Research Triangle Energy Consortium

A recent article by Bordoff (Columbia University) and Levi (Brookings Institution) makes some interesting observations with regard to a possible shift in the balance of oil power from the Middle East to the Western Hemisphere.  Of particular note is their discussion of the concept of spare capacity.  For a net exporting nation this would be defined as the ability to shut in or produce more at will.  They report that the Saudis have spare capacity of 3.5 million barrels per day (MMbpd) against total exports of 8.7 MMbpd.

This immense spare capacity allows the Saudis to be the moderating influence on oil prices. If prices rise steeply, with the risk of causing demand destruction, the Saudis can open the spigots. They could also respond to pressure from influential importing nations. No small wonder, therefore, that the US continues to have a comfortable relationship with the Kingdom despite major differences of opinion on issues such as women’s rights and the war on terrorism.

For net importing nations the concept of spare capacity scarcely applies. For the US, increased domestic production, which is proceeding in leaps and bounds, merely means decreased reliance on foreign oil. But here is the kicker. Our new found oil is all from tight formations and virtually all of it is sweet, light oil. It commands a higher price than the heavy oil from Canada, Mexico and Venezuela. Many of our refineries have invested heavily in coking equipment to deal with the heavy stuff. Their margins are less for the light crude. So, the displaced crude will be the light oil from Nigeria and some from the Middle East, which is increasingly turning heavier, despite the benchmark name Arabian Light.

All of this complication underlines a truism: oil is not just oil and refineries are very picky about what crude suits them.  The smartest move may be for us to export the light crude at high prices and continue to import the heavy crude at low prices (that differential can be as much as $30 per barrel).  That requires Presidential approval, I do believe.  For reasons best known to someone other than I, refined products can be exported at will but the raw oil or gas export requires approval, except to NAFTA countries.  Permitting oil exports at high prices has no downside to it especially if the resulting import is from friendlies such as Canada.  The question of Canadian oil being dirty can be debated elsewhere.  Suffice to say there are solutions if folks are prepared to be a wee bit innovative.  Unconstrained export of LNG will have a significantly net negative impact on the economy.  When you go to this link, go further to the report linked therein.
The authors of the cited article opine that the Saudis will continue to be the controlling factor on oil prices even if our dependence drops dramatically. This seems right because even if the US drops to zero oil from the Middle East, it will have an interest in keeping oil price moderated. In part this would be to keep our own imported oil price in check, and in part it could be to protect our allies. But this probably means that the dreams of a few of us, of ceasing the policing of the Strait of Hormuz, may well need to be relegated to the wishful thinking pile.

One important point missed by the authors is the potential impact of gas and gas derivatives reducing domestic demand for oil.  They recognize the oil/gas price spread and the arbitrage opportunity it brings in the chemicals industry.  But they don’t sufficiently recognize the significant movement in displacing diesel with compressed natural gas (CNG), liquefied natural gas (LNG), gas derived synthetic diesel and dimethyl ether (DME).  Technology is increasingly enabling this direction and it could have a material impact upon the demand for oil.  When added to the oil derived chemicals, such as nitrogen fertilizer, ethylene and propylene, as already noted by them, significant demand destruction of oil can be anticipated in the US.  This was noted recently be a Saudi prince (pictured above) in a warning to the Saudis to diversify.
One final argument relates to the previous point regarding the role of abundant and cheap natural gas in the US. To the extent that this affects demand destruction of oil, natural gas could be the spare capacity nobody is thinking about. It can be turned on in under a month when needed. Shutting in natural gas is more feasible than shutting in oil. In an odd twist the oil substitute natural gas could be our spare oil capacity.
Vikram Rao

Many are aware of Just In Time (JIT) manufacturing.  It was originally invented by Toyota Motor Company and then copied elsewhere.  This is one of the principal tenets of lean manufacturing, the technique of manufacturing with a minimum of waste.  The most powerful piece of JIT is inventory control.  Inventory is kept slim at each juncture of the manufacturing cycle and made available only just in time as needed.  Similarly products are made only as needed, thus minimizing finished goods inventory.

JIT is powerful and the principles go beyond the fairly obvious efficiencies in sequential assembly line type of manufacture.  Goldratt broadened it into his Theory of Constraints as first detailed in his extremely readable book The Goal.  In all of the discussions in the past manufacturing has been defined by large plants that make and then distribute products.  We will discuss here a relatively new concept: make it when you need it (just as in JIT), but also right where you need it.  I call it Just In Place (JIP) manufacturing.

