Research Triangle Energy Consortium

Two weeks ago, The House entertained 140 amendments to HR21, a bill intended to influence the drawdown of the Strategic Petroleum Reserve (SPR). President Biden had executed a drawdown last year in response to oil supply disruptions caused by the Russian invasion of the Ukraine. An amendment by Marjorie Taylor Greene seeking to halt the drawdown was defeated 418 to 14, a historic beat down of any amendment. That is interesting, and embarrassing for her, but what in Sam Hill is going on here?* The answer, further detailed below, is that the SPR has been passe for quite a while. Now, it is just a piggy bank for the administration in power and a convenient political football for the opposition, the latter being emboldened by the fact that the public (including “experts”) does not realize that the original purpose of the SPR is no longer relevant, certainly not at its current size. Here’s why.

The Arab Oil Embargo in 1973 caused a major supply disruption in the US. President Ford signed the Energy Policy and Conservation Act in 1975, which enabled a petroleum reserve of up to 1 billion barrels of oil in four locations in Texas and Louisiana. This target was later lowered to 714 million barrels. The purpose was to ameliorate the effects of “economically-threatening disruption in oil supplies”. SPR releases have been ordered 3 times prior to the current one, twice by Republican Presidents and once by a Democrat. There has been no hint of releases being a partisan issue. Until now.

The three previous releases were in 1991 (Desert Storm driven), 2008 (Hurricane Katrina), and 2011 (International Energy Agency led effort in response to dramatic supply disruptions in Libya and elsewhere). The significance of the year 2011 is that US shale oil production hit its stride shortly thereafter. Once it did so, two aspects became clear. One, that the reserves were enormous, and two that production could commence within months of financing and permitting. Several thousand drilled, but not completed (DUC, pronounced duck) wells could come on stream even faster, and nearly half the cost would already have been incurred. Today, North America is essentially self-sufficient in oil, and natural gas too, for that matter. This is a far cry from the Arab Oil Embargo days that caused the creation of the SPR. Back then, the US was heavily dependent on imported oil and new domestic oil production, especially offshore, would take years. Today, shale oil in the ground is the strategic reserve.

Let’s discuss timing. SPR releases are limited to a rate of 1 MM bpd (one million barrels per day). 90 MM barrels could be drawn in 90 days, or roughly 3 months. Double that and we have 180 MM barrels in 6 months. Currently, the SPR is at about 370 MM barrels. That could get drawn down another 100 MM barrels and still leave enough cushion for shale oil production to pick up the slack in the event of a catastrophic curtailment of normal oil supply. Not only is the current drawdown to 370 MM barrels not consequential to national security, even a further withdrawal would be safe. There is a caveat. Many small operators went bankrupt during the Covid related demand drop and the properties are now with more fiscally conservative owners. Therefore, in the event of a true national energy related emergency, the government may need to step in to assure the necessary production. Persuasion largely failed in the last year or so, but nor did we have a dire situation. In fact, none of the three previous releases were triggered by anything approaching the threshold of supply disruption envisioned when the SPR was authorized. In each case, as in the one ongoing, the release was coordinated with other countries. The US portion was about 30 MM barrels on each occasion, a barely noticeable dent in the total (see figure). So, in close to half a century after creation, the SPR has never been needed for the original purpose. US shale reserves and the feasibility of relatively rapid production ramp up further reduce the justification for anything more than a modest reserve of 200 MM barrels. The current brouhaha over withdrawals is a tempest in the SPR teapot.

Vikram Rao

February 2, 2023

*Everybody look what’s going down, from For What It’s Worth (Stop, Hey What’s That Sound), song by Buffalo Springfield (1966), written by Stephen Stills.

The Trump administration’s decision to sell half the holdings in the Strategic Petroleum Reserve (SPR) is the right step.  The SPR was created following the Arab Oil Embargo in the early seventies. It is currently near capacity at about 685 million barrels. The intent had been primarily to guard against a disruption of imports.

The President of the US has the authority to add to, or subtract from, the Reserve without Congressional approval.  But the stated reason for this draw down, revenue for the treasury, is debatable, not the least because this is not a piggy bank; withdrawals must serve a strategic purpose.  Also, such a massive draw down is likely not in the spirit of the authority given, so Congressional approval may be prudent.

