Original Article

Experts are so focused on analyzing the BP spill that they’re overlooking the next big thing.

By John Deutch

Even energy experts tend to forget the enormous impact unanticipated events can have on markets and public policy. Today there are two developments that have the potential to cause dramatic change: the existence of enormous reserves of natural gas and the BP spill.

As recently as two years ago, we had no idea that there were vast natural gas resources in unconventional reservoirs like coal seams, tight sand and shales in the United States and elsewhere. That’s the positive surprise. On the negative side, the severity of the oil spill in the Gulf of Mexico could well turn the global public against oil and natural gas exploration.

If the past is any guide, accidents in the energy sector profoundly affect this country’s energy outlook. Reactor incidents at the nuclear power stations at Three Mile Island in Harrisburg, Pa., in 1979 and in Chernobyl, Ukraine, in 1986 interrupted nuclear power plant construction in the U.S. and Europe for two decades. The 1973 oil embargo by OPEC and the 1978-79 oil crisis caused by the fall of the Shah in Iran permanently changed expectations about the security of the oil supply and the long-term price trend.

The BP spill will certainly lead to a major review of the risks involved in offshore drilling. Re-examining operating practices and regulations will likely take more than a year, during which time new deepwater operations will be curtailed. The danger is that public attitudes and government policy will lead to an extended period of reduced investment and licensing.

Some observers will characterize the blowout as an exceptional case due to chance or negligence. Others will see it as evidence of general inattention. Few will recall the facilities in the Gulf survived Hurricane Katrina in 2006, an unusually stressing event, without appreciable problems.

Yet even as we endlessly debate U.S. energy and climate policy in the wake of the BP gusher, we aren’t spending enough time considering what’s on the horizon—particularly natural gas’s transition from a dwindling to an abundant resource. According to the Energy Information Agency (EIA), natural gas could become a much more important fuel for the U.S. in the coming decades.

In its 2010 International Energy Outlook, the EIA predicts growth in natural gas production principally from shale in Latin America, China, Australia, North Africa and the former Soviet Union. Global unconventional gas production is projected to increase to 7.9 trillion cubic feet in 2035 (1/3 of total natural gas production) from its 2008 level of 3.5 trillion cubic feet (about 1/6 of total production). The 2010 EIA projection of world-wide production of unconventional gas increases at 5.2% per year between 2008 and 2035, compared to 1.4% for total gas production.

What will this mean? In the short run, natural gas will displace coal in the electricity sector. This will significantly lower carbon emissions. In terms of renewable energy, low-cost natural gas will make hybrid solar plants that use both sunlight and natural gas to make electricity more economically attractive.

As oil gets more expensive and natural gas cheaper, there will also be an enormous incentive to use far more natural gas in the transportation sector. Compressed natural gas can power buses, medium-duty trucks and light-duty vehicles that operate in urban environments close to fueling stations.

But the U.S. is far behind the rest of the world in using this source of energy for transportation. As of 2009, Pakistan led the world with 2.4 million vehicles fueled by compressed natural gas and over 3,000 fueling stations. By comparison, the U.S. had about 100,000 such vehicles and 1,300 stations, consuming 0.1% of the 12 million barrels of oil per day devoted to transportation.

The penetration of natural gas into the U.S. market will be determined by the cost of kits to convert gasoline-fueled vehicles to natural gas. That cost should decline sharply with scale, new vehicle offerings, the availability of fueling stations, and, of course, continuation of the favorable cost of natural gas compared to motor gasoline.

Even 10% penetration in the next decade or two would displace 1.2 million barrels of oil per day. This may not be decisive, but it certainly could have as big of an impact as other proposals to reduce import dependence, like gasohol (a mixture of motor gasoline and ethanol from corn).

Natural gas can also be transformed into liquid fuels, such as methanol, for transportation or industrial use at a production cost that I estimate to be approximately $45-$60 per barrel of product. This is expensive, but lower than the likely price of crude oil and the anticipated cost of synthetic liquids from coal or shale (plus it has less carbon emissions).

