MIND THE GAP

May 25, 2020 § Leave a comment

London Underground railway platforms have warnings to “mind the gap”. In those cases, the meaning is literal: curvature of the platform often creates a variable gap between the concrete and the first step on the train. In any Presidential election year news and views are sometimes difficult to separate. For this discussion I am ignoring the obvious disinformation promulgated by conspiracy theorists and the like. The gap we are minding is more along the lines of spin.

Spin has always been a permissible technique in society. These are facts presented in a light favorable to a point of view or cause. This year the main issue that will get spun is the economy. Had the pandemic not intruded, the argument would have been the causes of the Dow at 29000. The present administration handed a vibrant economy on a plate by Obama or Trumpian wizardry. Well, Covid-19 took care of that. Now, it will be about how the pandemic was managed to keep deaths to a minimum, while also minimizing damage to the economy caused by the shutdowns. On the one hand you have Australia and New Zealand, who took early decisive actions on distancing and now have remarkably low mortality. On the other end of the spectrum is Sweden, which conducted a massive experiment by relying almost solely on herd immunity. Every state in the Union is relaxing distancing differently. While only time will tell, the spin business is in high gear.

In the reporting of improvement in the economy, mind the gap in how percentages are used. Mind the denominator. Consider a commodity, say oil at USD 100 a barrel. A 50% drop (as happened in late 2015) would take it down to USD 50. Then a 50% gain at that point would take it to USD 75, still USD 25 short of where it started. Each a 50% change, but the denominator intrudes. A recent headline stated that air travel had surged 123% in just the last month. The comparison was with a period that had seen a drop of 96%. The 123% gain brought it up to a figure that was still 91% short. This is not to say that the increase was not welcome and noticeable; it is just that some reporting leaves that detail unsaid.

An interesting variant on dicey comparisons is a story in the NY Times on the price of oil. It reports that price was USD 31.82 on May 18, 2020. Then it goes on to say, “That may seem like a minor miracle given that the price is more than $60 above where it was about a month ago”. While not inaccurate, the fact is that the drop to negative USD 37 a month ago was anomalous and for one single day due to an oddity in trader behavior. The comment was in the context of prices at which oil production could be profitable. However, the producer never saw the negative price, just the traders. The true price at that time was the price a day later, about USD 17. Still a huge jump to USD 31.82, but not USD 60 and not in the miracle range, minor or otherwise.

Currently, possibly the biggest gap is in matters relating to ameliorating or avoiding Covid-19. Investigative papers are placed online before they have been peer reviewed. The intent is to get them out for use by other investigators, but an eager press does not always underline that fact. Vaccines get a spotlight. While understandable, in view of the promise of such things, the “we are nearly there” feeling underlies many of the stories. They even move markets, as did the recent success of Moderna’s vaccine in a very limited trial. Dueling well-intentioned experts add to the gap, the minding of which proves daunting for the general public.

Now, this last is for the many of us who are in baseball withdrawal. In the parlance, throwing a curve is not the same as putting spin. In baseball, a curve may have some spin, but so can a fast ball. And fielders must be ever vigilant in minding the gap. Else, a single could turn into a double or worse. Now I return you to regular programming.

Vikram Rao

May 23, 2020

NEGATIVE LNG PRICES IN OUR FUTURE?

May 14, 2020 § 3 Comments

The combination of Covid 19 driven demand loss and the Russia/Saudi spat sent oil into negative pricing for a day in late April 2020. This was largely an anomaly driven by futures trader missteps. Now, there is the real, although still unlikely, scenario unfolding for negatively priced Liquefied Natural Gas (LNG). Spot pricing in Europe and Asia is at historic lows, approaching USD 2 per MM BTU, and dipping below that on one occasion. At that price it is tantamount to being negative because it is less than the cost to produce and deliver for most.

The cost of landed LNG anywhere may be broken down into two parts: liquefaction and transportation. Post landing, there is a re-gas cost. The first step is the costliest and is broken into capital cost amortization and operating cost. The capital component is the higher of the two. While location specific variants exist, very roughly speaking, liquefaction costs USD 2 – 3, transportation 0.4 – 1.1 (sometimes double that in times of scarcity of vessels) and re-gas O.4. The transportation costs are distance driven. Add to that the cost of the feed gas, which can be lower than the regional price due to long term contracts. Nevertheless, even if a low cost of USD 1.0 is ascribed to it, a useful total figure for the US would be USD 4. This makes the landed cost still higher than the spot pricing in evidence today.

