Bakken Shale Gas Flaring Highlights Global Problem

• High rates of natural gas flaring in the Bakken shale formation are symptomatic of infrastructure limitations that prevent this gas from reaching a market.
• Although various technical options could reduce flaring from high-output well sites, none matches the benefits of developing large-scale outlets for the gas.

The Wall St. Journal recently reported on the high rate at which excess natural gas from wells in North Dakota's Bakken shale formation is burned off, or "flared."  The Journal cited state data indicating 10.3 billion cubic feet (BCF) of gas were flared there during April 2014. That represented 30% of total gas production in the state for the month.

North Dakota's governor attributed the high volume of gas flared in his state to the great speed at which the Bakken shale has been developed, outpacing gas recovery efforts. Oil output ramped up from 200,000 barrels per day five years ago to just over a million today, in a region lacking the dense oil and gas infrastructure of Texas and other states with a legacy of high production.

Nor is this situation unique to the Bakken. The World Bank has estimated that around 14 BCF of gas is flared every day, globally. Such flaring is a problem for more than governments and other mineral-rights owners that worry about missing potential royalties.  Aside from our natural aversion to waste, flaring natural gas has environmental consequences.

The tight oil produced from the Bakken shale is quite low in sulfur, and so is most of the associated gas, but some of it contains relatively high percentages of hydrogen sulfide (H2S). When that gas is flared, rather than processed, the resulting SOx emissions can affect local or even regional air quality.

Gas flaring also contributes to the greenhouse gas emissions implicated in global warming, although it must be noted that flaring is 28-84 times less climate-altering, pound for pound, than venting the same quantity of methane to the atmosphere.  When annualized, and assuming complete combustion of the gas, North Dakota's recent level of flaring equates to around 6.7 million metric tons of CO2 emissions, or nearly a fifth of total estimated US CO2 emissions from natural gas systems in 2012. That means this one source accounts for around 0.1% of total US greenhouse gas emissions, or somewhat less than US ammonia production.

Why would anyone flare gas in the first place? As the Journal pointed out, the oil produced from Bakken wells is worth significantly more than the gas, although the energy-equivalent price ratio favors oil by more like 4:1 than the 20:1 cited in the article. Still, the economics of Bakken drilling are mainly driven by oil that can be sold at the lease and delivered by pipeline or rail, and not by the associated gas, particularly after tallying the cost of capturing and processing it, and then hoping capacity will be available to deliver it to a market that in the case of the Bakken might be hundreds or thousands of miles away. The characteristics of shale wells, with their steep decline curves, raise this hurdle even higher: Shale gas infrastructure at the well must pay for itself quickly, before output tails off.

There is no shortage of technical options for putting this gas to use, instead of flaring it. An industry conference in Bismarck, ND this spring featured an excellent presentation on this subject from the Energy & Environmental Research Center (EERC) of the University of North Dakota. Among the options listed by the presenter were onsite removal of gas liquids (NGLs), using gas to displace diesel fuel in drilling operations, and compressing it for use by local trucking or delivery to fleet fueling locations. However,  contrary to the intuition of the rancher interviewed by the Journal, none of these options would reduce high-volume flaring by more than a fraction, despite investment costs in the tens or hundreds of thousands of dollars per site.

Even in the case of the most technically interesting option, small-scale gas-to-liquids conversion to produce synthetic diesel or high-quality synthetic crude, EERC estimated this would divert only 8% of the output from a multi-well site flaring 300 million cubic feet per day, while requiring an investment of $250 million. And to make this option yet more challenging to implement, of the 200-plus such locations EERC identified in the state, fewer than two dozen flared consistently at that level over a six-month period. The problem moves around as older wells tail off and new ones are drilled.

Significantly reducing or eliminating natural gas flaring ultimately requires a large-scale market for the hydrocarbons being burned off. That's as true in North Dakota as in Nigeria. While various technical options could incrementally reduce gas flaring from Bakken wells, the highest-impact solutions would be those that promote market creation. That would include fast-tracking long-distance gas pipeline projects or building gas-fired power plants nearby. Absent large new customers for Bakken gas, additional regulations on flaring will either be ineffective or impede the region's strategically important oil output.

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

ABCs of LNG

• Current debates over LNG export often ignore its primary benefits, such as enabling gas to be produced for sale to markets beyond the realistic reach of pipelines.
• It also allows gas to compete with petroleum liquids where energy density is important, such as in powering ships, trains and land vehicles.  

The international reaction to Russia's annexation of Ukraine's Crimean peninsula has put a spotlight on liquefied natural gas (LNG), which was already under debate in the US as a mechanism for exporting increasingly abundant shale gas. Meanwhile, LNG is emerging as a fuel in its own right, rather than just a means of transporting gas from source to market. What links these trends is LNG's capability to enable natural gas to approach the convenience and energy density of petroleum.

