Showing posts with label japan. Show all posts
Showing posts with label japan. Show all posts

Wednesday, December 12, 2012

Should Alaska Export More LNG to Asia?

The Governor of Alaska reportedly met this week with officials from the South Korean national gas company to discuss exports of liquefied natural gas (LNG). Ever since crude oil production on Alaska's North Slope ramped up in the 1980s, industry observers have speculated about the ultimate disposition of the significant associated natural gas reserves found with the oil. In a letter filed with the state of Alaska, BP, ConocoPhillips and ExxonMobil, the three main North Slope producers, together with pipeline company Transcanada, recently confirmed their plans for a potential liquefied natural gas (LNG) project, instead of the long-mooted pipeline to deliver the gas to America's lower-48 states. The contemplated megaproject would validate both the scale of Asia's future LNG market and the long-term nature of the US shale gas revolution.

Alaska's North Slope has already yielded
15 billion barrels of oil. Production peaked at over 2 million barrels per day in 1988 and subsequently declined to less than 600,000 barrels per day last year. With around 6 billion barrels of remaining reserves, it's still a very significant field but well past its prime. While the public has focused on its oil output, the producers and the state have long had their eyes on how best to harvest the value of the 35 trillion cubic feet (TCF) of gas dissolved in the oil. In fact, the North Slope complex has produced several TCF per year
of gas for years, ranking it among the largest gas fields in the world, but almost all of that gas has been reinjected into the formation to aid oil recovery--and for lack of a market in an isolated and sparsely-populated state.

For decades the default assumption was that
a pipeline would eventually be built across Alaska and Canada to link this gas to the existing network feeding the contiguous US. That idea gained traction when US marketed gas production stalled around 2000 and then began to decline. The economics of an Alaskan gas pipeline compared poorly with gas produced along the Gulf Coast, but competing with rising LNG imports looked much more feasible. Then along came unconventional gas, starting with coal-bed methane and culminating with the surge of shale production since 2005. The US gas market now has enough domestic supply to shrink coal's contribution to US power generation by 7% since 2008
and revive gas-intensive industries.

If shale gas were only a short-term phenomenon, as some have suggested, it would be of little relevance to the plans of the North Slope producers. All they'd need to do would be to delay their pipeline for a few more years, and the market would come to them. However, estimates put US shale gas resources at between
482 and 686 TCF--a 60-90 year supply at current shale production rates. And the fact that all three of the main North Slope producers have invested in significant acreage positions and production in US shale basins
surely gives them insights into the longevity of those resources.
Nor is time on the side of the Alaskan producers. As oil production declines the economics of the North Slope operation will deteriorate, while keeping the Trans Alaska Pipeline full becomes more problematic. Finding an attractive outlet for the North Slope "gas cap" wouldn't just provide a new revenue source; it could keep oil production going for additional decades.


The LNG option offers several advantages, despite its estimated $45-65 billion price tag and technical complexity. For starters, it cuts roughly 1,000 miles of difficult terrain off the distance that the gas must be pipelined, in this case to a site on the southern Alaskan coast. That location is much closer to Asia, the world's largest LNG market, than export projects intended to ship LNG from the US Gulf Coast. The Asian market is also growing, thanks in part to Japan's post-Fukushima reassessment of nuclear power. The Japanese government has backed away, at least for now, from plans for a firm nuclear phase-out, but it seeks to diversify its energy sources. Among other steps taken in the aftermath of the Sendai quake and nuclear disaster, it has instituted the world's most attractive solar power incentives. Yet Japan's solar resources provide just a few hours of peak output per day, on average, requiring substantial fossil fuel generation to fill in the gaps. Power plants burning LNG are well-suited to that task.

China presents a more complex picture, with its own significant
shale gas potential and an energy market expected to add as much
natural gas demand by 2035 as all the world's developed countries put together. Considering the scale of eventual demand and the infrastructure necessary to bring China's shale gas to market, it seems likely that the growth of the market in the interim must depend heavily on LNG imports.

Assuming that the state of Alaska presents no obstacles and that US export permits would be forthcoming, because Alaskan LNG exports wouldn't impact US natural gas prices, the main questions that will determine the future of this project can't be answered definitively today. Among these are whether the numerous competing LNG projects being planned and built around the Pacific Rim and elsewhere will saturate the global market in the meantime, and whether the market will provide an attractive price for Alaskan LNG, influenced more by crude oil prices than by US shale gas. The North Slope producers are already immersed in these issues via their other activities, including ConocoPhillips' small
LNG plant in Kenai, Alaska, which has been shipping LNG to Asia for more than 40 years. The project timeline provided to the state includes at least three go/no-go decisions along the way as the answers to these questions unfold.


