May 29, 2017 § 1 Comment
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.
October 22, 2020 § 8 Comments
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.
October 22, 2020
*Turning Oil into Salt, Anne Korin and Gal Luft, 2009, Booksurge Publishing
September 21, 2020 § 2 Comments
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
April 26, 2020 § 2 Comments
On Monday this week, traders paid to unload oil purchase contracts known as futures. The price of oil went negative. Story lines had titles about being paid to fill gas. But, sorry, you will not be paid to fill up your gas tank. You already knew that because business does not work that way. What may surprise you is that some gas station owners are commanding better margins right now than before. Some explanation for the conundrum follows*.
The real price of oil, the price folks actually using it are prepared to pay, never went negative. This was an artifact of commodity trading. Traders buy oil for delivery sometime in the future. They never intend to take delivery. They are speculating on the price rising prior to the delivery date, netting a profit. When they are wrong, they sell the contract to someone at a loss. This one was a doozy of a loss. Because of the precipitate action of many traders on the same day, the price of oil plummeted, going to a negative USD 37 (see graph in the link). They paid someone to take that oil off their hands. To underline the transient aspect of this event (no matter the chicken little headlines), at this writing a scant few days from the plummet, the price is just over USD 17. Not munificent, but not negative.
Futures trading in oil in the US is different from that in Europe. In the US, oil delivery must be taken in Cushing, Oklahoma. Traders caught in the squeeze described above have the option of storing it in Cushing for a while. Not this time. No spare capacity was available. Brent oil futures take delivery at a port in Europe. Brent May futures dropped just 2 dollars. This Cushing pinch point feature, together with other bottlenecks in pipeline transport, are the reasons why West Texas Intermediate (WTI), the US benchmark, always is USD 2-5 below the Brent price. This despite the fact that the oil is sweeter (less sulfur) and lighter.
The majority of US oil produced today is shale oil. This is light and sweet and when distilled in a refinery, over 90% comprises useful transportation fuel gasoline, jet fuel and diesel. Only 5% is a residue known as fuel oil, which also can be burnt for heat. The problem today is that gasoline and jet fuel have plummeted in demand, but diesel has kept up reasonably because of farm use and increased truck traffic for deliveries. A refinery today can get crude oil for a very low price. It can sell much of the diesel fraction, but the gasoline fraction (usually more than the diesel fraction) has low demand. Yet, to produce diesel, gasoline is also produced. The result is that the gasoline is sold to the distributor at a very low price. But, according to some reports, some retailers are not passing on all the savings, with the result that their profit margins are higher than they were in normal times. That may be scant comfort with the low volumes. But in recent times, the convenience store associated with the pumps has been the profit maker, not the fuel, and that volume likely has not dropped. You will also notice that the spread between the pump price of gasoline and diesel has increased substantially.
Oil price is likely to remain low until the demand returns in some measure. Demand is estimated to have dropped by 27 million barrels per day (bpd) in April. OPEC + (OPEC plus Russia) agreed to a 9.7 million bpd reduction in output. The Texas Railroad Commission considered forcing a reduction of 1 million bpd and hoped to persuade other US jurisdictions to reduce another 3 million. After a critical meeting this week, two of the three commissioners voted it down. That leaves the supply/demand imbalance too high to put upward pressure on price. President Trump wants to top up the Strategic Petroleum Reserve (SPR) from the current 635 million barrels to 710 million. Congress is still to approve the cost to do that. The average cost of of oil in the SPR is USD 28. A top up at current prices would be a good deal. But the rate of fill cannot exceed 0.5 million bpd. So, it may not make a material difference. What will make a difference is wells being shut in. Companies will go bankrupt and be swallowed up for dimes on the dollar by the big ones, who have the deep pockets to hold on for better pricing.
Negatively priced oil was a mere curiosity. The over USD 50 price drop in a day was driven by trader behavior. That is unlikely to repeat. Many states are relaxing restrictions. Tracking already shows more people on the move. Schools are likely to open in some jurisdictions. Expect oil prices to hover in the low 20’s in the near future. That will not be enough for many producers, who will shut down their wells, which in turn will cause prices to firm. In other words, supply/demand drivers will return, and the aberrant negatively priced oil will be a story for the ages.
April 26, 2020
*this piece was driven by a request from three regular readers of this blog.
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
March 19, 2020 § 2 Comments
If enough of the light was at ultraviolet wavelengths, the virus would die. This light, however, is an attempt to explain some of the science behind the virus and its effects. I fully expect you folks to obtain fact or inference checks from physician scientists and am prepared for the comment onslaught.