The big driver for this is economic: UK Brent crude is currently over $100 per barrel, while natural gas in the US Gulf Coast trades at the energy equivalent of around $25 per barrel. That creates a significant incentive to build LNG plants, despite the recent escalation in their cost. Even after adding the equivalent of $20-30/bbl in expenses for liquefaction, shipping, and regasification to convert the LNG back into pipeline gas at its destination, the opportunity is significant. In Asia, where LNG sells for $14 or $15 per million BTUs, that's still less than $90 per equivalent barrel. And because gas can only be produced if it can be connected to a market, LNG enables more gas to compete in more markets, while providing customers a cleaner and cheaper fuel.

This is not a new technology. Early demonstrations in the 1940s and '50s were followed by commercial-scale plants built to export LNG from Alaska, Algeria and Indonesia, establishing what has since become a global industry. Every LNG plant is designed to take advantage of the fact that at atmospheric pressure natural gas becomes a liquid at -259 °F ( -161 °C)--about 60°F warmer than liquid nitrogen--shrinking by a factor of 600:1 in the process. As long as it is kept below that temperature, it can be stored and transported as a liquid.

That has important advantages over the alternative of compressing natural gas to create a denser fuel. For example, a gallon of LNG has around 2.2 times as much energy (based on lower heating values) as the same volume of compressed natural gas (CNG) at 3,000-3,600 pounds per square inch (psi). A gallon of LNG also has 98% of the energy of ethanol, and 64% that of gasoline. This makes LNG dense enough to transport economically over long distances, unlike CNG.

These differences have a practical impact on the gradual penetration of the transportation fuel market by natural gas. While most natural gas passenger cars are based on the simpler CNG approach, LNG is gaining a foothold in trucking, particularly where the combination of low emissions and denser fuel--yielding longer range--is important.

LNG is also emerging as an option for transportation modes that have had few viable alternative to oil-based fuels, such as in shipping and even rail where electrification is impractical. Replacing ships' bunker fuel with LNG could be a key strategy for responding to increasingly strict international regulations on sulfur and nitrogen oxide pollution from ocean-going vessels.

The environmental benefits of LNG can be significant, when it replaces higher-emitting fuels like coal and fuel oil. Even after accounting for the energy consumed in the liquefaction process-- equivalent to 8% or less of the gas input to a new LNG plant--and in storage and transportation, lifecycle emissions from LNG in power generation are 40-60% lower than those from coal. Its advantage in marine engines is smaller, but still positive at around 8%, while reducing local pollution significantly.

LNG isn't without drawbacks, including "boil-off", the gradual tendency of LNG in storage to evaporate due to heating from the environment outside the insulated tank. In stationary facilities the resulting gas can either be re-liquefied or delivered to meet local gas demand. In vehicles, it is vented after a specified holding time of around a week or more. That makes it more suitable for vehicles that are used frequently, rather than sitting idle for extended periods.

It's worth noting that while LNG is increasingly linked to shale gas in North America, nearly all the LNG currently marketed around the world is produced from conventional gas reservoirs, such as the supergiant North Field in Qatar, or the gas fields of Australia's North West Shelf. That would also be the case for a new LNG plant based on Alaskan North Slope gas, as described in a post here in 2012.

Only a few years ago, government and industry forecasts were unanimous in projecting a large and growing US LNG import requirement, as domestic gas production declined. The number of US LNG import facilities expanded to meet this new demand, but the combination of the recession and the shale gas revolution has resulted in imports shrinking substantially since 2007. The Energy Information Administration now expects the US to become a net exporter of LNG in 2016, including exports from repurposed import facilities. They will join a market that now supplies around 10% of global natural gas consumption and accounts for a third of global gas trade.

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

Natural Gas Vehicles Already Big in Italy, Iran

The sudden abundance of natural gas in the US triggered a startling divergence of crude oil and natural gas prices that, in turn, has energized the advocates of using more gas in transportation. Yet despite the availability of wholesale natural gas at less than $0.60 per gasoline gallon equivalent (GGE), and with retail compressed natural gas (CNG) prices under $2.00/GGE in many locations, natural gas accounted for less than 3% of US transportation energy consumption in 2011--most of it attributable to pipeline compressors. The picture is very different in countries like Italy and Pakistan, where CNG has a significant market share in motor fuels. As the US looks ahead to greater reliance on secure domestic gas for road transport, it's worth considering why other countries have such a big head start.

