Research Triangle Energy Consortium

Methanol is pro life as well, the good life.  Lower cost driving that is relatively immune to gasoline price run ups and lower emissions to boot, now that is living well.  Add to that the fact that in the production of methanol we have choice of starting raw material.  Unlike ethanol, that other alcohol, methanol is easily derived from a host of carbonaceous materials other than natural gas.  So it is not subject to price volatility, as for example was ethanol, to the vagaries of corn prices.

As we have discussed previously, flex fuel vehicles capable of running any mixture of either alcohol or gasoline would afford consumers choice.  The E85 experience was not all positive because ethanol prices without subsidies were relatively high in the US.  Brazil, with its low cost sugar cane derived ethanol is a different story.  Now with the disappearance of the import tariff on ethanol, perhaps Brazilian ethanol will be viable here.  But ethanol from biomass still suffers economic hurdles.  So, the choice of feedstock in this country is pretty much limited to corn.  Other crops such as sweet sorghum have not yet become viable.

Methanol on the other hand is very simply produced from natural gas, coal, petroleum coke or woody biomass, pretty much in order of ascending cost to manufacture.

This chart was derived by RTI engineers for a typical methanol plant producing 5000 tonne/day.  Plants double or triple that size are also not uncommon.  Costs at such plants would be comparable.  At April 2012 prices methanol could be produced for about 30 cents per gallon.  Add to that typical distribution costs and taxes of 30 cents.  Then double that for gasoline equivalence because methanol has half the energy content of gasoline.  We come up with methanol costing roughly $1.20 at the pump on a gasoline equivalent basis.  Compare that to regular gasoline today at about $3.80 per gallon.  Do keep in mind, though, that with today’s low compression car engines the methanol tank would be roughly twice the size of a gasoline tank, or you would simply have to refuel more often.  This would be a part of the consumer trade off.  As reported in a previous blog posting, high compression engines could eliminate that penalty.

But natural gas pricing today is abnormally low in large measure due to the warm winter.  A more normal price would be the October 2010 price shown in the figure.  That would put methanol at the pump at about $1.60 per gallon, still a steep discount to gasoline.  Looking out further, we forecast the ceiling for natural gas pricing as shown.  This has support from the study by Amy Jaffe and colleagues at the Baker Institute in Houston, who used different methods.  At the upper end of the range we could expect methanol at the pump to be $2.30 per gallon.  The likelihood of gasoline dropping to those levels in the foreseeable future is extremely remote and episodic at best.  All forecasts of oil prices are well into three digits and not the sub $70 per barrel they would have to be to get gasoline to break even with methanol.  We are forced to conclude that methanol will be cheaper than gasoline on a miles driven basis for decades.

That leaves the question of whether natural gas supply will keep up with the demand.  The concern is valid to some degree because of the expected massive displacement of coal as a fuel for electricity production.  Add to that the expectation of rapid expansion in other chemical industry segments such as fertilizer production.  Finally, export of liquefied natural gas (LNG) will certainly be in play.  LNG adds between $3 and $4 to the cost of a million BTU, the position in that range depending upon how far is the delivery point.  Even with that mark up, gas at prices shown in the graph will be profitable for delivery to countries such as Japan and India, who are currently paying over $12 per million BTU.  Such export is being resisted by the US chemical industry because of worries of price escalation, so it may well not happen.  Said industry is enjoying a windfall at current gas prices.  Anhydrous ammonia sells for between $600 and $800 a tonne.  The raw material cost of that at April 2012 natural gas prices is under $60.  That is the definition of profit.

Methanol from coal can be expected to cost about the same as natural gas at the upper end of the range in the figure.  For this computation we take $25 per tonne for the low grade coal at the mine mouth.  High grade coal at $150 per tonne would be out of the question and unnecessary.  Petroleum coke is a bi-product of heavy oil processing and has very low value.  But it is very high in carbon and extremely low in ash.  It can, however, have high sulfur and heavy metals.  These last are manageable.  One could expect methanol from petroleum coke to be just a bit higher than from low grade coal.  All of these are still very competitive with gasoline.  Finally there is biomass.  The lignin content of some woody biomass is particularly deleterious for ethanol production.  But thermal processes used to make methanol are not bothered by that aspect.  The costs would be higher than for the other sources discussed but further research could bring that down.