A general caution is that very few sites, including this one, ought to be relied upon without verification. The reputable sites include the National Institutes of Health (NIH) and in particular the National Institute of Allergy and Infectious Diseases (NIAID), the Center for Disease Control (CDC), and the World Health Organization (WHO). Other sources are sites at top medical schools such as at Johns Hopkins, Stanford and Harvard.
First the nomenclature. COVID-19 is the disease resulting from the virus. The virus is from the general family of coronaviruses, with this variant being named SARS-CoV-2. SARS stands for Severe Acute Respiratory Syndrome. The name being a bit of a mouthful, the WHO often refers to it as the “COVID-19 virus”. The virus is related to those responsible for the recent outbreaks of SARS in 2002-2004 and Middle East Respiratory Syndrome (MERS) in 2012.
Structure and function
In common with other coronaviruses, they are spherical, with protein spikes sticking out about 12 nanometers (nm). Resemblance to a crown informs the corona name. They also have a striking resemblance to the fearsome medieval weapon, the mace. In size they are reported to be in the range 50-150 nm, which places them roughly in the ultrafine classification of airborne aerosols. However, deposition fractions in various parts of the respiratory tract cannot be presumed to be similar to those of particulate matter, even those coated with organic molecules.
SARS-CoV-2 transmission electron microscopy image, courtesy NIAID-RML
The image is of a virus isolated from a US patient. The spiky proteins attach to receptors in human cells. The mechanism is not unlike a lock and key. The key of the virus protein needs a receptor lock to attach in order to then enter the cell. Another analogy is docking of a spaceship to a space station. Once this docking happens, the virus can enter the human cell. Then it can replicate in the human cells and the disease is well on its way. Recent research has shown that the receptor for SARS-CoV-2 is the same as that for the SARS virus. That is the good news, because we know a lot about the original SARS. The not so good news is that the binding affinity for this virus is ten to twenty times greater than for the original SARS (Wrapp et al. 2020). This could explain why the human to human spread appears to be greater than was noted in the SARS outbreak. Furthermore, despite the similarities in the structure and sequence of the protein spikes of the two viruses, three antibodies developed for SARS were not effective in binding to the SARS-CoV-2 protein spike.
A feature of the SARS-CoV-2 virus is that it is enveloped by a lipid (fat) layer (the “crown” protein extends beyond the lipid layer). In this aspect the structure is like that of influenza viruses and the other coronaviruses (and unlike the diarrhea inducing rotavirus). This is fortunate because soap and water will kill it. Soap has a hydrophilic head and a lipophilic tail. The tail penetrates the lipid layer and pries it apart, thus leading to the destruction of the viral genes, with all the fragments being washed away by the water. This mechanism of action underlies the most important public health guideline for minimizing spread, washing of hands in soap and water for at least 20 seconds, taking care to wash between the fingers. Hand sanitizers are believed effective if they contain at least 60% alcohol. They too remove the lipid layer and cause the disintegration of the virus.
Except for the hand cleaning discussion, I did not get into disease avoidance. For the rest you need to go to one of the reputable sites. But I will note that my limited examination of the literature shows a flurry of scientific activity on several fronts. These include studies of the immune response, development of a test to verify the presence of antibodies (UK), testing of intensity reduction drugs (example Tamiflu for influenza), and research on the ultimate prize: vaccines. Keep in mind that folks are rushing to publish, in order to get the information for others to use, and so findings may be subject to revision. The study linked above is based on a single patient, but still instructive. With all the stuff out there, caveat emptor!
Reference: Wrapp et al., (2020) Science 367, 1260–1263
Vikram Rao, March 19, 2020
September 8, 2017 § 1 Comment
A recent story discusses the impact of Hurricane Harvey on the availability of some common plastics. It points out that the hurricane has shut down production on the Gulf Coast sufficiently to impact availability of these materials well into November. They refer to derivatives of ethylene, in particular, polyethylene and PVC.
We have previously discussed in this forum, and in my 2015 book, the concentration of ethylene crackers in the Gulf area. The main point made then was the distance of the crackers from many of the ethane sources associated with shale gas. This distance has caused ethane pricing to be extremely low in consideration of its calorific value. In the book, I note that LyondellBasell grew substantially because they owned two crackers in the Midwest, and profited handsomely from the low local prices. More recently, ethane from Texas sources has fed plant expansion in existing plants near Houston. These are barely on stream. Then Harvey hit and shut many of these down. Incidentally, gasoline and diesel production also was impacted. This is evidenced by (Arab Embargo caused) 1970’s style lines at gas stations in Dallas.
