Friday, April 26, 2013

Engineering Carbon Out of Energy

  • Because of the slow progress in displacing fossil fuels with renewables, carbon capture and sequestration should receive much more attention as a game-changing technology.
  • The challenges that must be overcome for CCS to be deployed on a large scale remain significant.

Yesterday I ran across an excellent article in The Atlantic on the importance of carbon capture and sequestration (CCS).  In light of last week's warning from the International Energy Agency that efforts to reduce the carbon intensity of global energy have yielded minimal results over the last two decades, the authors' chosen title, "Learning to Live with Fossil Fuels", seems particularly apt. Although neither they nor the IEA are suggesting we abandon renewable energy, they do effectively question the conventional wisdom that climate change can only be addressed by abandoning coal, oil and natural gas within the next decade or two. 

I'm predisposed to their argument, because it aligns with my own view--the result of long and careful analysis--that the transition to a low-carbon economy is going to take a lot longer than optimists hope.  A speaker at yesterday's policy briefing on renewable energy from the Worldwatch Institute and REN21, marking the annual release of the latter group's always-useful Renewables Global Status Report, stated that long-term energy scenarios in which renewables don't significantly increase their market penetration are no longer credible, and that only scenarios including medium-to-high penetration rates by mid-century are credible today.  I had to wonder whether he had been looking at the same data as the IEA, even though he cited their "2DS" scenario in support of his view.  Sarewitz and Pielke, Jr. appear to take quite the opposite view in The Atlantic: We cannot ignore the potential of CCS, because it is not self-evident that renewables will sweep away carbon-based energy any time soon, for reasons of economics, politics, and "complex social arrangements." 

In their brief article, they do a good job of summing up the major options for capturing CO2, including some of the major challenges to be overcome, as well as how the captured CO2 might be used or disposed.  Underground storage, enhanced oil recovery, and conversion back into fuels are all technically feasible, despite significant obstacles of public acceptance, logistics, and cost. However, I believe they seriously underestimate the challenges of capturing CO2 from the air, instead of power plant smoke stacks. 

The desirability of doing so is clear; the atmosphere is everywhere, convenient to whatever use to which me might put the captured CO2, while power plants aren't always located near the oil fields, saline aquifers, or fuel markets that offer the best potential for storage or reuse. The problem is that, while 397 parts per million (ppm) of CO2 in the air is high enough to cause great concerns about global warming, it is still quite low in engineering terms.  Expressing it as a percentage it's 0.04%, or about 1/1000th the typical concentration of CO2 in flue gas.

Before writing this post I literally dusted off one of my old chemical engineering texts to look up the equations of mass transfer.  I was reminded that the flux, or flow, of molecules from one fluid into another--from air into the capture medium, for example--is proportional to the difference in their concentration in the two fluids.  What that means in practical terms is that extracting the same quantity of CO2 from the air as from flue gas will entail larger and more complex hardware, more energy, and probably a much higher cost per ton, barring a breakthrough that emulates green plants, which use chlorophyll, sunlight, water and nutrients to do this cheaply on a vast scale every second of the day during the growing season.

In any case, have a look at the article and give some thought to how CCS might, as the authors suggest, "transform the political debate" around mitigating climate change.

Monday, April 22, 2013

Will Water Limit Fracking in Arabia?

  • Poor water availability could hamper efforts to develop Saudi Arabia's shale gas resources, in order to meet growing gas demand from Saudi industry.
  • Water recycling and alternative fracking fluids could provide the solution.  

Recent comments by Saudi Arabia's oil minister, Ali Al-Naimi, indicated that Saudi Aramco would soon begin exploring the country's shale gas resources. As another means of reducing oil consumption in the Kingdom's electricity sector, in order to preserve oil exports, this appears to make both practical and economic sense. However, as noted by the Wall St. Journal, compared to the US Saudi Arabia has much less water available for the hydraulic fracturing of shale and tight gas reservoirs. Absent a reallocation of its substantial conventional gas production, Saudi shale gas could become a key factor in global energy security. However, the techniques employed to extract it might be different from those that currently dominate the US shale gas scene.

