April 16, 2020 § Leave a comment
I used to think geothermal energy was a niche play. And it was, until fairly recently. Or, to be fair, I became aware recently that multiple approaches were being investigated, all of which were scalable, albeit to different degrees. I define scalability to mean the ability to supply a material portion, and in the limit, a majority, of the electricity needs of the world at a price competitive with conventional alternatives.
The source of geothermal energy is the core of earth. Essentially a nuclear reactor, where temperatures approach those at the surface of the sun. The heat is conducted to the earth’s surface and eventually dissipates into our atmosphere. Harnessing this heat is the essence of geothermal energy production. Utility scale geothermal energy involves drilling a well, not unlike an oil well, pumping a fluid down, usually water, and then recovering the fluid heated by the subsurface rock to perform some work. That work is usually the generation of electricity. In short, we are mining for heat rather than oil or gas. The operations to accomplish this, and the underlying technologies, are identical to those used to prospect for oil and gas, except for the final power generation bit. To the extent that step out technologies are needed, these too are in the general realm of oil industry capability.
Oil and gas companies have recognized the need to diversify and become energy companies. Over a dozen years ago, BP’s CEO famously declared that BP stood for “beyond petroleum”. While premature, the sentiment still led to forays into solar and wind. Except for offshore wind having some synergy with oil company core competencies, these areas were not good fits as portfolio components. Accordingly, to this day, they comprise small portions of the companies.
Geothermal offerings fall into two buckets: those that operate in rock at 200 C plus and ones that require 300 C plus. In the former category fall Engineered Geothermal Systems (EGS). Because the heat content of the rock is relatively modest, inducements are needed for the heat to transfer to the fluid being circulated. This is accomplished with standard hydraulic fracturing. The twist is that existing natural fracture networks are utilized to advantage. The energy required to open existing fractures is much less than that to create new ones. Consequently, induced seismicity (the risk of creating an earthquake, and a concern that has been raised by observers) is very unlikely.
Induced seismicity requires a high energy input into an active fault. An active fault is roughly defined as a fault likely to move in response to an energy input. A fault is a mismatch between two bodies of rock, often created due to a movement (known as slip) of one body relative to another adjoining one. Continued movement in response to an energy input can create a seismic event, an earthquake. The magnitude of the earthquake is directly proportional to the length of the fault. As noted above, the energy from opening natural fractures (a common geological feature not to be confused with faults), is small. Furthermore, EGS operations require a thorough knowledge of the earth stresses, and so detecting faults and their lengths is straightforward. Avoiding operating in proximity to long active faults would mitigate earthquake concerns.
The second bucket is that of hotter zones, exceeding 300 C, most preferably 350 C. High thermal pickups by the fluid in the well can be achieved with well architecture that maximizes contact with the rock, and no hydraulic fracturing is involved. This would be a closed loop system, with the working fluid not entering the rock. If the temperature exceeds 374 C and pressure 221 bar, any water present in the reservoir would be in the supercritical state. This is a state in which it behaves like both a liquid and a gas. When CO2 is sequestered in porous rock, it is in a supercritical state, taking advantage of this dual property. A more mundane example is CO2 decaffeination of coffee beans: the supercritical state allows easy entry into the bean as a gas and dissolves the caffeine like a liquid. Supercritical water will produce more power than would steam.
EGS operations can be executed with the latest current technology. The deeper stuff needs development. The oil and gas industry is well positioned to do both. In fact, an aspect of the development of deeper systems is an extension of recent advances by the industry in high temperature, high pressure systems. One could argue that they are the only ones who could reasonably pull it off.
Now is the time. The oil industry (especially including oil service companies) is positioned to put geothermal energy into high gear. This would not have the appearance of greenwashing even to the most jaded. The federal government ought to help, although in the midst of Covid 19 recovery efforts, that might be tough. And yet, that pandemic is the reason (now that the Russia/Saudi spat is resolved) that the US oil and gas rig count has plummeted over 30% in just one month. Continued demand destruction could ensure a long-lived drop at some scale. That then, would be the time, to put people to work doing something else productive. If at the same time this work moves the needle on a renewable energy source the appeal is to both sides of the congressional aisle.
For the oil and gas companies, a sizeable geothermal portfolio (eventually) provides optionality. Since essentially the same crews can be used to drill for either oil or heat, portfolio shifts driven by market conditions are feasible. Forecasting the speed of adoption of electric vehicles will no longer be important. Good for the industry and good for the environment. Large scale win wins are often mirages; not this one.
