R-Squared Energy Blog

Pure Energy

My Top 10 Energy Related Stories of 2009

Here are my choices for the Top 10 energy related stories of 2009. Previously I listed how I voted in Platt’s Top 10 poll, but my list is a bit different from theirs. I have a couple of stories here that they didn’t list, and I combined some topics. And don’t get too hung up on the relative rankings. You can make arguments that some stories should be higher than others, but I gave less consideration to whether 6 should be ahead of 7 (for example) than just making sure the important stories were listed.

1. Volatility in the oil markets

My top choice for this year is the same as my top choice from last year. While not as dramatic as last year’s action when oil prices ran from $100 to $147 and then collapsed back to $30, oil prices still more than doubled from where they began 2009. That happened without the benefit of an economic recovery, so I continue to wonder how long it will take to come out of recession when oil prices are at recession-inducing levels. Further, coming out of recession will spur demand, which will keep upward pressure on oil prices. That’s why I say we may be in The Long Recession.

2. The year of natural gas

This could have easily been my top story, because there were so many natural gas-related stories this year. There were stories of shale gas in such abundance that it would make peak oil irrelevant, stories of shale gas skeptics, and stories of big companies making major investments into converting their fleets to natural gas.

Whether the abundance ultimately pans out, the appearance of abundance is certainly helping to keep a lid on natural gas prices. By failing to keep up with rising oil prices, an unprecedented oil price/natural gas price ratio developed. If you look at prices on the NYMEX in the years ahead, the markets are anticipating that this ratio will continue to be high. And as I write this, you can pick up a natural gas contract in 2019 for under $5/MMBtu.

3. U.S. demand for oil continues to decline

As crude oil prices skyrocketed in 2008, demand for crude oil and petroleum products fell from 20.7 million barrels per day in 2007 to 19.5 million bpd in 2008 (Source: EIA). Through September 2009, year-to-date demand is averaging 18.6 million bpd – the lowest level since 1997. Globally, demand was on a downward trend as well, but at a less dramatic pace partially due to demand growth in both China and India.

4. Shifting fortunes for refiners

The Jamnagar Refinery Complex in India became the biggest in the world, China brought several new refineries online, and several U.S. refiners shut down facilities. This is a trend that I expect to continue as refining moves closer to the source of the crude oil and to cheap labor. This does not bode well for a U.S. refining industry with a capacity to refine 17.7 million barrels per day when total North American production is only 10.5 million bpd (crude plus condensate).

5. China

China was everywhere in 2009. They were making deals to develop oil fields in Iraq, signing contracts with Hugo Chavez, and they got into a bidding war with ExxonMobil in Ghana. My own opinion is that China will be the single-biggest driver of oil prices over at least the next 5-10 years.

6. U.S. oil companies losing access to reserves

As China increases their global presence in the oil markets, one casualty has been U.S. access to reserves. Shut out of Iraq during the recent oil field auctions there, U.S. oil companies continue to lose ground against the major national oil companies. But no worries. Many of my friends e-mailed to tell me that the Bakken has enough crude to fuel the U.S. for the next 41 years

7. EU slaps tariffs on U.S. biodiesel

With the aid of generous government subsidies, U.S. biodiesel producers had been able to put their product into the EU for cheaper than local producers could make it. The EU put the brakes on this practice by imposing five-year tariffs on U.S. biodiesel – a big blow to U.S. biodiesel producers.

8. Big Oil buys Big Ethanol

I find it amusing when people suggest that the ethanol industry is a threat to the oil industry. I don’t think those people appreciate the difference in the scale of the two industries.

As I have argued many times before, the oil industry could easily buy up all of the assets of ethanol producers if they thought the business outlook for ethanol was good. It would make sense that the first to take an interest would be the pure refiners, because they are the ones with the most to lose from ethanol mandates. They already have to buy their feedstock (oil), so if they make ethanol they just buy a different feedstock, corn, and they get to sell a mandated product.

In February, Valero became the first major refiner to buy up assets of an ethanol company; bankrupt ethanol producer Verasun. Following the Valero purchase, Sunoco picked up the assets of another bankrupt ethanol company. If ExxonMobil ever decides to get involved, they could buy out the entire industry.

9. The climate wars heat up

There were several big climate-related stories in the news this year, so I decided to lump them all into a single category. First was the EPA decision to declare CO2 a pollutant that endangers public health, opening the door for regulation of CO2 for the first time in the U.S.

Then came Climategate, which gave the skeptics even more reason to be skeptical. A number of people have suggested to me that this story will just fade away, but I don’t think so. This is one that the skeptics can rally around for years to come. The number of Americans who believe that humans are causing climate change was already on the decline, and the injection of Climategate into the issue will make it that much harder to get any meaningful legislation passed.

Closing out the year was the United Nations Climate Change Conference in Copenhagen. All I can say is that I expected a circus, and we got a circus. It just goes to show the difficulty of getting countries to agree on issues when the stakes are high and the issues complex. Just wait until they try to get together to figure out a plan for peak oil mitigation.