Almost by definition JIP entails smaller plants.  This flies firmly in the face of the engineering principle known as Economies of Scale.  Larger plants are simply more efficient per unit of production.  Consequently, we are presented with the engineering challenge to ameliorate this effect.  Certain endeavors, such as production of vehicles, will simply not meet the criteria.  Electricity production using solar panels fits like a glove.  In fact, one could argue that solar power ought to be distributed to take advantage of the inherently valuable feature, and not be force-fed into large solar farms.

JIP plants will enjoy the economic advantage of reduced distribution infrastructure.  In the limit, as for example of transport fuel produced directly at a truck stop, the infrastructure is essentially zero.  This brings us to the question: which products may inherently be better suited to JIP? Rather than taking a crack at a generic argument, we will discuss two examples, both in the transportation sector.

Cheap natural gas in North America has emboldened the displacement of gasoline and diesel with natural gas.  To the extent that methane is used directly in the engine, the production of the fuel simply entails tapping into the natural gas infrastructure, which is extensive.  If compressed natural gas (CNG) is the fuel carrier in the vehicle, it can be filled at a service station.  But if the more energy dense Liquefied Natural Gas (LNG) is required, as it would be for long haul trucks, distribution infrastructure for LNG becomes an issue.  LNG is conventionally made in massive plants and refrigerated transport over great distances could be prohibitive. Each normal LNG plant produces at least 9 million gallons per day.  That is about 5.2 million gallons diesel equivalent per day (LNG has about 58% of the energy content of diesel).  That is a lot of truck fill ups at 180 gallons a pop, so distribution will be needed to a lot truck stops.

Mini LNG plants are slated for about 50,000 gallons per day.  This is about 160 fill ups.  Also the natural gas requirement is only 4 million cubic feet per day a manageable rate for most gas supply lines.  A number of big players are after this segment, including Linde, Shell and GE.  An ongoing study at RTI appears to indicate that if the newer nitrogen expansion cycle method of refrigeration is used, small scale plants could deliver LNG quite economically.  Keep also in mind that preparing on or near the site for essentially same day use is a good deal cheaper on refrigeration than shipping over distances.  This stuff is stored at -162 degrees Fahrenheit.

Volvo recently announced a truck engine running on dimethyl ether (DME).  DME is derived from natural gas and produces zero particulates when combusted.  At current natural gas prices on a diesel equivalence basis it can be manufactured for far less than the cost of diesel.  Volvo is teaming up with Oberon Fuels, a California company, who have designed plants to make DME economically on a scale over 100 times smaller than conventional plants.  Although Oberon is the current leader, others are heading in the same direction.  Some of these others are targeting the production of diesel from natural gas, a somewhat more difficult target than DME.

One other tidbit. Smaller plants are easier to finance, are quicker to build and distribute jobs all over the country rather than in concentrations such as the Houston Ship Channel.

Just In Place manufacture is on its way.  Watch that space.

Vikram Rao

A recent announcement by Volvo is yet another salvo into the fortress of oil.  They announced the commercial launch of a truck engine that uses Dimethyl Ether (DME) without any diesel blend.  We have spoken about DME previously in this blog, but it bears repetition.  The structure of the molecule is such that when it burns no soot is produced.  The principal knock on diesel is not the carbon dioxide produced on combustion, it is the soot.  Things have improved markedly since the days of the black smoke belching from the back of school buses.  But small particulates, which the cognoscenti refer to as PM2.5, are implicated in various respiratory illnesses.  When New Delhi moved from diesel to Compressed Natural Gas (CNG) on all public vehicles, the mortality and morbidity improvements were dramatic, as reported on by the World Bank. By the way, that move was prompted by an order from the Indian Supreme Court.  And you thought the Supremes only bothered with the likes of hanging chads and rogue sheriffs in Arizona.

This underlines a favorite theme for me.  I am all for reducing carbon dioxide emissions because there appears little doubt these are harmful.  But in the short term, the health effects of diesel emissions loom larger.  In general, substituting for oil based fuel is a good idea, especially when the substitute is better for the health of the populace.  Pink Floyd aficionados will blanch at my use of their signature song in the title.  But I have always interpreted the lyrics as meaning that any individual teacher was no more than just another brick in the wall of learning.  So, in that sense, DME fueled trucks are an important step in that long road to eroding the monopoly of oil.  Sure, there will be issues.  The vast majority of the DME used in the US is imported.  Distribution of the fuel to gas stations will be daunting.  But most anything good is going to take effort.