LNG is the methane part of natural gas cooled to -161 oC. Most natural gas contains up to 10% larger molecules than methane. These are primarily ethane, propane, and butane. These must be removed prior to liquefaction. In the liquid state methane is 600 times denser than the gas from which it was derived. This property makes it amenable for long distance transport across oceans. But it must be kept at -161 oC. The most economical way to accomplish this is to allow some of it to evaporate, which cools the bulk liquid. An everyday example is the cooling action of sweat evaporating from one’s skin in a breeze. The gas is collected and used in the vessel engine or to make steam, which conserves it and prevents a greenhouse gas emission, but still constitutes loss of a saleable good.

As in the case of oil, when the demand is suddenly depressed, LNG gets stored. Limited capacity at the land locations leads to storage in the idled vessels. This week Qatar reportedly has 17 tankers idling off their coast. Each tanker carries up to 3 billion cubic feet of gas. Unlike in the case of oil, this storage has a cost beyond the lease of the vessel: the boil off gas has no use in a stationary vessel. It must be released from the tanks and will likely have to be flared.

Most LNG contracts have pricing pegged to the price of oil. The plummet in the price of oil in the last couple of months took with it the LNG price. In net importing nations, LNG sourced gas is the marginal cubic foot. Domestically sourced gas is used first. In India, for example, in normal times, the controlled price for domestically produced gas was complex, but around USD 4 per MM BTU. The LNG import price was around USD 11. Now things are different. After the Covid 19 depressed demand is met with regional gas, LNG demand is low, thus driving down the spot price. Incidentally, Indian renewable electricity has increased as a percentage of the total during the last few months.

LNG is to Qatar what oil is to Saudi Arabia: the primary source of income for the nation. It does not have the luxury of a cartel to control prices. Qatar, together with Russia and Iran, did attempt to form the Organization of Gas Exporting Countries (OGEC) in 2008. This was about the time that US shale gas was hitting its stride. Within a few years, US shale gas throttled the formation of the cartel because it was producing some of the lowest cost gas natural gas in the world, and lots of it. In very short order, the US went from plans to be a major importer of LNG (and therefore a client for the OGEC aspirants) to an exporter. Cheniere Energy, the US leader in LNG was forced to dump development plans for re-gas plants and to shift gears to become exporters. This reinvention did give them a cost advantage over competitors who joined the trend to take advantage of plentiful low-cost gas: existing facilities. The docking stations for the vessels and the shore storage existed and comprised nearly half of the cost, and half the time to commission, of that in greenfield operations.

Green field LNG liquefaction facilities and associated marine berths and storage cost about USD 4 billion, give or take some depending on details. 40-60% of this is labor, one reason why local governments find such plants attractive. But the high cost means long amortization periods. Add to that the fact that from start to finish they take up to 10 years to build. Uncertainty in pricing, the practice in this industry of long-term contracting notwithstanding, is daunting. That is precisely what Covid 19 has accomplished: created significant uncertainty in demand. Predictably, investors are balking. Worldwide, USD 50 billion worth of plants have been canceled or delayed.

Qatar faces the quandary of not being able to control prices, and yet needing a high market share: exactly what the Saudis faced with oil a couple of months ago and responded by offering discounts to get share increases. If Qatar were to do this, LNG price could briefly dive into negative territory. The US producers are likely to curtail production because it is unprofitable. Russia and Norway already are throttling back on gas sales. Qatar will most likely also drop production, no matter the fiscal pain, and spare us the drama of negative price lightning striking again *.

Vikram Rao

*”Lightning is striking again” in Lightnin’ Strikes, performed by Lou Christy (1966), written by Lou Christie and Twyla Herbert

WHEN 90% IS NOT GOOD ENOUGH

May 10, 2020 § Leave a comment

Usually 90% is a pretty good target. High schoolers in the top 10% get automatic admission to the University of Texas. Maybe not in engineering, but you get in. 80% right answers for 25 questions will get you a driver’s license. But when it comes to the post Covid 19 economy, 90% will not cut it, according to a story in a recent issue of the Economist. Much of the argument goes that an average of 90% means high nineties is some areas and much lower in others. In China, the manufacturing sector and export shipping are dramatically up, but consumer spending is still down, way down.

