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 § 3 Comments

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

THE POST COVID 19 ENERGY WORLD

April 9, 2020 § 3 Comments

A webinar conducted by the Research Triangle Cleantech Cluster this week, in which I participated, triggered this piece. Some points made by the other three panelists Ivan Urlaub, Renee Peet and Gary Rackcliff are reflected here, but I take responsibility for this product.

For purposes of this discussion, energy falls largely into two buckets: electricity and oil and gas derivatives. In the last two months or so, the price of oil has halved.  Part of the driver was the Saudi/Russia spat, which is likely to end soon because neither can live with USD 23 (price at the writing) oil for long.  But the “shelter at home” policy in much of the world has slowed industrial output to a dull idle. Gasoline and jet fuel use has plummeted. Electricity usage has dropped.  Here we will discuss the likely longer-term implications, especially as relating to energy.  Some of the issues addressed arise from questions that were asked in the webinar mentioned above.  Here is a crack at a list of outcomes that I see as highly probable.  A modicum of support is also offered for the assertions.

  • Electricity from renewable sources will not take a hit, except for diminished access to capital due to federal loan paybacks and the availability of workers for production and installation. An uptick in this space is possible, in which case closer attention to storage will be required.
  • Distributed electricity production, with associated microgrids, will remain unaffected, except for capital constraints.  Non reliance on a grid makes this segment attractive for resiliency in the face of disasters such as forest fires and hurricanes, but that sort of resiliency is less applicable to this disaster. To the extent that current deployments are in underserved communities, especially in low- and middle-Income countries, oversupply is unlikely because the supply usually just barely keeps up with demand, or the potential demand of increased productivity.
  • Electricity suppliers with a heavier footprint in smart features, such as remote monitoring of home usage, are benefitting during this crisis because so much service can be provided without deploying personnel.  Post crisis enthusiasm for these features, leading to wider adoption, is likely.  This can only help with resiliency as well and ultimately with enterprise profitability. Compared to other power industry investment, the scale of this one is small.
  • Oil prices will hover in the range USD 30-50 per barrel, with possible excursions to USD 25, with considerable volatility.  For the first time in a Very Long time, Texas producers may agree to a cap on production.  The Texas Railroad Commission, which has had nothing to do with railroads since 2005, regulates the industry.  Prior to OPEC, they were the determinants of oil price.  Production controls, whether mediated by the TRC or not, are likely to return.  Were that to happen, and if Russia and the Saudis reciprocate with production cuts, oil price could well be in the upper reaches of the range noted above, once the economic recovery is in full swing.  The US government has also announced a purchase of 77 MM barrels of oil for the Strategic Petroleum Reserve (SPR).  Since the SPR is depleted by about that amount, this would top it up.  The average cost of the current reserve is USD 28.  If they go through with it (funding for it is in doubt) the new oil will likely be at a similar price.  I have blogged previously that the SPR is not really needed any more, that shale oil in the ground is the reserve, but this could help prop up the price at a bargain cost.
  • In not agreeing with OPEC on production restraint, Russian intent was to kill US shale oil.  Shale oil will be wounded, but not killed.  As in the last plummet in oil prices in 2015, highly leveraged players will declare bankruptcies.  The properties will be scooped up by the major oil companies for dimes on the dollar.  With deep pockets, the majors will simply keep shale as a portfolio item and unleash when profitable.
  • The short- to medium-term reduction in shale oil production will reduce associated gas production.  After the winter of 2020, natural gas prices will begin to firm.  This firming will not be enough to reverse the attrition in coal demand for power.
  • Electric vehicle (EV) adoption rate will not materially be affected by the drop in gasoline prices, no matter how sustained. The fully loaded cost of EV fuel is dominated by cost of amortization of the batteries.  At a battery cost of USD 100 per kWh, as forecast by Elon Musk for next year (he actually said 2020, but I will cut him some Queen Corona slack), a 200 mile range EV will have a fully loaded cost of about USD 1.50 per gallon equivalent.  This is based on a lot of assumptions, but the electricity “variable” cost is between 17% and 30% of that figure.  The main takeaway is that unless gasoline price drops to a sustained USD 1.50 or lower (unlikely in most of the US, very unlikely in California and incomprehensible for Europe), gasoline pricing will have little influence on EV adoption.  If a battery swapping model is adopted (where the consumer does not own the battery and swaps a charged one at each “fill”), the pay as you drive concept will be appealing, with lower car purchase cost and lower per mile cost.
  • EV adoption rate is on the upswing, but still hard to predict. Oil and gas companies would do well to diversify their portfolios into electricity, which has other markets as well.  This has indeed been happening for a while.  But wind and solar don’t fit the core competencies of these companies.  A relatively new entry is scalable geothermal energy.  The operations are not only a fit, but oil (and oil service) companies are uniquely positioned to speed up the entrée and scale.  Once in their portfolios, they can balance them based on the EV adoption rate, much as they currently do with their oil versus natural gas components.
  • Remote working will have some measure of sustained adoption post apocalypse. It is being “field tested” by outfits that may not have used the mechanism in the past.  Some may find that it is cost effective.  I remember when Shell Oil went to a 10-hour day, four days a week, in Houston to reduce commute miles and associated emissions.  Remote working is that on steroids.  During this emergency each company will have sorted out which functions (and persons) are suited to this approach.  They can take an informed view on adoption.
  • Virtual meetings will have an even greater adoption rate.  Technology has kept improving, but inertia or conservatism has kept adoption down.  Now, with the enforced testing regime, informed decisions will be made.  I see a strong uptick in this area.  Winners are IT connectivity companies.  Losers are airlines.  Business travelers are the most profitable passengers on a plane.
  • Both the above will reduce use of oil derived liquid fuel.  Depending on scale this demand destruction could materially affect the price of oil. Natural gas pricing will remain unaffected; different markets served.