In summary, methanol offers consumers of transport fuel a viable low cost choice.  Producers will have choice with respect to raw materials, with natural gas currently being the low cost winner.  But in the future, a significant portion could be from poorly utilized resources such as low grade coals and petroleum coke.  Finally, renewable sources such as woody biomass could be made economically viable.  The only loser in this scenario will be imported oil.  If tempted to drink to that, make sure it is ethanol.

Vikram Rao

Responsible production of shale gas will essentially eliminate import of natural gas.  That leaves the big ticket item oil.  Here too, the notion of independence can usefully be bifurcated into first independence from distant and unreliable sources.  First step to that could be to target the oil passing through the Straits of Hormuz.  Iranian saber rattling today concerns that flow. 

The EIA forecasts that in 2022 we will import 7 MM bpd, down from the 8.1 MM bpd in 2011.  I think that if pipelines are built from N Dakota, Bakken oil will eat into this number more than already forecast.  But sticking with their figure, first subtract Canada and Mexico.  Canada can be expected to ramp up their current flow of 2.2 MM bpd to at least 3.0 MM bpd.  We have a special relationship with the Canadians: the bulk of their oil is refined in the US even if some of it is upgraded in country.  Aside from the high carbon footprint of this oil, this is a desirable and secure relationship.  There is a fair amount of trade in natural gas as well.  Mexico currently supplies 0.8 MM bpd.  This is at considerable risk of decrease because of the decline in the Cantrell field, but we will leave it at that figure for 2020.  This too is heavy oil suited to our refineries. 

Of the 3.2 MM bpd balance, we estimate about 1.7 MM bpd passing through the Straits.  So, one strategy would be to target oil alternatives to that level.  Ignoring for the present the fact that a barrel of oil does not generate a full barrel of transport fuel, we can target 1.7 MM bpd of oil replacement.  A rough calculation of all sources indicates this is viable, as enumerated below.

• Sassol, the South African leader in GTL has already announced construction of a GTL plant in Louisiana reportedly rated at 90000 bpd of fuel.  Assume at least one other such, bringing the total close to 200000 bpd from GTL emboldened by low gas prices.
• Alaska offers three distinct opportunities for supplying the Lower 48.  One is an abundance of heavy oil near infrastructure in Prudhoe Bay.  It suffers from high viscosity and cannot be sent down the pipeline.  But it could be blended with two different light oils.  One is shale oil, much as is in the Bakken and Eagle Ford.  One small company Great Bear Petroleum is reportedly collaborating with Halliburton to deliver this fluid.  The other source of diluting fluid is liquid from natural gas.  Prudhoe Bay has at least 35 trillion cu ft of recoverable gas that has no market.  This “stranded” gas has low value and can inexpensively be converted to liquids using well known methods.  The Trans Alaska Pipeline System is currently pumping just over 500000 bpd.  When it drops much below this the entire economics of transport are at risk.  So there is an imperative to feed more into that pipeline.  The measure noted above should accomplish that as well as supply at least an additional 200000 bpd to the lower 48.
• Long haul trucks switching to LNG or methanol could reasonably target 20% of current fuel usage, which accounts for 0.5 MM bpd of oil.
• Methanol, ethanol, CNG, biofuel and electric cars could target 1.0 MM bpd.  A significant part of this, and relatively straightforward, would be CNG displacement of diesel in metropolitan public and commercial transport.  For passenger vehicles methanol appears to be the most advantaged on a cost basis.

An angle other than a Straits strategy is a study of the marginal domestic barrel and what it replaces.  New domestic oil production is all light sweet oil.  This is most like the oil from Saudi Arabia and Nigeria.  So that may make sense as the first to be displaced.  The Saudi portion is, of course, Straits related and currently stands at about 1 MM bpd.  Similarly, the uptick in Canadian oil that we predict will displace heavy crude such as from Venezuela, which currently weighs in at about 0.65 MM bpd.  The main point is that crude quality is variable and refineries are choosy, so country strategies have to recognize this.

