Electric Cars and Natural Gas

Two items in the weekend Wall St. Journal caught my attention. The first concerned the mileage ratings of electric vehicles, with the EPA apparently reconsidering its initial methodology with an eye to making it better reflect reality. The second reported on a meeting of natural gas exporting nations, which seem to be backing away from notions of OPEC-style gas output cuts. While these stories appear entirely unrelated, at least in any cause-and-effect sense, they intersect in interesting ways. That's because natural gas has largely replaced fuel oil as the link between electricity markets and the world of hydrocarbons, while becoming a viable alternative vehicle fuel in its own right. Any shift away from oil-based transportation fuels toward either electric- or natural-gas-powered vehicles could be hindered, if gas prices started to behave like oil prices.

As the article on EV fuel economy reminds us, GM and Nissan made headlines last year with eye-popping mpg estimates for their Volt and Leaf electric vehicles, respectively. However, as I noted at the time, it is simply not realistic to apply a theoretical energy conversion equating the energy in a kilowatt-hour of electricity to the BTUs delivered by a gallon of gasoline without taking into account the means by which it was generated. According to the Journal, Nissan's 367 mpg claim was based on a calculation using 82 kWh/gal. That implies that it takes just 1,414 BTUs to generate each kWh of electricity used by the Leaf. Physics tells us that isn't possible, with 3,412 BTU/kWh as the theoretical minimum and real-world values much higher. Perhaps the earlier methodology reflected assumptions about the fraction of the time the Leaf might be expected to recharge on surplus wind or solar power, for which no fossil fuels are consumed. At this point any such assumptions look premature, at best.

Several years ago, the Pacific Northwest National Laboratory evaluated US power generating capacity to determine the level of EV market penetration that could be accommodated without building more power plants. Their conclusion that 84% of the cars on the road could be electrified without exceeding the capacity of existing power plants surprised a lot of people, and it has been cited many times since--usually without attribution--as evidence that EVs are a practical alternative to imported oil. The aspect of the study's findings that often gets ignored is that the unused capacity available to power EVs came mainly from gas turbines that are used to meet peak power demand and back up the intermittent output of renewables such as wind and solar power, and are thus idle for many hours a day. Yet while wind and solar have both grown substantially since the 2006 PNNL study, their contribution to actual US net generation has still only increased from 0.6% to 1.8% of the total--not enough to alter the conclusion that for the time being any incremental power consumed by EVs will come mainly from natural gas and other fossil fuels.

In that light, realistic fuel economy estimates for EVs must incorporate reasonable estimates of the amount of gas needed to generate each kWh used. Depending on the applicable gas turbine configuration, which would vary by time-of-day and market, that could range from 7,000 to 12,000 BTUs or more. Even if we used a conservative figure of 8,000 BTU/kWh, that means that the amount of natural gas equivalent to one gallon of gasoline (carrying 116,000 BTUs) would generate at most 14.5 kWh of power. If the previous 367 mpg estimate for the Leaf was truly based on an assumption of 82 kWh/gal., then its effective fuel economy might actually be no higher than about 65 mpg. That's still impressive, and it would save a lot of oil, but does it represent enough of an improvement over a Prius-type hybrid--or compared to the Chevrolet Volt, which the Journal cites as getting 50 mpg on its range-extending generator after the initial battery charge has been depleted--to justify the lifestyle constraints of a 100-mile range and recharging times measured in hours? More fundamentally, is this even the best use of the natural gas involved, compared with backing out coal-fired power generation and its high CO2 emissions, or using the gas directly as a vehicle fuel, particularly for trucks and delivery vehicles, as proposed by Mr. Pickens?

While the answer to the latter question is neither trivial nor obvious, all of these options hinge on natural gas being both plentiful and cheap, especially relative to crude oil. You've heard a lot about the impact of the shale gas revolution on gas supply and pricing in North America. Because the US now needs less imported gas to meet demand, and because domestic gas looks plentiful for decades to come, commodity gas on the Gulf Coast now trades for just 1/20th the price of crude oil. That means that the natural gas energy equivalent of a barrel of oil is selling for just $23.50. Even at the roughly $6/MCF indicated for December 2010 gas futures, that's still just $35/bbl. However, the more we rely on gas to generate electricity--to meet incremental demand, including from EVs, and to back out higher-emitting sources like coal--and the more gas we put directly into vehicles, the likelier it is that we'll need to import LNG to balance supply and demand. If the international gas market were controlled by an OPEC-like cartel that was able to constrain output to put pressure on prices, then eventually this would translate into higher gas prices here--closer to crude oil's--and that would make both natural gas vehicles and EVs running on gas-generated power less competitive with fuel-efficient gasoline and diesel cars. So for both EVs and NGVs, it's good news that the gas producers meeting in Algeria seem unlikely to be able to match OPEC's market power any time soon.

Prospects for an OGEC (re-run)

Last week's meeting of the Gas Exporting Countries Forum in Qatar spurred all sorts of speculation about a future gas version of OPEC. I wrote about this possibility last fall, and my view hasn't really changed:

An interesting article in the Financial Times (subscription required) raises--and then partially demolishes--the idea that producers of natural gas might band together in a cartel similar to OPEC, in order to control the future supply and price of international gas. Concerns about Russia's intentions seem to be the main driver, here, and at least for Europe these are quite legitimate. But while the FT accurately skewers the notion of an OGEC from the perspective of the current international gas business, dominated as it is by long-term contracts for pipeline gas and LNG, I wonder if they lack the necessary imagination to see how it could be made to work in the future.

I'm no expert on the history of OPEC, but when it was formed in 1960, the international oil industry looked quite different from today's. Global trade in oil was dominated by the major oil companies--the so-called Seven Sisters of BP, Chevron, Esso (Exxon), Gulf, Mobil, Royal Dutch/Shell and Texaco. In their glory days, these companies controlled proprietary value chains from wellhead to gas station, not unlike today's LNG value chains. The founders of OPEC foresaw a different world, in which nations owned not only the resource in the ground, but also the means of getting it to market and capturing much of its value added. In this regard, they were more accurate forecasters of the future than the corporations whose assets they subsequently nationalized, and which 30 years later had merged down to four survivors in order to compete with the big national oil companies.

Several of the factors the FT cites as hurdles to forming an alliance of gas-producing countries seem either temporary or superficial. Although most LNG is tied up on long-term contracts, many of which are pegged to oil prices, the number of "spot" cargoes is on the rise, as producers de-bottleneck their facilities to squeeze out extra volumes, outside their contractual commitments, and as contract-holders learn to optimize the value of their offtake by taking advantage of arbitrage opportunities. At the same time, having to attract project investors may be less constraining than suggested. The majors have been frozen out of many of the best remaining oil prospects, and they are turning to LNG to create bookable reserves to fill the gap. As long as gas resource owners offer access, and on terms at least as generous as those available for oil, the integrated international companies will sign up.

The biggest impediment to the effectiveness of a future OGEC may be more fundamental. Oil still enjoys a near monopoly on the transportation fuel market, and biofuels and synfuels will be a long time breaking it. Gas has no comparable lock on its future markets. Current gas consumers and their suppliers are locked in an embrace that is tantamount to Mutual Assured Destruction, but when, for example, power plant developers doubt the future affordability or availability of gas, they build coal, wind, nuclear, or some other capacity instead, and the associated potential gas demand disappears. Gas left in the ground due to greed is nearly worthless. This difference may not rule out an eventual OGEC, but it implies that it should at least be more user friendly than OPEC has proved.