Not debatable is that the US is increasingly importing less oil and it is progressively traveling shorter distances to get to the US.  Domestic oil is light and sweet.  It is, by and large, not desirable to most of the domestic refineries, which make better profits from discounted heavy oil from Canada, Mexico and Venezuela.  Consequently, imports from these neighbors combined with some export of domestic crude is a benefit to the nation.  Certainly, light oil from the Middle East and Nigeria, is scarcely required.  Our navy does not need to police the Strait of Hormuz, at least not for oil or gas supply reasons (ample shale gas has rendered import of LNG passé).  Supply disruptions are much less likely from the close neighbors.  About the only real risk is Venezuelan unrest.  This combination of reasons justifies a smaller SPR.

But the best reason for a smaller SPR is the rapid response ability of shale oil production.  Conventional offshore wells will produce oil 4 or more years after a decision to drill.  For shale wells, that figure is a few weeks if the lease is on hand.  This nimbleness of shale oil production is a reason why the industry has weathered the saw tooth price behavior of oil.  Furthermore, a threatened shale oil industry, run largely by entrepreneurial independent producers, has responded with innovation to drive down the cost to produce.  These reasons have conspired to defeat the Saudi gambit of leaving oil price down to freeze out shale oil.

In another twist, unique to shale oil, thousands of wells are drilled but not stimulated, known as DUC (drilled and uncompleted) wells.  They wait for better prices.   Around 5000 of these exist today.  A DUC well can be stimulated and produced in a week in response to even short duration shifts in the price of oil.  In fact, their very existence is a bearish influence on commodity traders.  These act as buffers and a surrogate for the SPR.  In fact, given the short time to production of even regular shale oil wells, all of shale oil still in the ground is the SPR.  In my view the SPR could serve its purpose by being only a third of the current 685 million barrels.

I have previously opined that, in the face of the SPR not being needed at current levels, it could be accessed to exert political will or influence.  A friendly, strategic, net importing nation could be provided the necessary technology to create the reserve (usually in salt caverns).  Oil could be supplied from the SPR to fill this country’s new reserve.  India, for example, could be enabled with a strategic reserve of 200 million barrels, more than enough for their purposes.  The US would be paid for this in one form or the other.  At today’s oil price, just north of USD 50, we even net a profit; the average acquisition cost of our SPR is close to USD 30.  We get our treasury funds, and we potentially slow down India/Iran coziness in energy.

Vikram Rao

Direct air capture of CO₂ (DAC) is all the vogue in carbon capture, with considerable innovation occurring. Nature tried its hand at innovating in the passive DAC space a while back. The public is very familiar with the role of forests. To a lesser degree, also known is the role of oceans as carbon sinks.

But it may surprise many that there is a form of vegetation that does a far better job than trees. Five times better per square meter in places. These are plants in peat bogs, which capture CO₂ and transfer it over time to the organic layer below, which results in the material we know as peat. Peat may be classified as a very early form of coal, with as little as 40% carbon. Were it to be subjected to higher temperatures and pressures by being buried under sediment, it would eventually convert to lignite, and thence to bituminous and finally anthracite coal. The last clocks in at over 90% carbon and looks like a shiny black rock. Countries, such as Estonia, which are short of other hydrocarbons, have combusted peat for electricity. In other places, regular folks have retrieved buckets of peat from the bogs and burned them for fuel.

Source: Peat Bogs Wallpapers High Quality | Download Free (yesofcorsa.com)

But it may surprise many that there is a form of vegetation that does a far better job than trees. Five times better per square meter in places. These are plants in peat bogs, which capture CO₂ and transfer it over time to the organic layer below, which results in the material we know as peat. Peat may be classified as a very early form of coal, with as little as 40% carbon. Were it to be subjected to higher temperatures and pressures by being buried under sediment, it would eventually convert to lignite, and thence to bituminous and finally anthracite coal. The last clocks in at over 90% carbon and looks like a shiny black rock. Countries, such as Estonia, which are short of other hydrocarbons, have combusted peat for electricity. In other places, regular folks have retrieved buckets of peat from the bogs and burned them for fuel.

Peat bogs comprise only 3% of the surface of the earth, but account for 30% of the land-based stored carbon, which is double that stored by all forests combined.  For comparison, forests cover about 31% of the earth’s surface. A recent paper compares carbon storage by trees and peat in boreal forested peatland (peatland that also has partial or complete tree canopy). They estimate that the organic storage is higher in the peat layers than in the trees and subsoil (11.0–12.6 kg m−2 versus 2.8–5.7 kg m−2) over a “short” period of 200 years.