The announcement referenced above concerned a vehicle demonstration by Volvo in Sacramento.  They were joined by a fledgling outfit named Oberon Fuels.  These folks announced the launch of small plants producing a modest 10000 gallons per day of DME.  This sort of distributed production of fuel will be a key to the infrastructure dilemma.  For perspective, typical DME plants would be sized for over 1 million gallons per day, requiring serious distribution infrastructure.  Another advantage of the small plants is the low cost and easier financing. Importantly, they can be expected to be operational in two years, as compared to four or more years for conventional plants.

I was recently making a presentation to administration officials in which one part referred to the environmental benefits of blending DME in diesel.  I noted that up to 20% could be blended with no modifications to the engine.  The secretary of the agency in question asked about the viability of pure DME.  I said they were experimenting in Sweden and Japan, but that I would check.  Weeks later came this announcement.  His interest was in part for school buses.  That is a neat concept: our children will be spared diesel fumes.  Incidentally, as far as that goes, CNG fits the bill as well.

We have discussed just the health and environmental benefits of substituting for diesel.  A compelling value is cost.  At natural gas prices today, DME can be produced at costs well below that of diesel.  Cheaper and better: one could well quaff one’s favorite beverage to that.

Vikram Rao

The DOE announced today approval of another LNG export permit.  The story linked here points out that FERC approval is still pending.  It also expresses surprise that this announcement came a day or so after Secretary Moniz was confirmed unanimously in the Senate.  The comment suggests that they would have expected Moniz to settle in before making the decision.  The cynic in me says they waited until after the confirmation before posting the decision so as not to lose any votes.  Also, the suggestion that Moniz, while at MIT, was not completely clued into the LNG debate is laughable.

The usual people are predicting the beginning of the end of cheap gas.  Let’s do the arithmetic.  The Cheniere permit plus this one brings the permitted export to 3.5 billion cubic feet (bcf) per day.  Compare that to the current consumption of about 68 bcf per day.  This is around 5%.  This is material, but is not going to change the price.  For one, the country already has shut in capacity that likely exceeds that.  Certainly hardly anyone is drilling for dry gas now.  The eastern Pennsylvania and Haynesville bust towns will attest to that.  From the day you decide to do it, gas production is possible in as few as 21 days.  But, figure on it being 90 days.  Compare that to the fact that no new gas will be needed till at least 2015 (Cheniere) and 2017 for the newly permitted outfit.

Expect for sure that gas  required for these two permits, when needed, will more than adequately be supplied by existing shut in facilities, possibly augmented by new wells.  One of the features of shale gas that is so unusual is that the spigot can be switched on so quickly.  With conventional offshore gas that would have taken five years.

This aspect of shale gas, that it can be produced on demand, is what bothers the Sierra Club and other opponents. They may even be concerned that a rush to produce more may cut corners.  There is merit to this last point.  However, after some laxity, most states, including ours, are putting down stringent regulations.  Much of the problem in Pennsylvania can be attributed to inadequate regulation and the unpreparedness of the small operators, and the communities, for that matter.  Waste water was sent to municipal treatment facilities with the best of intentions.  They were simply not suited to handle it.  We know that now.

I believe that due to the lag time to actual operation of LNG plants, permitting of up to 10 bcf per day will be benign.   The suppliers will have plenty of time to fill the gap.  Also, by that time most regulations assuring sustainable production will be in and functioning.  The US EPA regulation requiring zero fugitive methane emissions at well sites by 2015 will be in place. The technologies for handling these small volumes of gas will also have time to be developed.

The protestations of chemical manufacturing entities such as Dow, as reported in the cited piece, aside, there is no question that cheap natural gas is causing a renaissance in US industry today.  Many industries in Europe and Asia will simply not be able to compete with US companies.  They will be forced to invest here.  This will be good for us.  More jobs and more economic growth.  Consequently, LNG exports permits ought to be carefully considered to not squander this incredible advantage.  Then there is the Alaska wild card of which I wrote recently.

LNG exports are a good thing if we do it smartly.

Vikram Rao

The President has another of his no-win decisions on his desk.  If he says yes to Liquefied Natural Gas (LNG) exports he will be seen as caving to ExxonMobil.  If he says no, he will be accused of pandering to the liberals.  He could pull a Solomon and split the baby, although in this case actually do it: approve limited export.  A recent AP story goes into the likely options.  But nobody mentions Alaska.  One wonders if they are unaware of the wild card that Alaska represents in this debate.  More on that below.

