Monday, September 7, 2009

Natural Gas versus Coal - perhaps the UK experience revisited?

Back when North Sea oil and gas were discovered the British Coal Industry was a powerhouse in the land. Coal gas was used for domestic cooking, with the fuel generated by large gas works that dotted the landscape. Skip forward a little, and there was a massive campaign to convert the burners that had used coal gas over to a smaller size that allowed them to burn the natural gas becoming available from the North Sea. And with oil and natural gas coming ashore in increasing quantities the British coal industry rapidly faded from its peak to a fainter shadow of energy production, and coal gas became a historical item.

Coal gas is formed by the partial combustion of coal, natural gas (NG), on the other hand, occurs as a hazard in most coal mines. As the coal is mined the pressure comes off the coal, or it is fragmented, and the natural gas can escape. Once it reaches a certain concentration in the air it becomes explosive, and a heat source (a metal pick rubbing on sandstone for example) can ignite it, causing ignition of the gas, with a consequent disaster as those in the mine vicinity can be killed. Thus there are many precautions (which I will describe at another time) to stop that ignition, or to stop the flame from spreading very far.

But the natural gas can also be collected, and if it is collected in a purer form than that diluted by the ventilation currents of the working mine, it becomes a valuable resource, which the British miners now use to help power the mining process itself.
Sixteen generators are installed across 5 deep mine sites. These embedded generating sets are fuelled exclusively on mines gas. Some of the electricity generated is used at UK COAL sites representing a substantial energy cost saving.
However this harmonious use of the fuel projects a different attitude than that which existed as the National Coal Board died. And now that same struggle may be gearing up for a rematch in the United States, as the growing surplus of natural gas leads industry leaders to press Congress about forcing coal’s replacement with NG as part of the new Clean Energy Initiative. So far it hasn’t worked.
For all its pronouncements that gas could be used to replace aging, inefficient coal-fired power plants — and reduce greenhouse gas emissions in the process — lawmakers from coal-producing states appear committed to keeping coal as the nation’s primary producer of power.

However the folks at Chesapeake are now starting to face off against those of Peabody to try and influence the Senate version of Waxman-Markey. And the debate brings renewable energies into the picture, not necessarily to NG’s advantage. (Which is a little odd given that NG plants are generally considered the back-up power when the wind don’t blow or the sun don’t shine).
“By allowing free emission allowances to maintain coal production from existing coal plants, while providing mandates that there be more wind and solar, you squeeze gas out in the middle,” said William F. Whitsitt, an executive vice president at Devon Energy, a major natural gas producer.
This is not really something that it easily fixed in the marketplace, since the return on investment needed for the construction of a major power plant requires that there be a sustained market for the power produced, and concurrently a reliable cost-effective source of the fuel that will be required to generate the electricity for a significant portion of the plant lifetime.

Now the U.S. currently has a glut of natural gas. As a result futures have fallen to $2.508 per million Btu (give or take equal to 1 kcf). This has to start hurting some of the producers since, inter alia, Chesapeake has noted that it is costing them around $4.44 million to drill new wells in the Marcellus, a field in which they anticipate being the biggest player. The company is still very positive about that development – but notice the long-term price they are expecting to justify that optimism:
Based on drilling results by Chesapeake and others in the industry, the company has recently increased its targeted average EUR in the Marcellus from 3.75 bcfe per well to 4.2 bcfe per well. Assuming flat NYMEX natural gas prices of $7.00 per kcf (compared to a recent 10-year NYMEX strip price of approximately $7.02 per kcf), the company’s estimated pre-tax rate of return from a 4.2 bcfe horizontal Marcellus well drilled for $4.5 million is approximately 71% excluding the benefit of drilling carries and more than 1,000% including the benefit of drilling carries.
Back in March Chesapeake was reducing its production from the Haynesville shale however, back then they were also predicting that the drop in drilling activity would produce results before the end of the year.
During March 2009, most Mid-Continent natural gas prices at major interstate pipeline delivery points will average around $2.70 per thousand cubic feet, a price at which most natural gas production is unprofitable. We believe low wellhead prices combined with constrained capital availability will likely cause U.S. drilling activity to decline well beyond the 40% drop already seen since August 2008. As a result, U.S. natural gas production will begin to dramatically decline before the end of 2009 and consequently natural gas markets will regain better supply/demand balance by the end of 2009, if not sooner.
Given the continued excess in the marketplace, it would be nice if the NG industry could find a reliable market of greater size in power generation. They have already managed to corner around 25% of that market – but as yet have not managed to convince folk, such as the manager of our local power plant (which is already constructed to burn natural gas, but which blanked off the nozzles) to switch back.

Perhaps he, like so many others, realizes that as soon as the glut goes away, and the short-lived nature of the gas shale wells being what it is, that will likely happen within the year, then the price will go back up, and it will become less economic than the current coal contract.

Hence the desire of the natural gas companies to get a little more assistance from Congress in the struggle for the future.