It must seem odd that Saudi Arabia would even be interested in shale gas, a resource that wasn't exploited in the US until conventional gas production was declining steadily. Saudi Arabia might still be the world's largest oil producer, at least for now, but it is not the "Saudi Arabia of natural gas". Although the country has proved gas reserves comparable to those of the US, it apparently didn't win nature's gas lottery on the Arabian Peninsula. Saudi gas reserves and production amount to only about 10% and 19%, respectively, of the Middle East's gas totals. Iran and Qatar are far ahead. And while Saudi gas production has doubled since 2000, output in neighboring Qatar has expanded by a factor of six in the same interval.

Much of the Kingdom's conventional gas reserves are associated with oil production and are often required to be reinjected to maintain reservoir pressure and oil output. Available Saudi gas has been preferentially allocated to industrial projects, such as petrochemicals expansion. As a result, little new gas was supplied for power generation, so the Saudi electricity sector has been burning large and increasing quantities of oil that could otherwise be exported. The need for additional gas has become acute, but exploration in the vast Empty Quarter has not yielded the expected gas bonanza, while the internal price of natural gas has been constrained at levels well below even recent low US natural gas prices--too low to make most new production attractive on its own merits.

As if the economics of shale gas development weren't challenging enough in such an environment, the key ingredient that has fueled the US shale revolution, water, is in short supply in Saudi Arabia. The needs of cities and industry in this arid country exceed the water supply from aquifers to such an extent as to require 27 desalination facilities, delivering nearly 300 billion gallons annually. At several million gallons of water per hydraulically fractured shale gas well, the logic of burning oil to desalinate water to produce gas looks questionable. Fortunately, there are multiple emerging pathways for reducing or eliminating net water consumption in "fracking".

For starters, many US producers now routinely recycle the 10-30% of injected water that typically flows back from the well after hydraulic fracturing, for use in subsequent wells. Recycling has become the standard in places like Pennsylvania's portion of the Marcellus shale, reducing the call on fresh water for fracking. The oil services industry offers various techniques for cleaning "flowback" water, and new ones are under development, including the use of algae.

Drillers can further reduce freshwater consumption through the use of nitrogen in foam or other forms. ERDA, a precursor of the US Department of Energy, conducted research on that technique in the 1970s, and it has been refined since then. Nitrogen is readily available from air separation plants and does not depend on water, though it does require energy.

Another approach for waterless fracking has been field-tested in Canada, using gelled propane. A blog post in Scientific American described some of the pros and cons of this method, which is more expensive where water is cheap but might fit the bill in dry regions where LPG is readily available. For that matter, it might make sense in New Mexico if the Mancos Shale of the San Juan Basin turns out to be another viable tight oil play.

The upshot is that a shortage of fresh water shouldn't constitute an insurmountable obstacle to exploiting Saudi Arabia's unconventional gas resources, which Mr. Al-Naimi cited at 600 trillion cubic feet. However, it remains to be seen whether shale gas development is the best answer to a problem that has been created by selling natural gas to industry for as little as $0.75 per million BTUs, while burning $100 oil ($17 per million BTU) to generate electricity. Whether the ultimate solution is shale gas or something else, resolving this gap in Saudi industrial policy could have a significant impact on future oil prices.

A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation.  

Wednesday, April 17, 2013

How Will Oil's Current Slide Affect Gasoline Prices?

  • How far could crude oil prices fall, and what does it mean for US pump prices this summer?
  • The broad trends behind oil's current weakness could persist for some time. 

We all carry assumptions around with us.  For many who follow energy one such assumption is that oil prices, and thus gasoline prices, generally rise over time.  In an otherwise fairly well-reasoned blog post I read yesterday, that logic underpinned the case for electric vehicles (EVs) becoming more attractive to consumers.  Yet if we review the history of oil prices, it becomes clear that they don't only rise.  Just recently, the price of Brent crude oil, the current world benchmark, has declined roughly 11% since the start of April, prompting speculation about where it's headed from here and what that might mean for motorists.  It's worth stepping back from the day-to-day volatility of the market to consider what's behind this drop, as well as how OPEC might respond if the recent trend continues.