LNG in the US has had an incredible five years.  Around 2008 we fully expected to import large quantities of LNG and eleven re-gas terminals were permitted and in various stages of construction.  Today we are debating being allowed to export the stuff.  All this is, of course, due to shale gas driven abundance.  This causal connection is what prompts environmentalist push back.  Curiously, their bedfellows in this one are folks like Dow Chemical who currently enjoy an enduring competitive advantage against most of the world in chemicals derived from gas.

Unfettered LNG exports would certainly raise domestic gas prices.  The permit to Cheniere Energy, already granted, is for 2 billion cubic feet (bcf) per day.  This translates to about 700 bcf per year, against our current consumption of 25,000 bcf per year.  So it is unlikely to have an impact on the price of gas.  In fact up to about 10 bcf per day should prove pretty benign, particularly because production could pick up.  This is precisely what bothers the folks who believe shale gas cannot be produced safely.  However, a lot of the initial pick up will be in the dry gas wells that have already been drilled and shut in.  Less new drilling.  But none of this will happen for a while.  LNG plants take up to 6 years to build, so there will be no quick relief to the beleaguered dry gas owners.  Owners of import terminals do have an advantage on timing.  The deep water berthing of the massive vessels, the containment tanks and piping, all these can be used.  In fact such sites will have significantly lower new investment and the build time could be shortened by a couple of years.

LNG exporters, by definition, rely on the raw gas being cheap.  This is why so much of it comes from Iran and Qatar.  The liquefaction and re-gas adds up to about $3.50 per MMBTU and can be a bit more.  Transport adds between $0.50 to 1.50 depending on distance.  So, from the Gulf of Mexico the landed price in Asia would be the domestic price, say $4 plus about $5, maybe a bit more because of the long voyage around South America.  If the Panama Canal widening does happen, the voyage would be shorter but there would be fees.  Still, after all that, one could expect a landed cost of around $10 against a price of $17 or so.  Hence the excitement, even if the US prices went up some.

There is also a political dimension.  Relations with Japan would be strengthened if we guaranteed supply.  Since the Fukushima Daiichi disaster they are incredibly reliant on LNG.

Alaska the Wild Card:  Unnoticed in this debate is the role Alaska can play in all of this.  Alaska has vast reserves of natural gas that are well and truly stranded from the Lower 48.  The contemplated pipeline is on life support and ought to be allowed to die.  They are forced to re-inject gas associated with oil production, to the tune of 8 bcf per day.  If they were allowed to export this as LNG, there would be no material impact on US pricing because it never was on the market.  Note that this would be four plants of the size of Cheniere. In fact an even higher rate would have no effect on our pricing absent a pipeline.  All of this gas is produced from conventional reservoirs.  The Sierra Club, the most vociferous opponent of exporting LNG, should have no beef with this because it would not increase shale gas activity.  The US chemical industry ought to have no concern because they would continue to enjoy cheap gas.

This would be highly competitive with exports from the Gulf of Mexico or the east coast.  The shipping distance ought to be nearly half even with Panama Canal passage.  The raw gas ought to be priced extremely low because it has no market value and in fact a small cost is incurred to re-inject it.  This would work especially well if the gas producer were to be a partner and the gas would have internal transfer pricing.  This is certainly the case with the only current LNG exporter, which is ConocoPhillips/Marathon out of Alaska today.  In case you are wondering, the source for that gas would not be sufficient for expanded export.  The stranded gas referred to above is up at the North Slope.  A pipeline would have to be built, although much of it could likely come down alongside the existing TAPS oil pipeline.

The US should be a net exporter of LNG, but the bulk of it ought to be from Alaska.

Vikram Rao

I had the immense pleasure last week of listening to George Akerlof give his lecture Phishing for Phools, as part of Duke University’s conference on behavioral matters.  The organizers were from the D-CIDES interdisciplinary program at Duke.  Aside from the unique experience of listening to a Nobel Laureate, I had a personal reason for the gratification.  In my career as an engineering researcher and manager I have been strongly influenced by two non-engineer/scientists.  They are George Akerlof and Adrian Slywotzky (the concept of Value Migration).  I used their work directly in commercial endeavor, although likely in somewhat amateurish fashion.  However, there was nothing amateurish about the bottom line financial results from so doing.  A third influencer, Richard Thaler, I never had the opportunity to reduce to practice, but affects my thinking today in matters such as encouraging energy efficient behavior.