This observation reminds us that the US has increasingly become a consumer-based economy, with manufacturing going abroad, notably to China. The exception is the manufacture of petrochemicals. More on that later. The inference, therefore, is that a post Covid 19 recovery will lag in consumer goods being purchased. In large part this will be because of uncertainty regarding the disease and its likelihood of either lingering or reappearing. Job losses and savings being ravaged are not conducive to a climate for discretionary spending. When Germany allowed reopening of smaller retail stores, shoppers simply did not turn up. The same happened in China. Nieman Marcus declared bankruptcy, indicating that even the well heeled are likely to be cautious. Business models premised on continuous growth (think Uber), with investment in market share increases trumping earnings retention, are seriously damaged now and the model may be in question. Risk and uncertainty are recipes for less investing. At the very least, discount rates go up with risk, making the returns less attractive. The current rally in the stock market may prove to not have legs.

Innovation and creativity have been the hallmarks of economic growth in the last two decades. The list of the most valuable companies in terms of capitalization is informative: Amazon, Google, Apple, and Microsoft. All arrived there through some combination of innovation in technology and business models. Creative thought is difficult during the pervasive anxiety during a pandemic. Video conferencing is a poor substitute for personal interaction, not the least for the cross fertilization of ideas that occurs by chance in casual white board sessions and the like. Zoom meetings are now purpose driven and prone to distractions. Innovations that do see the light of day will find financing harder to obtain, except in narrow areas that are responsive either to the disease or to the restrictions brought on by the disease. The pipeline could endure a dry spell.

The US does have one thing going for it which could offset cheap labor abroad, which, in any case, has become less cheap over time. That is low cost energy. Natural gas prices are lower than in the cheap labor countries. Until this Covid 19 inspired downturn, US gas prices were less than 25% of those in India or China. They are artificially low in those countries now because liquefied natural gas (LNG) prices are pegged to the price of oil, which has plummeted. In fact, US export of LNG must be in trouble because the producer delivered cost will be over USD 5, whereas landed prices in Asia are under USD 3. But, when some semblance of normalcy returns, US natural gas prices will remain under USD 3 and Asian prices will drift back up to high single and low double digits. The certainty of low prices is why the US is a worthy target for manufacturing investment.

For goods where energy is a major component of cost, this is an area where manufacturing can return. For goods where natural gas is also a raw material it already has, in the last decade of the low gas price trend. The US also has the lowest cost ethane, a raw material for many plastics. This means that select sectors of manufacturing could return and should be given incentives to do so.

This pandemic has exposed ugliness in the more affluent societies. Americans earning less than USD 20,000 per year are twice as likely to have lost their jobs as those earning over USD 80,000. Mortality is greater in the minorities. The government is expected to do more. There is squabbling regarding federal action versus that in each state. States not being allowed to run at a deficit, federal bailout appears the only option, one which is resisted by elements of Congress. It is possible, perhaps likely, that the economic upheaval wrought by this pandemic will call for radical changes. What these are, and whether the changes are a net benefit for the future, will be determined by leadership and luck. This extraordinary period occurring during a presidential election year is unfortunate timing. The bipartisan response to the emergency sought recently by President George W Bush may be extremely difficult to come by.

We got lucky that the economy was robust at the time the pandemic hit. It allows for a quicker recovery. However, a 90% recovery will be uneven across sectors and is likely to lead to a world that is recognizably different. The term “new normal” has been thrown about. Regrettably, the emphasis will be on the “new”, and the habits formed during extended lock downs may be enduring. The last few percent always take longer, in innovative projects and cell phone battery charging.

Vikram Rao

MICHAEL MOORE FILM TAKES MACHETE TO RENEWABLES

May 3, 2020 § 1 Comment

Several of my readers asked me to comment on Michael Moore’s latest film, Planet of the Humans. One asked specifically for commentary on the contention in the film that progress in the use of renewables causes increased use of fossil fuels. I slogged through the one hour and forty minutes and did not find it said just that but could see how that could be inferred.

The film conducts an equal opportunity trashing of most darlings of clean energy: solar energy, wind energy, biofuels, electric vehicles (hydrogen and battery driven) and biomass energy.  Did note keep count, but the last probably gets burnt the most.  Prominent environmental organizations come in for lashings, either for supporting one or more of those listed above or for taking donations from folks who made money doing something deemed objectionable, such as logging.  The usual whipping boys, oil and gas, and even coal, are mostly spared.  In fact, the omissions are almost as interesting as the inclusions. 

