LNG, Shale Gas and Politics in India

July 24, 2010 § 4 Comments

Basking in a Bangalore breeze, with a mango tree swaying outside the window, I am reminded of a fairly recent article concerning liquefied natural gas (LNG) imports into India.  This story discussed a plan to import LNG from Qatar.  There were a couple of points of note that are grist for this particular posting mill.  First was the contemplated price of about $13 per mmBTU and the second was the mechanism for arriving at that price.

But first some background relative to Qatari motivation for long term deals such as this.  The abundance of shale gas in the US has essentially taken that country out of the running as a Qatari LNG destination.  Europe continues to be a valid target, but shale gas will likely be a factor there as well.  Russia could well react to domestic shale gas in Poland and elsewhere with price drops.  LNG may face lower prices but unlikely to see a US type debacle.  Relatively close markets such as India shave 50 cents or more off a US delivered price.  So, India could be important.

The truly curious aspect to the story cited is that the landed price is tagged to a Japanese crude oil basket price.  For a few years now there has been a disconnect between oil and gas prices based on calorific value.  Curiously, the more environmentally challenged one, oil, is currently priced at roughly three times gas price.  That is commodity pricing.  The disparity is even greater when one factors in refining costs.  Transportation is something of a wash, although gas is cheaper to move than crude oil or refined products, at least on land.  All of this is singularly premised upon the internal combustion engine being the workhorse of transportation.

Natural gas pricing is regional, largely due to the high cost of ocean transport.  If local gas price is low, it is difficult for LNG to compete, which is why the US will be off limits unless demand takes a huge jump.  Even then the abundance of the shale gas will likely keep the status quo.  Local gas price in India was under $3 per mmBTU until recently.  It is now $4.20, close to current prices in the US.  That is the controlled price paid to domestic producers of gas.  So, to contemplate imported gas at three times the price is the sort of action possible only in settings such as these: government control on commodity pricing.  But pegging the price to an oil market basket, a Japanese one no less, is where logic takes flight.

Oil prices in coming years are likely to see sustained increases.  Natural gas, on the other hand, will see a moderation in the US due to shale gas.  If shale gas resources are found in other countries, one could expect similar pricing behavior.  So, pegging any natural gas price, LNG or otherwise, to oil prices will result in a windfall for the producer and one that is not justified by supply and demand arguments. 

Consequently, the main problem with the contemplated Qatari deal is not even the current high price.  It is the possibility of up to a doubling in ten years.  At anything close to that the incentive to use natural gas evaporates.  Entire industries will shift offshore.  It will be cheaper to make fertilizer, polypropylene and the like abroad and import the finished product.  This will have a lasting negative impact on domestic jobs and the balance of trade.

An interesting subplot in the Qatari deal is the statement by them that they supplied cheap gas in India’s hour of need a few years ago.  It was landed at $2.53 and has crept up to around $7 more recently based on whatever oil linked formula was used.  The implication is that they should be rewarded now with a better deal.  A fairly high fixed price would fit that scenario while still being unfair to domestic production.  Pegging to oil defies logic and is simply bad business.  The story is now four months old.  Perhaps sanity prevailed.  It nevertheless gave us an opportunity to discuss the underlying fallacies.

The Oil Plateau and the Precipice Beyond

June 1, 2010 § Leave a comment

I’m certainly not the first to raise the specter of an oil plateau. This is not the same as Peak Oil, although there are similarities.

The first intimation of the concept was by Christophe de Margerie, the CEO of Total S.A., based in France, who first described this issue back in the fall of 2007. Subsequently PFC Energy went public with their research.

de Margerie’s statement made quite a splash. Here was one of the top five oil companies in the world, and the CEO was saying there’s a plateau coming. He put the plateau at 100m barrels a day. At that time the world was producing about 85m.

After that I personally, publicly asked a CEO of a major oil company to comment on de Margerie’s prediction. He acknowledged the plateau was real. He said, “I’m not sure I’m going to subscribe to the 100 number, but there’s a plateau coming.”

Shortly before that I spoke to the head of the the French Petroleum Institute (IFP), and they confirmed that their modeling showed the same thing. They pegged it at a somewhat lower number.

So here we have substantial people saying there’s a plateau coming and yet nobody acknowledges it publicly. Nobody wants to discuss it. Nobody really wants to act on it.

Causes

Now you’ll ask the reasons for the plateau. First of all there is a technical model thatpredicts a plateau, courtesy of PFC Energy in DC, but if you want to speak conversationally, the reasons are multifarious.

For example, national oil companies have realized they have a resource they need to husband. International oil companies used to move in and extract oil via Production Sharing Contracts, which made the incentive to get the most oil out as quickly as possible.

There’s a truism in oil and gas production: if you extract the petroleum quickly, then the net recovery, that is the fraction of fluid in the reservoir that is ever recovered, reduces. When the international oil companies went into these nations, they were drawing as quickly as they could because their contracts ended in X years. That was not in the best interest of the national resource.

