INCONVENIENT REALITIES ABOUT FOSSIL FUEL

November 3, 2021 § 2 Comments

A recent story in the Economistpoints out that fossil fuel is not retreating from the world energy stage any time soon.  Decreasing, yes, but not going away.  This is certainly truer for natural gas than for oil.  But even oil has circumstantially made a reprise appearance due to a complex scenario which we will discuss below.

The world has rushed into renewables without adequately solving the issue of swings in output of solar and wind.  Over 90% of augmentation during slow intervals (rainy and windless periods) is with natural gas fired power.  The battery back up that we hear about is mostly for the 4 to 6 hours in evenings.  Even that almost doubles the cost of solar in some cases.  Storage and augmentation are badly lagging solar and wind installations.  Ironically, therefore, the more we install, the greater the demand for natural gas.  Not helping is that . . . . .

Natural gas prices are at unprecedented highs in most of the world other than the US.  Even in the US, they have doubled in the last few months.  In many parts of the world, including Europe and Asia, prices have been over USD 20 per MMBTU, and as high as USD 30 last week.  In Europe, in June they were USD 8 and a year ago they were USD 4.  This extraordinary surge is attributed to a combination of events, but all underpinned by one characteristic of gas: it is a regional commodity.  Pipelines do not cross oceans.  The only means of transoceanic supply is through Liquefied Natural Gas (LNG).  New LNG supply takes 5 years to go on stream, so it is not the means for a short-term remedy.  The process of liquefaction, transport and re-gas adds between USD 3 and 5 to the original cost.  In net importing nations, LNG will be the marginal cubic foot, so it will set the price, creating something of a windfall for the domestic gas producers.  Look for European gas (and oil) companies to report record profits.  Shell’s shift from oil to gas is looking brilliant.

Europe gets a little over 40% of its natural gas from Russia.  The mere announcement of an intent to increase supply from Russia caused a drop from USD 30 to USD 20 in days.  Then, news of a hiccup increased the price over USD 2 in a day.  This underlines the power wielded by Russia.  We have discussed the use of energy as a weapon of political will in this column in the past.  Putin is unlikely to let this opportunity pass, especially if the winter is colder than usual.

Another odd dynamic is in play in oil.  Much of the crude oil produced in the world has undesirable quantities of sulfur.  In the refining process this is removed using hydrogen.  Also, heavier oils require hydrogen to be “cracked” down to useful transportation fuels.  Over 95% of hydrogen is produced from processing natural gas.  High natural gas prices mean that light, sweet oil is suddenly prized even more than usual because it will not incur those added costs (by and large).  US shale produces such an oil.  Look for shale oil to be in short supply.  We used to think that when this happened, producers would quickly ramp up.  That was before the carnage of the last couple of years, during which small producers sold out to large ones.  Large companies are more measured in their response, and the carnage has reduced investment appetite.  The table is being set for USD 90 per barrel oil.  Two years ago, it was under USD 20.

At current prices gas, on an energy equivalency basis, is much more expensive than oil.  Using a rule of thumb, at USD 25 per MMBTU, gas is more than twice as expensive as oil, which is at about USD 80 per barrel.  I do not recollect ever seeing that in my 40 odd years in the energy business.  In many parts of the world, dual fired electricity generation capacity is using oil instead of gas, thus increasing oil demand. At a time when oil majors Shell and BP have announced strategically planned production decreases and US shale oil interests will be slow to respond unless prodded by the government.  Such prodding, while pragmatic and a plus for the balance of trade, will certainly not play in progressive circles. If this game can be played while still emphasizing carbon mitigation, the US could be positioned to be the swing producer in both oil and gas.  Until oil goes away. Slowly.  Being a swing producer has political heft.  Just look at Russia in the European gas scene.

Governments having been doing much to subsidize and otherwise drive the use of renewables.  They should now put an even greater emphasis on the development of sustainable storage and augmentation means.  Otherwise, they run the risk of a public losing faith in at least the renewable energy arrow in the carbon mitigation quiver.

Vikram Rao

November 2, 2021

§ 2 Responses to INCONVENIENT REALITIES ABOUT FOSSIL FUEL

  • Rob Fulks says:

    Vik, an excellent glimpse into the market dynamics of fossil fuels set against the current backdrop of progressive political influence. Once again thanks for sharing your view on yet another important element impacting the global transition to renewable energy.

  • Tim Fairchild says:

    Vik – this is an outstanding piece of work that belongs side-by-side with the inconvenient realities of the laws of gravity, inertia, friction, mass, and thermodynamics. I agree that a focus must be put on “the development of sustainable storage and augmentation means.” The RTP region enjoys generally good weather but you probably remember that 12 day stretch of clouds and rain we experienced back in the fall of 2015. Even 4 to 6 days of battery backup wouldn’t have seen us through that period.

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