April 16, 2020
May 31, 2021 § 2 Comments
This is the story of a minority investor attempting to influence the direction of ExxonMobil to be more climate conscious while being even more profitable. Engine No. 1 (evoking childhood images of the Little Engine that Could) pulled off the improbable. With less than 1% shareholding, they persuaded major players such as BlackRock and the California State Teachers Retirement System (a major pension fund) to go along. Two of their slate of four nominees have been elected and another is possibly on the brink. Management resistance had been acute; much money was spent in opposition. This was seen as a defeat for the Chairman and CEO.
This is New York Times front page news. ExxonMobil’s deteriorating earnings performance certainly helped the insurrection. In a fireside chat with my economist son @justinrao, I was asked whether this would work. Another NY Times piece opined it would not, and that 2 in 12 directors would simply not have the votes to accomplish anything. This is simplistic thinking. A board is not the US Senate (remember the days when senators were collegial and actually listened to opposing viewpoints; well, those days are gone). Each member of any public board has a fiduciary duty to the shareholders. They are on the same team. Usually, important direction setting is given to a subcommittee to research and report on the matter. The report is debated, and a board consensus is achieved. If the new members command the respect of the others, and they are not too radical in their approach, change is possible. The new members are “independent directors”. For those not in the know, independent directors are defined as those not having a material association with the company. Certainly not officers. But also, not employees of the investment groups. There are shades of gray, but independent directors are seen as not influenceable, hence the term.
All change will have to meet the conditions of duality of earnings growth and some other softer objective, in this case carbon mitigation. These are early days in the battle for climate preservation. Relatively low hanging fruit ought to be available. Were I one of those new directors, I would request scenarios to be produced. Scenarios are not predictions, they are more in the form of what-if exercises, and particularly useful when strategizing in an uncertain environment. These would be guides to at least a provisional strategic direction which yields good returns while meeting climate change objectives. The latter would be seen as likely societal outcomes directing company behavior, not ideological.
The future will almost certainly entail reduction in oil usage, with the only debate centering on rate of change. Certainly, both Shell and BP are betting on that outcome. While this is a carbon mitigation direction, from a board perspective it is a demand signal needing response. In this example, the response would be to plan on oil production reduction while investing in electricity, which will be the “fuel” displacing oil. ExxonMobil has stated that entering the renewables arenas is contraindicated because they have no edge in that space. I agree with this view when it comes to production of solar energy. Not so much on wind, where they could have an edge in the emerging application of deeper water production, for which floating platforms will be needed. This last is where they have deep expertise. California has a sea floor that drops off precipitately. Floating production is very likely.
Rather than participating directly in the production of renewables, they could innovate in the space of filling a critical gap in renewables: the handling of diurnality and peaks and valleys. Germany derives 40% of its electricity from renewables. This is an average figure. On a given day that number could be 15% or 75%. A recent solar bid accepted in Los Angeles had a direct solar output price of about 2.3 cents per kWh. But the battery back up added nearly 2 cents to that. Enabling renewables requires a storage solution. As evidenced by the LA figure, basic solar is becoming the low-cost standard. In my view it is headed to commodity status. The profit will lie in solving storage. In that area, companies such as ExxonMobil are well stocked in science and engineering talent. Production of electrolytic hydrogen during periods of excess is one of the candidates. So, is ammonia. Both are staples of ExxonMobil downstream operations. They could do this more profitably than most.
My favorite renewable for oil companies to consider is geothermal energy. It is fast reaching feasibility at scale. It is also the only renewable of which I am aware, which is both base load scale and load following. Load following essentially means tunable to demand. No storage required. Most importantly, for oil companies, the core competencies are the same as for oil production. Furthermore, the personnel laid off due to reduction in oil production could simply be switched to geothermal.
There is profit in renewables, you simply must pick your spots. The new directors could educate the rest on these points. As for the CEO, sometimes a win follows a loss. Sometimes you get thrown into the briar patch*.
*How Br’er Rabbit snatched victory from the jaws of defeat, literally the jaws of Br’er Fox. Br’er Rabbit and the Tar Baby, a Georgia folk tale.
April 16, 2021 § 5 Comments
Transportation has bad climate change related PR. All sectors combined (including aviation) account for about 13% of global CO2 production, whereas just steel and concrete add up to 15%. Estimates vary, but inescapable is the conclusion that we have not given steel and concrete the attention that we have heaped on transportation to mitigate CO2 production. To exacerbate matters, the world is on an infrastructure expansion spree, including more recently the Biden administration in the US. More infrastructure equates to more concrete and steel. That is more CO2 emissions. Unless we do something about it as we have with electric vehicles and hybrid vehicles.