Increasingly, the nations have figured that out. Now they are forcing the issue, telling the international oil companies, “We’ll do it ourselves. We don’t need you.” The key point is they want to bleed the oil out in a more measured fashion. Guess what that does to production rates?

Most of the major oil companies like Exxon are therefore forced to seek unconventional sources of oil — for example, Canada’s Tar Sands — which are largely heavy oil. Additionally, now the Tar Sands may get a carbon tax.

Then you’ve got Matt Simmons, a highly respected figure in oil and gas investment circles, who says Saudi Arabia will not be able to open the spigots: that they don’t have the oil.

The fact of the matter probably is that the Saudis have the oil, but they’ve got a different view of it now and how to release it. They have been the leaders in the application of technologies to maximize recoveries.  They’re not going to get bullied into releasing it faster just because the world wants a lower price on oil. People thought of Saudi as the buffer, that they’d just open the dams, but it just doesn’t seem like they will. Matt Simmons takes the position that they can’t. It’s irrelevant: they won’t. Whether they can’t or won’t compensate shortfalls elsewhere in the world, it comes to the same thing: they won’t.

Consumption versus Production

The estimated plateau of 95 million barrels a day — I think PFC at this point is talking about 90-92 million barrels a day — comes dangerously close to the 87 million barrels we’re supposedly consuming. I say supposedly because I think current consumption has dropped. In this country we decreased consumption from 21 to 16 million barrels a day from one year to the next. The decreased consumption is not going to last: we’ll become profligate again.

Consumption is the key to determining the impact of the plateau. Where is the point where consumption and production cross? If in fact the plateau is there, and in fact economic recovery is coming (which it is), and you base your models on consumption and PFC Energy estimates of 1.5% annual growth in oil usage, the crossover comes in 2020.

The key factor is the speed of the recovery with respect to automotive use. In the United States at least, oil is about transportation. Gas is about power and petrochemicals. The plateau is real and the recovery is real. It’s very real in China and India, which never really saw much of a recession. In China and India what do you think a newly prosperous person does? They buy a vehicle. They go from a bicycle to a motorcycle to a car. Everything consumes fuel except the bicycle.

There are statistics on per capita automotive usage in these countries versus the so-called advanced countries and it is staggeringly different. All of this says that transport fuel usage is likely to keep increasing, and that if it does, the crossover point between consumption and production is probably sooner than later (I’m not talking electricity — that’s a completely different argument).

If you want to reduce consumption of oil, you’ve got to switch transport fuels. People say very silly things about oil prices and imported oil juxtaposed to wind and solar. There’s no meaning there. The only meaning will come years from now when electric vehicles are a significant fraction of active automobiles.
The plateau is coming and if consumption continues at the current rate, there is a crossover coming. And at the point of the crossover, we’re not talking a spike in prices. We’re talking a sustained price increase. A spike is driven by a shortage at some point. This is not a shortage at some point. This is a plateau.

But let me end on a very simple point: do you really want to test the plateau theory? The alternative to testing it is doing something smart, like replacing oil with something that is more environmentally responsible. Are you going to argue with me about models, or are you going to do something that’s right to do anyway? Let’s just do the right thing, especially if it also happens to ameliorate, and in the limit, nullify, the plateau problem.

Can North Carolina be a domestic source for lithium for electric vehicle batteries?

February 14, 2009 § Leave a comment

Making transport fuel fungible with electricity offers options to net importers of oil such as the US.  As a state, North Carolina is in the unenviable position of importing all of its fuel from other states.  While biofuel will undoubtedly play a role in reducing this import, electrifying the fleet offers another avenue.  The primary mission of electric vehicles(EV’s) would be the reduction or elimination of tail pipe emissions, the notoriously most difficult site for carbon dioxide capture, although a secondary one may be to act as a storage medium for the grid.  The FRDM program, led by NC State University, targets creating all elements of a Smart Grid, which would be a key vehicle in grid optimization.  So, North Carolina is already well placed to take a lead in electrifying the passenger vehicle fleet.

EV’s such as GM’s Plug-in Hybrid (PHEV), the Volt, scheduled to be marketed in 2010, are intended to be charged in conventional electrical outlets, with a gasoline engine for charging the batteries if needed to go beyond the nominal range, 40 miles in the case of the Volt.  Pure EV’s, running solely on electricity, such as one scheduled by Nissan for limited entry in 2010, are also likely to be part of the equation.  If such vehicles are to become a substantial portion of the passenger vehicle fleet, several economic hurdles will have to be crossed, some possibly needing subsidies.  The principal of these is the expected higher cost of the vehicle (pure EV’s, because of their simplicity of design, will be somewhat lower in cost than PHEV’s), driven largely by the cost of the battery.  Research to reduce cost and increase range is ongoing in this and other countries, and the current administration has announced the intent to significantly fund this endeavor as part of the Stimulus Package.