Start with the fundamentals of demand and supply.  Demand in the developed world remains weak. Despite modest GDP growth in 2012, US oil demand fell by 2% last year and is now 11% below its 2005 high.  This year, the unemployment rate is down a bit, but economists see signs of another  "spring swoon." The outlook seems no better in the other big economies, including China, prompting the International Energy Agency last week to cut its estimate of annual oil demand growth to just below 800,000 barrels (bbl) per day, with the US government cutting its estimate even further.  Meanwhile, many refineries are either undergoing maintenance or about to, reducing the most direct element of demand, at least temporarily. 

On the supply side, US production growth remains the big story.  US crude oil output is currently 7 million bbl/day, up nearly a million bbl/day in just the last year, and projected to average at least 300,000 bbl/day more than that for 2013. Overall, the IEA anticipates non-OPEC oil supply to increase by 1.1 million bbl/day this year.  Whenever non-OPEC growth exceeds the growth of demand, while inventories and spare production capacity are adequate, that puts pressure on OPEC and oil prices tend to weaken.  North Korea, Iran and a few other hot spots provide ample geopolitical risk, but the market has already absorbed the loss of about half of Iran's exports due to sanctions, while some other problem areas, such as Sudan/South Sudan, are being resolved. 

Taking all this into account, the market seems to have concluded prices were too high.  This is the other face of speculation that is never subjected to Congressional investigations.  Yet it also seems premature to assume this is the start of a major move downward, or an imminent oil price collapse.  Nick Butler of the Financial Times suggested that normal economics would take us to around $70/bbl, though I think he underestimates OPEC's cohesion and their willingness to absorb pain to defend a crucial price threshold.  Their experience in 2008-9 provides a vivid recent reminder that selling 10% less oil at something close to the current price is a much better deal for them than selling all the oil they can at $35/bbl.

It's also not clear how quickly a sharp drop in prices would undermine the output of the Bakken, Eagle Ford and other big US shale oil plays. These reservoirs require more intensive drilling than conventional oil fields, and many of the drilling rigs in use there were redeployed from gas-rich opportunities after the US price of natural gas slid sharply in the last several years.  It also seems that some of the weakness in Brent is specific to its market. West Texas Intermediate (WTI) crude hasn't dropped as quickly, thus narrowing the gap between the two from $20/bbl as recently as February to about $11 today.  So those parts of the US where refiners still import significant quantities of foreign crude pegged to Brent, such as the east coast, might see more gasoline price relief than those where abundant supplies of cheaper, WTI-related crude have kept pump prices lower.

And that's what it boils down to for most Americans, who don't burn crude oil or invest in oil futures.  The Energy Information Administration (EIA) of the US Department of Energy recently issued its Summer Fuels Outlook, projecting that US gasoline prices would average $3.63 per gallon for the April-September "driving season", down from $3.69 last year and up just slightly from last week's $3.61/gal. However, that forecast was based on a July Brent crude price of $107/bbl.  Crude oil makes up around two-thirds of the retail cost of a gallon of gasoline in the US, where fuel taxes are relatively low compared to other developed economies. If Brent merely held where it is today we could see summer gasoline prices below $3.50/gal. for the first time in several years.

Longer-term, oil and gasoline prices remain as unpredictable as ever.  However, the trends combining to produce today's weaker prices could well have staying power.  It's still relatively early days in the US shale, or "tight oil" upsurge, with more growth expected, and new-car fuel economy continues to improve.  Those factors support the trend of falling US oil imports, which will take pressure off global markets, no matter what happens to demand in Asia.  At least until we see a different configuration of factors the argument for suspending our assumption of steadily rising future oil and motor fuel prices looks pretty robust.  That suggests that the case for EVs and alternative fuels must be made on the basis of other factors and, if anything, be prepared to weather another period of lower fuel prices should oil continue to weaken.