The film title notwithstanding, the content is very US centric.  While externalities are discussed, such as tailings from mined minerals, the biggest atmospheric pollutant killer, particulate matter, does not get even a footnote.  This even though the bulk of this pollution is from biomass combustion.  They trash biomass but miss this connection seemingly because their messaging is on how wrong everybody (especially prominent environmental NGO’s) is on biomass being renewable. Even 100-minute documentaries have time limitations, I get that.  Particularly when essential minutes must be spent on two takes on an allegedly 500-year-old cactus being bulldozed for the Ivanpah solar thermal plant.  We were spared a prairie dog being brutalized.  But important minutes were spent on primates on a leaf denuded tree.

I will first address the issue of increased use of fossil fuels with further penetration of renewables. Solar energy is properly criticized for its diurnality requiring back up generation or storage. Footage is devoted to outdoor events powered by solar having backup generators or power from the grid. Event support people are interviewed in what is cast as an expose, sadly of a well-known issue. But even though fossil fuel is often used to level the load where solar is the main source, any use of solar displaces fossil fuel derived electricity.  I suppose one could argue that this shortcoming of solar will always keep fossil fuel in business.  But that ignores advances in storage which do not, or minimally, require fossil fuel. Also, and here is the US centric part, the over a billion folks without electricity can most advantageously be served by solar (many are in high solar intensity regions) combined with microgrids, potentially eliminating grids and the fossil fuel powered plants connected to them. Backup power can be with biomethane derived from animal waste.  This is by way of example only.  The point is that folks with nothing will settle for something, warts and all, when it comes to affordable energy.

Speaking of biomethane, this film does not parse the biofuels field.  It paints with a broad brush, using ethanol from sugarcane and corn as the whipping boys.  This is too easy.  Many, including I, consider ethanol from food crops to be a bad idea, even if it can be accomplished without accompanying deforestation and open field burning of residue (practices implied as commonplace in the film).  For fuel substitution in gasoline or diesel, methanol from a variety of sources, not the least animal and municipal waste, is far preferable.  This last is not mentioned, and I do not expect it. This film is about problems, and the wrong headed thinking by all but the narrator, not resolutions.

The broad-brush strokes are particularly evident in the very long critique of biomass combustion.  The contention is made that biomass is not a renewable resource. While, once again dealing in absolutes, they still managed to strike a bit of a chord with me.  The fundamental premise of biomass being renewable is that plants consume CO2 and when they die, the CO2 released is the same as if it is combusted.  The argument goes that one is better off burning for a use rather than letting it die.  And, if a new plant is grown in concert with the combustion, the biomass burnt is carbon neutral. By contrast, fossil fuel combusted has no offset regeneration.  Accordingly, biomass combustion is a net positive on carbon emissions.

Reality intrudes.  If trees hundreds of years old are used for this purpose, even if replanted, the time scale of regeneration is inadequate.  On the other hand, if fast growing trees are grown and harvested for this purpose and replanted on a planned basis, one is closer to neutrality.  The most benign, and unarguably sustainable source is slash.  This is the residue of tops, branches and leaves left after logging operations.  Add to that the woody waste from sawmills.  Finally, small diameter trees removed to encourage the growth of the more desirable forest species (or for reducing the impact of forest fires), are also a viable source.  We are left to conclude that many factors are involved in determining whether biomass combustion can be considered a net positive for carbon mitigation.  Declaring all woody biomass as renewable, as some jurisdictions have done, together with associated credits, is counterproductive.  It could, and likely does, encourage harvesting of forests without proper management. Policy in this area ought to be more nuanced.

The film is generally long on criticism and short on solutions. Were I a proper reporter, I would watch the film over again to confirm this abiding feeling.  But I simply do not have the stomach for it.

Vikram Rao

May 3, 2020

THE NEGATIVE OIL PRICE CONUNDRUM

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.

Vikram Rao

April 26, 2020

*this piece was driven by a request from three regular readers of this blog.

“CHARGER DESERTS” PUT BRAKES ON EV’S

April 21, 2020 § 4 Comments

A New York Times piece on April 17, 2020 contends that lack of charging infrastructure will hold back electric vehicle (EV) adoption.  This argument is not new, but the slant is.  The usual argument for more charging stations is “range anxiety” (the fear of running out of juice). This one is entirely premised on car owners with parking spaces with little or no access to charging stations.  Single family dwellings need only decide between slow 110 V and faster 220 V charging capability.  Apartment dwellers face the issue noted in the piece: nowhere to charge conveniently. 