One, somewhat off topic outcome is rise in public empathy, and possibly altruism. When behaviors such as these are entrenched for months, they are more likely to stick. This is good. The (positive) irony would be if the pandemic caused “a contagion of good example” to spread. From an entrepreneurial standpoint, innovations in enabling this trend could be effective.

Vikram Rao

April 9, 2020

WE MUST RENAME “SOCIAL DISTANCING”

March 30, 2020 § Leave a comment

Social distancing is a catchy phrase.  The distancing part is easily understood.  However, the implication is that all communication requiring bodily closeness is driven by social triggers.  This is not necessarily the case.  Business transactions entail close contact, especially in the west.  The shaking of hands, the exchanging of pleasantries and the ice breaker along the lines of “so, how ‘bout them Sox” (that particular line will be shelved for 2020, it seems, which is likely all to the good for the red variety of Sox, what with overpaying for injured stars and all), all require close bodily distance, the most egregious, under the circumstances, being the hand shake.

Today, in most places in the world, “shelter at home” orders discourage interaction based primarily on social objectives.  Sanctioned are trips, albeit careful ones, to the grocery stores, gas stations, hardware stores, pharmacies and curbside pickup of food at restaurants.  All these demand a measure of bodily proximity, which can easily be managed to minimize distance between individuals.  Shown below is an image from India, where the shopkeeper is taking steps.  Note the appropriation of a portion of the road!

Source: bangka.tribunnews.com retrieved March 30, 2020

Our farmers market in Carrboro, NC, did not go to these lengths.  But they separated the individual farmers by about three times the usual separation, instituted one-way pedestrian traffic (super decision whose value is immediately obvious: distancing is harder in cross flow), instructed all farmers on protection measures including produce handled only by glove equipped farmers* and dictated inter-customer distance, with roving enforcers.  Note, however, this was business distancing, not social, in the main.  The non-buying, chatting customer holding up the line last Saturday, comes to mind.  But, all good, nobody had anywhere to go anyway.

Social interaction, on the other hand, being expressly forbidden in person, has found avenues, new to some.  This is important.  Social connectivity may be more critical than ever.  Uncertainty is rife due to lack of information, poor information and information with agendas.  Just discussing with someone helps, especially if one lives alone.  All of us ought to be resolved to connect with someone each day.  Technology helps, but simple phone calls may work better for some.  Zoom parties are fully in play, as are virtual baby showers, birthdays and all manner of celebrations.  They may never replace the real deals, but then again, there is that chance.  Nothing substitutes for the warmth of direct personal contact (when permitted).  Hopefully, virtual social contact will be the exception in normal times.

Certainly, if Zoom (used generically here, take your pick on Skype, BlueJeans or any other) meetings prove effective even in business settings, two outcomes may outlive the emergency.  One is the increased appetite for remote workplaces.  This is already a trend, but the effectiveness could expand this, especially to businesses that did not already use the option.