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

Thursday, March 17, 2011

Fewer Choices Post-Fukushima?

Even before the resolution of the crisis at the Fukushima Daiichi reactor complex--a crisis that has diverted media attention from the much larger humanitarian crisis caused by last Friday's tsunami--its consequences for nuclear energy policy are rippling across the globe. It is extraordinarily premature to form conclusions about these events, although that didn't stop many from arriving at similarly hasty and under-informed conclusions in the case of last spring's Deepwater Horizon accident. Pervasive instant analysis promotes knee-jerk responses. If the nuclear renaissance that had already been slowed by the recession and financial crisis was struck a fatal blow last week, what could that mean for our energy choices in the years ahead?

Although I want to focus mainly on the potential consequences in the US, what has already transpired in Germany provides a cautionary tale. As reported Tuesday, seven nuclear power plants of similar vintage and/or design to the damaged quartet at Fukushima are being shut down, at least temporarily, as the German government reassesses its decision to extend the operating life of the country's 17 power reactors. Germany hasn't been comfortable with its nukes for some time, though I find it remarkable that 70% of the population is apparently concerned that an accident that required an epic earthquake and a tsunami to trigger could happen there, too. (The next time someone lectures you about German practicality, this would be a fine counter-example to trot out.) However odd that reaction might seem to me and others with an engineering/hard science bent, it's a reminder that nuclear risks are viewed differently than many others, perhaps because radiation is invisible and insidious in its effects. Even if the reactors are finally cooled down with no further incidents and no injuries beyond the plant personnel, who have taken great risks for the public good, we will tend to focus on how much worse the outcome could have been.

Yet shutting down those nuclear plants in Germany is not without consequences, either, as noted by the Breakthrough Institute. Germany's greenhouse gas emissions will inevitably increase, because the country is already adding renewable generation as fast as it can and must make up any shortfall from fossil fuels. After committing an estimated €120 billion ($167 billion) for solar power through 2011, based on the 20 years of feed-in tariff support existing installations will receive, Germany still gets just 2% of its annual generation from solar, compared to around 24% from nuclear. That's mainly because Germany is such an unsuitable location for solar.

What about the US? Nuclear power supplied almost 20% of the electricity generated here in 2010, compared to 45% for coal, nearly 24% for natural gas, 10% for all renewables, and less than 1% from oil. Any notion of replacing the contribution of nuclear power in the longer term would require careful consideration of the energy sources that might fill the gap--based on scale and growth potential--and what it would mean for efforts to cut greenhouse gas emissions by reducing the generation of electricity from coal, which accounted for 81% of the emissions from the electricity sector and 26% of all US emissions in 2009. As for replacing nuclear power in the short run, that's simply out of the question, unless we want to bring on a recession that would make 2009 look like a boom year.

It's not that it's impossible to imagine a US energy mix without nuclear. After all, that's what we had on a much smaller scale prior to the 1960s. We certainly have enough coal and natural gas to take up any slack, although I don't think that would be quite the desired solution of those who would be most eager for an end to nuclear power. For that matter, a combination of geothermal power and concentrated solar power (CSP), the former baseload and the latter at least dispatchable, could also fill the gap, although a geothermal build-out on that scale would provoke concerns about "induced seismicity", while CSP would be largely a regional solution or require lots of very long-distance, high voltage power lines that present massive NIMBY issues of their own. Wind power, which until last year was growing at around 40% annually, could provide 20% or more of the generating mix by 2030, but it can't substitute for nuclear's central role without far more cheap power storage than we can reasonably expect to have available by then. And while solar has great potential, especially as its cost falls, it's no better suited to delivering reliable 24/7 power than is wind, and it is starting from an even smaller level than wind's 2.3% of generation last year.

The likeliest replacement for nuclear power in the US would thus be a combination of sources similar to our current non-nuclear mix, comprised of about 55% coal, 30% gas and 15% renewables, with some help from efficiency. On the basis of the average emissions from these sources, making up for the loss of the 807 billion kilowatt-hours generated by nuclear last year would increase US greenhouse gas emissions by around 580 million tons of CO2-equivalent per year, or 10% of net US emissions in 2009. That would hardly be conducive to meeting our Copenhagen pledge to reduce emissions by 17% by 2020, but then in a non-nuclear world most such pledges would have to be considered null and void.

