Shale Gas

RTEC’S ROLE IN REALIZING THE POTENTIAL OF SHALE GAS

This piece was written in the fall of 2010 and is dated in some respects.  For more current status of the issues read the relevant posts in the Directors Blog such as https://rtec-rtp.org/2011/08/12/making-a-virtue-of-being-late/  .

The identification of economically recoverable shale gas is arguably the most significant fossil energy event in North America since the discovery of Alaskan oil.  It also comes at a time when natural gas is increasingly being proposed as a transitional fuel for carbon mitigation; even by Non-Government Organizations’ that in the past were firmly opposed to all fossil fuels.  RTEC has examined the underlying premise and concludes that it is well placed as an organization to play a significant role in informing on the policies that will drive the energy sector in this area.  We also believe that the Triangle region can be responsive to the research needs of this endeavor.

Natural gas can be expected to have an impact in two areas that to a large extent are separate:  electricity production and transport.  In North America, the truism applies that oil is about transportation, and gas is about power and petrochemicals. But more recently we have come to believe that natural gas can play a role in transportation as well.

Electricity Generation

The vast majority of electricity today is produced using coal as fuel.  Substitution with natural gas has lower capital cost, about half the carbon dioxide production and the avoidance of other coal externalities, such as fly ash disposal costs.  Today, natural gas is used primarily for peak demand.  The relatively low duty cycle causes the unit cost to be high, often two or three times the base load.

For natural gas to be used for base load, one would need to have assurance of supply with low to moderate cost.  The cost of electricity from natural gas can, as a rough rule of thumb, be estimated to be one cent per KWh for every dollar MMBTU.  So, at today’s natural gas price of about $4 per MMBTU, the cost is roughly 4.5 cents per KWh.  At $10 per MMBTU the cost would be about 9.5 cents per KWh.  In the last two decades, gas spot price has been above $12 for only four months, non-contiguous.

For a new coal fired plant, the fully loaded delivered cost is about 6 to 6.5 cents per KWh.  For post combustion capture to bring the carbon dioxide to natural gas levels, the cost is likely to be in the general vicinity of 3 to 3.5 cents per KWh.  So the fully loaded cost will be close to 10 cents.  This then is the breakeven comparison with natural gas for comparable emissions.

Shale Gas Considerations

Shale gas offers the promise of abundance and relatively low cost.  The abundance is no longer called into question.  The low cost is being grumbled about and debated, but big players are voting with their wallets.  This includes Exxon, the most fiscally conservative oil company.  They are paying significant premiums to acquire small operators.  If history is a guide, the cost of production of any new resource always drops over time.  In a short few years shale gas will be produced more cheaply than conventional gas.  So, what can one expect on pricing?  The low end, propped up by demand, will be about $4.  The high end is likely to be $8.  This is because of the unique aspects of shale gas prospects.  They are on land and relatively shallow.  An owned lease can get first production 90 to 180 days from the decision to drill.  That number is closer to 4 years or more for conventional offshore gas. (Also land assets are much less susceptible to weather disruption.)

Consequently, any upward trend in three month futures will be countered by more drilling.  Speculators, with this awareness, will stay out of the fray.  The price can be expected to range from $4 to $6, with excursions to $8.  This sort of stability is unprecedented and a great comfort to all users of natural gas.  Certainty stimulates investment.  Expect also for certain offshore chemical and plastics production operations to return home due to this.

Transportation

Gasoline, diesel and jet fuel, in ascending order of energy density, are all derived from oil.  The energy security of net importing nations such as the US, India and China, depends upon finding substitutes for oil.  The most effective substitutes are drop-in fuels.  These are fuels with chemistry so similar as to permit mixing in any proportion with no change to the engines or the distribution infrastructure.  The two sources of greatest interest on this are biomass derived alkanes and solar fuels.  But natural gas can play both a direct and indirect role in oil replacement.  The indirect role comprises gas fueled electricity for electric vehicles.

The direct role is to simply burn it as fuel for an internal combustion engine.  Albeit with lower energy density, compressed natural gas (CNG), and in some cases, liquefied natural gas (LNG) can be used directly.  It is cleaner burning but pays a penalty of dead weight and has refueling infrastructure hurdles.  This is offset by the lower cost per unit of energy.

RTEC believes that oil will continue to rise in price.  Much of the belief is premised on the model that suggests a plateau in oil production some years out.  This combined with continued demand improvement, especially in the developing nations, will cause a supply imbalance in the out years.  At that point, oil price will go to sustained high levels.  If gas prices stay low, as postulated above, the disparity between the two on a calorific basis will widen.

Today, natural gas is one third the price of oil, with oil at $75 a barrel.  This is the key argument for using natural gas for transport.  As a practical matter, the only passenger vehicles likely to see the change are taxis and pickups.  The CNG tank occupies trunk space that the regular consumer will not easily countenance.  But buses and other manner of public transport are fair game, as they already are in Kuala Lampur and New Delhi to name just two.  Fleet vehicles could also be in play.  When long haul transport shifts to this fuel, the impact on imports will be huge.  The Pickens Plan posits this as viable, and China appears to have adopted it to some level.  Details will have to be worked out regarding distribution infrastructure.  But the key enabler here is stability of price and ample availability.  A comprehensive study of the relative economics of the three gas-based alternatives, electric cars, natural gas as fuel and GTL, is necessary.

Shale Gas Issues

Shale gas exploitation has been met with surprisingly heavy opposition from the bulk of the environmental community.  Surprising because the chief alternative for power, coal, is even more unacceptable to them.  In recognition of this, some NGO’s, such as the Sierra Club, are reluctantly supporting shale gas.  The issues facing shale gas are largely those common to all petroleum production activity.  They are getting magnified in the Marcellus exploitation regions because of the newness of such activity in the states of New York and Pennsylvania.  The latter was in fact the location of the first oil well in the US, but that is long lost in antiquity.  The placement of wells in farming areas raises special challenges.  On the plus side, the farmers get a new source of substantial revenue.

The most significant issues center on four matters:  fresh water withdrawals, flow back water and collateral issues, produced water handling and disposal, and fresh water aquifer contamination.  Of these, the last is the most contentious, even though it is the most tractable as well.  A recent award winning documentary “Gasland” has fanned these particular flames.  A summary of the issues and their potential resolution has recently been produced but is already a little bit dated at this point.  Halliburton and Baker Hughes are disclosing chemicals used and the former claims to have a product line that employs only material used in food preparation.  These notwithstanding other material issues remain.  In our view the environmental issues related to shale gas production can reasonably be addressed by a combination of technology, regulation, operator willingness to be transparent and public willingness to allow it to be informed.  The importance of this resource to national priorities such as energy security, a low carbon future and health of industry demands that all concerned collaborate to expeditiously understand and then deal with the issues.  RTEC proposes to lead a Triangle effort to help make this happen.

Next Steps for RTEC

We intend to hold a workshop early in the year (2011) not unlike one of the early ones we did for the solar fuels effort.  After a few presentations that set the stage, we will break into logical breakout groups to brainstorm potential areas for research.  We expect to have a mix of investigators from fields such as economics, behavioral sciences, chemistry, environmental sciences, policy and engineering.