The continued expansion of gas pipelines around the world, as well as the expanding trade of liquefied natural gas, indicate a movement toward a global market for natural gas similar to oil, and ultimately with a single world price. A global price implies major changes in patterns of gas trade between the North American market, where gas is priced to coal, and the Asian market, where gas is priced to oil. Because coal is cheaper than oil on an energy efficient basis, this means that current natural gas prices in North America are $4 per thousand cubic feet compared to $10 per thousand cubic feet in Asia.

That’s where things seem to be heading now, but our thinking should remain agile. There undoubtedly will be other energy surprises that will disrupt conventional thinking.

Political instability or military conflict in the Persian Gulf could create a lengthy supply disruption, while a resolution with Iran could lead to welcome additions to world supply. An extended global economic downturn would reduce demand but also reduce energy investment critical for the future. Unexpected advances in photovoltaics, batteries or biofuels likely will change the affordability of new technologies.

The U.S. should have a comprehensive, long-term energy strategy. But when unforeseen events arise, we should adjust as necessary to take advantage of unexpected opportunity.

Mr. Deutch is a professor at MIT and former under secretary of the Department of Energy. He currently serves on the board of directors of Cheniere Energy and was formerly on the boards of Schlumberger, CMS Energy and Citigroup.

Original Article

By Benson Kong

After announcing its intent to offer compressed natural gas and liquefied petroleum gas-compatible Chevrolet Express and GMC Savana vans in May, we have learned General Motors is ready to begin offering the CNG versions this fall.

The CNG-ready Vortec 6.0-liter V-8 engines will be assembled at GM’s Wentzville, Missouri, plant, and the Express and Savana full-size vans will be fully compliant with emissions regulations. To help with the necessary conversions, GM tapped Productive Concepts to assist with the fuel delivery, storage system, and emissions testing. Vans in tow, GM will be looking for sales this fall, and the LPG versions are due early next year. Each van will come with a three-year, 36,000-mile new vehicle limited warranty and a five-year, 100,000-mile limited powertrain warranty.

“Our focus from the beginning has been to offer fleet customers a simple ‘check the box’ approach with our CNG Chevrolet Express and Savana vans,” said Brian Small, general manager for GM’s fleet and commercial operations. “Our robust production process is a key enabler and certainly separates us from any competitive offering.”

Original Article

Russia, Moscow

The city council of Moscow passed Resolution # 553-PP –State of the Works and Further Measures to Promote the Use of Compressed Natural Gas as a Motor Fuel for the Automotive transport of Moscow — in June. The Resolution aims to reduce the harmful effects of transport on environment and health of the population of Moscow by expanding the use of CNG as a motor fuel in the city. Practical implementation is underway, facilitated by an earlier decision by the Moscow government, N 170-PP (March 2002), which introduced alternative motor fuels for road transport to the city.

Eugene Pronin, NGVRUS president, referred to the Resolution as opening Moscow to CNG investment and development.  Areas for potential investment are:

• Building CNG/LNG filling stations;
• Assembly / construction of OEM NGVs;
• Manufacturing high pressure cylinders;
• Setting up transportation companies (taxis, buses, trucks) that use NGVs.

The key points of the Resolution are:

• Social facilities (hospitals, kindergartens, schools) shall be served by Euro-4 vehicles or CNG vehicles.
• Electrical and CNG trucks vehicles will be exempt from the ban to enter the central area of Moscow.
• Communal vehicles in the central are of Moscow shall use alternative fuels (CNG, electric power).
• Multifuel filling stations in Moscow, where CNG make no less than 30% of the overall fuel sales, and automotive companies, where no less than 50% of the fleet are vehicle powered by alternative fuels (CNG and electric power) may get at least 5 year land tax holidays.
• Six Moscow bus companies will switch to CNG.
• 21 sites are approved for construction CNF filling stations.
• Filling stations without CNG options will not be allowed in Moscow.
• A Moscow law on the Use of Alternative Transportation Fuels will be developed.
• Electrical and CNG trucks vehicles will be exempt from the ban to enter restricted traffic zones.
• Government of Moscow intends to begin OEM production of NGVs in the city.
• Moscow NGVs will be used to serve the XXII Olympic Winter Games in Sochi, in February 2014.
• Biomethane from sewage water and landfills will be produced in Moscow.