It depends on how well they sell, and how well the coal companies manage to resist. All tied up with the debate about climate change, which seems to be less certain with recent publications (in New Scientist among other places) suggesting that the globe may cool for a while before reheating, this could be an interesting debate. And perhaps one with less certain an outcome than the British experience.

9 comments:

  1. We seem to have gas coming out of our rear ends. A glut to the moon. If you go the the website cngvehicle.net, you will find a used car dealer in Oklahoma selling CNG vehicles for under $10k. Lots of 'em.
    I just don't see any doom scenario that makes sense.
    Add to that, lithium batteries seem to be improving at an 8 percent annual clip. Give it 10 years, and they start to get pretty persuasive.
    Who pays for The Oil Drum?

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  2. You get this sort of excitement at the beginning of a boom period, and with the advent of the gas shales that is what we have at the moment.

    However you need to note the difference in price between what the market is currently paying and what they need to get a profit.

    Because there is also extra LNG available from Qatar it will keep the price down for a little while, but as demand then goes up so the reserves start to run down. The UK had about 30-40 years and now are importing - the US though it has larger deposits also has the potential for higher demand, and not all the gas wells are productive - for the Barnett the number was about 28%.

    It's not therefore an immediate issue but rather one that will evolve over time. As market share increases reserve life reduces.

    When we started TOD Kyle and I paid for our own expenses and he covered the incidentals, as it grew for a while we had ads that contributed to the cost of the operation (largely paying for the server). There was a time when one or two folk provided a donation but I think that Kyle has this Center now that supports it, but to be honest I don't know. All the contributors write for nothing.

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  3. Thanks for your reply. BTW, I meant to write www.cngvehicles.net. If you get a chance, it is a hoot. A used car dealer selling CNG vehicles off the lot for under $10k (though some cost more).
    Obviously, even middle-class people can switch to CNG.
    My guess is that Oklahoma and Utah start switching early to CNG, if and when oil stays up. Then, fleets nationwide.
    I have to say, I have never been so optimistic about the future of the planet as now. I expect we are on the cusp of another 20-year boom in global GNP. The only Achilles heel I see is our flimsy-flakey financial system. Obviously, our banks, and investment banks, must be rock-solid, beyond doubt.
    If people know that financial collapse is not possible, then they can invest more aggressively.
    We are again accumulating huge pools of capital, and R&D globally is greater in every field than ever before. Venture capitalism has gone from cottage industry to major force.
    I wonder about the intent of The Oil Drum. Today, it seems to spread fear more than light. The Center that financed it--from where does their money come from? Oil speculators?
    OPEC?
    I have to say, TOD seems less like a forum, and more like a doomsday club.

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  4. TOD really tries firstly to get information out, and then to interpret what this might portend. There is a considerable concern over the availability of financing to help re-expand supply to meet perceived demand, and this is sometimes carried over in the tenor of the posts.

    I think that we will see some growth in overall demand, but with so much of the world currently tied to an oil economy you can't switch away much of it to supplies such as CNG in the short term - there isn't the support network in place to sustain it, though it would be nice if you were right.

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  5. The network for CNG pumps is easy. We have more than 200,000 gasoline stations in USA, already in the best locations.
    CleanEnergyFules just put in a CNG pump in West Los Angeles for $750k. That means we couuld put in 13,000 pumps nationwide for $10 billion.
    About the cost of 10 days of our ill-advised Iraqistan war. So, cost is not the issue.
    Gas is not the issue, we have plenty. Converting cars is not the issue--the Oklahoma guy does it, and sells the cars for under $10k.
    So, what is the issue?

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  6. a) Getting enough people to commit to the investment in the distribution network at the scale that will be required.
    b) deciding which part of the process is the chicken and which the egg (i.e. who makes the investment first the network or the folks who buy the modified vehicles)

    What works on a small scale requires a huge amount more effort and enthusiasm and money, and technology when it is translated into a size that has any significant impact on a national level. A million barrels is a lot of fuel.

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  7. The price mechanism works wonders. If gasoline goes to $6 a gallon, there will be no probem convincing people to switch. In fact, we won't convince them...they will switch no matter what we say.
    Global demand for crude oil looks to hardly rise at all for years and years.
    I think the Oil Era is ending, and with a whimper, not a bang.
    I just don't understand the scare-mongering at TOD. It feels like they have a hidden agenda, or conenctions to oil speculators, or oil-exporting countries.

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  8. No agenda that I know of relative to Peak Oil or the fuel situation, at sites where there are multiple authors usually each writes based on the opinions that they have, and the underlying knowledge of what is going on - which varies from individual to individual. But where the data base is shared - as it is through the large amount of data that has been posted at TOD over the past few years, then it is not surprising that there is some consensus among those that write.

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  9. Small Business owners are largely forgotten. Thats why I only focus on them. I have experience several members of my family file bankruptcy due to small business failures. I also I suffered through 2 destroyed businesses due to failure however, in my failings I have learned some of the secrets to success. (Who can say they know it all?)
    smallbusiness

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