Shale gas produced responsibly will be a key enabler for methanol to be produced at prices attractive with respect to gasoline.  Broad scale availability of FFV’s and associated fueling infrastructure will give the public choice.  Tomorrow that choice could include other alcohols or methane and a suggested high performance FFV will enable that.  Today methanol appears to be particularly advantaged.  Ultimately, gasoline (and diesel) can be rendered just another option, not a requirement.  And even that portion could be from domestic production.

Currently there is national handwringing over the increasingly high price of gasoline.  This appears to have Presidential election ramifications.  A lower cost substitute for gasoline is good politics.  Bills are pending in both houses of Congress to impose an Open Fuel Standard.  This would require all new cars by 2017 to be able to operate on all proportions of gasoline, ethanol and methanol.  From the standpoint of giving consumers choice for something approaching $100 per vehicle, this had always been a good idea.  But persuading gas pumps to supply alternatives was going to be difficult because volume could not be guaranteed.  Also, alcohols could not be predictably lower cost than gasoline.  So, while the choice would be enabled by the legislation, unless at least a significant portion of the populace was likely to make the alcohol choice, fuel stations would not be persuaded to carry the product.

Cheap shale gas has essentially removed the uncertainty on methanol pricing.  By contrast ethanol from corn and sugar will depend upon commodity prices and inherent variability in the same.  Economical ethanol from biomass is not a sure thing.  On the other hand methanol from biomass, or coal for that matter, is straightforward.  Of the two, ethanol is preferred because of higher energy density. It has about 33% fewer calories than gasoline of equivalent volume, whereas methanol is disadvantaged by about 45%.  Ethanol is also easier to store and handle. 

Methane can be oxidized to a mixture of carbon monoxide and hydrogen known as synthesis gas or syngas for short.  Syngas is a basic building block from which a variety of chemicals can be synthesized.  The simplest of these is methanol.  Consistently cheap methane equates to consistently low cost methanol.  Because of the mileage penalty of about half in comparison with gasoline, methanol will need to be less than half the price of gasoline.  Assurance of this boils down to the relative prices of oil, from which gasoline is derived, and natural gas.  We have predicted that natural gas will remain low cost provided shale gas development is permitted.  Oil on the other hand we forecast as likely to see a sustained increase in price in the ten year time frame.  Furthermore, oil pricing will be subject to the whims of Middle East turmoil, as evidenced today with Iran/Israel war drums.  This will cause uncertainty in gasoline price at the pump.  Natural gas on the other hand is a regional commodity and US pricing will by and large be impervious to world events.  The upshot of all of this will be sustained favorable ratios of methanol to gasoline prices. 

At the time of this writing retail gasoline was at $3.79 and methanol wholesale at $1.13, so let us increase that to $1.50 to include retail margins, tax and the like.  This is well below the factor of two.  Furthermore, almost all the methanol is currently imported.  Several companies have announced plans to add domestic capacity, driven by cheap natural gas.  When this happens, we can expect a drop in price of methanol.  Ongoing research is targeting direct conversion of methane to methanol, skipping the syngas intermediate step.  One less unit operation is likely to drop the price.

Consumers given choice are likely to find a sustained low price for methanol compared to gasoline.  However they will drive only half the distance on the full tank, a bit more with M85 (an 85% methanol 15% gasoline blend).  This range penalty will be a minus.  The plus in addition to price, will be substantially lower emissions, which could be a driver for some consumers.  They will essentially be trading more frequent refueling for the green feeling.  Eventually, new cars may install larger fuel tanks to accommodate the demand.

A wild card in the longer term would be engines that took advantage of the higher octane rating of methanol, 117 as compared to 87 for regular gasoline.  Today dragsters and Indy race cars use methanol because with high compression ratios they get a power boost.  A 2010 report from the MIT Sloan School (see comment below for the link) suggests the feasibility of an engine that injects methanol on a programmed basis.  This technique causes an effective compression ratio even greater than the number mentioned above.  The result is a small spark ignition engine with mileage that exceeds that of a gasoline fueled machine by about 35%.  So, harnessing the higher octane rating goes even beyond wiping out the calorific penalty.  They also believe that the cylinders would not need to be excessively heavy, and so will be lighter than the ones for high compression diesel engines.  This appears to offer the promise of an engine not costing much more than a normal one, and likely less than a diesel engine.  This would involve re-tooling by automobile manufacturers but not radically.  A significant attraction in the medium term will be in meeting CAFÉ goals with lower emissions.  In the long term, biomass derived methanol will make for a truly sustainable transportation future.