According to Chris Nelder, a manager in the EV space at the Rocky Mountain Institute, about 40% of Americans do not live in single-family homes.  He is quoted in the article as saying, “We should stop waffling and start building some charging infrastructure”.  I am sure he meant substantial charging infrastructure.  Just “some” already exists.  The point is that a high proportion of potential EV owners need access to charging.  One Manhattan resident interviewed in the story referred to his area as a “charger desert”.  Hence the title of this piece.

Public charging stations would face at least two issues needing resolution.  We will discuss each and finish with an alternative with no onboard charging. 

Speed of charging: Charging stations may be Level 1, Level 2 or DC fast charging.  Level 1 charging is done at a line voltage of 120 V and would be prohibitively slow for public charging stations.  Level 2 chargers operate at 220-240 V and are the minimum for such installations. With some assumptions, one could expect about 25 miles worth of charge in an hour (more miles in an hour for an all-electric like Bolt or Tesla).  DC fast charging is a different animal.  Here, the AC/DC conversion is done outside the car and a lot more watts can be delivered to the (DC) battery, at a voltage that is double again that of the Level 2.

Logistics:  How many charge stations, at which locations and how would a driver know one was available, these are all practical considerations, but not unlike those for gasoline stations.  Taking the analogy further, the charge stations likely would be much like gas stations, and with DC fast chargers comparable time for a mere top up, if not a complete fill. Even a complete fill should really be 80% of capacity because one should not take a battery down to single digits prior to recharging.  Any rechargeable, including your cell phone one.

Battery exchange electric vehicles (BEEV):  In Battery Electric Vehicles, BEV’s (all electric; really the only way to go, in my opinion) the battery modules are almost always located at the bottom middle of the chassis in a flat profile.  If designed appropriately, they could be swapped out and fully charged ones put in place. This was suggested by the charismatic Israeli entrepreneur Shai Agassi over a dozen years ago, but the concept was ahead of its time in many ways, and was hampered by many factors, including battery cost of about USD 1000 per kWh. USD 1 billion and 1500 vehicles later, his startup Better Place declared bankruptcy in 2013. Today, according to Tesla’s Elon Musk, we are close to USD 100, an amazing drop in just ten years(see figure).  My calculations, with reasonable assumptions, for a 200-mile range BEEV, has the fully loaded fuel cost to the consumer that breaks even at under USD 2 per gallon of gasoline, closer to USD 1.50.

The true allure of the model is not even the per mile cost.  It is that the BEEV consumer is not saddled with the capital cost of the battery, which at USD 100 per kWh is around USD 6000 for a 200-mile range.  A BEEV sans battery ought to cost less than a comparably sized gasoline vehicle because it does not have an IC engine and transmission and gearing.  The buying decision becomes much easier and directly on the merits of the vehicle, which an EV wins hands down on performance.

On point for this piece is that the car owner no longer cares about charging equipment or remembering to charge during low rate hours (garage owners) or charging infrastructure (everybody, especially the ones in charger deserts).  At the “fill stations” gasoline pumps are replaced by underground robots.  The Tesla Model S demonstrated a 90-second swap (car was on a raised platform) at the unveiling in 2013, three weeks after the Better Place bankruptcy declaration.  Elon Musk, while decidedly not drinking any of the Better Place Kool Aid, instituted the design feature but not for immediate use (some gamesmanship, perhaps, by a fellow Israeli?).  The battery pack could have onboard intelligence which accounts for residual charge to be credited against cost of the replacement pack.  The battery charging can be done in controlled atmospheres and at troughs in electricity usage, and the charged packs taken to the fill stations.  When feasible, solar power could be used, because the recharge units can be anywhere within a practical distance of fill stations.  From a systems standpoint there are even more pluses such as battery improvements incorporated as they become available, which would be infeasible with consumer ownership.

If electric vehicles cost much the same as equivalent size conventional vehicles, and the fully loaded “fuel” cost is comparable as well, and recharging is as simple as today’s trip to the gas station, the proverbial Katy may have to bar the door to large scale adoption of EV’s.  Some combination of BEEV’s and regular BEV’s with fast charging will deliver a cleaner energy future.  Charger deserts will be served up with multiple oases.  And they will not be mirages.

Vikram Rao

April 23, 2020

GEOTHERMAL ENERGY IS AN OPTIONS PLAY

April 16, 2020 § Leave a comment

I used to think geothermal energy was a niche play.  And it was, until fairly recently.  Or, to be fair, I became aware recently that multiple approaches were being investigated, all of which were scalable, albeit to different degrees.  I define scalability to mean the ability to supply a material portion, and in the limit, a majority, of the electricity needs of the world at a price competitive with conventional alternatives.