10. Exxon buys XTO for $41 billion

In a move that signaled ExxonMobil’s expectation that the future for shale gas is promising, XOM shelled out $41 billion for shale gas specialist XTO. The deal means XOM is picking up XTO’s proved reserves for around $3 per thousand cubic feet, which is less than half of what ConocoPhillips paid for the reserves of Burlington Resources in 2005.

Honorable Mention

There were a number of stories that I considered putting in my Top 10, and some of these stories will likely end up on other Top 10 lists. A few of the stories that almost made the final cut:

The IEA puts a date on peak oil production

The statement they made was that barring any major new discoveries “the output of conventional oil will peak in 2020 if oil demand grows on a business-as-usual basis.”

AltaRock Energy Shuts Down

Turns out that deep geothermal, which the Obama administration had hoped “could be quickly tapped as a clean and almost limitless energy source” – triggers earthquakes. Who knew? I thought these were interesting comments from the story: “Some of these startup companies got out in front and convinced some venture capitalists that they were very close to commercial deployment” and “What we’ve discovered is that it’s harder to make those improvements than some people believed.” I am still waiting to see a bonafide success story from some of these VCs.

The biggest energy bill in history was passed

In total, $80 billion in the stimulus bill earmarked for energy was a big story, but I don’t know how much of that money was actually utilized.

The Pickens Plan derails

The website is still there, but the hype of 2008 turned into a big disappointment in 2009 after oil prices failed to remain high enough to make the project economical. Pickens lost about 2/3rds of his net worth as oil prices unwound, he took a beating in the press, and he announced in July that we would probably abandon the plan.

So what did I miss? And what are early predictions for 2010’s top stories? I think China’s moves are going to continue to make waves, there will be more delays (and excuses) from those attempting to produce fuel from algae and cellulose, and there will be little relief from oil prices.

December 24, 2009 Posted by | biodiesel, China, climate change, ethanol, ExxonMobil, geothermal, global warming, Media coverage, natural gas, oil consumption, oil demand, oil prices, oil refineries, T. Boone Pickens, valero | 27 Comments

CNG in Your Beer

Thanks to a reader for this story:

Cheap Natural Gas Drives Truck Alternatives

NEW YORK (Dow Jones) – If you order a beer in New York, the odds are growing that it was delivered by a truck running on natural gas.

Beer distributors are among a growing vanguard of private trucking fleets encouraged by cheap natural gas and new government funding to adopt compressed natural gas, known as CNG, as a cleaner alternative to diesel.

As I have argued before, I think it makes a lot of sense for fleet vehicles to migrate to compressed natural gas (CNG). Natural gas is historically a lot cheaper fuel than liquid fuels such as diesel or gasoline. A quick check of prices today shows natural gas for October delivery at $3.78 per million BTUs (MMBTU). By contrast, gasoline is currently trading at $1.62/gallon (spot market, no taxes included) which works out to be $14 per MMBTU. Ethanol is trading on the CBOT at $1.66/gal for October delivery, which works out to be $21.84 per MMBTU. (In 2006, Popular Mechanics put together a graphic comparing different fuel options. See The Great Alt-Fuel Rally).

But more importantly than where prices are today is where prices are going. Natural gas will have a lot of resistance trying to sustainbly break through the $7-$8/MMBTU range because shale gas starts to become economical in that range – and we have a lot of shale gas resources. So if you are planning for the future, the odds are with you over the next few years if you are betting on moderate natural gas prices. Oil prices, on the other hand, are far more uncertain in my opinion.

The caveat of course is that the conversion can be quite expensive (the reasons for that were explained in a previous essay). The article explains that lawmakers are tackling that issue as well:

Paying for CNG conversions is still a problem. Federal funds are available to cover up to $32,000, or roughly two-thirds, of the additional costs associated with purchasing a CNG truck as opposed to a diesel one.

A company that gets the full $32,000 in federal funds should be able to make back its investment in less than three years, according to Natural Gas Vehicles for America.

Lawmakers in Congress are trying to shorten the time it takes to recoup costs on a CNG vehicle. Senate Majority Leader Harry Reid, D-Nev., is among legislators backing a bill, dubbed the NAT GAS Act, that would cover 80% of the incremental cost of a natural gas vehicle and give a $100,000 property tax credit to any company that builds a CNG fueling station. The bill has yet to come up for a vote.

The price differential between CNG and diesel/gasoline/ethanol-powered vehicles is quite large (around $10K for an individual vehicle), which is why natural gas may not make sense for individuals unless they drive a great number of miles. But that’s what fleets do, so it may make more sense to convert fleets over (and the localized nature of fleets also improves the economics of putting in CNG refueling stations). It all boils down to how many miles a year you drive and your expectation for the price differential between natural gas and gasoline/diesel/ethanol over the time you will drive the vehicle.

Finally, in the spirit of my previous post, fleet conversions are one more way to reduce our dependence on imported petroleum.

September 25, 2009 Posted by | CNG, natural gas | 75 Comments

Britain’s Impending Energy Crisis

In case you missed the story yesterday in the Economist:

How long till the lights go out?