And yet, saving rainforests gets all the ink. Save the peat bog does not have the same ring. And yet, it should. Admittedly, on imagery alone, a bog finds it hard to compete against a rainforest. Cuddly koala bears versus fanged Tasmanian Devils (mind you, as any Aussie knows, real-life koalas are not to be messed with either, and in a further nod to excellent promotion, they are not even bears, they are marsupials, as are kangaroos). And the comparison is not that straightforward, because forests provide other benefits over bogs.  In any case, the global warming situation is so dire that this is not an either/or proposition. The purpose of this discussion is twofold. One is to draw attention to peat bogs as at least just as important as forests for preservation and expansion, including the use in carbon offset programs. The other is to delve into the science of why peat moss is more effective than other plant matter in capturing and storing carbon.

Sphagnum mosses are the dominant species in peat bogs. They are specially adapted to thrive in low pH (acidic), anaerobic and nutrient poor waterlogged environments. The bog microbiome (defined as a mix of microbes) plays a critical role in the fate of the Sphagnum. The microbiome is dominated by bacteria, but also has fungi. The microbes are highly specific to the Sphagnum, indicating plant-microbe co-evolution. This specificity is believed to increase the carbon fixation efficiency, and to adapt to changing climatic conditions. An Oak Ridge National Laboratory investigation showed that heat tolerant microbes transferred heat tolerance to the Sphagnum.

A key feature of the low pH and anaerobic environment is that when the mosses die, they sink into the bog and do not decompose, thus retaining the carbon for incorporation into the peat layer. Meanwhile new moss grows above. This unique ecosystem carries on fixing carbon from the atmosphere in a manner far more effective than any other natural means. Yet, possibly through a failure to recognize the value, or through a desire to repurpose the land for commercial interests, many of the peatlands have been drained. In the state of North Carolina, nearly 70% of peatlands were drained, according to a Nature Conservancy report (Afield, Spring 2023), a reading of which was the impetus for this discussion. Drained peatlands cease to be carbon absorbers and become emitters. In the more spectacular instances, fires lit by lightning strikes have burned and smoldered for up to a year, spewing as much as 270 tons of CO₂ per day. This duration of a year is not surprising because the fire can go underground, where the fuel is plentiful.

Reforestation is a laudable goal. As is the support of the many ongoing investigations targeting passive and active capture of CO₂ from the air. But, equally, restoring peatlands and protecting existing ones ought to be a priority. Nature has already provided an efficient CO₂ sponge. We must feed it*. Adopt a bog.

Vikram Rao

* Sat on a fence, but it don’t work, from Under Pressure, by Queen and David Bowie (1981), written by Roger Taylor, Freddie Mercury, David Bowie, John Deacon and Brian May.

I published my “fun book” nearly six months ago, entitled A Stranger in No Land, tales of assimilation. With considerable reluctance, because it smacks of self-promotion, I am linking you to it. The sneak peek that Amazon gives is well selected. But the Preface may be more informative relative to your wanting to investigate it any further. Accordingly, it is reproduced below. The cover art is a painting by my mother, and the illustrations are by my grandniece. As I noted, a fun book.

PREFACE

“People are strange when you are a stranger”

From People are Strange by The Doors (Written by Robbie Krieger and Jim Morrison)

            As the Doors song line goes, a stranger in a new land will be faced by strange behavior. The episode described in If it Moves. . . was the author’s introduction to the stark contrast in sexuality of California in the 1960’s to the experience of a 21-year-old from the all-boys (at the time) Indian Institute of Technology in sleepy Madras. Culture shock about defines it. These shocks can range from the essentially pleasant and intriguing, as was this one, to the shocking. But they all share the trait of a feeling of inadequacy. Of a lack of preparedness.

            In this situation, the stranger has two choices. One is capitulation. (S)he simply returns home. This may not be a physical return; it could merely entail making a choice not to be involved in said activity. In context, home is a zone of comfort. Similarly, the interpretation of “land” in the book title would be a place or pursuit (public speaking, for example), not necessarily a country. When I (the author) was a child, the capitulation option was not available when the family moved every couple of years on postings. Children of such professional nomads, affectionately known the world over as army brats, are reduced to the second choice. Assimilate. Minor avoidances are possible, such as school changes. But in the main, one simply fits in. Personality differences matter for the ability to fit. I was blessed with malleability and the childhood experiences served to inspire confidence that I would not be a stranger in any land for too long.

            This book is largely devoted to tales of assimilation. Characters appear with the familiar names used by the author in addressing them. The meanings of the names and relationships to the author may be found in the Glossary.

The principal criterion for inclusion as a chapter was that something interesting or fun had to have happened. On more than one occasion, that criterion was compelling in its own right. Assimilation took a back seat unless one indulged in flights of fancy to find that association. The Scrooge Strategy was one such. At a performance of The Christmas Carol, the actor playing Scrooge took some extemporaneous license which appeared to give Scrooge a sense of humor. This emboldened me to present a side of Scrooge that Mr. Dickens never intended. Business schools tempted to include the Scrooge Strategy in their branding classes best come calling for permission.