Mitigating CO2 emissions from concrete and steel is more straightforward than from vehicles because they are what we refer to as point sources. Vehicle tailpipes are distributed, making capture, and disposition of the CO2, prohibitively difficult. Technically doable with pressure swing adsorption methods, but logistically tricky in release to regenerate the adsorbent and subsequent handling of the CO2. A decent analogy is NOx capture with urea, requiring canister replacement, a nuisance to many consumers. This difficulty led to alternative non-intrusive means such as the Lean NOx Trap, with the attendant VW deception.
First a bit of a primer on iron and steel making. Iron ore is largely iron oxide and must be reduced to iron. This is accomplished primarily in blast furnaces, which are shaft furnaces where the reactants are fed at the top and the metal is taken out of the bottom. The iron oxides are reduced by gases produced from coke, which is a derivative of coal. The reaction products include iron and CO2. The iron is then converted to steel by reducing the carbon content and by addition of other alloying elements for properties such as strength and corrosion resistance. Each metric ton (tonne) of steel produces a staggering 1.8 tonnes of CO2.
The Direct Reduction Iron (DRI) process is a means for reducing the carbon footprint. The process temperatures are low, and the iron never in a molten state. The reducing agent is syngas, a mixture of CO and H2. The combination reduces the emissions to 0.6 tonnes CO2 per tonne steel. In a variant, hydrogen alone is the reducing agent, and in a further green variant, the hydrogen is from renewable sources such as electrolysis of water using renewable electricity. However, unlike in the blast furnace process, there is no mechanism for removal of impurities in the ore. Consequently, only high-grade iron ore is tolerated, and this limits DRI to about 7% of the total market because such ore is in relatively short supply and much more costly.
The most promising route to the greening of steel is through CO2 capture at the blast furnace. Unlike flue gases from a power plant, blast furnace flue gas is concentrated, typically 30% CO2. As a result, removal processes are more effective. Today we are on the brink of capture costs below USD 40 per tonne CO2. Carbon credits may be purchased in Europe for about USD 55 per tonne. A recent New York Times story suggests that this will keep rising, with one analyst predicting prices above USD 150. If a major CO2 producer such as steel or cement is forced to buy credits, the price is certain to go up. When the capture cost is below the price for credits, the industry has an incentive to simply collect the gas. However, merely capturing accomplishes little if the gas is not permanently sequestered in what are known as sinks.
One such sink is subsurface storage in oil and gas reservoirs depleted of the original fluid, or in saline aquifers. While feasible, often with costs lowered by using abandoned wells, debate centers on permanence of the storage and the risk of induced seismicity (earthquakes). A variant with an important distinction is injection into reactive minerals such as basalt, with the formation of a non-water-soluble carbonate, which certainly is permanent. However, these wells are more costly because existing abandoned wells are unlikely to be in locations with suitable mineralogy. The exception to that would be abandoned geothermal wells, which could be proximal to igneous rock from the basalt family. However, there are not too many of those, and they are geographically constrained.
Mineralization as a genre is being pursued vigorously, with systems already commercial, although the tonnage being sequestered is still low. Done on the surface in reactors, the resulting carbonate of Na, Ca or Mg can have uses. Monetization even at small profit still renders the capture cost effective. Since, in my opinion, capture costs are heading in the right direction, and already at acceptable numbers, the focus ought to shift to sinks with scalability. Scalability is usefully defined as an aspirational goal of 0.5 gigatonnes CO2 per year by 2040. But goals short of that are fine if several approaches are proven viable.
Endeavors to achieve these goals could be materially assisted by appropriate policy action by the various federal governments. All forms of renewable energy have received subsidies or loan guarantees at some stage in their development. This has resulted in wind and solar being an established part of the electricity portfolio. Similarly, electric vehicles have received subsidy support. The greening of steel and cement ought to receive the same attention. For example, the Biden administration’s infrastructure bill ought to include provisions for preferential purchase of green steel and cement, at premium pricing.
Technology is approaching a tipping point for serious inroads into making steel and concrete green *. Public policy must keep pace.
*For the times they are a changin’ from “The Times They Are a-Changin’” performed and written by Bob Dylan, 1964
April 16, 2021
August 20, 2020 § 4 Comments
Oil drilling leases will soon be available in the Arctic, according to a story in the New York Times. The Alaska National Wildlife Refuge (ANWR), a land-based portion of the Arctic, is cited. But the Arctic is cold, both figuratively and literally. When he took office in 2017, President Trump announced a roll back of a “permanent” ban on Arctic drilling that President Obama instituted as he was leaving the White House. I opined then that the roll back would have no net effect because interest from oil companies would be minimal. I also wrote at the time that President Obama’s action was also largely symbolic, and not material.