North Sea gas has served Britain well, but supply peaked in 1999. Since then the flow has fallen by half; by 2015 it will have dropped by two-thirds. By 2015 four of Britain’s ten nuclear stations will have shut and no new ones could be ready for years after that. As for coal, it is fiendishly dirty: Britain will be breaking just about every green promise it has ever made if it is using anything like as much as it does today. Renewable energy sources will help, but even if the wind and waves can be harnessed (and Britain has plenty of both), these on-off forces cannot easily replace more predictable gas, nuclear and coal power. There will be a shortfall—perhaps of as much as 20GW—which, if nothing radical is done, will have to be met from imported gas. A large chunk of it may come from Vladimir Putin’s deeply unreliable and corrupt Russia.

Many of Britain’s neighbours may find this rather amusing. Britain, the only big west European country that could have joined the oil producers’ club OPEC, the country that used to lecture the world about energy liberalisation, is heading towards South African-style power cuts, with homes and factories plunged intermittently into third-world darkness.

For more background on Britain’s situation, see also The looming electricity crunch.

I thought about these issues a lot when I lived in Scotland. Britain is clearly facing a crisis, and how they address it will be instructive to those of us who are concerned about energy shortages. I always said that Britain will ultimately conclude that they have to have a lot of new nuclear power, but it looks like that recognition won’t come in time to help them. So what’s the answer? They start ramping coal back up – breaking those green promises – or they start to suffer power outages. What do you think they will do? As I have said before, when the power starts to go out, environmental concerns will fly out the window. Sure, people like the idea of not burning coal. But will they give up power 6 hours a day to achieve that? I don’t think too many of them will.

Of course there is still natural gas from Russia, and I think they are going to have to roll the dice in the short term and hope Russia doesn’t hold them hostage. Longer term, LNG terminals would seem to make sense to me, but they don’t seem to be a part of the discussion here.

Ultimately, I think Britain will behave as the rest of the world will behave when faced with energy crunches. They will find that renewables can’t step up and fill the gap, and so they will roll out conservation measures and make do with whatever it takes to avoid crippling power outages: No matter if it takes coal, natural gas, or the blubber from baby seals. This is how I expect the world to respond when renewable dreams meet the reality of power shortages.

August 7, 2009 Posted by | coal, electricity usage, energy crisis, natural gas, Russia, Scotland, United Kingdom | 43 Comments

Answering Reader Questions 2009: Part 1

Before I took a recent trip to Canada, I opened up the floor for questions. Getting them answered has taken longer than I intended. Fortunately, other readers answered a lot of them in the comments of that thread. So I have sifted through the list, trying to find questions that were still open, or those I wanted to make an additional comment on. Thanks to those who submitted questions, as well as to those who answered them. A special thanks to Kit P., who wrote some extensive answers to some of the questions around electricity and saved me a good deal of work.

This is going to take at least three installments. But I have put this off long enough, so here are my answers to the first five questions. This installment covers plasma gasification, natural gas projections, free energy, promising alternative energy technologies, and GTL.

I have a total of about 25 to answer, and I will get to them in the coming week.

The Questions

Russ wrote: I read about plasma gasification of garbage. Naturally the people promoting it say how great it is. Your comments please. Answer

Bob S. asked: What will natural gas production in the US be 5, 10 and 15 years from now? Should I convert my 310 delivery trucks (I operate in an east coast city) from diesel to natural gas? Answer

bc asked: The inline ad for this article claims “Never pay for electricity again”, something called Magniwork. I recommend NOT clicking the click, as it does dodgy things with your browser. Does Magniwork really work? Is there such a thing as “free energy”? How do I stop these scammers’ ads appearing on my screen? Answer

C asked: Which alternative energy technologies do think will have the greatest impact in the US? Answer

Benny wrote: A friend of a friend of mine is working on a process to convert natural gas to gasoline, through some sort of heat and pressure. My friend did consulting on pressure and flow inside of a tube. That is all I know. Is there any hope for such a scheme? Any hope of commercial viability (obviously, we have abundant NG in North America)? Answer

The Answers

Answer

Gasification technologies in general have a lot of idiosyncrasies that can make them difficult to get right. I have seen this first hand in a gasifier that failed to perform. The issue in that particular case was the refractory which protects the metal from the very high temperatures of the gasifier. If the refractory has a problem, you can get hot spots on the shell of the gasifier and weaken the metal.

That’s just an example of one of the things you have to get right. Plasma gasification is a special case within gasification technologies. It uses electricity and very high temperatures (thousands of degrees) to gasify the feed. Because of the electricity demands, the external energy inputs into plasma gasification can be high relative to other gasification technologies. Further, if you are using the synthesis gas produced to further produce a liquid fuel, there are a couple of other considerations. Plasma gasification occurs at low pressures. Many of those downstream reactions (like Fischer Tropsch) are carried out at high pressure, requiring a further energy intensive compression step. This means that plasma gasification has been looked at very little for the production of liquid fuels. Coskata is looking at it for their system, but this was one of the criticisms I had of them. The technology at scale and in that application is an unknown. That puts increased risk on Coskata’s technology.