The obstacles to greater market penetration by natural gas in transportation are well known. CNG and LNG (liquefied natural gas) require new infrastructure. Many more retail gas facilities would be needed to assure motorists of convenient access at service stations. CNG takes a separate dispenser and compressor on the forecourt, while LNG requires both a new pump and insulated storage. Where pipeline gas is unavailable, such as in parts of the northeast, additional investments in the local "gas grid" may also be necessary.

Vehicle conversion costs represent another significant barrier. Engine modifications and crash-resistant fuel tanks add significant costs for both new vehicles and retrofits. Even with gas priced well below gasoline or diesel fuel, the payback for these costs can be lengthy. That's one reason that gas has made greater strides in bus, truck and delivery fleets in the US than for personal cars, since the more intensive use of such vehicles substantially shortens the resulting payout periods. Countries with high gas-vehicle penetration typically have government policies and incentives in place to promote the use of gas by mitigating these obstacles.

Italy leads the EU in CNG vehicle adoption, with more than 11% of new passenger cars equipped for natural gas last year. That compares to 0.01% for the US in 2012, where only one CNG model, a Honda, was sold. The Italian government promotes natural gas use in vehicles both directly and indirectly. The country provides a subsidy of €700 ($945) to purchasers of CNG automobiles, while manufacturers like Fiat offer discounts to expand their market for CNG cars. Incentives were even larger a few years ago. The government also makes retail petroleum products extraordinarily expensive with high taxes. So even though Italy is a large net importer of natural gas, CNG is much cheaper than gasoline or diesel at the pump.

Fuel availability may also have something to do with the disparity in adoption rates. Despite having an 83% smaller overall vehicle population , Italy has over 40% more CNG or "Autogas" refueling stations than the entire US, at around 900. This is due in part to state-level incentives, with 50-70% of the cost of a new CNG filling station reimbursed by regions such as Liguria, Lombardy, and Piemonte.

In terms of market penetration, Pakistan, which appears to be self-sufficient in gas, leads the world in natural gas vehicles, at 80%. That translates into over 2 million CNG vehicles, the result of a determined effort on the part of the government to reduce imports of petroleum by shifting to domestic fuels, with gas as its best option. This is a common theme in the non-oil-exporting developing world, where oil imports impose a large drag on national trade balances. CNG use in Iran is even higher than in Pakistan, as an unintended consequence of protracted international sanctions.

For the US, where oil production is increasing and oil imports declining, a shift to natural gas for transportation is likely to remain an opportunity, rather than a matter of necessity. The "NATGAS Act", a bill proposing incentives for CNG and LNG along the lines of the Italian model has languished in the US Congress for several years. It remains to be seen whether this will become a higher priority in the new Congress, which has shown early signs of interest in breaking the recent logjam on energy legislation.

In the meantime, adoption of natural gas vehicles in the US will proceed based on market forces, supported by a small advantage in the way CNG cars are counted in manufacturers' fleets under the stringent federal fuel economy regulations issued last summer. That could lead to natural gas fueling 3% of US vehicles --mostly trucks--by 2020, based on the analysis of a partner at McKinsey & Co. Much like the case for energy efficiency investments, the available savings indicate a much larger potential, but funds for CNG/LNG transport must compete with other priorities.

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

Green Car Tech: Workhorses Trump Thoroughbreds?

Fisker Karma at 2013 DC Auto Show

Yesterday I made my annual trek to the Washington Auto Show, which hosts a media day before opening to the public.  Between the show's focus on policy--a natural draw inside the Beltway--and the opportunity to connect with OEM contacts, it's always worthwhile.  Besides, the cars never look the same on a screen or printed page as they do in person.  Yet despite all of that, this year's show left me with what I regard as a healthy form of disappointment: Unlike past years, which provided my first opportunities to see--and sometimes drive--cutting-edge cleantech cars like the Chevy Volt and Nissan Leaf, I saw ample signs of evolutionary change but no new revolutions in the offing. 

A few data points to support that conclusion: First, the Fisker Karma, undeniably sleek and reminiscent of my favorite Hot Wheels® car of long ago, was arguably the most exotic car there.  It sat unattended and largely ignored.  More significantly, the 2013 Green Car Technology Award announced at the show by Green Car Journal went to Mazda's "SkyACTIV" suite of technologies.  These include improvements in engines, transmissions and chassis that Mazda plans to roll out across its fleet, along with the North American launch of a clean diesel version of its Mazda6 sedan later this year.  Among the other finalists were Ford's stop-start and EcoBoost technologies, Fisker's "EVer" plug-in hybrid powertrain, and Fiat's Multi-Air gasoline engine efficiency package.  Half the candidate technologies related to EVs and hybrids, while the other half focused on making conventional cars incrementally more efficient--in the process raising the bar that EVs and hybrids must vault.   

