PGW sees a future in liquefied natural gas

Now that the dust has settled over the failed privatization of Philadelphia Gas Works, the city-owned utility is exploring a new business venture that may take it into uncharted commercial territory.

PGW announced last week that it was accepting nonbinding proposals from buyers of liquefied natural gas, taking aim at potentially lucrative markets for off-system sales of LNG.

The utility produces LNG at its Port Richmond plant, where the fuel is stored and converted back into gas to supply customers on peak winter days. It began selling surplus LNG in 2013 and earned $4 million last year.

PGW wants to double its LNG production capacity to produce fuel for transportation markets - mostly long-haul truckers - and also for use in areas unserved by natural gas pipelines.

"We have a sense there's a very strong market," said Craig White, PGW's chief executive. "The real advantage here is we're ahead of the game. Our facility is already built."

PGW's capital budget for 2016 calls for spending $60 million to double production capacity at Port Richmond. The plant already has sufficient storage capacity in its two 120-foot-high, white-domed tanks on Delaware Avenue.

If buyers' response to PGW's "open season" is strong - the deadline to reply is Friday - it may consider scaling up the budgeted 15 million-cubic-feet-per-day expansion.

"If our market sounding shows us we can develop an even greater market, we may expand that and seek out even greater funding," White said.

The market potential for LNG was a hot topic during last year's contentious debate over the Nutter administration's proposal to sell PGW for $1.86 billion to UIL Holdings Corp. City Council balked at selling the utility, saying PGW was more valuable remaining in public ownership.

Much of the debate concerned whether PGW should seek a private-sector partner for a commercial venture like an LNG expansion. But White says PGW has enough experience to go it alone.

"This is not necessarily something where we want a partner," he said. "We do all aspects of this very well, and we would like to take 100 percent of the margin we generate."

A City Council-commissioned study last year by Concentric Energy Advisors estimated PGW could generate $7.7 million to $10 million in profits from an LNG expansion. That would substantially reduce the $40 million shortfall PGW estimates it will face in 2018, cutting the size of a rate increase.

But Concentric noted that an LNG venture involves risks and that PGW's customers and city government would be responsible if it should fail.

"The LNG market is not price-regulated and thus, PGW would be investing in facilities to support sales in a competitive market, where supply, demand, and price are all impacted by market forces beyond PGW's control," Concentric said.

Robert W. Ballenger, a Community Legal Services lawyer who acts as PGW's public advocate, calls the utility's proposal "interesting" and says he is open to any discussion that would reduce customers' bills.

"What would it mean to PGW's residential customers to have that investment?" he asked. "PGW feels very strongly about it. We're looking at it."

But the recent plunge in oil prices has heightened the uncertainty about emerging LNG markets.

LNG, which is produced by chilling natural gas to minus 260 degrees, competes primarily with diesel fuel in transportation, used by heavy trucks, trains, and ships. IHS, the energy consultant, estimates that LNG will capture 40 percent of the fuel market for long-haul trucking by 2040.

But with diesel prices falling below $3 a gallon, LNG's price is less attractive, and fleet owners are rethinking conversions, said Rafael McDonald, the director of global gas and liquefied natural gas for IHS.

"Basically, the lower oil prices are going to slow adoption for the next four or five years," McDonald said. "Is it going to derail adoption completely? We don't think so."

Another emerging market for LNG - fueling drill rigs and hydraulic-fracturing operations in the Marcellus Shale region - also appears to be poised for a slowdown because of the fall in energy prices.

Range Resources Corp., the biggest Marcellus gas producer, announced Thursday that it will cut its capital spending for 2015 to $870 million, from $1.3 billion. A broader slowdown in Marcellus drilling would radiate throughout the supply chain - including demand for LNG.

John Zuk, PGW's vice president for marketing, said oil prices were expected to recover by the time the utility's expanded LNG plant commences operations in 2017.

"I have not heard of a dampening of interest," he said. "I guess we'll know if we get few bids by the 23d."