The impact of Harvey on ethylene production underlines the risk associated with large concentrations of oil and gas refining, or any chemical industry for that matter, in storm prone areas. Distributed production of fuels and chemicals is a good idea for a variety of reasons. One is exemplified in the Harvey ethylene and gasoline situation. Another, more germane, is the location of conversion plants close to the raw material source. In the limit, pipelines are eliminated. Today, shale oil from the Permian is being hampered by lack of pipeline capacity. The spread between WTI and Brent is once again rearing its ugly head. It was squeezed when oil export was allowed.
The knee-jerk reaction would be to build more pipelines, fast. The more thoughtful action would be to permit and build small refineries proximal to the production. Shale oil is light, and mostly sweet (low sulfur). It can be refined in “simple” refineries; essentially distillation columns. The complications of cracking are not in play. Once financed, these can be built in two to three years, not very different from the time scale to enable pipelines. Fewer pipelines are better for local property owners, and for the environment. Local jobs will be created, and the prosperity will be distributed.
Shale oil, because it is light, always has associated gas. Expect a ramp up in gas production, possibly without enough pipeline capacity. Distributed conversion of this gas into chemicals such as methanol would be an alternative to pipelines. In some cases, new technology will be required, because small scale production of fuels and chemicals is disadvantaged by absence of economies of scale. A national network of manufacturing institutes (NNMI), a federal initiative, has one in this space, known as RAPID. The objective is process intensification, a means by which small scale processes can be economic.
The oil price scenario is playing out now. Shale oil caused the plummet in oil prices, beginning in late 2014. That 50% drop has substantially remained, almost three years later, with some ups and downs. The Saudis gambled on the demise of shale oil if the prices stayed low. Sure enough, according to the Economist, there were a hundred bankruptcies, and default on USD 70 billion in debt. But the industry is still alive, and fairly well. Part of the reason is the entrée of the big players such as ExxonMobil and Shell, into the Permian. The other reason is innovation to reduce the breakeven cost of production. Initially, the cost reduction came from service company discounts and operational efficiencies. Following a thinning out of service companies, those prices will rise. The key parameter is cost per barrel. The improvement can come either in reduced cost or increased production. Expect the latter to be the main player, through innovations increasing the percentage of oil in place recovered.
My crystal ball says that innovation will reduce breakeven costs below USD 40 per barrel and the industry will thrive. But oil prices will continue to stay low, in the consumer-friendly range USD 40 to 65 per barrel. If all of this comes to pass, expect US oil production to go up 3 million barrels per day by 2020 or so. That is a good 30% over current production. Associated gas will flow as well. Now is the time to challenge the orthodoxy in fuels and chemicals processing.
April 11, 2017 § 1 Comment
Here we go again. Presidents making decisions that are largely symbolic in the face of economic realities. The latest is a report that President Trump will shortly issue an executive order to promote oil and gas exploration and production in the Arctic and Atlantic.
I had previously written that President Obama’s 11th hour decision to ban future sales of leases in the Arctic would have no net effect on the industry in the foreseeable future. His ban on the Atlantic coastal waters was more interesting, in that it stopped at approximately the North Carolina border with Virginia. Interesting, because previous exploration had shown potential in the North Carolina waters, more so than Virginia. I think some exploration is likely as a hedge, but actual development will await the sorting out of the true impact of shale oil, as discussed below.
The industry has gone through a secular change. Predicting oil price has proven even more tenuous than in the past. When conventional oil (as opposed to the more recent shale oil) was the only product, oil price prediction entailed understanding the development pipeline, usually years in duration, while factoring in political instability in the oil producing nations. Further assisting the crystal ballers was OPEC, which manipulated prices to remain in the vicinity of USD 100 per barrel. Since about 2015 all that has gone out of the window. Shale oil in the US caused a halving and it has been seesawing around USD 45 ever since. What the future bears depends on the source. In the past, there had always been the outlier analyst predicting USD 200 or some such. But the consensus was in the low one hundred region. Now we have polar opposite predictions regarding supply and demand from the likes of Goldman Sachs and Morgan Stanley. Sort of the definition of uncertainty. Not the best climate for long term investment. More on that below.