Vikram Rao, Executive Director

The military is the largest consumer of energy in the public sector, consuming 5 billion gallons of fuel in 2010.  Access is not really the issue even in times of tight supply.  But it is incumbent on the military to reduce its reliance on fuel while at the same time not sacrificing operational effectiveness.  This applies to all forms of energy, not just fuel for transport, although that is the one with the greatest imperative. 

During the Iraq war there was great deal of public angst with the price of fuel for the war effort, and many in the supply chain got blamed.  The fact is that a captain in a forward emplacement is not worrying about the price when he or she needs fuel urgently.  The monetary cost aside, the human cost of such delivery is substantial.  In the Iraq and Afghanistan wars in 2007 an estimated 3000 military and civilian support personnel were killed or wounded while transporting fuel or water.  Reduction in fuel usage, substitution with more benign alternatives, local sourcing of energy and water, these all ought to be priority strategies for the military today.

 The time was never more right than now to innovate in reducing cost of energy in the military.  The budgetary toll will be heavy this year once the congressional squabbling is over.  One war has wound down and another on the way to exit.  The next war must be supported by low energy methodology running the gamut of lighter vehicles (fits well with the smaller lighter army motif in vogue today), fuel replacement to minimize high risk convoys of diesel and gasoline, off grid distributed power with renewable energy supported by micro grids, desalination of saline ground water to minimize water transport, and electric vehicles when feasible, because distributed power is lot easier than distributed fuel generation.

Semi-permanent bases domestically and abroad could even invest in distributed fuel production.  If natural gas were to be readily available, small footprint production of a drop-in fuel would not be out of the question.  Given this possibility, the military ought to fund such developments rather than the massive coal and gas to liquids projects that it has been wont to do.  In any case, small scale distributed power in the form of mini-nuclear (what would be more secure than a military base?), wind and solar, combined with a micro-grid could power entire bases off the grid.  This not only will give the green feel, but also would render the base relatively impervious to weather or sabotage related grid outages.  Certainly in forward locations, the solar option would apply.  In some foreign locations the base could consider providing surplus power to the neighbouring townships and as a result buy goodwill which is sometimes hard to come by for US bases.

Base vehicles are uniquely suited to fuel switch over.  This is because infrastructure support for refuelling is straightforward.  Furthermore, in the example of CNG and LNG substitution of diesel and gasoline, where feasible the engines ought to be modified to take advantage of the high octane rating of methane (125 as compared to 87 for gasoline).  High compression engines enabled by the high octane number will deliver more power and distance for less fuel.  Ultimately, civilian versions of these vehicles could capture consumer imagination.  We would in effect have a reincarnation of Hummer as a HEAT (High Efficiency All Terrain) vehicle.  Bring  the HEAT!

The same goes for electric vehicles.  Again, distributed electricity is easier than distributed liquid fuel and an electric vehicle delivers 60% more miles per unit of energy consumed.  Not only will imported oil be substituted for, but less energy will be used.  Only certain vehicles may be suited to electrification, but any gains would also have the virtue of symbolism. 

Fresh water transport to front lines does not get much press but is a tractable objective for reduction.  The shale gas industry will be learning to deal with low cost water sourcing and treatment.  These advances could be used to advantage by the military.  Salt water aquifers are fairly ubiquitous, and the shallower they are the less salty.  The Defence Department ought to consider sponsoring developments of small footprint desalination, especially targeting the types of salt water anticipated in theatres of action.  In foreign locations, the use of otherwise useless brackish water rather than fresh would also have a public relations ring to it.

Every President in the last decade or so, no matter from which side of the aisle, has drawn that bright line between energy security and national security.  President Bush, a champion of oil and a onetime owner of oil interests, famously complained about our “addiction to oil”.  President Obama recently said “America’s dependence on oil is one of the most serious threats that our nation has faced”.  That sounds like a national security statement.  So, equating national security to energy security and thence to reduction of imported oil will not be disputed by many.