            In Jodhpur I do start the book at the beginning of the journey. An early chapter is Forty-nine Not Out which recounts the considerable step for a 16-year-old to leave home on a two-day train journey to live and study at an elite institution where everybody could be expected to be as competent as he. This would be unlike the relative walk in the park high school experience. That I became comfortable enough even in the first year to take time to help launch the campus monthly Campastimes is as much a testimony to the embrace of the setting as it is to my assimilative skills. That is when my love of writing emerged. My second to last book is dedicated to Campastimes, and not to a person.

The Stanford University years are prominently represented, beginning with If it Moves, and followed by Forks in the Academic Road and De-mystifying Legendre. These last two have more academic underpinnings, but fitting in takes many forms, and the “something interesting happened” stricture was always in play. That period was transformational. The process of becoming an American was well under way at the end of the Stanford era, even recognizing that California, especially in the sixties, might not have been fully representative of the US. Domicile had not been intended. The plan had been a master’s degree at Stanford, at essentially no cost, followed by a return to India. Events conspired.

The next major change, working for a living, at first on the other coast and later in Houston, merited three chapters as well. All fall in the main theme of the book, beginning with Folded or Crumpled, with an amusing rite of passage at work. When Cultures Cross and When in Rome have the shoe on the other foot. I am now the American dealing with strangeness in England and France, respectively. Interestingly, once one crosses a major cultural barrier, all the rest appear easier to traverse. In When Cultures Cross, I am put in the position of saying grace prior to the company Christmas meal in Cheltenham, England. With ten minutes notice. The Director of the facility realized he was no longer the senior person present; I was. Custom decreed that I, the Hindu, who had only read about such things, perform. Perform, I duly did; having read Jane Austen came in handy.

The two chapters The Rao Dog Tells Tales and The Last Lap for the Rao Dog relate to the assimilative trials faced by our dog Kalu following adoption from the SPCA. Written in her first person, it will be annoying to some. My defense is Peter Mayle. Not that I aspire to his stature, but this author of A Good Year¹ also took a flyer with a first-person narration by his dog in A Dog’s Life². A great read, as are many of his other books set in and around Provence.

            Even the chapters departing from the assimilation theme have elements of cultural differences. Culinary Matters describes the compelling social circumstances under which horse was consumed for the first (and last) time in West Germany (was West and East back then). Close Encounters, on the other hand, is a pure capitulation to whimsy. But closely adheres to the stricture of being interesting, with intent to amuse. If the last is all that a reader gets out of the book, I will be content.

1 Mayle, P A Good Year (2006) Vintage ISBN 0307277755 

2 Mayle, P, A Dog’s Life (1996) Penguin Books Ltd. ISBN 0140261559

There is a lot of teeth gnashing about President Biden ordering a limited drawdown of the Strategic Petroleum Reserve (SPR) earlier this year. A New York Times piece warns that the SPR is at its lowest level in four decades (see chart). How relevant is that statistic?

Let’s go back to how it all began. In 1973 the US was importing 6.2 million barrels per day (MMbpd). Today, it is the largest oil producer and a net exporter by a small margin. But importantly, about half the imports are from Canada, with whom the US has a mutual dependency. Canada has heavy crude the bulk of which is refined in the US, with a resulting export of refined products. Viewed in North American terms, imports from other parts of the world are minor.

Back to 1973. The Arab Oil Embargo to countries such as the US and the UK caused a tripling of the price of oil. To avoid such disruption, the US decided in 1975 to create the SPR. Since then, the crises that drove the decision have not materialized. Drawdowns have been few and light (see chart). In other words, even before shale oil and the resulting North American self-sufficiency, strategic access has not been needed. And yet, pundits, such as those in the NY Times piece, keep maintaining that someday the reserve may be needed*. We discuss that premise here.

The SPR comprises four salt caverns, created by drilling into salt bodies and excavating using circulating water. These are ideal for storage of oil. In fact, salt has been an important impermeable stratum to trap oil in reservoirs. At its peak the reserve had about 719 MM barrels. It was filled over the years and has a low average purchase cost of USD 28 per barrel. While the President’s purpose was to ease the cost of gasoline at the pump for the populace, the sale of SPR oil is coincidentally generating a profit for the government at today’s prices.