Barring a worst-case outcome in Japan, I don't expect a groundswell in the US if favor of abandoning nuclear power--not even for the 35 reactors of generally similar design to the ones at Fukushima. Despite that, the emissions figures I calculated above remain relevant. Without a concerted effort to build new power reactors in the next two decades, the US will be on a sure path to de-nuclearization, as 41 of the existing plants would reach the end of their lives and operating licenses--many after a full 60 years of operations--by the mid-2030s. That process could accelerate significantly if the facilities that are awaiting license extensions now face much tougher scrutiny and are turned down in significant numbers. In that case we could lose up to 10,000 MW of nuclear capacity by the end of this decade, generating roughly the same annual output as our entire current wind power capacity. There are some who are already working to make that happen, either openly or more subtly. In that context the story on MSNBC yesterday listing US nuclear reactors in order of earthquake risk was either a public service or fear-mongering, depending on your perspective.

Whether we back away from nuclear power all at once, as Germany seems poised to consider doing, or one plant at a time, the result would be much the same: increased emissions, costlier and less reliable power, at least in the near-to-medium term, and more strain on infrastructure. I still think we'll choose to include nuclear in our evolving future energy mix, particularly given the significant improvements in the technology since the Fukushima reactors were built, along with the development of new, smaller-scale nuclear power options. Yet I have to admit my confidence in that result has been shaken by the reaction to the events in Japan.

Tuesday, March 15, 2011

Energy in the Aftermath of the Sendai Quake

Investors and companies around the world are scrambling to assess the impact of the Sendai earthquake and tsunami on supply chains and markets, both within Japan and globally, between the direct damage from the event and the disruption to critical infrastructure in its aftermath. An item I spotted in this morning's Wall St. Journal provided an early clue concerning the potential ripple effects in global energy markets, as Chevron sold a cargo of Indonesian crude to a power customer south of Tokyo. However, it remains to be seen whether demand destruction or the impairment of supply capabilities will dominate over the short, medium and longer-term recovery periods.

The impact on the Japanese power grid extends beyond the shutdown of 9,702 MW of nuclear power capacity, including 2,812 MW at Fukushima Daiichi that will not resume operations for many years, if ever. Some fossil fuel power plants have also shut down, and more than a fourth of the country's refining capacity is down, cutting off a significant supply of power plant fuel oil, along with a wide range of other petroleum products. That helps explain the interest in light, sweet Indonesian crude that can be burned directly in power plants as a replacement for low-sulfur fuel oil. Significant quantities of Indonesian Minas crude formerly came to the US west coast for a similar purpose, when we still had a lot of oil-fired power generation, although the crude was normally processed to remove the valuable light products from the fuel oil before sale to utilities. (My first job in the industry was at a refinery that did just that as part of a contract Texaco had with a southern California utility.)

Burning crude oil for power is a practical stop-gap, and as long as so many of Japan's refineries remain shut for damage assessment and repair, it shouldn't have much impact on the global crude market, since the crude those refineries would have otherwise run is now surplus. That explains the $5 per barrel drop in crude prices this week. However, if demand recovers faster than Japanese refinery capacity returns to operation, much of that extra crude oil will need to be processed in refineries elsewhere around the Asia-Pacific region, to provide the refined product imports that Japan will need.

It's much harder to assess the medium-term situation, because it will be some time before the full extent of the damage to industry, power generation and transportation is known. If more demand was destroyed than the capacity to supply it, then Japan could actually end up with surplus energy capacity until demand recovers, and that would be a bearish factor in global energy markets. If more energy supply than demand was destroyed, as seems possible given the largely agrarian nature of the part of Japan that suffered the worst consequences of the quake and tsunami, then Japan could be importing additional supplies of energy from regional sources for a long time.