Akerlof was awarded the Nobel Prize for Economics in 2001 (together with Michael Spence and Joseph Stiglitz) essentially for the concept of Information Asymmetry.  It goes something like this.  If I am selling you a used car and provide all information regarding maintenance records and so forth, you will have a sense of the price you are prepared to pay.  If I provide you nothing at all, you are likely to think I am trying to pass off a lemon and will devalue it.  Essentially, the asymmetry of information (seller knows more than the buyer) devalues it in the eyes of the buyer.

Akerlof is generally credited with coining the term ”lemon” for a defective car in his 1970 paper that first described the concept above.  The work is also credited with an impetus to make more information available to car buyers, including the use of Vehicle Identification Numbers (VIN).  Also of note is that this paper, which essentially produced the Nobel Prize, was reputedly rejected by the first three journals to which it was sent!  This is not unlike the reception that Stanley Prusiner got for his paper on prions, infectious proteins that now are the accepted cause of Mad Cow Disease and other cross species infection.  In his case it went beyond rejection to overt denigration, when it did get published.  It too resulted in the Nobel Prize, in this case for Medicine.  This is the curious instance of a Nobel being awarded for the right mechanism for a disease, after another was given for the wrong explanation (Carlton Gadjucek, Nobel Prize for Medicine, 1976) much earlier!

Akerlof defined a phool as a person who is an informed person but still makes an error in judgment.  He explains the recent recession as occurring because phools were misled by highly rated derivatives.  The ratings agencies could not possibly evaluate the mortgages underlying the derivatives but gave them high ratings nevertheless.  He ascribes this to greed.  One wonders whether there was an element of sheer arrogance: their sterling reputations demanded that they have the expertise to do so, and so they did.  He reminded us that economists rely on the belief that people are rational and always act in their own best interests.  But phools may believe they are acting rationally and in fact are not.  He believes that there are folks out there phishing for these phools.  Phishing here is used in the broader context of profiting from the gullible.  Akerlof has a book in the writing entitled Phishing for Phools.

One other paper at the D-CIDES conference was very interesting.  It was by Rick Larrick and co-authors and soon to be published in the Proceedings of the National Academy of Sciences.  We have discussed his other work previously in this blog.  It demonstrated that consumer choice was affected by the labeling information, in this case on compact fluorescent bulbs.  In a laboratory study with real money and technology, conservative and liberal subjects purchased CFLs at the same rate when the economic benefits alone were emphasized, but if a “Protect the Environment” label also appeared with the CFL, moderates and conservatives became significantly less likely to purchase the CFL.  I will post the paper when it is published.  You may remember the Cialdini experiment from a previous blog post of mine.  One wonders whether a segmentation of the subjects may have yielded different results.

The original work by Richard Thaler and Laureate Daniel Kahneman is now being built upon by a number of people, chipping away at this original belief by economists, that people act rationally and in their own best interests.  Duke’s Dan Ariely has a body of work here.  The social science of why people make the decisions they do will be crucial to the adoption of environmentally responsible practices.  This will run the gamut from using less energy for the same level of gratification to the substitution of oil derivatives with more benign alternatives.

Vikram Rao

The Keystone XL pipeline hangs in the balance on the President’s desk.  Opposition to it is the cause du jour of the Sierra Club and certain celebrities.  The Sundance Kid has an op ed in a recent Huff Post railing against the “dirty oil” from Canada.  So, how dirty is Canadian oil and what are the alternatives?  I think we all recognize the reality that displacement of oil based fuel is going to be incremental.  So we are going to have to make choices regarding the sources of our oil.

The top four sources for our foreign oil are Canada, Venezuela, Saudi Arabia and Mexico.  Most of the oil from all but Saudi Arabia is classified as heavy oil.  Even Saudi oil is starting to get heavier.  The term heavy is used for the fact that the oil has a greater proportion of large molecules.  As the molecule gets larger, the relative proportion of carbon by weight compared to hydrogen is higher.  When such oil is refined, the long chains are broken down thermally and hydrogen added.  This process is known as hydrothermal cracking.  For particularly heavy oil a carbonaceous residue is left known as petroleum coke.

