Part 1: Explaining PGW’s LNG Proposal
On September 20, 2018, Philadelphia Gas Works (PGW) submitted a petition to the Philadelphia Gas Commission for approval to move forward with plans to expand liquefied natural gas operations at its Passyunk LNG storage facility, via a public-private partnership with Liberty Energy Trust.
In an effort to benefit its ratepayers, PGW has been exploring optimization of its LNG assets through a public-private partnership for several years. I developed a report back in 2016 to help the public and policymakers understand and evaluate PGW’s LNG expansion efforts.
This short blog will explain PGW’s recent petition, while a second blog details key considerations for evaluating the proposal.
New Facilities: The new venture, called the Passyunk Energy Center LLC (PEC), would finance, design, and construct a new gas pretreatment and liquefier with ≥ 120,000 gallons of LNG per day capacity (about 10 million standard cubic feet per day, or MMcfd), plus other equipment needed to expand the Passyunk LNG plant to serve new customers. The Passyunk plant currently includes a 250 MMcf capacity LNG storage tank and two LNG vaporizers (i.e. converts LNG to natural gas) rated at 45 MMcfd each.
The new investments would enable on-site liquefaction (i.e. convert natural gas to LNG), eliminating the need for LNG manufactured at PGW’s Port Richmond plant to be transported via truck to Passyunk for storage. Liberty Energy Trust recently established a partnership with Northstar Industries, a firm specializing in natural gas and LNG infrastructure construction that has developed projects similar to PEC.
The Cost: The new facilities would require a $60 million investment from Liberty Energy Trust (capitalized in part by Permit Capital Advisors, and using no more than $30 million in debt). PGW would approve of the design plans for the new facilities, but would not be required to contribute financially. PGW would pay a $10 per year rental fee to PEC, and could purchase the new facilities from PEC for $1 at the end of the 25-year contract term. PEC would provide PGW with a 3-year warranty for the new facilities, plus would pay for capital replacements and spare parts during the 25-year term. PGW would be responsible for maintenance and repairs of the new facilities, with PEC covering fixed (estimated at $1.1 million annually) and variable (estimated at $3.5 million) incremental costs.
PGW Services to PEC: PGW commits to operate the expanded Passyunk LNG facilities over a 25-year term, providing certain services to PEC. These services include providing PEC with firm liquefaction, storage, loading/unloading, and vaporizing service, plus interruptible on-system transportation service. PEC will be required to buy natural gas and pay pipeline shipping cost to deliver that gas to Passyunk. Once PEC’s gas arrives at Passyunk, it takes priority to process and store an estimated 2.75 billion cubic feet (Bcf) of LNG per year (10 MMcfd of gas processed over 275 days of operation, leaving 100 days of down time for maintenance).
PEC would have the right to request 44 MMcfd in “exchange services” from PGW during the peak gas season (November through April), where PEC’s LNG stored at Passyunk could be vaporized and injected into PGW’s system, and in exchange PGW would deliver flowing gas to PEC’s customer via PGW’s interstate pipeline capacity. PEC can request up to another 44 MMcfd of exchange service in peak periods, subject to PGW’s system send out capability. PEC would also be permitted to store up to 195 MMcfd of LNG at PGW’s Richmond LNG facility, and request “exchange service” during the peak season, subject to a cap. PEC would also have a call option to 195 MMcfd of PGW’s LNG from Richmond during the peak season, subject to a cap. However, in addition to the caps, these services are limited by the availability of liquefied LNG in Passyunk’s tank (250 MMcf), plus an equivalent amount stored in the Richmond facility.
PEC would be able to withdrawal it’s LNG from Passyunk for truck based delivery year round.
PGW doesn’t anticipate needing to access LNG at Passyunk, beyond the call option included in the agreements that gives the company the right to 44 MMcfd of PEC’s LNG during the peak season, subject to a 250 MMcf cap.
The Benefits: PGW would earn guaranteed revenue of no less than $1.35 million per year (based on 2.25 Bcf of take-or-pay volume) for providing the various LNG services to PEC. This fee could be greater, based on the throughput volume of LNG utilized by PEC, with services for intra-city on-system transport, liquefaction/storage, extended storage, standalone storage, vaporization, truck loading, and truck unloading each priced separately (at $0.20 per dekatherm). In addition, PGW would be eligible for 50%/50% profit sharing, after PEC pays for all costs (including payments to PGW for services, and incremental costs). Since PGW is a municipally-owned utility, revenues generated from the project could go towards distribution system maintenance or deferral of rate increases for customers.
Next Steps: The Gas Commission accepted public comments on the petition through November 28. The Gas Commission’s hearing examiners will make a recommendation to the commission, who is expected to vote on the matter as early as December 4th. The issue will then go to City Council, expected to review the matter in early 2019. The PA Public Utility Commission will also likely need to be involved (e.g. to establish rates in PGW’s tariff).
Check out my next blog which includes more detailed insights into the project.