Yesterday's policy day also provided a chance to meet with the team from Robert Bosch, LLC, which among its many business lines supplies under-the-hood gear for clean diesels and efficient gasoline cars, as well as hybrids.  Our conversation focused on clean diesel, which remains the least-appreciated big-bang fuel efficiency option in the US, despite its wide adoption in Europe, where diesels enjoy about a 50% share in "take rate", reflecting consumers' choices when more than one fuel option is available in a given model.  Diesel take rates range from 30-60+% here, too, but with only 20 diesel models available in the US last year--many of them German luxury models--overall diesel penetration in new cars was just under 1%.  That could start to change this year. Bosch's Andreas Sambel, Director of Diesel Marketing and Business Excellence, indicated 22 new models slated for 2013 introduction, with the total increasing to 54 models by 2017. 

We also discussed future improvements in diesel passenger car technology.  Bosch sees ample opportunities to maintain diesel's edge over steadily improving gasoline-engine efficiency.  Possible enhancements include engine downsizing, higher injection pressures (already 29,000 psi), the addition of stop-start, and combustion improvement via something called "digital rate shaping"--my jargon takeaway of the day.  I was surprised to hear that diesel-hybrid models are already available in Europe, since conventional wisdom holds that doubling down on two expensive efficiency strategies can't be cost-effective.  Mr.Sambel offered the view that hybrids are becoming a distinct market segment, and that fuel choice within that segment will appeal to some buyers.  I'll have to watch for further signs of this intriguing development.  I certainly concur with his take that there is unlikely to be a one-size-fits-all solution.  Don't expect an imminent winner among the proliferating powertrain and fuel choices available to motorists, including biofuels and CNG/LNG.

This year's DC Auto Show includes a wide selection of nicely sculpted steel and glass, but at least from a "green car" perspective the technologies that made such a big splash a few years ago are becoming a bit mundane.  That's just as well.  EVs still haven't taken off, yet, with only 53,000 sold in the US last year out of a much-recovered 14.4 million car total, despite lavish tax incentives.  However, with oil prices stubbornly high and US gasoline prices on the verge of setting new records for this time of year, the evolutionary improvements in fuel economy that were honored and displayed at the DC Convention Center will find plenty of takers.  For the near-term they'll contribute far more to saving oil and reducing emissions than a few more EVs could.

Could Diesel Fuel Made from US Natural Gas Compete with CNG and LNG?

The announcement last month of a $21 billion project to capitalize on abundant, low-cost US natural gas should have caught the attention of everyone interested in this resource. As reported in the New York Times, Sasol, a South African energy company, intends to build a 96,000 barrel-per-day gas-to-liquids (GTL) plant in southwestern Louisiana, in conjunction with a new gas processing plant and ethylene cracker. The synthetic diesel fuel produced by this facility would provide a different pathway for shale gas to displace imported crude oil in the US transportation sector, in competition with compressed or liquefied natural gas (CNG or LNG.)

GTL involves a two-step conversion of the methane that makes up the bulk of natural gas into synthesis gas and hydrogen, which are recombined into liquid hydrocarbons by means of the decades-old Fischer-Tropsch (FT) process. GTL is also energy-intensive, with an overall efficiency around 60%. South African companies have vast experience with such synthetic fuels. Sasol are partners in the Oryx GTL plant in Qatar, and their coal-to-liquids plants in South Africa utilize a similar syngas step and the same FT process as GTL.

With the US suddenly perceived to be sitting atop a century's worth of natural gas, mainly in the form of unconventional gas from shale, tight gas formations and coal-bed methane, T. Boone Pickens isn't the only one to see an opportunity to displace imported oil with gas. Yet as attractive as that sounds for reasons of energy security and trade, it isn't obvious whether the public or even fleet operators are willing to switch on a larger scale to a lower-density gaseous fuel requiring both new distribution networks and new or modified powertrains. Only 0.1% of the natural gas consumed in the US now finds its way into vehicles, equivalent to less than 0.1% of US oil demand. Under the circumstances, it would be surprising if someone weren't looking seriously at GTL, one of the few practical ways to circumvent the mechanical and logistical barriers that have impeded the fueling of more US cars and trucks with natural gas.

When I read about Sasol's proposed project, I immediately thought of another, less well-known South African synfuels facility. Since 1992 the Mossel Bay GTL plant has been turning natural gas into gasoline, diesel and other fuels, drawing first on the Mossel Bay gas field and then on newer fields as the original one depleted. Although owned by another firm, the ongoing struggles to keep the "Mossgas" plant supplied are well-known in South African energy circles. I can't imagine Sasol embarking on a project like the one in Louisiana if they had any doubt about their ability to keep it supplied for decades.