The principal reason for these conclusions is that the price of oil has been low since 2015, when US shale oil became the determinant of oil price in the world and the ability of the Organization of Petroleum Exporting Countries (OPEC) to prop up prices was deeply undercut. USD 120 per barrel highs became USD 70 highs. The Covid-19 pandemic has decimated shale oil company ranks, but it has also caused demand, and price, to plummet to historic levels. Accordingly, the crystal ball of future oil prices is murky. Murky crystal balls equate to uncertainty, which, added to the environmental risks, further equates to higher discount rates. Making matters worse on the investment side, any Alaska play has a long-term payout. First oil is likely a decade after the lease purchase. This involves forecasting the price of oil into the second half of the century.
All the indications are that oil demand will reduce significantly by 2040, largely through electric vehicle adoption. Certainly, the super-major oil company BP’s beliefs in this regard have translated into plans for a major replacement of oil revenue with revenue from renewable electricity. They recently announced that by 2030, their oil production will be reduced by 40%, concurrent with major investment in renewables, resulting in 50 GW electricity production. That production is up there with good size electric utilities. This decision also comes at a time when the dividend has been halved and properties divested to raise cash. It also is coincident with the divestiture of their pioneering Alaska North Slope holdings to privately held Hilcorp, during which transaction they sweetened the pot with a loan to ensure closure of the deal. This does not sound like a company that will invest in a US Arctic lease. I do not see any oil company headquartered in Europe doing it either.
Hydrogen is an important industrial commodity even not counting the possible use as electric vehicle fuel. US refineries purchase 2 billion cubic feet per day of hydrogen (in addition to using another 0.5 billion cubic feet produced internally). Virtually all of it is produced from natural gas. As we discussed in these pages earlier, hydrogen produced using surplus electricity during low demand periods is one of the most promising solutions for the problem of intermittency of renewable electricity. Oil companies like BP, doubling down on renewables, are unlikely to miss this point. Also, if conversion to ammonia is more appropriate for storage and transport, who better positioned than an integrated major oil company? In its announcement, BP makes a vague reference to hydrogen. No mention is made of geothermal electricity, but it is highly unlikely they are not watching that space.
Returning to the issue of success of a lease sale in the ANWR, one of the primary challenges is the paucity of high-quality seismic data. These are subsurface images acquired by individual oil companies in proprietary shoots or by seismic operators speculatively shooting to then sell subscriptions to the data in “libraries”. The acquisition and interpretation of the data is the edge employed by oil companies in obtaining the winning bids without overpaying. Less data means more uncertainty. My take on the situation is that there will be fewer bids due to competing capital spend directions, the uncertainty in the price of oil, the environmental risks, and the delays likely due to litigation (case in point the litigation based delays in the Keystone XL oil pipeline construction). But whatever bids that materialize are likely to be low-balled. In that case, the revenue from the sale will be underwhelming. This assumes, of course, that the administration goes ahead with plans to auction the tracts. More than likely this is just another tempest in the Alaskan teapot.
August 20, 2020
April 9, 2020 § 3 Comments
A webinar conducted by the Research Triangle Cleantech Cluster this week, in which I participated, triggered this piece. Some points made by the other three panelists Ivan Urlaub, Renee Peet and Gary Rackcliff are reflected here, but I take responsibility for this product.
For purposes of this discussion, energy falls largely into two buckets: electricity and oil and gas derivatives. In the last two months or so, the price of oil has halved. Part of the driver was the Saudi/Russia spat, which is likely to end soon because neither can live with USD 23 (price at the writing) oil for long. But the “shelter at home” policy in much of the world has slowed industrial output to a dull idle. Gasoline and jet fuel use has plummeted. Electricity usage has dropped. Here we will discuss the likely longer-term implications, especially as relating to energy. Some of the issues addressed arise from questions that were asked in the webinar mentioned above. Here is a crack at a list of outcomes that I see as highly probable. A modicum of support is also offered for the assertions.
- Electricity from renewable sources will not take a hit, except for diminished access to capital due to federal loan paybacks and the availability of workers for production and installation. An uptick in this space is possible, in which case closer attention to storage will be required.
- Distributed electricity production, with associated microgrids, will remain unaffected, except for capital constraints. Non reliance on a grid makes this segment attractive for resiliency in the face of disasters such as forest fires and hurricanes, but that sort of resiliency is less applicable to this disaster. To the extent that current deployments are in underserved communities, especially in low- and middle-Income countries, oversupply is unlikely because the supply usually just barely keeps up with demand, or the potential demand of increased productivity.