Responsibility for rolling out the implementation and operation of the project, including development of associated infrastructure, has been allocated to the Department of Transport and Communications of Moscow.

Original Article

By Warren R. True

Hydraulic fracturing, as many OGJ readers know, has been around for decades. Recently, its use has driven development of US natural gas reserves locked in shale. And it promises the same for other global areas.

In January, the prestigious Sundance Film Festival awarded Josh Fox’s Gasland” a Special Jury Prize for documentary films. The film records Fox’s visits to fracing locations to record the damage he alleges has resulted from its use.

Last month, TV cable channel HBO showed the film as one of its summer documentaries.

Coinciding with that showing, oil and gas producer organization Energy in Depth (EID) issued a 4,000-word, point-by-point rebuttal of virtually every allegation the movie makes against the technique and the industry that employs it.

With that as background, call what follows a point/counterpoint on, as it happens, a subject well known to many Journal readers.

EID vs. ‘Gasland’

Fox: The 2005 Energy Security Act exempts the oil and natural gas industries from the Clean Water Act [sic], the Clean Air Act, the Safe Drinking Water Act, the Superfund law….”

EID: The oil and natural gas industry is regulated under every single one of these laws…. [H]ydraulic fracturing, to which Fox appears to be making reference here, has never in its 60-year history been regulated” under the 1974 Safe Drinking Water Act.

Fox: When the 2005 energy bill cleared away all the [regulatory] restrictions,” companies began the largest and most extensive domestic gas drilling campaign in history….”

EID: Never in the 60-year history of the technology, the 36-year history of SDWA, or the 40-year history of the US Environmental Protection Agency has hydraulic fracturing been regulated by SDWA. There were, therefore, no restrictions” in the 2005 ESA to be cleared away.”

Further, EID cites the US Energy Information Administration that more natural gas wells were drilled in the US in 1982 than today.

Fox: Hydraulic fracturing blasts a mix of water and chemicals 8,000 ft into the ground. The fracking [sic] itself is like a mini-earthquake. …In order to frack, you need some fracking fluid—a mix of over 596 chemicals.”

EID: The composition of fluids commonly used in the fracturing process” consists of a 99.5% mixture of water and sand. The remaining materials, used to help deliver the water down the wellbore and position the sand in the tiny fractures created in the formation, are typically components found and used around the house. The most prominent of these, a substance known as guar gum, is an emulsifier more commonly found in ice cream….

Fox graphically depicts the fracturing process as one that results in the absolute obliteration of the shale formation. In reality, the fractures created by the procedure and kept open by the introduction of proppants such as sand” are typically less than 1 mm thick.

Fox: To exemplify the environmental damage fracturing causes, the film shows images of dead fish along a 35-mile stretch of Dunkard Creek in Washington County, Pennsylvania.

EID: Fox’s attempt to blame the Dunkard Creek incident on natural gas exploration is contradicted by an EPA report [that] blamed the fish kill on an algal bloom, which itself was fed by discharges from coal mines.”

A local newspaper, according to EID, said: One glaring error in the film is the suggestion that gas drilling led to the September [1979] fish kill at Dunkard Creek…. That was determined to have been caused by a golden algae bloom from mine drainage from a [mine] discharge.”

Fox: By far the most dramatic sequence in Gasland” is a flaming water faucet in a Fort Lupton, Colo., home, which the movie blames on natural gas development.

EID: According to the Colorado Oil & Gas Conservation Commission, Dissolved methane in well water appears to be biogenic in origin. …There are no indications of oil and gas related impacts to water well.” And EID notes the complaint was resolved in September 2008.

OGJ connection

Fox’s Gasland” web site lists several press reviews,” including one from OGJ: The film is ‘well done. It holds people’s attention. And it could block our industry.’—Oil and Gas Journal President of the Natural Gas Supply Association.”