If the purpose is merely to destroy the garbage and produce a bit of syngas in the process, then that might be a more workable option. I think it just depends on how the costs compare to digestion or to producing power from incinerating the waste. But if the intent is to turn that garbage into liquid fuels, plasma gasification may not be the best choice.

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Answer

Bob, the projections from the EIA (admittedly taken with a grain of salt) are that natural gas production will be relatively flat because prices are expected to be relatively flat. Because of all of the shale gas that starts to become economical in the $6-$8/MMBTU range, I think it is going to be hard for natural gas prices to break through those levels for a good while. Therefore, if I was planning for fleet purposes, I might take the upper end as a worst case and see what that would do to my business. Then, I think whether to convert depends entirely on how many miles per year your fleet travels and the availability of fueling stations in your area.

I believe that if the savings would pay back the conversion costs in 3 years at a presumed natural gas cost over that time of – say $5 – then I would do it. For that matter, you can hedge your natural gas price. If I look out 5 years, the price I can lock natural gas in for is still in the $6-$7 range in 2014, and in 10 years is only in the $7-$8 range. You just have to make the call on whether you are going to be financially OK if prices do get up into that range, knowing you have a substantial upside if they stay in the $3-$5 range.

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Answer

No, I don’t believe any of these free energy systems work. The ones I am familiar with all violate laws of thermodynamics (e.g., Steorn). So I certainly don’t endorse any of them, and the appearance of their ads here is because someone paid Google to place their ads on topical websites (presumably with certain energy-related keywords). I don’t know how to stop them from appearing, except I do have some ability to block them when I see them. I have done this in the past for highly non-topical ads.

My other option is of course to take the ads down altogether. The income from them is pretty trivial. However, I have always liked the idea that my writing is helping to pay my grocery bill. Best thing I would suggest is just not to click on ads that seem too good to be true.

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Answer

I am going to tip-toe around this one. As some others pointed out, there are options that are making a contribution right now, albeit I think you probably mean in the long run. To be clear, I think we will have corn ethanol for a long time. But I also think it will necessarily be subsidized for the next 30 years as it has been for the past 30. I don’t believe it will be able to make a big impact insofar as displacing large amounts of fossil fuels simply because a lot of fossil fuels tend to be consumed in the process of producing the ethanol.

However, I do think there are technologies that have a lot of promise – especially in specific niches – but that haven’t gotten a lot of attention. But in my new role, I will be working on developing some of these technologies and trying to bring them to commercialization. Some of them are very specialized and relatively unknown, and therefore I don’t want to write about them until our relationships are more secure.

But without totally dodging the question, I will provide some hints. There is a guy who posts here sometimes called Al Fin (see his website here). I was reading through a blog posting on cellulosic ethanol a few days ago, and I ran across a comment that Al made. His first paragraph here hits specifically upon some of the things that I think show a lot of promise – and in fact that first paragraph hits very close to the mark on several things I am looking at. I will at some point start writing more about some of them.

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Answer

Benny, that’s the basis for gas-to-liquids (GTL). Natural gas can be turned into synthesis gas, and then you can send that gas through a Fischer-Tropsch reactor to make longer chain hydrocarbons. From this process, you get wax which has to be cleaned up, and as part of the clean-up you can make gasoline blending components. The problem is that it is a capital intensive process due to all of the downstream clean-up equipment required, and thus is expensive. This is why – despite lots of natural gas reserves – we don’t have GTL plants popping up all over the place.

Now if your friend is working on a process to directly make gasoline from natural gas, I am unaware of such a process. Natural gas isn’t too keen on reacting with other natural gas molecules to form longer chain hydrocarbons without first converting it into an intermediary like syngas. One could perhaps envision a catalyst that could build up the chains directly from natural gas into something longer.

There is a reaction called methane coupling (which I have some experience with) in which the methane (C1, because it has one carbon) in natural gas is converted into C2. In order to get up into the gasoline range, you need to grow that chain to something like the C5 to C8 range. In other words, you have to grow the single carbon atom in methane into a string of 5 to 8 carbon atoms joined together. The methane coupling reaction, for instance, has low yields and low selectivity, demonstrating the challenge of growing these chains. If you can only get 10% of the methane to form C2, and the reaction is capable of going to C3, then your yields beyond C2 are going to be trivial. Still, it isn’t pseudoscience.

OK, that’s all for now. The next installment will start with the story about the UT Arlington researchers making oil from lignite.

August 1, 2009 Posted by | coal, Coskata, fischer tropsch, free energy, gtl, methane coupling, natural gas, plasma gasification | 24 Comments

Behind the Costs of CNG Conversions

In my recent post – How Much Natural Gas to Replace Gasoline? – I mentioned that it is quite expensive to convert a gasoline-powered vehicle to natural gas. If you drive a tremendous number of miles each year – as many fleets do – the conversion will pay for itself relatively quickly. For most of us, the savings wouldn’t be enough to justify the conversion.

Today I received an e-mail from Marc J. Rauch, Exec. Vice President/Co-Publisher of The Auto Channel, who shed a bit more light on why the conversion is so expensive. I found this information quite useful, and I received his permission to post his e-mail, seen below.