Of course volume and price are two very different aspects of supply. A decade ago, conventional wisdom held that GTL required a gas cost of around $1 per million BTUs to be viable. Even with the shale bonanza today's US natural gas price is well above that level. What now makes it possible to conceive of GTL in the US is that the price of the crude oil used to make diesel and other fuels has risen so much higher than that of natural gas. That comparison is more obvious when one converts natural gas prices into their energy equivalent in crude oil. Today's US natural gas price is below the $23 per equivalent barrel that it was in 2001. Meanwhile crude oil has increased from about $26 to $95 per barrel. The drastically improved attraction of GTL becomes even clearer when comparing ten years of wholesale US Gulf Coast diesel prices to natural gas prices using the approximate GTL conversion rate of 10 million BTUs of gas per barrel of liquid product.

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As the chart above reveals, this theoretical GTL margin has exploded since 2009. Yet it also shows that if gas prices returned to the levels we experienced just a few years earlier, the proposed project would encounter significant risks. Perhaps that helps explain Sasol's concept of a larger integrated gas complex with multiple sources of margin, capitalizing on the waste heat from the GTL process and the lighter hydrocarbons it yields as byproducts.

It remains to be seen whether GTL will prove an attractive means of leveraging the US shale gas revolution to back out imported oil. However, if Sasol and others proceed with US GTL projects, anyone eyeing our gas surplus for other purposes, whether in manufacturing, fertilizer production or power generation, would face serious competition linked to the global oil market. That includes potential LNG exporters, who passed an important hurdle with the publication of a favorable analysis by the Department of Energy.

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

Ammonia As An Alternative Fuel?

In the last seven years I've written extensively about a wide variety of alternative fuels, including ethanol, methanol, and higher alcohols like butanol, along with compressed and liquefied natural gas (CNG and LNG), hydrogen, and electricity, but I find I haven't said anything about anhydrous ammonia. It turns out that there is a small but enthusiastic group of people promoting its use as an alternative fuel, going back to at least the 1940s. Much of the recent interest in this stems from the fact that ammonia releases little or no greenhouse gas when burned, and that it's possible to produce it by means that involve minimal GHG emissions throughout its lifecycle. However, when you dig into this a little deeper, you discover that almost all ammonia today is produced by the Haber process, using hydrogen sourced from natural gas. And if that weren't enough of a deterrent, the physical properties of ammonia render it an unattractive candidate for a mass-market fuel.

So-called "green ammonia" would avoid natural gas by substituting hydrogen from electrolysis using wind, solar or other renewable electricity. As long as natural gas remains abundant, it's hard to envision this growing beyond a small niche, because the price of ammonia will ultimately be set by the price of natural gas, which remains a cheaper source of hydrogen than electricity from any source, let alone from expensive renewable power sources. Moreover, electricity is fungible, and the best use of renewable or other low-emission power (e.g., nuclear) is probably in backing out power from higher-emitting sources, rather than diverting it into inefficient production of chemicals. As a result green ammonia, like green power, would require subsidies for at least the near-to-medium term if it is to compete with conventional ammonia, which seems like a crucial prerequisite for competing with conventional fuels. And without green ammonia, the whole rationale for an ammonia fuel-and-vehicle network looks questionable--why not just use the gas as CNG or LNG instead, with a fraction of the headaches?

Even if that weren't the case, ammonia faces serious obstacles as a consumer fuel, compared to either conventional fuels or to many other alternatives. Start with energy density, which is less than half that of gasoline by weight, and about 40% by volume. So a gallon of ammonia would only take you about 40% as far as a gallon of gas, even if you could burn pure ammonia in your engine--and from what I've read it still requires help from another fuel to sustain combustion. (That means two fuel tanks, which constitutes another major hurdle with consumers.)

Then there are the economics. Ammonia itself isn't exactly cheap, if you adjust for its energy content. The price of bulk ammonia for agricultural use appears to be around $550-$600/ton, which equates to $1.55-1.70/gal. But when you factor in its lower energy density, that raises it to at least $3.85/gal. of gasoline equivalent, without any fuel taxes. And while a distribution system exists to supply farms with ammonia, this is a long way from what would be required to fuel anything beyond farm vehicles. Because ammonia boils well below ambient temperature, it must either be refrigerated or stored under pressure, and dispensed through special equipment. And if all that weren't daunting enough for any service station owner considering adding an ammonia pump on the forecourt, the safety aspects of ammonia handling look even worse.