Sustained low prices decimated the ranks of the shale oil producers, resulting in 100 bankruptcies and default on USD 70 bln in debt. But a new force has emerged. Major oil players with deep pockets, such as ExxonMobil and Royal Dutch Shell, have taken large positions. More importantly, those two plus Chevron are committing to USD 7 bln investment in 2017 (some estimates are up to 10 bln.) in shale plays, primarily in the Permian Basin. This is a giant leap from before, when the emphasis was on offshore development. This comes shortly after the Shell announcement of withdrawal from the Arctic “for the foreseeable future”. This withdrawal is from continued development of existing leases. That would appear to indicate a disinterest in any more leases in auctions, enabled by the reported President Trump order. In fairness, that does not necessarily follow. Even if they are backing off on development offshore, new leases will still be bought as hedges. This is evident from the recent robust lease sales in the Gulf of Mexico. This is in the relatively benign environment of the Outer Continental Shelf (OCS). But an Alaska lease is a horse of a different color. The costs and environmental risks are much higher and the time to first oil (forget gas; that is even more in the doldrums of price than oil) is double that in the OCS.
Uncertainty, with concomitant higher discount rates, particularly hurts long term plays. By contrast, shale oil plays are short term in the extreme. Due to the steep decline rates, new wells must be drilled to keep up the production. These wells take a couple of weeks, not years. When the prices drop, drilling can be curtailed and then picked up at the drop of the proverbial hat. This flexibility is a key to the resilience that shale oil has shown to saw tooth prices. Furthermore, breakeven costs have dropped dramatically. At first these were due to steep service company discounts, which in turn caused bankruptcies among the smaller players. The big boys will inevitably raise prices, especially now with the reduced competition. But the industry is seeing genuine technology advances dropping costs even in the face of the upcoming service price increases. These advances will continue. A Shell spokesman recently stated that they were profitable in the Permian at USD 40 and that “newer wells” were profitable at USD 20. There is little doubt the industry is “high grading” their prospects: mostly just the most productive areas are being exploited. I think that is sustainable until additional technology driven cost reductions bring the lesser prospects back into play in roughly the three to five-year time frame.
The foregoing arguments underline the point that with oil companies likely struggling to pay their dividends in a low-price scenario, shale oil is a good bet. Expensive forays into the Arctic with long term payouts will be off the table in the foreseeable future. Presidential actions on leasing are mere tempests in the Arctic teapot.
March 13, 2016 § 1 Comment
In most pursuits and especially baseball and personal relationships the concept of advancing from third to first would decidedly not be a good idea, and oxymoronic to boot. But there are settings in which this would be contrarian thinking at worst. The third here is not a base, it is a world. Sure, the more genteel term is developing countries. Transfer of technology has always been seen as a one way street, from the first world to the third.
When we seek to improve the lot of the over one billion with no electricity access, our tendency is to solve this in a first world way. This entails massive power plants in excess of a gigawatt with transmission lines everywhere, never mind the up to 40% losses on the way. This reminds me that folks who consider windmills to be visual pollution somehow do not have the same fervor in objecting to high tension lines cutting ugly swaths through forests.
Central plants inevitably are fueled by coal or natural gas, and more the former in the developing world. This in turn causes the west to complain that with all due diligence there, the developing world would progressively add to the carbon loading. Two distinct areas could avoid this trap of having to choose between lifting people out of poverty and climate change mitigation. One is distributed renewable power (with an assist from microgrids) and the other is energy efficiency.
The two most technologically and economically advanced renewable energy sources are wind and solar. Both of these are inherently distributed in nature. A single windmill of the most modern sort puts out about 1 megawatt. Even smaller units are feasible. An Alaskan village, and here we are talking first world, will need at the most a few of these. On price it is competing with diesel based power, with the diesel transported only once a year (due to short duration of water borne transport) at high cost. The ancillary benefit of fewer emissions are clearly a plus. An Indian or African village may well make do with just one, and smaller at that. A development to watch in this space is vertical axis turbines. They are much more bird friendly and eminently more deployable into interior areas than the large sails which have bridge clearance issues.
Solar is by far the best suited technology for the developing world, which by and large tends to be blessed with high incident radiation. Since solar power is generated in DC form, we would be advantaged if we stayed with DC all the way to usage. In a village setting the primary uses are lights, fans and cell phone chargers. With LED’s becoming more ubiquitous, all these devices can be DC operated. The good news is that fans running on DC are between 40 and 75% more efficient than those on AC. The same applies to compressors for refrigeration. The not so good news is that DC operated fans and compressors are not yet mass produced to get the cost down. LED’s are getting there and cell phone chargers are already there.