———————————————-

Hi Robert -

Thanks for the work you did on figuring out how much natural gas we actually seem to have (according to current knowledge) and for the related cost comparisons. It’s a great and value tool for those of us that believe in CNG (and propane) as a viable engine fuel alternative.

One thing that I would like to add (assuming that you didn’t already know this or learn it since posting your piece), is that the cost of CNG conversions for existing vehicles is as high as it is because of EPA licensing requirements. For an individual (or shop) to be licensed to do a conversion, the person must pay $10,000 per year, per engine type, per year of manufacture. So that if a conversion shop wanted to do conversions in 2009 for Camrys for the years 1995 to 2005, the shop owner would have to pay the government $100,000 in licensing fees. Then, if he wanted to do conversions on the same models in 2010, he would have to pay the $100,000 again, even though they are the exact same models and engines that he has been licensed on already. And if there is more than one engine involved, i.e., a 6-cylinder and 8-cylinder, the cost would double.

Therefore, if a shop owner wanted to do 10 model years of Camrys and Corollas and Celicas, and well as Honda Accords and Civics, unless there were common engines being used in these five models the licensing cost (for just one engine per) would be a half million dollars, which would have to be paid again in 2010. These fees are, needless to say, ridiculous and are only there to ensure that many don’t get done (thanks to the gasoline lobby). The cost of the conversion kits are actually relatively inexpensive. If there was a sensible licensing fee (or no fee) the cost for the work could be just a few hundred dollars.

To be fair, there is a second part of the cost equation that has to be addressed: trained CNG conversion mechanics. An argument is typically made by those that want to make argument against CNG that there aren’t enough trained mechanics. This is somewhat true, but of course there really is no shortage of new and old mechanics that would be willing to learn. So the issue is where can they be trained? The University of West Virginia has a great automotive program that they’ve “syndicated” to other colleges around the country. In California, two schools (Rio Hondo in So. CA and Yuba College in No. CA) teach the UWV curriculum. They can and do teach CNG conversions.

I hope the above wasn’t too redundant for you. If you have other information or newer information I would love to hear of it.

Regards.

Marc J. Rauch
Exec. Vice President/Co-Publisher
THE AUTO CHANNEL
www.theautochannel.com

July 21, 2009 Posted by | CNG, natural gas | 25 Comments

How Much Natural Gas to Replace Gasoline?

I Took This Picture of a CNG Bus on a Recent Trip to D.C.

You may have seen the news this week that a report by the Potential Gas Committee says natural gas reserves in 2008 rose to 2,074 trillion cubic feet. The New York Times and the Wall Street Journal (via Rigzone) both had stories on it, and T. Boone Pickens issued a press release. First, from the New York Times (and this is a really good article):

Estimate Places Natural Gas Reserves 35% Higher

Thanks to new drilling technologies that are unlocking substantial amounts of natural gas from shale rocks, the nation’s estimated gas reserves have surged by 35 percent, according to a study due for release on Thursday.

Estimated natural gas reserves rose to 2,074 trillion cubic feet in 2008, from 1,532 trillion cubic feet in 2006, when the last report was issued. This includes the proven reserves compiled by the Energy Department of 237 trillion cubic feet, as well as the sum of the nation’s probable, possible and speculative reserves.

The new estimates show “an exceptionally strong and optimistic gas supply picture for the nation,” according to a summary of the report, which is issued every two years by a group of academics and industry experts that is supported by the Colorado School of Mines.

The Wall Street Journal wrote:

US Has Almost 100-Year Supply of Natural Gas

The amount of natural gas available for production in the United States has soared 58% in the past four years, driven by a drilling boom and the discovery of huge new gas fields in Texas, Louisiana and Pennsylvania, a new study says.

…the Potential Gas Committee’s study was prepared by industry geologists who analyzed individual gas fields using seismic imagery and production data provided by gas producers. The surge in gas resources is the result of a five-year-long drilling boom spurred by high natural-gas prices, easy credit and new technologies that allowed companies to produce gas from a dense kind of rock known as shale. The first big shale formation to be discovered, the Barnett Shale near Fort Worth, Texas, is now the country’s top-producing gas field, and companies have made other huge discoveries in Arkansas, Louisiana and Pennsylvania. Together, the shale fields account for roughly a third of U.S. gas resources, according to the Potential Gas Committee.

Pickens had this to say:

T. Boone Pickens Statement on Surge in Estimated Natural Gas Reserves

Today’s report substantiates what I’ve been saying for years: there’s plenty of natural gas in the U.S. I launched the Pickens Plan a year ago to help reduce our dangerous dependence on foreign oil, and using our abundant supply of natural gas as a transition fuel for fleet vehicles and heavy-duty trucks is a key element of that plan. On the same day this report is going out, diesel prices are again on the rise, squeezing the trucking industry. Now more than ever we need to take action to enact energy reform that will immediately reduce oil imports.

The 2,074 trillion cubic feet of domestic natural gas reserves cited in the study is the equivalent of nearly 350 billion barrels of oil, about the same as Saudi Arabia’s oil reserves.

