Analysis - Morgan Stanley seeks profit in natgas exports where others failed

By Edward McAllister and Anna Louie Sussman

NEW YORK (Reuters) - Morgan Stanley's unorthodox plan to export U.S. compressed natural gas could give the Wall Street bank quick access to emerging Caribbean markets - if it can find a way to ship the fuel in bulk after decades of other failed attempts.

A Morgan Stanley subsidiary in May applied for a license to export CNG from Freeport in Texas, one of the only applications of its kind in the United States. The plan, at an initial cost of $200 million (124 million pounds), is to load pressurized containers up to 40 feet in length filled with CNG onto ships for export.

The potential is clear. Gas compression stations are cheaper, faster to build and face a less stringent regulatory process than multi-billion dollar liquefied natural gas (LNG) plants that use giant refrigerators to chill gas to a liquid for export. CNG from the United States could be cheaper for Caribbean consumers than domestic fuel oil or LNG.

CNG has for decades been used to power garbage trucks and bus fleets in U.S. cities from New York to Los Angeles. Cleaner burning than gasoline and now cheaper thanks to a domestic drilling boom, its use in transport is on the rise in the United States.

But for all CNG's popularity on land, shipping it overseas has proven problematic. The number of containers and ships required to ship meaningful volumes of CNG could make an export project cumbersome and even economically prohibitive in the long term, experts said.

Short-haul CNG transport could make sense in specific circumstances, but for now LNG plants remain more feasible for exporting gas from the United States.

"The cost of avoiding the U.S. regulatory hurdles only make CNG at best a short-term play until some long-term and less- costly solutions are found - a spot market, if you like," said Gordon Pickering, director of energy at Navigant consultants.

PREVIOUS EFFORTS

Columbia Natural Gas of Ohio experimented with CNG shipments in the late 1960s before aborting the programme because it was too expensive.

Since then, private companies like Calgary-based Sea NG Corporation and Houston-based EnerSea Transport have been developing ways to ship CNG by tanker. A number of pilot programs are underway to ship small volumes of CNG.

In June last year, Nova Scotia-based Emera applied for approval to ship CNG in containers from Florida to the Bahamas.

The main problem for Morgan Stanley, and for CNG shipping in general, is the space the fuel takes up. While CNG is one hundred times more compact than natural gas, it is still six times less compact than LNG, limiting its effectiveness as a shipped fuel.

Morgan Stanley, under the name of Wentworth Gas Marketing LLC, has applied to export just 166 million cubic feet of CNG per day, a tiny slice of the 70 billion cubic feet of natural gas produced each day in the United States. Wentworth is a Delaware company that shares a business address with Morgan Stanley Capital Group.

That means filling and loading between 330 and 550 specifically designed containers per day, according to Frank Haeberli, vice president of gas distribution at Hexagon Lincoln, one of the few firms that makes these kind of containers.

While that is possible, compared with LNG it is an arduous process. One tanker of LNG can typically carry about 3 billion cubic feet of natural gas and can be loaded in less than a day.

Potentially thousands of containers costing anywhere between $50,000 and $200,000 each will be needed, said one source familiar with Morgan Stanley's plans. Regular loadings would be required, as would constant supervision.

"Who can handle all those containers of CNG? How are you going to move 200 of these things a day?" said one shipping source said. "I'm a fan of natural gas, but it just doesn't work. If it worked, we'd all be in it."

COST ADVANTAGE?

Even so, nearby Caribbean countries with growing fuel needs have already expressed interest in importing some of the United States' abundant gas reserves as CNG to replace dirty, expensive fuel oil.

Fuel oil at $20 per million British thermal units (mmBtu) is more than five time more expensive that U.S. natural gas whose value has been depressed in recent years by ample supply.

Shipping CNG from the U.S. to the Caribbean could be cheaper than both fuel oil and LNG, analysts said, although the price advantage could be cut by the cost of shipping. Ocean transport of specially designed containers filled with natural gas could cost up to $3,500 per container, one shipping source said.

Morgan Stanley declined to comment on supply deals in the works, but said in its May filing with the U.S. Department of Energy that it is targeting six countries in the Caribbean and Central America. One round trip in the Caribbean could take up to 15 days, one shipping source said.

One advantage for Morgan Stanley over other smaller CNG players, however, is its balance sheet.

"Money is the key," said Pat Malara, owner of Western Cascade, which makes LNG containers for transport on ships from the United States to Hawaii. "The guys with the deepest pockets will be able to do it if they want."

(Reporting By Edward McAllister and Anna Sussman; Editing by Josephine Mason and Alden Bentley)