional refrigeration in the tanks, some LNG warms up and returns to a gaseous state - it is sent out into the PGW distribution system. Most of the LNG remains in a liquid state until it is drawn off, warmed into vapor and distributed to customers.

About seven years ago, PGW proposed to use the Richmond plant to receive imported LNG by ship, but the plan generated opposition.

Now, with great volumes of natural gas being produced from new formations such as Pennsylvania's Marcellus Shale, some producers are talking about exporting LNG rather than importing it. But PGW's plant is not large enough to produce export quantities, White said. "The scale is not something I see as technologically feasible for us," he said.

But the prospect of producing LNG for motor fuel is alluring.

Unlike compressed natural gas, which is used as motor fuel by millions of motorists in countries such as Argentina and Pakistan, a gallon of LNG contains a large amount of energy, comparable to ethanol.

Natural gas advocates see LNG as a good fit for long-haul truckers and operators of heavy trucks. LNG requires some training to use - if mishandled, it might give new meaning to the term Popsicle Toes.

"You can't spill it on yourself - it's minus 260 degrees," said Richard Kolodziej, president of NGVAmerica, a trade association for natural gas vehicles.

Although an LNG engine can add $70,000 to the price of a long-haul truck, those vehicles drive up to 120,000 miles a year and consume 25,000 gallons of fuel. The lower cost of LNG fuel, along with proposed government clean-fuel subsidies, might make LNG competitive.

If the LNG market takes off, PGW's White said he believed there might be potential to expand PGW's production facilities.

"The folks that are doing this, they want a lot more liquid than we can produce," he said.

"We are now in a position where we can get a market that would really have fundamental change for Philadelphia Gas Works," he said.