The other is a decreased need to travel for meetings.  This last has always been on the cards with the ever-increasing sophistication in information technology.  But there is nothing quite like an extended “pilot test” to drive home the value.  Airlines and hotels will be the losers if this sticks.  Global warming could be a winner here, but only if the shift is large scale (aircraft have fewer options on fuel substitution than do automobiles). On the home front, the forced pilot test could make some couples realize that they were not as compatible as they believed.  Pervasive uncertainty and the need to make coordinated decisions will not help with frayed tempers.  Wiser counsel, or just another ear, would help.  This returns us to the need for social network access.  The opposite of social distancing, but without physical proximity.

India Prime Minister Modi recently made note of the distinction in his radio program Mann ki Baat, which loosely translates from the Hindi into “Something to think about”.  He referred to “increasing social distancing but reducing emotional distancing.”  Take your pick on alternatives to “social distancing”.  My Aussie nephew’s suggestion is “physical distancing”.

Vikram Rao

*You can’t touch this from “U can’t touch this” performed by MC Hammer 1990, written by MC Hammer (Stanley Burrell), Rick James and Alonzo Miller

SHEDDING LIGHT ON THE COVID-19 VIRUS

March 19, 2020 § 2 Comments

If enough of the light was at ultraviolet wavelengths, the virus would die.  This light, however, is an attempt to explain some of the science behind the virus and its effects.  I fully expect you folks to obtain fact or inference checks from physician scientists and am prepared for the comment onslaught.

A general caution is that very few sites, including this one, ought to be relied upon without verification.  The reputable sites include the National Institutes of Health (NIH) and in particular the National Institute of Allergy and Infectious Diseases (NIAID), the Center for Disease Control (CDC), and the World Health Organization (WHO).  Other sources are sites at top medical schools such as at Johns Hopkins, Stanford and Harvard. 

First the nomenclature.  COVID-19 is the disease resulting from the virus.  The virus is from the general family of coronaviruses, with this variant being named SARS-CoV-2.  SARS stands for Severe Acute Respiratory Syndrome.  The name being a bit of a mouthful, the WHO often refers to it as the “COVID-19 virus”.  The virus is related to those responsible for the recent outbreaks of SARS in 2002-2004 and Middle East Respiratory Syndrome (MERS) in 2012.

Structure and function

In common with other coronaviruses, they are spherical, with protein spikes sticking out about 12 nanometers (nm).  Resemblance to a crown informs the corona name.  They also have a striking resemblance to the fearsome medieval weapon, the mace.  In size they are reported to be in the range 50-150 nm, which places them roughly in the ultrafine classification of airborne aerosols.  However, deposition fractions in various parts of the respiratory tract cannot be presumed to be similar to those of particulate matter, even those coated with organic molecules.

A picture containing indoor, sitting, star, old

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SARS-CoV-2 transmission electron microscopy image, courtesy NIAID-RML

The image is of a virus isolated from a US patient.  The spiky proteins attach to receptors in human cells.  The mechanism is not unlike a lock and key.  The key of the virus protein needs a receptor lock to attach in order to then enter the cell.  Another analogy is docking of a spaceship to a space station.  Once this docking happens, the virus can enter the human cell.  Then it can replicate in the human cells and the disease is well on its way.  Recent research has shown that the receptor for SARS-CoV-2 is the same as that for the SARS virus.  That is the good news, because we know a lot about the original SARS.  The not so good news is that the binding affinity for this virus is ten to twenty times greater than for the original SARS (Wrapp et al. 2020).  This could explain why the human to human spread appears to be greater than was noted in the SARS outbreak.  Furthermore, despite the similarities in the structure and sequence of the protein spikes of the two viruses, three antibodies developed for SARS were not effective in binding to the SARS-CoV-2 protein spike.

A feature of the SARS-CoV-2 virus is that it is enveloped by a lipid (fat) layer (the “crown” protein extends beyond the lipid layer).  In this aspect the structure is like that of influenza viruses and the other coronaviruses (and unlike the diarrhea inducing rotavirus).  This is fortunate because soap and water will kill it.  Soap has a hydrophilic head and a lipophilic tail.  The tail penetrates the lipid layer and pries it apart, thus leading to the destruction of the viral genes, with all the fragments being washed away by the water.  This mechanism of action underlies the most important public health guideline for minimizing spread, washing of hands in soap and water for at least 20 seconds, taking care to wash between the fingers.  Hand sanitizers are believed effective if they contain at least 60% alcohol.  They too remove the lipid layer and cause the disintegration of the virus.