Batteries: The Lithium Ion battery is the clear leader in this field and many believe it will continue to be so for the foreseeable future.  Other manner of sophistication, such as augmentation with super capacitors for short  bursts of power, is expected to reduce the load on the batteries.  However, the current unit costs are high, although high volume throughput has not yet been in place.  One can expect the costs to come down over time.  A point of note is that while the technology is domestic in many cases, all battery manufacture is currently in other low labor cost countries.  However, as in the case of foreign designed cars, domestic manufacture may become feasible.  Location of such capability in North Carolina would go hand in hand with any decision to make North Carolina a primary launch state for electric vehicles.

Lithium: A more pernicious issue is the sourcing of the critical commodity, Lithium.  World reserves are considerable, but the majority of these are in Latin America, including some countries such as Bolivia who are not in close alignment with the US.  There is the risk of trading foreign dependency of one commodity for another.  Unlike the battery manufacturing situation, a mineral is uniquely situated, as in the case oil.  North America does have sizeable reserves of lithium ore, in the form of spodumene, an oxide, but with current technology the processing costs are high when compared to the cost of processing the brine based deposits in other countries.  The vast majority of spodumene reserves in this country are in North Carolina, in an area northwest of Charlotte.

Call for Action: The technology for spodumene processing deemed non economic is at least half a century old.  Hints exist in the literature for more innovative methods.  In the national interest a research program should be instituted to investigate the possibility of economic recovery of Lithium from oxide ore.  RTEC has commenced a scoping exercise in this area, currently involving a literature search, but a fully fledged investigation will require State or Federal funding.

Flexi-Fuel Fairy Tale

December 11, 2008 § Leave a comment

The Utopian State, known the world over as the US, was in the throes of a dilemma.  Much maligned for not doing enough to limit carbon dioxide emissions, it developed a plan that seemingly in one fell swoop tackled global warming associated with automobile emissions while at the same time reducing import of oil from nations, some of whom were deemed unfriendly, at least in the rhetoric of elections.

This solution was known as the 20/10 plan.  The goal, to replace 20 percent of gasoline with ethanol in 10 years, was seen as visionary, if for no other reason as that 20/10 was about as good as one got with vision.  However, even before vast quantities of alcohol had been consumed, a hangover of major proportions was in the making.  Therein lies the tale.

The Utopian State, as befitted its name, was inclined to believe that the public would recognize a really good thing when they saw it.  They especially believed in the maxim: If You Build it, They Will Come, because said maxim was irresistibly derived from the powerful combination of Kevin Costner, the National Sport and mysticism.

So they built it, a complex web of subsidies to farmers, automobile companies and refiners, and tariffs on imported ethanol, all designed to produce domestic ethanol to blend with gasoline, and vehicles that would run on the stuff.  In a nod to perceived consumer preferences, they incentivized the auto companies to make flexi-fuel cars, capable of using regular gasoline and also E85, a blend with 85% ethanol.

They even created demand for these cars by ordering their agencies to use them and mandating the use of the new fuel.  Waivers to the mandate were given generously, no doubt in the Utopian belief that said waivers would not be sought if not merited.  It seems that some of these outfits are seeing a net increase in gasoline usage (Washington Post: Problems Plague U.S Flex-Fuel Fleet, Oct. 23, 2008), a result contributing in no small measure to the aforementioned hangover.

At the core of Utopian belief is that folks will “do the right thing.”  So, purchasers of flexi-fuel vehicles were expected to purchase E85, even from filling stations some distance away, ignoring the fuel consumption getting there and back.  Then word filtered through that E85 delivered 28 percent fewer miles per gallon.  In short, it was more expensive to use and harder to find.  They started filling up with regular gasoline because the flexi-fuel vehicle allowed that; filling stations noted the drop in volume and stopped stocking E85.

In time, it became apparent that the federal policy and legislation underestimated, or ignored, the fact that even in the US only market-based policies function.  Into this nightmare scenario stepped in Prof. Wunderbahr from a prestigious eastern university, with an engine design that delivered a small car running  on E85, delivering fuel economy and the muscle of a larger vehicle.  The design took advantage of the high octane number of ethanol (113 versus 87 for regular gasoline), which allowed effectively high compression ratios, which in turn improved the efficiency of combustion.  The result was elimination of the gas mileage penalty from using ethanol, increased power for an engine of given size, and retention of the improved emissions associated with ethanol usage.

Auto makers vied with each other to retool and produce these cars without any federal incentive because the public actually wanted them.  Fuel distributors rushed to install E85 pumps and realized that this was simply achieved by eliminating one grade of fuel.  They came to the realization that all vehicles on the road today specify either 87 or 91 octane.  A third grade was not needed, and the third pump was now available with modification to dispense E85.  The US government, not wanting to be left out of this, set policies to further these steps.  Ethanol from sources non competitive with agriculture became cheaply available.  All was well again.

And then they elected a new President who resolved never again to set policy that was not market-based.  The country united behind him on this and it was never quite the same again.  The country was henceforth known as the United States.

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