The web site, not surprisingly, takes out of context NGSA Pres. R. Skip Horvath’s statement in an online article by Washington Editor Nick Snow as if it were a review of the film (OGJ Online, Mar. 24, 2010). The statement’s presence on the Gasland” web site suggests OGJ has reviewed the film.

On the contrary, it hasn’t, nor would it.

By Jeremy Alford

Original Article

BATON ROUGE — Two new laws that seek to encourage compressed natural gas as a fossil-fuel alternative have been endorsed by Gov. Bobby Jindal.

Efforts to make vehicles that run on compressed natural gas, or CNG, more readily available started to peak in Louisiana last year when Jindal ushered a tax credit through the legislative process for those who convert to the clean-burning fuel.

This year’s regular session produced another set of policy changes.

Sen. Nick Gautreaux, D-Abbeville, is the author of both measures.

His Senate Bill 103, now Act 118 of the 2010 regular session, creates the Alternative Fuel Vehicle Revolving Loan Fund Program.

The initiative went live July 1 and is being administered by the Department of Natural Resources. Another entity may take over as the program evolves.

The fund will provide financial aid to local governments seeking to convert to clean fuel vehicles.

While Gautreaux said the fund may be empty for a while, state officials identified Petroleum Violation Escrow Funds as an eligible source. That account includes money collected from oil overcharge penalties assessed on energy companies during the 1980s.

It holds $18 millions, but only $5 million is needed to get the loan program going, according to an analysis by the Legislative Fiscal Office.

Jindal also signed into law Gautreaux’s Senate Bill 254, or Act 436, which permits political subdivisions to buy or lease any motor vehicle capable of using alternative fuels.

Houston-based Apache Oil, which has offices in Houma, vowed to build a CNG filling station in Lafayette and has worked with the Greater Lafayette Chamber of Commerce to form a consortium that will build three more stations in Acadiana.

Britt Dearman, manager of special projects, brought a natural-gas powered Chevrolet Tahoe to the Quality Hotel in Houma for an event earlier this year aimed at gaining support for the technology.

The Houma-Terrebonne Chamber of Commerce has hosted CNG seminars this year for its membership.

Given the federal ban on new exploration in the Gulf of Mexico and the subsequent court battle, local economic-development enthusiasts say the timing has never been better for CNG in Louisiana. That’s good for the state, which has an abundance of natural gas, and Houma-Thibodaux, where its big business.

In 2009, Terrebonne Parish produced 88 million cubic feet of natural gas, according to annual tabulations.

That’s fifth among Louisiana’s 64 parishes, and Terrebonne plays second fiddle only to the northern parishes that house the record-setting Haynesville Shale.

Lafourche Parish, meanwhile, produced more than 30 million cubic feet of natural gas this past year. But it’s the conversion of those finds into CNG that has supporters energized.

CNG is made when natural gas, the same stuff Louisiana’s existing drilling rigs are producing, is compressed.

Many of the vehicles on the open market that run on CNG can also run on gasoline with the flip of a switch. Carmakers like Honda, Toyota and Volkswagen are already producing such vehicles, but only Honda has one that’s 100 percent CNG. There’s also a $5,000 federal tax credit for buying a full-on CNG model, like the Honda Civic GX.

Overall, it’s CNG is about 30 percent to 50 percent cheaper than the gas you get at the pump today.

Interim Lt. Gov. Scott Angelle, who has temporarily vacated his post as secretary of the state Department of Natural Resources, said CNG is part of Louisiana’s new energy economy.

“We are in the golden age of natural gas,” Angelle said. “This is an opportunity for Louisiana to take the lead in showing the rest of our nation that it can be done and how it should be done.”

The CNG-related measures adopted by the Legislature and endorsed by Jindal this year build upon previous efforts.

Last year, Jindal signed a bill that increased personal and corporate alternative-fuel income-tax credits.

Jeremy Alford can be reached at jeremy@jeremyalford.com.