Except for the hand cleaning discussion, I did not get into disease avoidance.  For the rest you need to go to one of the reputable sites.  But I will note that my limited examination of the literature shows a flurry of scientific activity on several fronts.  These include studies of the immune response, development of a test to verify the presence of antibodies (UK), testing of intensity reduction drugs (example Tamiflu for influenza), and research on the ultimate prize: vaccines.  Keep in mind that folks are rushing to publish, in order to get the information for others to use, and so findings may be subject to revision.  The study linked above is based on a single patient, but still instructive. With all the stuff out there, caveat emptor!

Reference: Wrapp et al., (2020) Science 367, 1260–1263

Vikram Rao, March 19, 2020

ENERGY IN THE PRESIDENTIAL ELECTION

March 17, 2020 § 2 Comments

Energy showed up in the Democratic Presidential Debate, albeit not as a central issue; COVID-19 took care of that, closely followed by the ghosts of past senate votes.  Sanders wanted elimination of fossil fuels; I was not clear whether this referred only to domestic production or also domestic use.  For purposes of argument I will assume both.  There was little doubt that production was a target, because he called for an end to frac’ing, which is the primary means for domestic oil production.  But he also mentioned electric vehicles, giving weight to the second category.

When challenged by Sanders on the frac’ing issue, Biden used the time-honored debating technique of answering the question he wanted to hear.  Incidentally, this direct questioning of each other was tolerated and added spice.  Biden’s response was along the lines of Obama era policies: no drilling on federal lands and similar prohibitions.  Sanders too used the same technique during the climate change portion.  When asked by the moderator how he squared his banning frac’ing with the evidence that frac’ing was responsible for carbon reduction, through displacement of coal-based electricity, he simply ignored the question and gave some response that I forget.  He missed a bet by not proffering a “yes, but” response getting into the risks to human health, largely unrealized, but good debating material.  The pluses and minuses are in my 2016 book Shale Oil and Gas, the Promise and the Peril.  RTI Press will send you a free soft copy if you let me know.

How relevant was all this to the primary process?  Probably not much.  A quick search of opinions on the debate shows almost no mention of the points raised above.  I suspect Sanders raised the issues largely because they resonated well with his constituency.  Banning frac’ing is a classic progressive rallying cry.  Or used to be. Virtually zero mention in the talking head analyses indicates something.

But, will energy be a significant issue in the title bout?  Depends on who has the Democratic nomination.  Sanders would certainly make climate change an issue; Biden may as well, but likely not as stridently.  Sanders will use it to attack fossil fuels and frac’ing.  Trump’s support of the oil industry is solid, including permitting drilling on federal lands.  Nevertheless, he did, inexplicably, applaud the recent plummet in the price of oil, because it enabled cheaper gasoline. 

Biden, on the other hand, will likely evade oil and gas altogether.  If this issue comes up it will be because the Trump camp raises it. The only real policy differences with Trump appear to be on drilling (and likely, frac’ing) on federal lands and the Arctic (which will not involve frac’ing).  As to the latter, the likelihood of any oil company action in the Arctic at even USD 70 oil is minimal.  The reason is that developments in the Arctic, even the slightly more benign versions in the Alaska National Wildlife Refuge (ANWR), are expensive.  They would require stable high prices.  The recent near halving due to COVID-19 combined with the Russia/Saudi spat will provide scant comfort.  Used to be that wars were the primary reasons for volatility.  Now we have added a pandemic.

One final word on the issue of oil, gas and sustainable alternatives.  I have opined in these pages that oil must be displaced with dispatch in the transportation sector, and certainly the electricity sector.  If you are experiencing a doubletake on the second point, note that the Saudis currently use nearly a million barrels per day to produce electricity.  Diesel generators are the backups to power interruptions in innumerable locations.  In transportation, electric vehicles are the future.  But hurdles remain to speed the transition.  A complete transformation is at least 15 years away, 10 if we do most things right.  In the interim, continued domestic oil production is a national security issue. 

Natural gas is a different story.  Cheap natural gas from shale was arguably one of the most significant reasons for recovery from the recession of 2008.  The chemical industry relying on natural gas as a raw material, returned to our shores in droves, bringing jobs and prosperity.  Cheap natural gas rapidly displaced coal and dramatically reduced US carbon emissions.  The US stopped importing LNG, and this effectively dropped gas prices worldwide. Russian ability to use gas as a weapon of political will in Europe was severely curtailed.

These are facts and inferences that politicians of all stripes must internalize.  Also, that no form of energy comes without baggage.  Finally, affordable energy raises all boats of economic prosperity.

Vikram Rao, March 17, 2020

You may be right, and you may be wrong” from You May Be Right, 1980, performed and written by Billy Joel