The charge of “dirty oil” leveled against Canadian oil is based primarily upon the fact that the petroleum coke, if utilized, releases carbon dioxide.  Clearly a processed light oil such as the shale oil from the Bakken or Eagle Ford has very little of this residue and so is clean in comparison.  But petroleum coke is in fact quite comparable to coal.  The energy content is generally a good deal higher than most grades of coal and the ash content is much lower.  But it usually is worse on sulfur content.  For workhorse applications such as cement kilns that is of little consequence because of the presence of agents that capture the sulfur.  Petroleum coke also has significant quantities of heavy metals nickel and vanadium.  This almost all ends up in the ash in a form that is essentially not leachable by water.  Nevertheless, this too is another reason for the “dirty” appellation.

In the event of a spill heavy oil biodegrades more slowly.  This is in part because oil eating bacteria prefer the smaller morsels of the light constituents.  On the other hand it will not leach into the soil as readily because of the viscosity.  This notwithstanding, the originally proposed route for the Keystone XL was ill conceived.  It went through a portion of Nebraska where the sediment was very porous, and this overlaid the Ogallala, the most important aquifer of the region.  The proposed new route is longer (see red portion on map), but avoids the potential for aquifer contamination.

A little discussed fact is that the pipeline will also carry some of the light oil from the Bakken shale oil fields in North Dakota and possibly Montana.  This important new source of light oil is currently being transported by truck and rail, increasingly the latter.  Both of these forms, especially trucks in the northern climates, would appear to be more spill prone than pipelines.  Besides, absent a pipeline the Bakken oil will likely be limited in production, which is not good news for domestic output.

Consider the scenario of the Keystone XL not being permitted.  The Gulf Coast refineries have expensive equipment known as cokers, specially designed to handle heavy oil.  If Canadian oil is curtailed they will source heavy oil elsewhere.  The best bet is Venezuela, already a source.  The carbon loading of this oil is very similar to that from Canada.  Furthermore, the nickel and vanadium concentrations are three to four times greater.  Trading Canadian partnership for dependency on a country with leadership unfriendly to US interests sure sounds addled.

Finally, consider the question: can Canadian crude be cleaned up before it comes to us?  The answer is yes.  The simplest way to accomplish this is to remove much of the excess carbon prior to shipping using a technique known as de-asphalting.  When propane, hexane or a combination are added to heavy oil, they pick up the lighter component of the crude and the carbon heavy asphaltene drops out as a solid.  The extracting liquid can be regenerated for re-use and the so called de-asphalted oil (DAO) can be sent down to us.  A bonus: much of the sulfur and most of the heavy metals preferentially segregate to the asphaltene, so the DAO is lower in these elements as well.

Our refiners currently get Canadian crude at a heavy discount.  The DAO will likely command a better price.  The cokers will be underutilized because the oil is cleaner.  But the country will be the better for it.

Vikram Rao

The title brings immediately to mind energy from biomass.  While that is a perfectly reasonable thought we ought to consider the other angle, that of energy use in agriculture.  Water intensity of agriculture is one of its hallmarks.  In the US roughly 31% of water withdrawals are for this purpose.  The vast majority of withdrawals require the use of pumps.  This is because Artesian wells, which are naturally pressured, are in a minority.

According to a World Bank study, the economic status of the farmer determines the type of energy used in farming operations.  Human effort is progressively replaced by animals such as bullocks.  The next step up the economic ladder causes the use of pumps powered by fossil fuel, usually diesel or kerosene.  The use of wind, which goes back centuries, is still nascent.

The ever increasing economic status in the developing world would therefore point to greater use of fossil fuel for lifting water and for tilling and harvesting.  In response to this virtual certainty, two options are available.  One is a shift to wind or solar.  In the consideration of these alternatives, the economic parity required may be with very expensive fossil fuel.  In India much of the diesel for this purpose is heavily subsidized and so the apparent cost may not be high.  But the real cost to society is high in the tax burden of subsidies and cost of transportation in trucks over long distances.  Furthermore, hybrid systems could be considered where the wind power produces electricity when not pumping.

The other solution is to produce diesel substitutes locally.  At RTEC and RTI this year we will be making a major push on the concept of small footprint production of fuels and chemicals from natural gas and biomass.  The scale would be about a hundred times smaller than conventional refineries and chemical plants and the targeted economics of production would be comparable or lower than with large plants.  This flies in the face of current dogma on economies of scale but is feasible with exceptional innovation.  Each farming community would be supplied locally, using the raw material of convenience.  This would be natural gas, methane from refuse and waste, or biomass in the form of waste cellulose (stalks of plants and so forth) or woody biomass.  The fuel produced could be diesel, methanol or di-methyl ether, all of which would function in pumps, tractors and cook stoves.