Oil is not all the same. One reason the US imports oil from Canada and Mexico, while at the same time exporting domestic production is that US refineries prefer the heavy oil from those countries. They have expensive process equipment to refine such oil, which they get at a large discount because the cost to refine is higher for these crudes. To pay more for light shale oil, while at the same time idling the expensive kit, makes no economic sense. And unlike the European situation with Russian oil and gas, the imports are from friendly neighbors who need the US refineries.

Similarly, the oil in the SPR is not all the same. Over 60% of it is high in sulfur (designated sour) and has significantly lower value than the sweet oil.  The final withdrawals this year are 85% sweet, possibly because that is the mix most suited for purchasers. If, and when, shale oil is injected, it will improve the quality of the balance. But that ought not to be necessary. Here is why shale oil could directly address any shortfalls in supply.

First, there is a significant inventory of DUC wells. DUC stands for drilled and uncompleted and is pronounced duck. I will spare you duck hunting allusions. The hydraulic fracturing portion of the completion is the costly part of the operation. It was suspended for some wells during the low oil prices of a few years ago and the wells were mothballed. Such wells can come on stream in a matter of weeks. Second, even new reservoirs can be accessed and flow oil in a few months. Environmentalists are concerned that new wells will perpetuate fossil fuel production. Ordinarily they would be right for, say, deep water wells. But shale oil wells are burdened with high rates of reservoir depletion. Production from the first couple of years must justify the return on investment. The capital asset does not need years of production to provide the return, as it would for conventional plants such as refineries, or deep water wells, for that matter.

The drawdown executed by the US administration of about 1 MMbpd for 180 days is nearing the end, with 160 MM barrels already released. The reserve is at about 420 MM barrels and will drop to 400 MM barrels by the end of the year. In the unlikely event that the strategic purpose of the SPR is invoked, and it has not since its inception, that amount provides a cushion while additional shale oil is brought on stream.  Over the last few years, the shale oil industry has been more restrained than in the past, seeking better returns. If this were to be a national security issue, short term policy measures could overcome that hurdle.

Shale oil in the ground is our strategic petroleum reserve.

Vikram Rao

October 1, 2022

*’Cause someday never comes, from Someday Never Comes, Creedence Clearwater Revival (1972), written by John Fogerty.

Perhaps the question ought to be how well we are being allowed to manage the transition.  When President Biden attempted to put the arm on OPEC+ (Organization of Petroleum Exporting Countries plus Russia) to increase production to dampen oil prices, he was accused in some progressive circles of acting in opposition to his avowed climate change goals.  No matter that in a country beset by inflationary pressures, any relief for the consumer ought to be welcome.  The oil market is elastic.  Only increased supply, at constant demand, will reduce prices.  Unable to persuade OPEC+, President Biden took the unprecedented step of coordinating with several net importing nations in releasing oil from strategic reserves.  The US will release 50 million barrels, only about 8% of the reserve.  This too was criticized from many angles. 

The one criticism I found most interesting was that US refineries would not want the stuff because the release was from the more sour (high sulfur) crude containments.  The argument was that they would need hydrogen for desulfurizing (true) and that rising natural gas prices made the hydrogen (mostly derived from natural gas) prohibitive (not so true).  The US may be the one country not having a natural gas supply issue, provided producers choose to respond to the relatively high prices.  One factor in favor of so doing is that shale gas wells have a short payback period due to high decline rates (rate of drop in production).  Consequently, an investment in shale gas is not a bet on the long term prospects of the commodity.

Also, the LNG business will continue to grow to feed Europe, Japan, China, India, to name a few dependent on it.  The relative lack of it is why the prices are at unprecedented highs in those countries.  In other words, LNG will be an important customer for decades for new natural gas.  Another parenthetical point on what US refineries want: they do not want US shale oil because it is too light and too sweet(!), and they have expensive kit going idle if all they refine is shale oil.  This is one reason that the US imports 4 million barrels a day of heavy crude from Canada (and only 0.4 million from the Saudis).  The SPR release oil will blend in just fine.

The moral of this particular episode is that while long term carbon mitigation goals must be set, if they cause significant privation in the short term, the current public support for carbon mitigation could dwindle, making it harder for those goals to be bolstered with necessary policies.  Take the current explosion in natural gas prices worldwide, but mostly in the net importing nations.  European governments are scrambling to protect the public from crippling heating bills this winter.  In this scenario, investors shunning fossil fuels do not serve the common good.  The argument is made that investors are leery of taking positions in areas that are in decline.  Natural gas may be the one fossil fuel that will see growth in the short to medium term, and eventually take longer to decline than oil.  In part this is because over 90% of essential backup of renewables comes from natural gas.  As noted in a previous blog, this will continue until we solve the storage problem at scale.