A glance at a typical material safety data sheet (MSDS) for anhydrous ammonia reveals that the recommended exposure limits are very low, under 50 parts per million in air, and the consequences of exposure include caustic burns and much more serious outcomes. Gasoline has its own issues, but spilling some on your hand won't send you to the hospital, and a larger spill or leak doesn't require first responders in hazmat suits. I simply can't imagine any fuel retailer wanting to take on the liabilities that would go along with this, even if there were an attractive margin in it, which there doesn't appear to be.

I concluded long ago that we're heading into a period of much greater fuel diversity, and that certainly seems to be true, with LNG catching on for big-rig trucks and CNG for a few cars but more fleet vehicles and buses, and even hydrogen appearing in a few places for fuel cell vehicles. However, it's very hard to imagine a substance with as many drawbacks as ammonia coming into wide use for consumers or even fleets. Our range of alternative fuel options seems sufficiently broad already, without having to consider a fuel that turns into a poison gas at atmospheric pressure and temperature.

Pickens Plan, the Sequel

How can you not love T. Boone Pickens? Here's someone who made his fortune in oil, and now he's advising us to switch major parts of the US economy to wind and natural gas. And unlike some of the other concepts for taking a big bite out of our oil consumption, his current idea actually stands a chance of making a significant difference on a timescale of years, rather than decades. At the same time, however, Mr. Pickens has sometimes been a tad bit less than accurate with the numbers he uses to make his points. Remember those ads about the $700 billion per year we were sending overseas to buy oil? Even at its absolute peak in July 2008, reality was more like $500 billion, and the total for 2008 ended up around $385 billion, based on net imports and the average refiner acquisition cost for the year. That's hardly peanuts, but it's roughly half his cited figure. So let's take a look at the key numbers behind his proposal to convert long-distance trucking to natural gas. It's a great idea, though not quite as much of an economic slam-dunk as it might seem when he describes it.

I just finished reading the interview with Mr. Pickens in The American Spectator, published yesterday. The big shift in the Pickens Plan since the first time I examined it in detail is that he has switched his emphasis from using wind to free up natural gas to replace gasoline in cars, to using the abundant natural gas from our enormous shale gas reserves, which are already transforming the US gas and power markets, to replace diesel fuel in big-rig trucks. He is also in the process of lining up the legislative support to nudge this along much faster than market forces alone would. But does it make as much sense as he suggests when he talks about using $4.50 worth of natural gas to replace 7 gallons of diesel fuel at $3 per gallon?

Strictly in energy terms, that 7 gallons might even be a bit low. A million BTUs of gas (roughly 1,000 cubic feet or one MCF) would deliver as much energy to a truck as 7.8 gallons of diesel. And fundamentally, he's right that the recent price relationship between natural gas and crude oil makes gas a tremendous bargain, BTU for BTU. However, the prices he mentions in the Spectator interview constitute an apples vs. oranges comparison from both sides. Even if natural gas remained at a steady $4.50/MCF at the wellhead for the next 20 years, which seems unlikely despite the bounties of shale, that's not what you'd pay at the natural gas pump.

Start with the fact that it costs something to transport gas from the wellhead, wherever that might be, to market. Based on current pricing relationships, if gas starts out at $4.50, then by the time it's sold to a commercial account, which is probably how filling stations would be classified, it could cost as much as $9. And someone has to invest in the equipment to compress it to 3,000 or 3,600 psi and pump it into an 18-wheeler's tanks. Even with tax credits to help, a station owner will need to make a return on that investment, and some profit, too. Add another buck an MCF to cover that, and we're up to $10/MCF, which equates to $1.28/gal. of diesel. For a reality check on this, I took a look at cngprices.com, which shows the locations and pricing for stations selling compressed natural gas (CNG) for vehicles around the country, expressed in dollars per gasoline-equivalent-gallon (GGE). Prices range from roughly $1.25 to around $2, with a few outliers over $3. Since a GGE contains about 10% less energy than a gallon of diesel, you'd have to bump these prices up by about 10% to get the equivalent for a fair comparison.

Under $2 is still pretty cheap, but you shouldn't compare that to the $2.90/gal average retail price of diesel this week. The latter includes federal excise tax of $0.244/gal. and state excise and sales taxes that range from $0.08-0.49/gal. and average $0.281/gal. As best I can tell, CNG is taxed at the federal gasoline rate of $0.183/gal., while states seem to tax it to a much lesser extent than gasoline and diesel, as for example the $0.085/gal rate in Utah, compared to their state fuels tax of $0.245/gal. However, this is only viable as long as demand for CNG is tiny, relative to other fuels. If Mr. Pickens succeeds in displacing large quantities of diesel with CNG, then it will either need to carry a similar tax burden, or the lost revenues must be collected in some other fashion. If you strip out the taxes to get to an apples-to-apples price to compare diesel to CNG, it works out to around $2.50, give or take a dime or two, depending on location. So while CNG is still clearly cheaper than diesel, it's rarely $1/gal. cheaper on a truly comparable basis. This, together with conversion costs as high as the $65,000 per truck that Mr. Pickens cited, might explain why market forces alone haven't led to a rapid switch to CNG-fueled transport.