Chemical fertilizers are also energy intensive and farming increasingly relies on these.  The dominant feed stock for these is natural gas.  Potash, a source of the nutrient potassium, is mined and processed, also using much energy.  Reduced reliance on fertilizer is a tough but worthy target.  These chemicals are also amenable to smaller footprint production, but likely not as dramatic as for transport fuel.

Increasing per capita GDP is also strongly correlated with more meat in the diet.  It appears that this is a sociological response similar to the escalation in ownership from scooters and motorcycle to cars.  Meat is decidedly less energy efficient than a vegetarian alternative.  This is especially so as practiced in the west, where corn and soy beans are used as feed in place of forage.  But the bigger environmental factor may be the inefficiency of the rumen in animals such as cattle.  That results in the production of methane, which in many countries such as the US is one of the top contributors to greenhouse gases.  The solution likely lies in two areas.  One would be selection of the more efficient breeds, but on a large  scale this could be tough.  The other is additions to diet to improve conversion.  Researchers in Canada and France have already reported some success with enriching feed with certain lipids.  Some believe that addressing the meat eating increase could rapidly become the highest priority element of the imperative to feed a burgeoning world population.

Finally, there is the whole issue of producing energy from plant matter.  Congress appears to be on track to retain subsidies of about $1 a gallon on cellulosic ethanol. This is a tough techno-economic nut to crack so deserves an assist till it gets going.  But as we have discussed before, methanol could be produced economically from biomass with no subsidies for the fuel.  That is the reasonable course especially this year when cliff avoidance compromises have left the country with a greater burden on deficits.

Vikram Rao

Two senators recently weighed in on this issue at a Hill Policy Breakfast, Natural Gas and Energy Issues in the New Congress, sponsored by the American Natural Gas Alliance.  This organization name, abbreviated to ANGA, unfortunately, or perhaps deliberately, sounds like anger.  Not surprisingly the senators selected to speak, each from one side of the aisle, were largely pro-industry and yet balanced.  It was personally gratifying that both were women, Lisa Murkowski of Alaska and Mary Landrieu of Louisiana.

Just about all of the discussion centered on the advisability of exporting liquefied natural gas (LNG).  Murkowski was more strongly in favor with a bit of a caution on what it could do to domestic prices.  Landrieu was openly conflicted because her constituents were major producers and users.  Both were looking forward to the long awaited decision from the administration.

A representative from Dominion Oil, an applicant for LNG export, asked Murkowski whether rules may get made allowing Alaskan gas export but not in the Lower 48.  She essentially said it would not go down that way, possibly in an effort to not sound partisan.  Both senators gave the distinct impression of serving the nation not just their constituency.  This was refreshing given the recent history of congressional behavior.

The senator’s response notwithstanding, the idea of permitting just Alaska export is not without merit.  There are two principal arguments against LNG export.  One is that it could raise the price of domestic gas and thus reduce the advantage US chemical manufacturers currently enjoy with respect to European and Asian competition.  The other is that it makes more sense to convert the gas into chemicals and fuels and export those items.  The spread between the raw material price and the finished goods is so great that it just makes economic sense to export the high value items not the raw commodity.  That also results in the manufacturing jobs being retained in this country.

On the first point, there is considerable head room in the competitive advantage for US chemical manufacturers.  Today European prices are up to three times those in the US and Far East prices are as much as five times.  So even if LNG exports raised prices the US advantage would remain, albeit less strikingly.  Modeling could identify the upper limits of LNG exports to minimize the effect.  Natural gas pricing in the vicinity of $5 per MM BTU would be good for consumers and producers.  One could also make the point that at prices today under $4, dry gas prospects (those without appreciable high value natural gas liquids) are essentially uneconomical.  LNG needs dry gas and would constitute a robust destination for the commodity especially from currently distressed areas such as the Haynesville.  The fly in that particular ointment is that LNG plants take up to four years to construct and commission.  By that time other factors may advantage dry gas, such as methanol production in expansions of current capacity, displacement of coal for electricity production, use in transportation and so on.