A number of people have rightly pointed out that a 100-year supply implies usage at current rates. But it got me to thinking about how much natural gas it would take to displace all U.S. gasoline consumption. So in the spirit of my previous essay Replacing Gasoline with Solar Power, I will do the same calculation for replacing gasoline with natural gas. The big difference between this calculation and the earlier one is that solar power still has some technical issues to resolve (e.g., storage) and electric vehicles are not yet ready for prime time. On the other hand we are perfectly capable, today, of displacing large numbers of gasoline-fueled vehicles with natural gas.

How Much Do We Need?

The U.S. currently consumes 390 million gallons of gasoline per day. (Source: EIA). A gallon of gasoline contains about 115,000 BTUs. (Source: EPA). The energy content of this much gasoline is equivalent to 45 trillion BTUs per day. The energy content of natural gas is about 1,000 BTUs per standard cubic foot (scf). Therefore, to replace all gasoline consumption would require 45 billion scf per day, or 16.4 trillion scf per year. Current U.S. natural gas consumption is 23 trillion scf per year (Source: EIA). Therefore, replacing all gasoline consumption with natural gas would require a total usage of 39.4 trillion scf per year, an increase in natural gas consumption of 71% over present usage.

Assuming for the sake of argument that the 2,074 trillion standard cubic feet cited in the study is accurate, that the “probable, possible and speculative reserves” eventually equate to actual reserves, and that the gas is economically recoverable, that is enough gas for 53 years of combined current natural gas consumption and gasoline consumption. If you assume that only the proven plus probable reserves are eventually recovered, the amount drops to about 1/3rd of the 2,074 trillion scf estimate, still enough to satisfy current natural gas consumption and replace all gasoline consumption for almost 20 years.

We can also calculate in terms of oil imports. Right now the U.S. imports about 13 million barrels per day of all petroleum products. A barrel of oil contains around 5.8 million BTUs, but oil only makes up 10 million of the 13 million barrel per day figure. Other imports include things like gasoline (4.8 million BTUs/bbl) and ethanol (3.2 million BTUs/bbl). Scanning the list of imports, I probably won’t be too far off the mark to presume that the average BTU value of those 13 million bpd of imports is about 5.4 million BTUs/bbl. On an annual basis, this equates to 25.6 trillion scf of natural gas, which would be an increase over current natural gas usage of 111%. Going back to the 2,074 trillion scf from the study, this would be enough to displace imports of all petroleum products (again, at current usage rates and not factoring in declining U.S. oil production) for 43 years.

What’s the Cost?

Natural gas is presently trading at about $4 per million (MM) BTU (although December 2009 is trading at almost $6). Oil is presently trading at $71/bbl, which equates to $12.24/MMBTU. Gasoline is presently trading at over $17/MMBTU. Thus, natural gas is a bargain relative to oil or gasoline. Incidentally, I just checked on seasoned wood and wood pellets, and they range from $8-$12/MMBTUs. So it is cheaper to heat your house with gas than with wood. I am not sure I would have guessed that.

While natural gas is a bargain relative to gasoline, converting a gasoline-powered vehicle to natural gas isn’t cheap. According to this source, it can cost $12,500 to $22,500 to convert a gasoline-powered car to natural gas. Honda makes a compressed natural gas (CNG) vehicle, but according to this review in Car and Driver the premium over the gasoline version is $8780. A person would need to drive an awful lot to justify that premium. However, that’s what fleets do. They drive a lot. The large price differential explains why fleets would be interested in running their vehicles on natural gas.

Conclusions

So, the good news is that the United States could be energy independent if the newly released natural gas reserve numbers are remotely accurate. It also appears that we have enough natural gas available that civilization isn’t going to end any time soon due to lack of energy supplies. There are three caveats. First, energy independence via natural gas could require us to spend significantly more for personal automotive transportation. Second, “possible” reserves may never materialize. Finally, a large chunk of the calculated reserves are based on shale gas, and that requires gas to be in the $6-$8/million BTU range to be economical. Still, it is a bargain compared to gasoline, and it explains why fleets are more receptive to conversion to natural gas than the general public is likely to be for their personal vehicles.

June 19, 2009 Posted by | CNG, energy consumption, gasoline, gasoline demand, gasoline imports, natural gas, oil consumption, oil imports, T. Boone Pickens | 63 Comments

Time to Switch to Natural Gas?

A couple of articles, both at Seeking Alpha, got me to thinking about whether it might be time to trade in my Petrobras (PBR) stock for something in the natural gas sector. From the first of the two articles:

Natural Gas Should Get a Boost from China’s New Demand

China has been developing natural gas vehicles for many years, recently the number of vehicles running on nat gas has risen dramatically. For example, the government of Xi’an in western China, a medium size with 8M population, has decided to mandate all city buses and taxis using natural gas. The government website reported 5000 buses and 20000 taxis was using nat gas in 2008, and is expected to grow in coming years.

That wasn’t the most interesting bit for me. This was:

With natural gas price at historic low $3.74, investors should take advantage and invest in ETF such as (UNG), or producers such as Chesapeake Energy Group (CHK), Devon Energy Corp (DVN) and XTO Energy (XTO).