I've had several people ask me about the potential of these events to increase Japan's demand for renewable energy, and I think that's a likely outcome. As of the end of 2009 Japan already had the world's third-largest installed solar power capacity at 2,600 MW, to which another 1,000 MW or so was apparently added last year. For Japanese businesses suffering from rolling brownouts, solar power is one of their few options other than diesel generators for becoming more self-sufficient fairly quickly. However, at the scale of the grid, intermittent solar isn't a great substitute for 24/7 nuclear power. With Japan's average solar insolation, it would take about 5,000 MW of solar panels to replace the annual output of a just one of the Fukushima Daiichi reactors (#2, 3 or 4) at an installed cost in the neighborhood of more than $20 billion. That might give a welcome shot in the arm to photovoltaic manufacturers that are still expanding rapidly but have been overly-dependent on faltering European solar incentives. I don't know enough about the Japanese grid to know how easily they could adjust to such a shift from centralized, baseload power to distributed, cyclical generation.

The long-term outcome seems impossible to gauge at this point, and I hesitate to even speculate while the engineers are still working to cool down the damaged nuclear plants. (The American Nuclear Society has a useful site with updates and background on the Japanese reactors.) Much depends on how well Japan's nuclear industry will be seen to have responded to these incidents. Unless these facilities are either rebuilt or replaced with new, next-generation nuclear plants, then Japan's imports of LNG, coal and other fuels could increase significantly, until and unless renewables ramped up enough to make up the difference. Japan is already the world's largest importer of LNG, and it is perfectly situated to absorb the output of the new LNG plants planned for Australia. That could boost global LNG prices for years to come.

Disclosure: My portfolio includes investment in Chevron, which is mentioned above and owns projects and facilities that could be affected by these events.

Monday, February 01, 2010

Advantage China?

A spate of articles on China over the weekend, including one in the New York Times entitled, "China Leading Global Race to Make Clean Energy" got me thinking about our reaction to such reports. The Times article included some important insights about the role of relative scale and growth rates in fostering the emergence of global wind and solar power competitors from China. From a wider perspective, however, I worry that we're beginning to apply the same kind of mental inflation of competitor attributes that made "Japan, Inc." seem such an overwhelming juggernaut in the late 1970s and most of the 1980s, when it appeared that Japan would dominate every important industry and own every scrap of signature US real estate, starting with Rockefeller Center and Pebble Beach.

In the last decade or so I've watched attitudes toward China evolve from what I used to call "China Big"--an unprecedented opportunity for global companies due to the size of its emerging consumer and financial markets--to something like "China Smarter", which compares that country's growth and the policies that have sustained it to those that helped guide the mature US and European economies down the path of unsustainable asset bubbles. During this interval Chinese renewable energy firms have grown from low-cost suppliers of parts and raw materials to established EU and US equipment manufacturers, to become integrated competitors in their own right, capable of undercutting the German solar power industry in its home market--to choose just one example.

As the Times points out, China gains a big edge in renewable energy because its entire power sector must grow so rapidly to support economic growth that is expected to average 8% this year, after a decade of double-digit growth interrupted only by last year's dip to 6% or so. That means that while renewables are still more expensive than the coal power plants that have dominated the Chinese market, they don't have to compete head-to-head with them; there's enough growth for all. Contrast that to a US power market that has shrunk by an astonishing 6% since 2007, instead of continuing to grow at its formerly-dependable 1-2% per year pace. The size of China's domestic expansion and the urgency of keeping it going, together with the increasing sophistication of its low-cost manufacturing base, make it nearly inevitable that China would become a serious competitor in an industry for which the biggest factor governing market penetration--other than the degree of regulatory and subsidy support they receive--is making renewables more cost-competitive with traditional energy sources. The more that depends on experience-curve effects rather than technology breakthroughs, the more this competition will favor China, for now. Throw in concerns about access to the rare earths and metals required by much of this technology, and China's long-term advantage in renewables looks even bigger.

I don't want to seem blasé about the challenge this represents, but I also think we should keep it in perspective, as we often failed to do concerning Japan in the 1980s, when its keiretsu companies seemed 10 feet tall and business bestsellers touted Japanese management techniques and warned that Japan was on the verge of overtaking the US in the global economy. Again, consider renewable energy. In 2008 the value of all wind turbines installed globally was on the order of $70 billion and for grid-connected solar power hardware around $20 billion, out of global renewable energy investments of $120 billion. That puts global wind and solar equipment sales at roughly the level of US aerospace exports for 2008, and about half the size of the total US aerospace market. That's big enough to want to retain a meaningful share of the market, but not so big that the entire economy depends on it. Or does it?

