NYTimes weekend round-up

I don't often read the full NYTimes, but I happened to this Sunday, and since I haven't posted in over a month, and it's almost the end of June, and my blogging progress seems eerily paused at 666 posts and 7,777 hits, I figured I'd throw out a few links with brief commentary:

• Insiders Sound Alarm Amid Natural Gas Rush: an interesting article seriously examining the claim that shale gas isn't profitable and is a big bubble. There's certainly some truth to that idea that many shale gas investments aren't making very good returns at $4.30/mmbtu gas; that said, the article would have really benefitted from some actual numbers (even ranges) comparing production costs to current and potential future gas prices. Without those, it's a qualitative discussion of a problem with a largely knowable quantitative answer.
  
  The one thing I did find intriguing (and again, would love to see real numbers on) is the steep decline in productivity of shale gas wells over the first few years. I would assume that since the technology is not new, this performance has been built into business cases for individual wells, but you never know...
  
  There's also a fundamental difference between a gas "bubble" (if there is one) and the typical bubble (e.g. internet) in media parlance, which is that North American gas prices have already crashed. This article would be analogous to calling the internet a bubble in 2003, not 1999, and that limits the usefulness of the analogy.


• Chevy Volt and Future of Electric Cars: A feel-good article from Joe Nocera after he test-drives a Chevy Volt; made me want to try one too. The “it’s like playing a video game that is constantly giving you back your score” comment particularly resonated with me. The lack of that type of feedback is a common motif across consumer energy usage (think about the current opacity of household electric power) and a thematic area for substantial change and impact.


• Power Drain From Cable Boxes: Striking; I had no idea that "some typical home entertainment configurations eating more power than a new refrigerator and even some central air-conditioning systems." Once again, greater feedback in home energy consumption could help move the needle on consumer behavior here.


• Ethanol Production Wastes Corn: Steve Rattner is right, but has nothing new to say

6/30 addendum: A colleague told me that Chevy loses $18,000 per Volt it sells. So we are still a ways away from the economic tipping point.

Germany to phase out nuclear by 2022

This isn't the first time they've said this (the last was before the commodity boom), but

Germany will shut down all its nuclear plants by 2022, and eight reactors shut down after Japan's nuclear disaster in March won't be reactivated, the government announced Monday.

I'm generally bullish on nuclear power compared to other power sources (especially those which are currently baseload capable), so I'm sad to see this. And as a colleague of mine noted, the Russians must be grinning with glee that their geopolitical leverage and economic profits from natural gas will return with a vengeance.

Issues with Howarth paper

Open season has opened on Robert Howarth's paper claiming that shale gas emits more GHGs than burning coal; I like CFR's Michael Levi's take:

Howarth’s basic question is an important one: what happens to the claimed emissions benefits of natural gas once you include the methane leaked in its production and transport? Alas, his analysis is based on extremely weak data, and also has a severe methodological flaw (plus some other questionable decisions), all of which means that his bottom line conclusions shouldn’t carry weight. But someone else, with better data and more careful calculations, ought to address this important set of questions that he raises properly.

He cites four main issues; the first three are:

First, the data for leakage from well completions and pipelines, which is where he’s finding most of his methane leaks, is really bad.

Second, Howarth’s gas-to-coal comparisons are all done on a per energy unit basis... Here’s the thing: modern gas power generation technology is a lot more efficient than modern coal generation, so a gigajoule of gas produces a lot more electricity than a gigajoule of coal. The per kWh comparison is the correct one, but Howarth doesn’t do it. This is an unforgivable methodological flaw; correcting for it strongly tilts Howarth’s calculations back toward gas, even if you accept everything else he says.

Third, the problems with gas that Howarth flags have cheap technological fixes (green well completion techniques, better pipeline care), though there may be institutional barriers to implementing them. If we scale up gas and realize we have an emissions problem, there are things we can do. The only technological fix for coal, in contrast, is CCS, which isn’t commercial yet; if we decide we want to fix our coal problem, it’s not clear we have any options.

The fourth is around the time horizon used - a 20-year horizon makes methane look worse than a 100-year horizon, because it decays much faster than CO2. This one is really more of a judgment call than a serious flaw in the paper (at least it is transparent). But well said, Michael Levi - you've earned your RSS feed entry into my closely guarded Google Reader.

Study says fracking emits GHGs

More ammunition for those who oppose the recent explosion of shale gas exploration and production (e.g. local environmentalists, coal companies):

Cornell University professors will soon publish research that concludes natural gas produced with a drilling method called “hydraulic fracturing” contributes to global warming as much as coal, or even more.

The study concludes that shale gas developed through fracking carries a higher greenhouse gas footprint because the “fugitive” methane emissions at the fracking sites are greater than releases from conventional gas wells.

I'm not really in a position to evaluate the credibility of the study, although one might read into the fact that industry groups are pushing back on the study's assumptions about the GHG potency of methane (the range is fairly well-established), whereas I would have thought that the quality of measurement of "fugitive methane emissions" would have been much more suspect.