An important consideration for investors is the payback period, and to a degree the allowable amortization period.  The latter is a policy matter for governments.  The US has a long-standing policy favorable to producers (essentially a subsidy), which is debatable in its merit because of the broad swath.  But were it to be used in targeted areas, the use of public funds could be supportable.  In any case, some mechanism must be found to incentivize investment in the bridging areas.  This applies also to vehicles.  We are a very long way from electric vehicles being in the majority.  The auto industry ought to continue to invest in innovation in the efficiency of IC engine based vehicles.

The concept of bridging to a greater goal must not only be tolerated, but ought to be considered essential.  Renewables have intermittencies, which will require fossil fuels to fill the gaps, for at least a decade and change. Today we are faced with the inescapable prospect that additional solar or wind places incremental demand on natural gas. This is an uncomfortable truth that must be faced until cost effective sustainable alternatives take a hold.

Vikram Rao

November 28, 2021

Low-cost energy lifts all boats of economic prosperity. Or on the other end of the spectrum, high-cost energy threatens to sink them, especially if prices rise suddenly. Nowhere is the positive scenario more evident than in Iceland. An otherwise resource poor country, cheap energy has elevated it to the third highest gross domestic product in the world. Unlike Norway, a country at a similar latitude, almost all produce is domestically derived. Greenhouses enabled by natural hot water operate for much of the year.

Iceland has the good fortune to be sitting on the Mid Atlantic ridge between the North Atlantic and Eurasian plates. Surrounded by volcanoes, the earth stresses are such that most eruptions are through fissures, unlike those in Hawaii and other places with typical conical protrusions with violent eruptions. Furthermore, with abundant subsurface water and high thermal gradients (subsurface temperatures that rise faster than normal with depth), hot water rises in the faults and emerges on the surface as geysers, or mere hot water lakes.  This hot water supplies heat for 90% of the homes.  It also is used to produce electricity, although in that case the water is from wells drilled a couple of kilometers. I estimate their cost to produce to be well under 2 US cents per kWh. They charge industry 5 cents and domestic users pay 13 cents. Clearly, tariffs are involved. But this compares to Netherlands and Germany at nearly 30 cents for domestic users.

A recent New York Times story reports a different scenario for the rest of Europe (yes, Iceland is in Europe) in that rising natural gas prices in Europe are slowing the post-pandemic economic recovery.  Natural gas prices are reported to have risen to USD 18 per MMBTU.  The pre-Covid 19 figures used to roughly fall out as follows: the US at USD 3, Europe at USD 9 and Japan at USD 17. The US is still low at USD 5, but that is the highest in nearly a decade. Abundant shale gas has kept the price down, but that industry has been battered by the pandemic, so is probably slow to respond to the surge. Remember also that shale gas driven low energy cost was the single biggest factor for US recovery from the recession of 2009.

What we can expect

On natural gas price, in one word: volatility*.  The USD 18 per MMBTU reported today as the spot price for Europe is probably aberrant.  The price was a third of that a few months ago. Also, most utilities operate on long term contract pricing. The high spot price is almost certainly driven by liquefied natural gas (LNG) import prices.  Drought conditions in countries such as China have reduced hydroelectric output and required augmentation with LNG powered electricity. Parenthetically, yet more evidence of impact of climate change. Usually, the spot price is determined by the price of the last cubic foot of gas imported.  For Europe, that is LNG. The winners here are the Russians with pipeline supplied gas, if the contracts allow escalators.

Again, most LNG contracts are long term and pegged to the price of oil.  In the US, most (all?) are based on the Henry Hub spot natural gas price.  It is multiplied by 1.2 and liquefaction cost of USD 2.50 is added to it. Today at USD 5 prices, LNG would be at USD 8.50, a far cry from the spot price in Europe of USD 18.  And so it goes in the commodity trading market.

I would expect US shale gas drilling to pick up in response to the price.  The smaller players, who are fewer yet after bankruptcies last year, will respond. Now that so many properties are in the hands of the major oil companies, expect their response to be more measured.  In any case, I expect US prices to stabilize and there is no serious risk of prices rising to the point where coal has a resurgence. Unlike in the case of oil, all gas pricing is regional. LNG is the only means of transport between regions and it adds a cost of somewhere between USD 3 and 4 to the produced gas price.

The experts are predicting a colder than normal winter.  If that transpires in Europe, the proverbial Katie will have to bar the door on natural gas prices.

Vikram Rao

September 9, 2021

*Everybody look what’s goin’ down from “For What It’s Worth” by Buffalo Springfield (1967), written by Steven Stills.

