Could LNG/CNG be an Attractive Transport Fuel in Romania?
This short article focuses on the business case for this shift, with a preliminary comparative analysis of value-chain fuel costs. The conclusion is that small-scale LNG/CNG as fuel is competitive with diesel prices even if oil prices were to stabilise at a level of $60/bbl.
The case for using natural gas as transport fuel in Romania remains strong, for both fuel users and authorities, despite lower oil prices. However, making the fuel shift from diesel to natural gas requires strong collaboration on infrastructure solutions, as well as financial and fiscal arrangements. Truck and bus fleet owners should take the initiative and engage in dialogue with fuel distributors, vehicle manufacturers, small-scale LNG (liquefied natural gas)/CNG (compressed natural gas) technology suppliers and the relevant authorities.
Romania is an odd exception in the growing European NGV market
Romania is the only European country with a mature gas market and well-developed pipeline infrastructure, which does not have natural gas vehicles. It was not always like this; in the 1980s, due to the oil price crises, both trucks and especially buses in Romania were retrofitted to use natural gas instead of diesel. Bulky gas tanks were placed on top of many buses in plain sight, an affordable and safe solution. However, the driving range was lower compared to diesel buses and people feared the risk of explosions, so after the oil price fell, in the 1990s there was a return to diesel. The high oil price years after 2004 did not trigger a fuel switch back to natural gas. Some car owners shifted to LPG, but nobody seems to remember methane. This is somewhat intriguing, since the global market share for natural gas vehicles is rising and vehicle manufacturers offer a wide range of models running on CNG or LNG.
The absolute leader in using natural gas as transportation fuel in Europe is the Ukraine, with 450,000 trucks and buses, due to historically low gas prices and a large price differential to oil products. Unlike Romania, the Ukraine did not return to diesel buses and trucks in the 1990s. There are about 22 000 trucks and buses and approximately 1.15 million cars using natural gas as fuel in the EU, mainly CNG. This stands for only 0.4% of the vehicle fleet and an estimated natural gas demand of 3.3 billion cubic metres (bcm). About 2% of the vehicle park in Italy and Bulgaria runs on natural gas and there is good re-fuelling infrastructure also in Germany, Sweden, the Netherlands, France, Switzerland and Austria. Of the 3345 re-fuelling stations in the EU, 65 are already supplying LNG and several more are planned. (NGVA Europe, October 2014)
The business case for using natural gas as transport fuel
Currently, the retail LNG price in the Netherlands is about €90/MWh (LNG24.com), while the average retail CNG price in Europe is about €80/MWh (NGVA Europe), roughly equivalent to €0.80/diesel litre equivalent (DLE). This includes all taxes/ duties, including VAT, and is considerably lower than recent diesel prices in Romania at about €130/MWh. Natural gas vehicles are on average 20% more expensive than the equivalent diesel model, but a 30% discount on diesel prices is usually seen as sufficient to make switching to natural gas attractive, when purchasing new vehicles.
Based on this observation, the following analysis models the CNG and LNG retail price in Romania under a range of assumptions, describing three different business case scenarios:
• Case A – Current price trends: Oil prices stable at $60/bbl, wholesale natural gas prices at 24 €/MWh (TTF price level, slightly higher than current Romanian prices). Natural gas used as transport fuel is and remains exempted from paying the excise tax (€9.4/MWh). The market grows slowly, so the costs of compressing/ liquefying the gas, storing and distributing it are rather high.
• Case B – Best case scenario: Oil prices rise back to $120/bbl, low wholesale natural gas prices at €18/MWh (below the current liberalised level in Romania). No excise tax for natural gas as transport fuel. Low specific costs of CNG and LNG, achieved with efficient design and utilisation, the result of effective collaboration.
• Case C – Worst case scenario: Oil prices stable at $60/bbl, high wholesale natural gas prices at €36/MWh (higher than the maximum level of the oil-link contract price in the past years). Using natural gas as transport fuel is subject to the same excise tax as average-sized industrial users. High specific costs of CNG and LNG, due to inefficient logistics in an incipient and slowly developing market, with little collaboration.
As depicted in Figure 1, both scenarios A and B offer a robust incentive to switch from diesel to natural gas. In case A, which may seem most likely today, CNG/LNG would be 38%, respectively 28% cheaper than diesel. More exactly, this scenario assumes a future price of RON4.6/litre for diesel, RON2.8/DLE for CNG and RON3.3/DLE for LNG. This should provide a clear and sufficient incentive for fleet owners to assess the gas option carefully for their new purchases, even as diesel prices are lower than in the last years.
In scenario B, which assumes a rebound in oil prices and low gas prices, the case for natural gas vehicles (NGVs) is even stronger. Assuming efficient use of infrastructure, the discount from switching to natural gas would be a whopping 68%. More exactly, the scenario assumes a price of RON6.4/litre for diesel and RON2.1/DLE for both CNG and LNG. The discount would still be 50-60% even with inefficient use of the CNG/LNG infrastructure. Case B may seem very unrealistic, but is in fact a good depiction of the situation during most of the past six years.
Even in the worst imaginable scenario, case C, the operational cost of CNG/LNG is likely to remain below the cost of running on diesel. However, due to the higher purchasing cost of the vehicles and the burden of scarce re-fuelling infrastructure, the price situation described in case C would advise against investing in NGVs. Of course, every transporter should make their own assessment of the future costs of alternative fuels, to decide in which future they believe most.
Setting up the value chain requires strong collaboration
The “chicken-and-egg” problem of setting up the CNG/ LNG infrastructure is often deterring fleet owners from switching away from diesel. It is difficult to invest in gas filling stations without demand and equally unattractive to purchase vehicles for which there is insufficient re-fuelling infrastructure. However, there are solutions to this dilemma and lessons to learn from developments in most European countries.
The EU wants to see LNG filling stations along all the critical arteries of the TEN-T infrastructure by 2020, including the highways and the Danube in Romania. There is co-financing available for such projects, together with local stakeholders such as city/ port authorities and fleet owners. When the infrastructure is set up to fuel LNG to ships/ barges, it is rather easy to expand and offer the service to trucks and buses in the port area. Moreover, as an LNG filling station is set up nearby a city on a TEN-T highway, the local vehicles fleets in the city are also able to use it.
The situation is in general easier to manage for the operators of captive fleets, such as local delivery trucks and buses, with overnight parking at a fixed location. These should be the first movers to adopt CNG/LNG as fuel, particularly if the parking location is close to the pipeline network. Small-scale compression, liquefaction and storage facilities have small spatial footprint and the prevailing safety regulations in the EU are strict, but manageable. With good collaboration between the authorities, infrastructure players and fleet owners, such investments can be affordable and happen in less than 2 years. A few success stories could play a key role in determining other investors to follow suit.
Given the strong business and energy strategic case for using natural gas as transport fuel in Romania, it is surprising that there is not even a proper public debate on the topic. I hope this short, preliminary analysis will at least generate good discussions between the key stakeholders.