The Times article included the worrying suggestion that the US might someday be as dependent on imported Chinese renewable energy gear as it currently is on imported oil from the Middle East--never mind that the latter made up just a fifth of net US oil imports and 12% of total US oil supplies in 2008. Yet even if that analogy were correct, there's a huge difference in the economic and security implications of these two positions. We understand from experience that even a partial suspension of US oil imports would create an immediate price spike and send a shock throughout the economy. It's hard to see how the impact of even a complete embargo on sales of wind and solar equipment from China to the US could ever approach that. Although curtailed renewable energy equipment imports might disrupt the activities of companies installing them and spoil the returns of those parties financing them, existing facilities would keep turning out power. Once you've imported a wind turbine or solar module and set it up, you own it and its output until it wears out. These risks simply don't equate in the manner the Times asserts. Moreover, they are naturally limited by the significant practical challenges faced by intermittent and cyclical power generation technologies. Just read the DOE's analysis of a 20% wind power scenario to see what's necessary to achieve even that threshold.

Unfortunately, concerns about China's advances in renewable energy carry extra weight, because they align with a larger pattern of China envy exemplified by the talk of a "Beijing Consensus" that Tom Friedman apparently encountered at the World Economic Forum in Davos. China's "Confucian-Communist-Capitalist" model certainly offers speed and clarity of purpose that our own system has matched only at times of immediate national crisis. However, it's worth recalling that in the 1930s the Soviet and Italian models had their admirers here, too, for their ability to get things done, compared to the messiness of a capitalist democracy. However discredited the US economy may look after a couple of bad years, I'll take that messiness, as long as we don't manage to kill the innovative spirit--and the incentives that drive it--that enabled us to adapt the best of Japan's ideas while continuing on a trajectory that eclipsed Japan's success over the last two decades, even when you factor in the Great Recession. I'm more worried about navigating the geopolitical challenges that China's rise will create over the next few decades, and ensuring that they don't end in the kind of confrontation that resulted from Germany's rise a century ago.

Wednesday, November 21, 2007

Energy Paragon

Today's Wall St. Journal profiles Japan's efforts to reduce its reliance on imported oil over the years. It's a compelling story, and the accompanying figures show remarkable progress between 1975 and 2004, presumably the last year for which all the comparable data was available. The author concludes that, as a result of these changes, Japan is better positioned to weather the economic impact of sustained high oil prices than other countries. The only problem with this analysis is that by many of the same criteria, the US is in even better shape than Japan.

I wouldn't want to take anything away from what Japan has done to reduce its vulnerability to oil shocks, and to make its economy more energy-efficient. It reduced its oil imports by about 4% in the last 15 years, while US oil imports were growing by an average of 4% per year. This is all the more remarkable, considering that Japan produces less oil than Wyoming. In the process, Japan has achieved one of the lowest levels of greenhouse gas emissions per unit of economic output, though because of the size of its economy, it ranks 5th highest among emitting nations.

Two of the factors contributing to this excellent energy performance might not be worth emulating, however. First, the period of comparison coincides with the flattening of population growth in Japan, resulting in one of the world's most rapidly aging populations and all the economic worries that brings. It also overlaps with the protracted recession that followed the collapse of the "bubble economy." Over the same period, US economic growth was robust, while our population increased by nearly half.

Nor does the US look so bad, in energy terms. The Journal extols Japan's 40% improvement in energy use per GDP, compared with 1975, yet in the same interval, the US reduced its BTUs/$GDP(real) by 44%. And while Japan imports 82% of its total energy needs, with oil making up 46% of the total, the US is still 71% self-reliant in energy, with oil making up 40% of the mix, down from 45% in 1975. For all of our problems, I wouldn't trade our position for theirs.

All of these comparisons are superficial, because the US and Japan are very different countries, with important economic, social and historical distinctions. Rather than touting the energy improvements of one against the other, the more useful conclusion is that both of these large industrial economies--and most others, by extension--became a lot more efficient after the energy crisis of the 1970s and are thus in a better position to absorb high energy prices without falling into severe recession. That helps explain why the virtual doubling of oil prices this year hasn't been catastrophic for the world economy, thus far. The longer oil prices remain high, the more these countries will invest in efficiency, making them even less vulnerable in the future, with accompanying benefits for the fight against climate change. Japan isn't alone in knowing how to do this.

I'd like to wish my US readers an enjoyable Thanksgiving. Postings will resume on Monday, November 26th.