- Electricity suppliers with a heavier footprint in smart features, such as remote monitoring of home usage, are benefitting during this crisis because so much service can be provided without deploying personnel. Post crisis enthusiasm for these features, leading to wider adoption, is likely. This can only help with resiliency as well and ultimately with enterprise profitability. Compared to other power industry investment, the scale of this one is small.
- Oil prices will hover in the range USD 30-50 per barrel, with possible excursions to USD 25, with considerable volatility. For the first time in a Very Long time, Texas producers may agree to a cap on production. The Texas Railroad Commission, which has had nothing to do with railroads since 2005, regulates the industry. Prior to OPEC, they were the determinants of oil price. Production controls, whether mediated by the TRC or not, are likely to return. Were that to happen, and if Russia and the Saudis reciprocate with production cuts, oil price could well be in the upper reaches of the range noted above, once the economic recovery is in full swing. The US government has also announced a purchase of 77 MM barrels of oil for the Strategic Petroleum Reserve (SPR). Since the SPR is depleted by about that amount, this would top it up. The average cost of the current reserve is USD 28. If they go through with it (funding for it is in doubt) the new oil will likely be at a similar price. I have blogged previously that the SPR is not really needed any more, that shale oil in the ground is the reserve, but this could help prop up the price at a bargain cost.
- In not agreeing with OPEC on production restraint, Russian intent was to kill US shale oil. Shale oil will be wounded, but not killed. As in the last plummet in oil prices in 2015, highly leveraged players will declare bankruptcies. The properties will be scooped up by the major oil companies for dimes on the dollar. With deep pockets, the majors will simply keep shale as a portfolio item and unleash when profitable.
- The short- to medium-term reduction in shale oil production will reduce associated gas production. After the winter of 2020, natural gas prices will begin to firm. This firming will not be enough to reverse the attrition in coal demand for power.
- Electric vehicle (EV) adoption rate will not materially be affected by the drop in gasoline prices, no matter how sustained. The fully loaded cost of EV fuel is dominated by cost of amortization of the batteries. At a battery cost of USD 100 per kWh, as forecast by Elon Musk for next year (he actually said 2020, but I will cut him some Queen Corona slack), a 200 mile range EV will have a fully loaded cost of about USD 1.50 per gallon equivalent. This is based on a lot of assumptions, but the electricity “variable” cost is between 17% and 30% of that figure. The main takeaway is that unless gasoline price drops to a sustained USD 1.50 or lower (unlikely in most of the US, very unlikely in California and incomprehensible for Europe), gasoline pricing will have little influence on EV adoption. If a battery swapping model is adopted (where the consumer does not own the battery and swaps a charged one at each “fill”), the pay as you drive concept will be appealing, with lower car purchase cost and lower per mile cost.
- EV adoption rate is on the upswing, but still hard to predict. Oil and gas companies would do well to diversify their portfolios into electricity, which has other markets as well. This has indeed been happening for a while. But wind and solar don’t fit the core competencies of these companies. A relatively new entry is scalable geothermal energy. The operations are not only a fit, but oil (and oil service) companies are uniquely positioned to speed up the entrée and scale. Once in their portfolios, they can balance them based on the EV adoption rate, much as they currently do with their oil versus natural gas components.
- Remote working will have some measure of sustained adoption post apocalypse. It is being “field tested” by outfits that may not have used the mechanism in the past. Some may find that it is cost effective. I remember when Shell Oil went to a 10-hour day, four days a week, in Houston to reduce commute miles and associated emissions. Remote working is that on steroids. During this emergency each company will have sorted out which functions (and persons) are suited to this approach. They can take an informed view on adoption.
- Virtual meetings will have an even greater adoption rate. Technology has kept improving, but inertia or conservatism has kept adoption down. Now, with the enforced testing regime, informed decisions will be made. I see a strong uptick in this area. Winners are IT connectivity companies. Losers are airlines. Business travelers are the most profitable passengers on a plane.
- Both the above will reduce use of oil derived liquid fuel. Depending on scale this demand destruction could materially affect the price of oil. Natural gas pricing will remain unaffected; different markets served.
One, somewhat off topic outcome is rise in public empathy, and possibly altruism. When behaviors such as these are entrenched for months, they are more likely to stick. This is good. The (positive) irony would be if the pandemic caused “a contagion of good example” to spread. From an entrepreneurial standpoint, innovations in enabling this trend could be effective.
April 9, 2020