I haven’t been following natural gas prices closely, and would have expected them to be on the rise like oil prices. Speaking of which, the other article was about Petrobras, and it argued that the price is poised to rise further if oil prices continue to climb:

Petrobras Ready to Benefit from Next Oil Price Spike

During the credit crunch, there were concerns Petrobras would have trouble obtaining financing to exploit Tupi. The stock dropped from over $70 to a low of under $15 in November of 2008. However, the stock has recovered nicely as credit crunch worries have subsided and financing deals have been reached with China and others. Recently PBR traded above $43/share. The PE=11.7 and the dividend yield is a scant 0.70%. But this isn’t a dividend story. Unlike US majors XOM, CVX, and COP, Petrobras is a story about strongly increasing production in an age of peak oil. That will certainly lead to increasing profits and a stock that will outperform its peers.

To me, this explains why PBR is trading at $43 a share. But I bought PBR at $17.50 in November – having just barely missed the bottom – and it has risen sharply with oil prices. But I think the upside at this point is limited unless oil prices continue to climb. In fact, I would have sold it already if I wasn’t trying to wait long enough to benefit from the long term capital gains tax rate.

And while I think there is some upside left to PBR, natural gas stocks should go sharply higher if natural gas prices start to respond to higher oil prices. (Historically, this correlation has not been very good, but the two have correlated well in the past few years). We are also entering the low demand time of year for natural gas, and prices also reflect that. But if your outlook is a bit longer than past this summer, natural gas is looking like a real bargain to me. In fact, natural gas stocks remind me of PBR back in November…

June 10, 2009 Posted by | CNG, investing, natural gas, PBR, Petrobras | 22 Comments

Natural Gas Gaining Momentum

I have said a number of times that I would prefer to take the natural gas we use to make ethanol and just use it directly in compressed natural gas (CNG) vehicles. Natural gas burns very cleanly, and I think that would be a lot more efficient than the convoluted scheme by which we turn natural gas into ethanol. One of the criticisms I sometimes encounter from ethanol advocates is that we would have to build out a new CNG infrastructure to do so. I always point out that the only reason we have built an E85 infrastructure is that taxpayers funded it.

But I learned something of interest today when I was flying back to Texas from Europe. I am currently reading Oil 101by Morgan Downey. This is a really great book by the way, which I will review as soon as I finish it. Downey covers natural gas in some detail, and the book states that there are 1600 retail stations in the U.S. selling CNG. That made me wonder how many stations are selling E85, since some ethanol advocates have claimed to me that we are already too far down the E85 path to start down a CNG path. It turns out that today there are 1900 stations selling E85, but the number only went past 1600 in 2008. So CNG isn’t operating from as big a deficit as some of my ethanol friends would like to believe. CNG just hasn’t benefited from the same kind of legislation that has benefited ethanol.

But the landscape may be starting to change. Of course T. Boone Pickens has been pushing CNG hard as part of his Pickens Plan. Then last month AT&T announced they would invest $565 million to replace 15,000 gasoline-powered fleet vehicles with compressed natural gas and hybrid engines. And yesterday Reps. Dan Boren (D-Okla.), John B. Larson (D-Conn.) and John Sullivan (R-Okla.) introduced new legislation to further incentivize CNG:

House members plan bill to expand NGV use

Known as the New Alternative Transportation to Give Americans Solutions (NAT GAS) Act, the bill also would create a new tax credit for automakers which produce natural gas and bi-fueled vehicles, the three federal lawmakers said. Currently, all major automakers manufacture NGVs for overseas markets and this provision is critical to encourage them to begin offering NGVs in the United States, they said.

Energy investor T. Boone Pickens applauded the measure. “America’s national and economic security depends on moving off foreign oil as quickly as possible. Natural gas is the cleanest, most abundant, most economic fuel to replace imported diesel fuel. The US has enough natural gas to last more than 118 years; we should turn to it as an immediately replacement for foreign oil in fleets and heavy-duty vehicles,” he said.

I will have to look into the context of that 118 year claim a bit later. But the U.S. is certainly in better shape with respect to our gas reserves than we are with our oil reserves. Further, gas can be produced renewably from the same feedstocks that go into any other biofuel.

Of all the schemes promoting energy independence, a massive expansion of CNG just might have a chance of displacing enough oil to achieve at least independence from the Mideast and Venezuela. Again, it will take many components, but I don’t see any possible way it can be achieved without a healthy contribution from domestic oil and gas production.

Now, since I have been up for 24 hours, I am going to call it a day.

April 3, 2009 Posted by | CNG, Morgan Downey, natural gas | 43 Comments

Natural Gas Gaining Momentum

I have said a number of times that I would prefer to take the natural gas we use to make ethanol and just use it directly in compressed natural gas (CNG) vehicles. Natural gas burns very cleanly, and I think that would be a lot more efficient than the convoluted scheme by which we turn natural gas into ethanol. One of the criticisms I sometimes encounter from ethanol advocates is that we would have to build out a new CNG infrastructure to do so. I always point out that the only reason we have built an E85 infrastructure is that taxpayers funded it.