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

Vikram Rao

April 16, 2021

The future of oil has been debated for ever since I can remember.  When I was an undergraduate in engineering in the early sixties, we were taught that the world would run out of oil in 30 years.  Such predictions continued with the concept of Peak Oil oft discussed.  But, with the recognition of immense heavy oil reserves, and more recently with the emergence of shale oil, the discussion has shifted to the demand side. 

For nearly a century all crystal ball gazing centered on sufficiency of a strategic commodity.  Over the last decade or so, oil is well on its way to turning into salt*.  Lest you conjure alchemical imagery, I hasten to explain that oil is merely going the way of salt. Salt used to be a strategic commodity. Canning, and later refrigeration turned it into a useful commodity, no longer strategic.  This was about the time that the era of oil began, with the discovery of Spindletop and the resultant decimation of the price of oil. The era was abetted by the demand created by mass production of economical cars by Ford, which incidentally killed the auto industry of the time: electric cars.  More on the revenge later.

But the demise of oil will be preceded by a protracted hospice stay.  Folks will predict X% electric cars by year Y.  But that will be for new vehicles.  Legacy vehicles will go a long time, especially in countries like India, a major developing market for automobiles.  The electric starter was first installed in a Cadillac in 1911.  I was still hand cranking our venerable Morris 8 sedan in India (with difficulty; I was 6) in 1950.  On the other side of the coin, India is more amenable to conversions to electric drive, in part due to low labor cost and in part due to a way of life that wrings out every drop of value in a capital asset.

The future of oil is now being discussed relative to demand, not so much supply.  Peak oil discussions are replaced by peak consumption ones. Shale oil put paid to the supply issue. Even before Covid-19 destroyed demand, a groundswell of movement was present towards oil alternatives for transportation fuel.  This was driven by climate change concerns, but also to a degree by emissions such as NOx and particulate matter.  But the projections on future demand depend on the tint of the glasses worn.  The Organization of Petroleum Exporting Countries (OPEC) is predicting return to pre-Covid levels of consumption by late next year.  Somewhat surprisingly, the US Energy Information Administration is also singing that tune as are some oil majors such as ExxonMobil. 

Most surprisingly, however, British Petroleum (BP) is very bearish.  Their projections, while being scenario based, are causing them to plan a 40% reduction in their oil output by 2030.  This is to be combined with a big uptick in renewable electricity production.  Shares rose on the announcement.  But BP has been contrarian before, along the same lines.  Over a dozen years ago they announced a pronounced shift away from oil, renaming BP to stand for Beyond Petroleum.  That did not go well.  Particularly unhelpful to their reputation for operating in difficult environments was the oil spill associated with the massive Macondo blow out.

The future of oil is not the future of natural gas.  Together they share the term petroleum, although it is imprecisely used in the parlance to stand simply for oil.  They were both formed in the same way, with natural gas being the most thermally mature state of the original organisms.  But in usage they are different.  Oil is mostly about transport fuel and natural gas is mostly about fuel for electricity generation and the manufacture of petrochemicals, especially plastics. 

The pandemic decimated transportation fuel but had much smaller effects on electricity and less again on plastics.  In the post pandemic world, natural gas will endure for long, while oil will be displaced steadily by liquids from natural gas and biogas, and ultimately by electricity.  This, of course, excludes aircraft, which will need jet fuel for the foreseeable future.  Biomass derived jet fuel will be a consideration, but not likely a big factor.

Electric vehicle batteries costing USD 100 per kWh will be the tipping point, and we are close.  At that level, the overall electric vehicle with modest range will cost about the same as a conventional one.  The battery and electric motors’ cost will be offset by the removal of the IC engine, gear box, transmission, exhaust systems and the like.  For a compact car, each 100 miles in range will add about USD 2500 to 3000 to the capital cost. Maintenance costs will plummet and the fuel cost per mile will be significantly less than with gasoline or diesel.  To top it off, the linear torque profile typical of electric motors enables high acceleration from a stop.  A progressive shift is inevitable. The revenge of the electric car.

The only debatable issue is the rate of change.  And this is where the opacity appears in the future of oil.  The main sticky bits are perceptions of range required (and the willingness to pay for more) and charging infrastructure.  The latter could be influenced by business model innovation, such as battery swapping rather than owning.  But oil is here to stay for decades.  Therefore, improvement in efficiency, to reduce emissions per mile, are paramount.  The industry appears to understand that.  When the US administration announced a drastic relaxation of mileage standards in 2025, four major companies voluntarily agreed to a standard close to the old one.  I suspect this was in part because they already had worked out the techno-economics to get there, and certainly the consumer would like the better mileage.  Could be also that they had projections of electric vehicle sales that allowed fleet averages to be met.  A compact electric vehicle has a gasoline equivalence mileage of about 120.  Quite an offset with even a modest fleet fraction.