Thursday, April 11, 2013

The White House 2014 Budget Energy Proposals: Stuck in A Timewarp

  • The President's budget proposal would increase taxes on energy in ways that would harm US competitiveness and consumers.
  • Presenting the Energy Security Trust as a zero-sum game undermines its potential effectiveness and bi-partisan appeal.

After spending some time going through the White House's proposed budget for 2014-23, several conclusions were inescapable.  First, this administration still hasn't thought through the implications of the energy revolution that's currently unfolding in the US, as a result of the technology to develop our enormous shale oil and gas resources, which grew even larger this week. Not satisfied to see tax revenues and royalties from oil and gas expand as production grows, they miss no opportunity to seek to slice more from the current pie. This failure of imagination extends to the proposed Energy Security Trust Fund, which sounded intriguing when President Obama mentioned it in this year's State of the Union speech, but now appears to be mainly an accounting gimmick based on a zero-sum mentality.  Meanwhile, the budget's proposals for renewable energy and advanced technology vehicles seem largely divorced from our experience of the last several years.

Let's start with the tax changes and quickly dismiss them, because they're mostly a rehash of provisions in the administration's last four budgets and stand no better chance of Congressional approval this side of comprehensive tax reform.  Once again, we see proposals to eliminate about $4 B per year worth of tax treatment for the oil and gas industry, including provisions like the Section 199 deduction enjoyed by all US manufacturers.  Now add proposed changes in the treatment of foreign taxes, which would subject this highly international industry to double taxation on its activities outside the US, under the misappropriated label of "reform."  (True reform would move toward the territorial system used by most advanced economies.) Finally, the President's budget would eliminate both the widely used last-in, first-out (LIFO) and lower-of-cost-or-market (LCM) methods of cost accounting for inventories.  I don't know how much of the $87 B of higher revenue over ten years ascribed to that shift would come from the oil and gas industry, but it would certainly be in the billions, if this weren't all dead on arrival.

That brings me to the Energy Security Trust Fund, described in the State of the Union as a way to employ revenue from oil and gas development to fund R&D on reducing our dependence on oil.  That looked clever, if applied to incremental resource opportunities.  More production would fund more research, in an almost virtuous cycle.  Yet that's not how the idea would be implemented in this budget.  Instead of opening up new areas for drilling, and earmarking the royalties that would generate, the $2 B for the Trust would come mainly from diverting royalties from leases already in the budget, and from further "reform": higher royalties on US production and higher rentals and shorter lease terms to provide "incentives to diligently develop leases."  The latter echoes the "idle leases" canard we've heard since 2008, reflecting a continued misunderstanding of how the industry actually works, along with the real-world factors that often impede faster lease development, such as permitting delays and lawsuits.

So at least this part of the President's "all of the above" energy agenda is reduced to measures that, rather than "encouraging responsible domestic energy production", would make the US a much less attractive place to invest in developing oil and gas resources, and likely reverse our recent successes.  Yet if the new budget treats conventional energy as a slush fund to be raided, renewables and efficiency are treated to what would amount to a reprise of the 2009 stimulus.  I tallied $39.8 B through 2023 for programs such as alternative fuel vehicles, advanced technology vehicle manufacturing, advanced energy equipment manufacturing, bioenergy crop assistance, home energy efficiency retrofit credits, efficient buildings, and the Energy Security Trust Fund.  44% of the total would go to a single measure: making the production tax credit (PTC) for wind and other renewable energy permanent, instead of phasing it out, as even the American Wind Energy Association has suggested.  That's a bad idea for two reasons. 

First, it ignores a growing body of analysis pointing to the need for significant innovation in wind, solar and other renewable energy technologies, rather than continuing to pay project developers indefinitely to deploy the current technologies.  It also exposes a basic logical flaw in the argument for more subsidies: Renewables cannot simultaneously be approaching the point of becoming competitive with conventional energy, as they must if they are to capture significant shares of the energy market--wind accounted for 3.5% of US net electricity generation last year, and solar just 0.1%--while still needing permanent subsidies at rates orders of magnitude higher, on an energy-equivalent basis, than the tax breaks for oil & gas that the administration seeks to end.