But I learned something of interest today when I was flying back to Texas from Europe. I am currently reading Oil 101by Morgan Downey. This is a really great book by the way, which I will review as soon as I finish it. Downey covers natural gas in some detail, and the book states that there are 1600 retail stations in the U.S. selling CNG. That made me wonder how many stations are selling E85, since some ethanol advocates have claimed to me that we are already too far down the E85 path to start down a CNG path. It turns out that today there are 1900 stations selling E85, but the number only went past 1600 in 2008. So CNG isn’t operating from as big a deficit as some of my ethanol friends would like to believe. CNG just hasn’t benefited from the same kind of legislation that has benefited ethanol.

But the landscape may be starting to change. Of course T. Boone Pickens has been pushing CNG hard as part of his Pickens Plan. Then last month AT&T announced they would invest $565 million to replace 15,000 gasoline-powered fleet vehicles with compressed natural gas and hybrid engines. And yesterday Reps. Dan Boren (D-Okla.), John B. Larson (D-Conn.) and John Sullivan (R-Okla.) introduced new legislation to further incentivize CNG:

House members plan bill to expand NGV use

Known as the New Alternative Transportation to Give Americans Solutions (NAT GAS) Act, the bill also would create a new tax credit for automakers which produce natural gas and bi-fueled vehicles, the three federal lawmakers said. Currently, all major automakers manufacture NGVs for overseas markets and this provision is critical to encourage them to begin offering NGVs in the United States, they said.

Energy investor T. Boone Pickens applauded the measure. “America’s national and economic security depends on moving off foreign oil as quickly as possible. Natural gas is the cleanest, most abundant, most economic fuel to replace imported diesel fuel. The US has enough natural gas to last more than 118 years; we should turn to it as an immediately replacement for foreign oil in fleets and heavy-duty vehicles,” he said.

I will have to look into the context of that 118 year claim a bit later. But the U.S. is certainly in better shape with respect to our gas reserves than we are with our oil reserves. Further, gas can be produced renewably from the same feedstocks that go into any other biofuel.

Of all the schemes promoting energy independence, a massive expansion of CNG just might have a chance of displacing enough oil to achieve at least independence from the Mideast and Venezuela. Again, it will take many components, but I don’t see any possible way it can be achieved without a healthy contribution from domestic oil and gas production.

Now, since I have been up for 24 hours, I am going to call it a day.

April 3, 2009 Posted by | CNG, Morgan Downey, natural gas | 65 Comments

Xethanol Now Defunct

This will be my last ever story on Xethanol. I have written a number of stories on them in the past. I wrote that their claims that they would be the first to produce commercial cellulosic ethanol were ludicrous. That was the gist of the interview I gave to Sharesleuth when they were writing their Xethanol exposé. I predicted that Xethanol would “offer up a litany of excuses and delaying tactics for why their cellulosic ethanol plant is not up and running.” I explained to several reporters that the technology agreements they touted to investors could be had for next to nothing, and in February of 2007 I predicted that Xethanol would eventually go bankrupt. I was sounding these warnings when the share price was $12. It eventually fell to well under $1.

You know where this is going, don’t you? I had failed to check in on Xethanol for a while, but today I did a search for the stock symbol, and got this: “No quote found for that symbol.” Hmm. So I searched Google News, and found this:

Xethanol changes name, energy focus

The self-proclaimed discredited cellulosic ethanol company Xethanol Corp. relaunched itself on Aug. 28 on the New York Stock Exchange as Global Energy Holdings Group Inc. and is ushering in what company executives hope will be new life for the company.

“We’re moving on from ethanol and the reason is – the business model doesn’t work,” Ames said. “With the price of corn and energy…we’ve lost a lot of money doing that. We’ve spent a lot of money in cellulosic research and nothing out there is really fruitful and will make a major economic impact on producing ethanol.”

And in another article, former Xethanol CEO David Ames made a very profound statement:

Ames is skeptical that cellulosic will change the U.S. energy system. He said difficulties associated with making the fuel will not be eased by making it in bigger batches.

You can scale widgets, but you can’t scale chemistry,” he said.

This is exactly what I keep trying to tell people who insist that cellulosic ethanol is going to proceed along a Moore’s Law path and scale up to displace significant quantities of gasoline. It’s not going to happen. The chemistry and physics are working against you.

I truly feel bad for Xethanol investors, but this is what can happen with overhyped technology. The investor who is out of their field of expertise can’t easily distinguish an overhyped company from a company with true potential. But that’s one reason I write this blog: To sniff out and expose the hypesters, while promoting the diamonds in the rough.

On a more positive note, their new direction (into methane) is a much more promising field. Biomass can be fermented to methane at a fraction of the expense and complexity that it takes to make cellulosic ethanol. This doesn’t mean they will be a commercial success, but their odds have gone from one in a million to one in a hundred.

November 11, 2008 Posted by | Global Energy Holdings Group, GNH, natural gas, Xethanol, XNL | 56 Comments

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