Vikram Rao, Executive Director

In the midst of the debate in this state on whether shale gas production is worth the environmental risk we posit a different notion.  We suggest that the state could create jobs and economic growth whether or not the gas was produced in state.  This proposition was discussed at the Breakfast Forum on February 16.

There are two underlying assumptions to this thesis.  One is that if shale gas continues to be produced in the Marcellus and Utica, we can expect copious quantities in neighboring states.  We can also expect prices to stay low for decades as modeled recently by Amy Jaffe and colleagues.  The second assumption hinges on the low price of gas.  If it stays really low as it is today, most of the shale gas production will be in the “wet” regions.  These are reservoirs with a high component of natural gas liquids (NGL’s) which have a much greater value than methane and so such wells are more profitable.  In a typical Marcellus wet gas well today the NGL component more than doubles the value of the methane. 

More than half of the NGL in the Marcellus is ethane.  A consequence of this shift to wet gas production will be an abundance of ethane.  Ethane is very easily “cracked” to ethylene in chemical plants known as crackers.  Ethylene is the raw material for a host of useful fabrics and plastics.  The alternative method of synthesizing ethylene is from an oil refinery derivative naptha. 

source:  Energy Information Administration

The figure shows EIA prices for all the relevant commodities.  On the vertical axis is plotted the price per million BTU.  This unit allows one to compare across different fluids.  Clearly ethane is priced well below the NGL composite, which is close to oil.  Ethylene derived from oil refining will therefore be more expensive than from cracking ethane.  Much of the world’s ethylene is from oil.  We could reasonably expect the US to be one of the lowest cost producers of this commodity.

At the Breakfast Forum there was pushback on this point.  It was suggested that demand could drive that price up.  While this is generally true of most commodities, one would expect the ethane supply to stay high due to the profit potential for the gas producer.  Also, from the figure we can see there is considerable head room between current prices and oil prices.

NC Opportunities:  Nitrogen fertilizers use methane as the feed stock.  90% of the cost of anhydrous ammonia is attributable to methane.   Cheap natural gas equates to cheap fertilizer.  At prices today, the raw material will cost about $100 and sell for between $600 and $800 a ton.  North Carolina has the opportunity to set up plants to make this conversion, most likely in areas just west of Charlotte.  A major pipeline comes in from the north in that vicinity.  The area is also currently suffering high unemployment.  These would be high paying jobs and lasting a long time.

There was discussion regarding explosive hazard and possibility of odor in proximity to the plants.  Anhydrous ammonia is not explosive but one final product ammonium nitrate is also used as an illicit explosive.  The suggestion is to produce only the first product and export.  Speaking of exports, if international exports are a possibility, rail lines to the coast are very accessible.  Also, the value created in this conversion of methane argues against exporting LNG.  Exporting ammonia makes more economic sense as we noted earlier in a post.  As to odor, obviously fugitive emissions of ammonia could be an issue.  But this should be a low probability event unlike the constant odor from some oil refineries.

Currently we import about half of our ammonia needs.  This capacity is returning to the US due to the forecasted low methane prices.  North Carolina would not be an obvious site for capacity so active steps would need to be taken to secure this. 

Ethane cracking in North Carolina does not make a lot of sense.  As noted by a discussant the ethane from the Marcellus is most likely to be shipped to the Gulf Coast because the vast majority of the capacity is there.  However, we take the view it should be done close to the production and the producing states are taking steps to accomplish that.  Shell has announced intent to build a cracker in one of the three states.  Where North Carolina could profit is at the next level.  Ethylene derivatives include a host of fabrics including polyester.  The state could profit from a detailed study examining residual competencies from the previously dominant fabric industry and the bridge to the ethylene derivative fibers.  North Carolina State excellence in this area should come in handy.  A return to textile roots would be immensely gratifying.

Cheap natural gas and associated ethane offer the opportunity for economic value creation whether or not we produce shale gas in the state.