After four years in office, it's reasonable to expect an administration to have learned what works and what doesn't. The President and his officials seldom miss an opportunity to brag about the enviable record of oil and gas production growth that has occurred since 2008, yet continue to propose and enact policies that, had they been in place in the previous decade--when the seeds of this growth were actually planted in an environment of rapidly rising energy prices--might well have nipped that growth in the bud. Nor do they seem to have learned much from the track record of business failures that has dogged their efforts in the renewable energy and advanced vehicles space--a record that extends well beyond the over-used example of Solyndra.  Taxing oil and gas much harder won't lead to more US production, nor will handing investors additional billions in taxpayer funds make renewables and electric vehicles competitive, without significant further improvements in the technologies.

Monday, April 08, 2013

Crude Oil Rides the Rails

Last month's publication of the State Department's latest environmental impact report on the Keystone XL pipeline project has sparked great interest in the logistics of shipping crude oil by rail. As described in a long article in the Washington Post, the availability of a rail option for oil sands crude could prove to be a crucial element in determining whether the pending decision to permit the pipeline to cross the US border would actually affect Canada's oil sands output, and thus its greenhouse gas emissions. As the article makes clear, however, oil's rail trend is already well underway , thanks to the surge of "tight oil" production from shale formations. Moving crude oil by train is experiencing a "Back to the Future" moment.

Oil shipments in rail cars are nothing new; the practice dates back to the earliest days of the oil industry. In fact, control of key railroad routes for oil and petroleum products was an important aspect of the US government's anti-trust case against the original Standard Oil a century ago. My first exposure to crude-by-rail was in the 1980s, when significant quantities of heavy crude from California's San Joaquin valley were routinely transported to Los Angeles refineries by dedicated "unit trains", because there wasn't sufficient pipeline capacity available.

The same dynamic applies today, with the rapid expansion of tight oil production in North Dakota's Bakken fields quickly outstripping the capacity of the state's few existing pipelines to transport the oil to market. A tank car loading rack requires much less time and money to build than a new pipeline or pipeline expansion. US railroads are also eager for the traffic, since coal deliveries, which accounted for 45% of US rail traffic in 2011, fell by nearly 11% last year as natural gas eroded coal's share of power generation. Meanwhile oil shipments by rail grew by 46% in 2012.

Precise data on just how much crude oil is currently moving by rail are hard to find. The American Association of Railroads doesn't differentiate between crude oil and refined petroleum products, which until recently accounted for most oil-related rail shipments. The US Energy Information Agency (EIA) reported last summer that crude oil had grown to roughly 30% of total petroleum rail deliveries, which would equate to around 300,000 barrels per day (bpd) on average for 2012. Yet EIA's analysis of recent trends suggested that crude-by-rail increased by nearly 250,000 bpd last year alone. The CEO of the Burlington Northern Santa Fe recently indicated that his railroad's total oil-related shipments alone could expand to around 1 million bpd, roughly double today's level.

It would be easy to conclude that all this growth reflects a temporary expedient, until North American pipeline capacity can be expanded and realigned to match rising output and the reversal of long-standing import trends. That view is clearly not shared by oil companies and traders who are lining up to purchase or lease new tank cars for this service. Perhaps that's because rail provides a degree of flexibility that would be nearly impossible to match by pipeline. For example, it creates an opportunity to supply domestic crude to East Coast refineries like Delta Airlines' Trainer, Pennsylvania facility, which had previously become uneconomical to operate on a diet of imported crude cargoes. Similarly, even if a pipeline from North Dakota to the San Francisco Bay Area could be justified economically, it would likely never receive the necessary permits. Yet Valero's Benicia refinery might soon receive up to 70,000 barrels per day of Bakken crude by rail.