The oil barrel has sprung a leak.  But it is likely a slow one.

Vikram Rao

October 22, 2020

*Turning Oil into Salt, Anne Korin and Gal Luft, 2009, Booksurge Publishing

California is ablaze. So are Oregon and Washington. The tally to date is 5 million acres burned, about halfway through the fire season, and well on its way to record territory. Putting that in perspective, the east coast of Australia, devastated similarly earlier this year in the Southern Hemisphere summer, closed the season with 46 million acres burned.

The statistic of greatest concern is that the intensity and scale of the fires is getting worse. Over the last thirty years, the number of fires annually has no discernible trend; certainly, has not gone up. But the acreage burned has; decisively. Both patterns are evident in the figure below. Five of the ten largest fires ever in California are currently active. The largest of these, the August Complex is already at 839,000 acres and still going. The next largest, ever, was 459,000 acres, the Mendocino Complex in 2018. Labeling any of this chance, or poor forestry management, evokes imagery of the proverbial ostrich, and the placement of its head.

The average hectares (a hectare is roughly 2.47 acres) burned has nearly doubled over this three-decade period. Nine of the ten largest fires have occurred since the year 2000. Note that this does not include the ongoing five, which certainly would be in that group, making it 14 of the 15 since 2000. Although a regression line would have uncertainty due to big annual swings, an eyeball estimate indicates a strong upward slope. If this is a predictor of the future, that future is indeed bleak and warrants a study of causes.

The recent EPA report, from which the figure was reproduced, ascribes the pattern of increased fire acreage to higher temperatures, drought, early snow melts and historically high fuel loading (which is the fire prone vegetation, including underbrush). We will examine these separately, although they may not be disconnected. But first, a comment on the pattern of numbers of fires being essentially flat. Ignition events determine numbers of fires. In California, the principal ones are arson, campfires, power lines and equipment. The equipment category comprises items such as power saws, mowers, and other operated machinery. Human behavior, absent intervention, can be expected to be constant. So, the flat profile on numbers of fires is to be expected. Interestingly, the incidences are seasonal, even, counter-intuitively, arson.

Climate change is implicated in many of the causes of increasing severity over the years. While the term has many interpretations, one generally accepted aspect is temperature rise in the atmosphere and in the oceans. The debate is not whether this happens, but how fast it does. Also generally accepted (to the extent any climate change causality is generally accepted) is that oceanic temperature rise causes increased severity in the El Niño phenomenon in the Pacific Ocean, which is responsible for catastrophic droughts. These are accompanied by drenching rains in other parts of the world in the same year. Both disturbances are extreme deviations from the norm, with resultant impact on vegetation and the way of life.

Atmospheric temperature rise can also be expected to change the proportion of rain and snow in precipitation. Lighter snowfall can be a result, as also early snow melts. Both are in the EPA list noted above.

California, being generally arid, gets most of its water supply from melting snow. While less snow in a given year is certainly a drought indicator, the phenomenon most studied is that of the timing of the snow melt. Data from four decades commencing in 1973 conclusively demonstrated that burn acreage was strongly correlated with the earliness of the snow melt (Westerling 2016). Decadal comparisons show that the fire seasons in 2003-2012 averaged 40 more days that the seasons in 1973-1982. Fires in the later decade were more severe. Large fires, defined as covering greater than 400 hectares, burned for 6 days on average in the early decade and for more than 50 days in 2003-2012.

Power lines deserve special mention.  Falling power lines were blamed for several fires in 2017 and 2018. The utility has accepted blame and is in bankruptcy. Trees falling on power lines snapped the poles. The tree roots, finding uncertain purchase due to drought conditions, were no match for the Santa Ana winds or any other storm sourced shoves. Those same drought conditions caused the underbrush to be dry. Power lines are usually not insulated.  Sparking wires on dry underbrush and the rest is incendiary history. A poster child for distributed power.

The wildfire future is indeed bleak. Climate change retardation is necessary. But it may not be sufficient in the shorter term. We need a reincarnation of Smoky to change human behavior to minimize the ignition events.

Westerling, A. L. (2016) ‘Increasing western US forest wildfire activity: sensitivity to changes in the timing of spring’, Philosophical Transactions of the Royal Society B: Biological Sciences, 371: 20150178. http://dx.doi.org/10.1098/rstb.2015.0178

Vikram Rao September 21, 2020