The case for Alaska is different.  This is a situation where the gas is stranded with no destination especially now that the long debated gas pipeline to the Lower 48 makes no sense at all.  Since it is not a part of the supply equation, export from that source ought to have zero impact on N American pricing.  So, while the likes of Dominion may consider it unfair to single out that source, purely on the basis of national economics it makes sense.  As mentioned in my book, the preferred solution is to convert it into liquids and slug it down the Trans-Alaska Pipeline, which is running dangerously low in capacity.  But the LNG solution could find support.  The logical destination would be the Far East where the landed price is the highest in the world and so margins for the producer may well be better than for the liquids solution.  High prices in Japan may be sustained if the opposition to nuclear energy remains strong.

With respect to the other argument against LNG export, the US manufacture of high value products, the factor in favor is that many of these products are currently imported.  Principal among them is ammonia fertilizer, with imports accounting for nearly half the consumption.  The spread is also large; at current gas prices, it can be produced for well under $100 per metric ton, with selling prices north of $600.  The prospect of the US becoming a net exporter is not at all farfetched.

Vikram Rao

We are much more used to the adage “bigger is better” in most things other than carbon footprints and runway models.  And in the case of the latter the operative term is more correctly slimmer as memorialized by the symbolism and actuality of Twiggy.  My enduring memory of arriving in this country in the late sixties is being struck by the fact that everything was large.  Toothpaste came in regular, large and economy sizes.  But marketing and consumer preferences aside, most industrial enterprises have always profited from scale.  “Economies of Scale” is firmly embedded in the engineering lexicon.  Which begs the question: when is this valid and when is it a hindrance?

In some ways it was Henry Ford who most popularized the notion.  An assembly line dropped the cost per unit, in his case for cars.  But it applies as well to any enterprise with high fixed costs, which now get spread over more units.  But for our discussion we will focus on process economics.  The standard power generating plant in the early part of the last century was in the vicinity of 30 MW (megawatts).  By the end of the century it was 1000 MW.  Some of this came about because the processes were designed to take advantage of economies of scale.  In fact, most chemical and metallurgical processes are designed with this as a feature.  Seldom will we find oil refineries smaller than 100,000 barrels per day (bpd).  The plants converting natural gas to transport liquids are even larger.  A counter example in power generation is windmills, which are small by design (3 MW or so).

This reliance on very large production plants has driven the business models.  Oil is lifted out of the ground and sent vast distances to be refined into useful products. When oil used to be light, this transport was not onerous because such oil flowed relatively easily.  However, oil produced today is increasingly heavier, especially the stuff from Canada, Venezuela and Mexico, three of the top four foreign sources for the US.  Heavy oil is very viscous and does not flow without the addition of a light hydrocarbon, known as a diluent.  The diluent is recovered at the refinery and reused.  But all this adds cost.  Ironically the largest pipeline transport distances are those for heavy oil from Canada.  This extreme reliance by Canada on US refineries is what created the political football of the Keystone XL pipeline addition in this last election.  But large refineries are likely here to stay.

Natural gas processing, on the other hand, could be amenable to innovation.  The explosion of shale gas production and the continued ramp up allows one to consider alternatives.  This is because pipeline infrastructure is inadequate and will need to be installed.  If technologies are developed that economically produce derivatives closer to the source of production, then several benefits accrue.  Manufacturing jobs will now be distributed across the country, not just in the Gulf Coast.  Today nearly 80% of ethylene cracking capacity is in Texas and Louisiana.  Ethane from east coast shale gas operations will need to be piped down over 1200 miles to be cracked.

Smaller facilities are quicker to build and easier to finance.  A 100,000 bpd gas to liquids conversion facility will cost about $12 billion.  A 1000 bpd unit will cost $120 million.  While not pocket change, this figure is much easier to raise for investment.  Lest this all sound too much like wishful thinking, several processes are currently in late stage development to produce diesel, jet fuel and methanol from natural gas on the scale mentioned. There is reason to believe that the linear reduction in cost I posted above can be beaten.  In other words, the smaller unit may well produce fluid at a lower fully loaded cost than a large one.  This is completely antithetical to the concept of economies of scale and is driven by breakthrough technologies that challenge design dogma.

Biomass conversion will be the area most advantaged by the sort of advance mentioned.  This is because biomass tends to have very low energy density, thus making transport to distant large processing plants cumbersome and often not economic.  A solution is to bring the plant to the biomass site.  This is strongly facilitated if small footprint technologies are brought to bear.  Interestingly, technology developed for natural gas conversion will apply directly to biomass, although some additional unique steps will be needed.  But here too, technologies currently in development offer promise.

Size matters, except when it does not!

Vikram Rao