The source of geothermal energy is the core of earth.  Essentially a nuclear reactor, where temperatures approach those at the surface of the sun.  The heat is conducted to the earth’s surface and eventually dissipates into our atmosphere.  Harnessing this heat is the essence of geothermal energy production.  Utility scale geothermal energy involves drilling a well, not unlike an oil well, pumping a fluid down, usually water, and then recovering the fluid heated by the subsurface rock to perform some work.  That work is usually the generation of electricity.  In short, we are mining for heat rather than oil or gas.  The operations to accomplish this, and the underlying technologies, are identical to those used to prospect for oil and gas, except for the final power generation bit. To the extent that step out technologies are needed, these too are in the general realm of oil industry capability.

Oil and gas companies have recognized the need to diversify and become energy companies.  Over a dozen years ago, BP’s CEO famously declared that BP stood for “beyond petroleum”. While premature, the sentiment still led to forays into solar and wind.  Except for offshore wind having some synergy with oil company core competencies, these areas were not good fits as portfolio components.  Accordingly, to this day, they comprise small portions of the companies.

Geothermal offerings fall into two buckets: those that operate in rock at 200 C plus and ones that require 300 C plus.  In the former category fall Engineered Geothermal Systems (EGS).  Because the heat content of the rock is relatively modest, inducements are needed for the heat to transfer to the fluid being circulated.  This is accomplished with standard hydraulic fracturing.  The twist is that existing natural fracture networks are utilized to advantage.  The energy required to open existing fractures is much less than that to create new ones.  Consequently, induced seismicity (the risk of creating an earthquake, and a concern that has been raised by observers) is very unlikely. 

Induced seismicity requires a high energy input into an active fault.  An active fault is roughly defined as a fault likely to move in response to an energy input.  A fault is a mismatch between two bodies of rock, often created due to a movement (known as slip) of one body relative to another adjoining one.  Continued movement in response to an energy input can create a seismic event, an earthquake.  The magnitude of the earthquake is directly proportional to the length of the fault.  As noted above, the energy from opening natural fractures (a common geological feature not to be confused with faults), is small.  Furthermore, EGS operations require a thorough knowledge of the earth stresses, and so detecting faults and their lengths is straightforward. Avoiding operating in proximity to long active faults would mitigate earthquake concerns.

The second bucket is that of hotter zones, exceeding 300 C, most preferably 350 C. High thermal pickups by the fluid in the well can be achieved with well architecture that maximizes contact with the rock, and no hydraulic fracturing is involved.  This would be a closed loop system, with the working fluid not entering the rock.  If the temperature exceeds 374 C and pressure 221 bar, any water present in the reservoir would be in the supercritical state.  This is a state in which it behaves like both a liquid and a gas.  When CO2 is sequestered in porous rock, it is in a supercritical state, taking advantage of this dual property.  A more mundane example is CO2 decaffeination of coffee beans: the supercritical state allows easy entry into the bean as a gas and dissolves the caffeine like a liquid.  Supercritical water will produce more power than would steam.

EGS operations can be executed with the latest current technology. The deeper stuff needs development.  The oil and gas industry is well positioned to do both.  In fact, an aspect of the development of deeper systems is an extension of recent advances by the industry in high temperature, high pressure systems.  One could argue that they are the only ones who could reasonably pull it off.

Now is the time.  The oil industry (especially including oil service companies) is positioned to put geothermal energy into high gear.  This would not have the appearance of greenwashing even to the most jaded.  The federal government ought to help, although in the midst of Covid 19 recovery efforts, that might be tough.  And yet, that pandemic is the reason (now that the Russia/Saudi spat is resolved) that the US oil and gas rig count has plummeted over 30% in just one month. Continued demand destruction could ensure a long-lived drop at some scale.  That then, would be the time, to put people to work doing something else productive.  If at the same time this work moves the needle on a renewable energy source the appeal is to both sides of the congressional aisle. 

For the oil and gas companies, a sizeable geothermal portfolio (eventually) provides optionality.  Since essentially the same crews can be used to drill for either oil or heat, portfolio shifts driven by market conditions are feasible.  Forecasting the speed of adoption of electric vehicles will no longer be important.  Good for the industry and good for the environment.  Large scale win wins are often mirages; not this one.

Vikram Rao

April 16, 2020