If somehow DC operated devices became the norm, the net effect on energy consumption would be highly material. A key enabler would be microgrids. In this situation this would be a DC grid. Edison famously lost that battle, and appropriately so for long distance transmission. But for a limited scope a DC grid would not suffer any material disadvantages. Importantly, conversion efficiency losses would be avoided. As it stands we convert the solar power from DC to AC, put it on the microgrid, deliver it to the homes and convert back to DC for use in LED’s and chargers. Each of the two steps has high single digit percentage losses, possibly more for older devices.
The notional thought is that villages ought to be powered using renewable sources and operate efficient devices. In time this could be the norm, thus reducing the need for large fossil fuel powered plants in developing nations. The ever improving economies of these countries will certainly add to the urban and industrial energy needs. The decarbonizing of these will need separate attention, although energy efficiency would also play here. While inevitably adding to the carbon burden of the earth, these nations could lead the way to a world that uses renewables effectively. The features of the settings of a pressing need and more expensive alternatives will allow widespread deployment. This in turn will bring costs down over time, especially of energy efficient devices such as DC fans and compressors. These advances would now be transferred to the first world, at first in isolated areas such as Alaskan villages and the Australian outback. This is the essence of the premise stated at the outset: advancing from third to first.
January 27, 2016 § 1 Comment
With Electric vehicles are at in interesting inflection point. Car makers are finally getting serious about traversing the main hurdle: battery cost. When the Nissan Leaf first emerged, and for that matter also the Chevy Volt hybrid, lithium cells cost over $450 per kWh (kilowatt hour). As a rule of thumb, each mile driven uses 0.25 kWh. A hundred mile range will require 25 kWh in principle. But it is impractical to drain down to zero and a useful figure is likely 80 or 85%. In other words, 100 mile range likely needs a battery pack with about 30 kWh.
Many of us have posited the notion that cost had to drop below $200, preferably $150 for any sort of widespread use. At $150 per kWh, a 30 kWh battery would cost about $5500, accounting also for the ancillary costs for the pack beyond that of the cells. That is a reasonable fraction of a selling price of $25,000, a useful target for an economy 5 seating car. An all-electric car has no internal combustion engine, no transmission, possibly no differential (if 4 motors are used), all of which reduces cost. But a 100 mile range may not sell broadly (witness the muted enthusiasm for the current Nissan Leaf). At 200 miles, we are talking the battery pack costing $11,000. That probably takes the pre-rebate price up to $36,000. Is that too pricey for most?
A Prius type of hybrid has many of the good features of EV’s: regenerative braking, engine stops when stationary, electric drive for start and low speed, where IC engines are less efficient, to name the principal features. All of these combined will typically add 40% or so to the gas mileage in city driving. I mention city driving for two reasons: one is that it shows off the hybrids the most and two because the all-electrics such as the Leaf are impractical for distance driving at this time. These cost 2 to 4K more than the base model. 200 mile range all-electrics eventually ought to cost about 6K more (after realizing gains on lower cost mechanicals).
Tesla is making things interesting. Their luxury Model S is priced not much more than regular luxury models. The 60 kWh battery is about to be replaced with a 70 kWh pack. They flirted with a 40 kWh pack and it never really left the blocks because of perceived customer reaction. It shows in buying behavior as shown in the 2015 statistics for large luxury cars. It seems that the same luxury for about the same price with zero tailpipe emissions makes it an easy decision.
The buying habits of this cohort may not comport with those of economy car buyers. So the $36K (before rebates) crossover may not have the same reaction. GM is betting on the forthcoming Bolt (great name by the way, reflective of the fast start possible with electric drive). Priced at $37,500, it will have 200 mile range (which, with a 60 kWh battery, is consistent with our computation above and so is believable) and seat 5. It will have plenty of pep: 200 HP (150 kW) and 206 foot pounds of torque. With the heavy batteries on the bottom of the cabin compartment, the center of gravity is in the middle and low. So in addition to being peppy it ought to handle well. GM can do this because they claim to be getting the batteries for $145 per kWh and much as Tesla has claimed, expect that to drop to $100 by 2020. These prices ought to translate to Nissan as well. So expect a bigger battery Leaf model.
Low gasoline prices, likely for a couple of years, affects some of the decisions. But it comes down to this: a hybrid five seat vehicle can deliver 45 mpg in the city. An all-electric will give about 105 to 110 mpg (computed on the basis of a gallon of gasoline containing 34 kWh of energy). It will cost more but maintenance will be much less, and so on. And there is the environmental benefit. Provided the big guns go forward with their intent the consumer will have choice.