Cranberry Township in Pennsylvania has seen immense revenue growth due to the shale gas boom.  No shale gas wells have been permitted or drilled in the entire township.  What they did was create an atmosphere that caused the regional headquarters of shale gas players to be located there.  Support personnel such as accountants, lawyers, repair and maintenance outfits and other professionals followed.  It was simply a great place to live, work and be entertained.

The Cranberry Effect can be replicated elsewhere with different tactics.  One simple one is in the area of fuel consumption.  For areas served by natural gas, the use of heating oil for homes is wrong on the basis of economics and the environment.  The consumption of heating oil is old and cumbersome.  Trucks deliver oil to homes, consuming fuel as they do so, and the combustion process produces more emissions than from gas.  And it costs 3 to 4 times as much as gas, although retail gas and oil prices can be variable.  Retrofit costs are an issue but the payback should be short if gas prices stay low, and that is the telling point.  They will stay low.  Amy Jaffe and colleagues at the Baker Institute in Houston recently published a study of various scenarios of shale gas usage.  In the unfettered use case (no blanket prohibitions as in New York state today), the average annual price never goes up above $5.80 for thirty years.  Using a different approach we too predicted along similar lines in an earlier publication.

A definitive switch to methane substitution of diesel and gasoline in fleet type vehicles would also be effective.  In fleet situations such as taxis, buses and the like, one of the drawbacks, that of convenient recharging, is ameliorated.

But the big bang in terms of economic gain and jobs is in the chemical sector.  This has many facets that depend upon natural gas or associated fluids for feedstock.  We will key on one by way of example.

Nitrogen based fertilizers:  Modern agriculture relies dominantly on synthetic fertilizers.  The most important one is ammonium nitrate, which also has an unfortunate use in explosives as well (think Oklahoma Federal Building bombing).  Another one is urea, much of which is used in the production of rice.  As a major producer of crops, the US is a significant user.  Much as in the case of oil, we use a quantity disproportionate to our population: 12% of the world usage as against 5% of world population.  The primary feed for this fertilizer is ammonia, which in turn is completely dependent on natural gas, which accounts for 90% of the cost.  The high and erratic prices of natural gas caused over half of the industry to flee to other parts of the world with low cost gas.  Trinidad and Tobago is the largest supplier by far, followed by Canada and Russia.  Cheap shale gas is luring this industry back.  Given the importance of food to the nation, it would not be much of a stretch to suggest that fertilizer is a strategic commodity and that domestic production is a welcome change.  Prior to the flight abroad the US was a net exporter.  This could happen again.  It might also not be off base to suggest the possibility of reduced food prices due to a consistently low fertilizer price.  Were this to happen the irony would not be lost that the last time the nation discussed the food/fuel nexus it was the anxiety occasioned by beef prices rising due to diversion of corn to ethanol.

The time could be right for a non producing state such as North Carolina to take a policy stance of encouraging fertilizer production in the state using cheap natural gas from the Marcellus.  At first blush the location of choice would be the Wilmington area.  The port would make this particularly attractive if export were to be a significant objective.  In purely economic terms the value created is considerable.  The cost of the raw material at today’s price of $2.50 per million BTU would be about $84 per ton, against a selling price for anhydrous ammonia of about $800.  That is a lot of economic value accruing to the state even with a more normal gas price close to $4.  The associated jobs would be high paying and long lasting.  Drilling jobs by comparison are more transitory.  If the drilling did happen in the state, the jobs would be elsewhere in the state as would be the associated nuisance of truck traffic and the steps to ensure minimizing environmental impact.

The Cranberry Effect can also be manifest in North Carolina in the fiber products arena.  The ethane present in wet shale gas in the Marcellus and Utica will cause a renaissance in US ethylene manufacture.  It will make sense to crack the ethane to produce ethylene in the production states.  But the downstream products such as polyester fabrics and PVC pipes could be made in any proximal state.  Here again would be high value products for domestic consumption and export.  As to the latter, expect the US to be one of lowest cost producers of ethylene in the world.  That will translate into low cost derivative products as well.  States without shale gas ought to exploit the Cranberry Effect.

Thanks to Daniel Raimi and Sara Lawrence for Cranberry data and discussion