I've looked at the House bill containing the natural gas vehicle tax credits mentioned in the interview. It would cover as much as 80% of the incremental cost (over the diesel version) of a truck that can only burn CNG or LNG, up to $80,000, depending on weight. It would also extend the $0.50/GGE tax credit for CNG and LNG through 2027. These changes would drastically shorten the payout of an investment in a natural gas-powered truck, even if the per-gallon advantage of CNG appears to be somewhat less than Mr. Pickens suggests. That could move CNG into the truck-fuel market pretty quickly.

The remaining question is what the $7 billion investment Mr. Pickens wants the government to make in this proposition would buy us. He believes that converting the US heavy truck fleet to CNG would save 2.5 million bbl/day of diesel, or about two-thirds of the diesel and heating oil now sold in the US. That would have a much bigger impact on our oil imports than ethanol, although it's hardly an either/or proposition. I'm surprised that Mr. Pickens didn't go on to suggest that this benefit could be leveraged further by utilizing the resulting surplus diesel in diesel automobiles. Given their approximately 30% improvement in fuel economy vs. comparable gasoline vehicles, that could save an additional 750,000 bbl/day of gasoline, while reducing greenhouse gas emissions on those cars by about 20%. If you play all this out, then just under 5 trillion cubic feet per year of natural gas, or less than a quarter of current gas production, could save more than 3 million bbl/day of gasoline and diesel, or nearly a third of our net petroleum imports.

That sounds like a pretty good deal for $7 billion, though it could be made even better if the vehicle tax credits involved were converted into low-interest loans and loan guarantees, instead. If the main impediment to switching to gas is the up-front cost of natural gas conversions and the time involved in recouping that cost, then let's make it much easier for truckers to borrow the money for this purpose, and for banks to lend to them. Giving everyone taxpayer money to induce them to do what we want makes a lot more sense when the government has plenty of money to spend. With the US running large deficits and the private sector holding lots of cash earning next to nothing, we should use our tax dollars as efficiently as possible to achieve the same outcome. Otherwise, Mr. Pickens seems to be on to a sensible idea, and I wish him luck selling it.

The Future of Gas

Not many years ago, natural gas was widely regarded as the fuel of the future. Its use was growing at a much faster rate than for oil, and it offered important environmental benefits in terms of both greenhouse gas emissions and local pollution, relative to its main competitors, coal and oil. At least in the US, however, these perceptions were altered by a period of unexpectedly tight supplies and high prices, and the rapid growth of even greener energy sources, such as wind and solar power. A new campaign by gas producers aims to restore the fuel's luster, and at least from the standpoint of the facts they cite, this ought to be an easier sell than a similar campaign by the nation's coal industry. The larger question is whether gas supplies would be adequate to displace a meaningful proportion of other energy sources, as part of the solution to both energy insecurity and climate change.

The full-page ad that caught my attention appeared in this morning's Washington Post, with the headline, "We're Not Running Out of Natural Gas." It went on to cite recent large increases in North America's gas resource potential, based at least in part on the gas industry's success at exploiting gas from non-conventional formations such as shale and deep coal beds. In fact, unconventional gas now accounts for over a third of US gas production. As recently as 2000, estimates of proved and potential US gas resources equated to about 58 years of production at current rates, so the reported jump to 82 years is impressive. More significantly, US proved gas reserves have increased by 26% over the same period, while global reserves grew by 20%. So here's another resource for which the US consumes a fifth of the world's supply while holding only 3% of total reserves, yet it looks entirely sustainable for decades. It's less clear how much more it could increase, when the fastest-growing segment of US gas supply is LNG imports.

There are at least four pathways by which natural gas could displace petroleum products for transportation energy: as compressed or liquefied natural gas for modified internal combustion engines, via chemical conversion to liquid fuels such as methanol or diesel, via conversion to hydrogen for fuel cells or modified ICEs, or as electricity generated from gas for plug-in hybrids and electric vehicles. All offer consumers environmental, efficiency and operating cost improvements, though with up-front costs that may not be fully recovered by those benefits, as in the case of today's CNG car models. Producing enough vehicle fuel from gas to replace 10% of current gasoline consumption might require another 1.8 trillion cubic feet (TCF) per year, increasing US gas demand by 8%.