Railroads are also surprisingly efficient. At an industry average of 480 ton-miles per gallon, my analysis indicates that shipping a barrel of crude from North Dakota to a refinery in either Houston or Philadelphia consumes a quantity of diesel fuel equivalent to just 1% of the energy content of the oil, while adding slightly over 1% to the typical well-to-wheels emissions for gasoline refined from it. That's higher than for pipelines, but not by enough to render the option unattractive.

Pipelines remain the preferred option for moving high volumes of oil safely over long distances and, when capacity exists, are usually cheaper for shippers. However, rapidly shifting sources of production and the high capital costs of new pipelines, combined with an increasingly challenging regulatory environment, could provide a durable opportunity for oil-by-rail, just as it has for moving petroleum products and ethanol by train

A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation.

Tuesday, April 02, 2013

Two Energy Revolutions Vie across the Atlantic

A front-page article in today's Washington Post reported on the trend of energy-related investments in the US by European companies.  This is another aspect of the competing energy revolutions I mentioned a few weeks ago, in my comments on President Obama's State of the Union speech.  Germany's 2000 Renewable Energy Law introduced feed-in tariffs for wind and solar power that have made that country a global leader in green energy implementation, yet it has also become increasingly apparent that this carefully planned transformation paid insufficient attention to the cost of the new energy sources it was embedding at the heart of the German economy.  The Post describes how leading German firms are looking across the Atlantic to invest where energy is cheaper, thanks to the unplanned, largely unanticipated extraction of hydrocarbons from shale. 

The Ludwigshafen, Germany dateline of the article caught my eye immediately.  Having just returned from a family trip to California with a packet of letters I wrote to my parents during a temporary work assignment in Germany in the early 1980s, I had only yesterday re-read the account of my visit to BASF's sprawling petrochemicals complex there.  I recall being greatly impressed by the site, which dwarfed the Los Angeles refinery at which I worked at the time. The BASF facility was part of the post-war boom--the Wirtschaftswunder--that made Germany the economic and industrial center of Europe, where it remains today two decades after reunification and a decade after relinquishing its cherished Deutchmark for the Euro.  Now the company apparently wonders whether Ludwigshafen can remain competitive in a global market dominated by US shale gas.

The divergence of energy prices that worries German industrialists is the result of conscious choices made by that country's government and a set of developments that occurred here largely out of sight of the US government, while its attention was focused elsewhere. In the same decade in which production from shale gas deposits in Arkansas, Louisiana, Oklahoma, Pennsylvania and Texas--output that now sets the price of both gas and electricity in much of the US--was gathering momentum, the German government was negotiating for more imported natural gas from Russia, via a pipeline built by a company led by a former German Chancellor.  It also set up a mechanism for consumers of electricity to fund the payment of up to $0.70 per kilowatt-hour that was necessary to support the initial solar power installations in one of the world's least sunny countries.

German solar tariffs have declined significantly since then, thanks in part to ruinous competition with China-based solar manufacturers.  However, in the aftermath of the nuclear accident at Fukushima, the German government agreed to retire the country's nuclear power plants, which supplied 22% of its electricity in  2010.  New solar might soon be cheaper than new nuclear capacity, but there aren't many energy sources cheaper than an existing, fully-depreciated nuclear reactor, even after allowing for waste disposal and site cleanup.  As a consequence of these policies, German managers such as those at BASF face natural gas prices that are a multiple of those here, along with the prospect of steadily rising electricity rates.  The option to offshore production must seem as obvious for them as it did for US companies in 2005, when US natural gas prices reached $10 per million BTUs.

Of course this comparison is just a snapshot in time; the competition between these two energy revolutions will likely ebb and flow for years.  However, the current energy divergence between Germany and the US should remind us that the cost of energy remains a very important economic parameter, even in highly developed countries.  Measures that inevitably raise it are very likely to bring adverse consequences, no matter how well-intended or carefully justified they might seem.  That's worth considering here, as well, when Congress debates new energy taxes and the administration proposes new rules that could raise energy costs or constrain output.