Gas could also be used to displace existing coal-fired power generation. Without fanfare, gas-fired electricity surpassed the contribution of nuclear power in 2006, despite the latter's steady and impressive improvements in on-line availability. Gas now accounts for 20% of US electricity supply, compared to 49% for coal. In the process, gas-fired power plants make up 30% of total US gas demand, up from just 22% in 2000. That expansion was achieved by squeezing out a large quantity of industrial demand. At that rate, replacing 10% of coal-fired power would require another 1.7 TCF/year of gas, adding 7% to total demand--or at the expense of other uses.

So in order for gas to make even modest inroads into oil's share of the transportation market and coal's share of electricity, without crowding out industrial and commercial users, US natural gas consumption would need to grow by about 15%, over and above the anticipated growth in traditional gas demand segments, while also providing most of the energy consumed by rapidly-expanding ethanol production. The reserves data and resource estimates confirm that there's enough gas. The real challenge, however, is whether it could be supplied without disrupting the price relationship between oil and gas--a 50% discount on equivalent energy, based on current futures contracts--that makes the prospect attractive in the first place, or without making gas less competitive with renewable energy sources, including wind turbines and solar thermal power. That would be a great question for the American Clean Skies Foundation to tackle.

The Natural Gas Option

As I noted in last Friday's posting, two recent scientific studies have severely undermined the environmental rationale for conventional biofuels, including corn ethanol. But if corn ethanol no longer looks attractive as a combined solution for our energy security and climate woes, where should we turn for a better alternative? As odd as it might sound to promote a fossil fuel, rather than another form of renewable energy, our lack of focus on natural gas as a transportation fuel seems equally surprising and illogical to me. It might not be the long-term answer to our complex needs, but making greater use of natural gas in vehicles could provide a broad range of benefits, with fewer drawbacks than some of the alternatives we are pushing now.

In addition to the natural gas-fueled buses that are becoming commonplace in big cities, cars running on compressed natural gas (CNG) are already on the road, including CNG taxis and fleet vehicles. For consumers, Honda sells a natural-gas version of its popular Civic model, which can refuel either at home or at commercial CNG stations, of which there are about 850 nationwide. Although the EPA estimates that the equivalent fuel economy of the Civic GX is about the same as a gasoline-powered four-cylinder Civic, its calculated annual fuel cost comes in $658 lower. Unfortunately, it would take just over ten years to pay out the car's higher sticker price, relative to a comparably-equipped gasoline model. If demand for CNG vehicles took off, their cost premium should come down dramatically, since the technology involved is much less intricate than a hybrid's.

There are good reasons to compare CNG to ethanol. Much of the energy required to produce corn ethanol comes from natural gas, in the form of ammonia-based fertilizer and process heat generation. And unlike corn ethanol, CNG consumes virtually no petroleum in its manufacture or distribution. Even before the latest studies cast doubt on ethanol's greenhouse gas reduction credentials, the emissions from a CNG-powered car looked lower than those of one running on E-85, when viewed on a full "well-to-wheels" basis, coming in at around 25% less than conventional gasoline and even a bit lower than diesel. Emissions of traditional pollutants are low enough to qualify the Honda GX as a partial-zero-emission vehicle under California's strict regulations.

While both fuels face obstacles to wider distribution, CNG's might be easier to overcome. Ethanol's big problem is its incompatibility with pipelines, forcing producers to ship it long distances by rail, before being blended into gasoline at the distribution terminal nearest the retail site. Natural gas has no long-distance pipeline issues, aside from some regional bottlenecks, but faces something of a "last-mile" problem: compressing it and putting it into a retail dispenser. That still looks simpler than digging up tens out thousands of service stations to put in E-85 tanks, because station owners don't wish to forego diesel or unleaded premium sales to add a low-volume new product.

Whenever you add a new category of demand without changing existing supply, prices tend to go up, and that's certainly one risk of shifting some of our transportation energy burden onto natural gas. However, gas used in transportation represents such a tiny fraction of current consumption that it could increase by a factor of ten without causing major ripples. The US still has significant untapped natural gas resources, and global production is rising steadily. The bigger risk is that high oil prices will spill over to natural gas and shrink the latter's cost advantage, which is currently close to a 50% discount on energy content.

CNG isn't a silver bullet, any more than anything else is. However, it's an excellent alternative that's available now. It unambiguously improves greenhouse gas emissions compared to gasoline, and it enhances US energy security by diversifying our energy imports away from OPEC. Given those attributes, it's a mystery why it was virtually ignored in the 2007 Clean Energy Bill.