Decoupling of oil price and renewables

Geoff Styles has a post titled "Will $100 oil help renewables?", in which he argues the counterintuitive answer that, "no, not that much." Worth reading in full, but since I like to practice synthesis:

Today, gas predominantly sets the marginal price of power generation, and gas prices have decoupled from oil due to abundant shale gas supply. Transport is minimally electrified, so renewable power cannot yet substitute oil in that sphere. And prices for commodity input often rise along with oil, increasing renewable costs (a.k.a. the "receding horizon").

The first, I totally agree with. The second is broadly speaking true, although paths like CNG, gas-to-liquids and coal-to-liquids become economically viable with high oil prices and could re-strengthen the link between transport and electric power (as could increasing EV penetration over the longer term). The third is directionally true, but not absolute (and not entirely causal). Many second-gen biofuels use waste inputs which are not otherwise traded, so higher oil prices are an unmitigated boon for them. The prices of silicon and corn are often correlated with crude, but probably more because of overall economic growth than because crude drives their price. It will be interesting to see if corn starts to price off of its value as ethanol, as it did back in 2008. Not good for food security, if it does.

Styles 2010 energy round-up

Geoff Styles, as preeminent an energy blogger as there is, has a little round-up of 2010 in energy, which is worth reading in full (including links), so I won't paraphrase it exhaustively here. He comments that the two truly unforeseen and shaping events of the year were Deepwater Horizon and "the less spectacular but no less profound awakening to the possibilities of the shale gas revolution." His comment on shale gas is particularly insightful:

That might help explain why the developers of renewable electricity sources such as wind have struggled so much this year, despite receiving $3.9 billion in direct cash grants from the US Treasury. They're not competing with $90 oil; the US generated less than 1% of its electricity from petroleum this year, through September. Instead, they're competing with gas at an effective price of $25/bbl or less.

Here's the killer graph:
Shale gas really is a game-changer, but its continued rapid growth is not a foregone conclusion. The two massive unknowns that I will be watching closely in 2011 are the environmental impact (already much debated and increasingly feared), and how it evolves outside of North America - in previously gas-vulnerable Europe, and even more so in China, where the reserves are likely enormous and the government has the power to develop them rapidly, if desired.

With that, Merry Christmas to you and your loved ones, and I will get back to mine.

More food price volatility drivers

Upon further reflection on Chris Blattman's rare dud, here are a few more (slightly overlapping) potential drivers of food price volatility in the future. Please note that I'm not saying these will definitely cause higher food price volatility in the future, only that it is very easy to believe that they might.

• Biofuels and bioenergy: An additional source of demand growth - potentially very large - that could keep demand at the very edge of supply capacity.


• Stronger links to energy prices: Energy prices have always been linked to agricultural input costs since the most widely used fertilizer (nitrogen) is generally made from natural gas. More recently ethanol has become at times the marginal buyer of corn (Bruce Babcock at CARD did some nice research demonstrating that ethanol was the marginal buyer from late 2007 to mid 2008; I couldn't find a link to the paper, but all you need to do is look at the high correlation between actual corn prices and break-even prices for ethanol production). If this continues - and it may well, particularly when oil prices are high - then volatility in oil prices will be transmitted to food prices more than in the past.


• Speculation: That old bugbear; I personally am more skeptical about this one, as longtime readers will know, but the former head of IFPRI isn't, and objectively I'm no more likely to be right than he is.
  

Update: Michael Roberts responds and reprimands:

Here Chris seems to talking as much about climate science as economics or politics. He has also stepped onto a pet peeve of mine, common among some economists, which is ascribing personal views as truisms stemming from the branch of social sciences in which one specializes. It's not quite as bad as Steven Levitt pontificating about global cooling, but it reeks of that kind of professional arrogance. If you're an academic and are going to start asserting scientific truisms you need to be more specific about the underlying science.

He also points out a few factors not yet on my list, which I'll paraphrase here:

• Globalization is not irreversible: Think about how surprisingly globalized the world became during 1870-1914, only to regress drastically following World War I and the Great Depression.


• Shifts in comparative advantage due to climate change, which Michael is "convinced" of:
  

  That is, [climate change is] going to shift where things are grown. A lot. It's also likely to change global quantities, but that's hard thing to put a finger on (i.e., model convincingly). With that much change going on, we should worry at least a little bit, and probably a whole lot, about how the kind of turmoil these changes will cause. Loss of comparative advantage is just the kind of thing that brings about bad policy response.

• Uncertainty itself can exacerbate market volatility, and uncertainty about the future is high, not just about long-term commodity prices, but also about the direction of the world economy and shifts in agricultural production due to climate change.

No oil wars in Latin America?

Via Chris Blattman, resource curse academic Michael Ross has a new paper which finds that in Latin America, unlike the rest of the world, oil wealth seldom leads to secessionist conflicts.

In the rest of the world, oil heightens the danger of both “governmental” conflicts (over control of the existing state) and secessionist conflicts (to form new states); but in Latin America, oil is only linked to governmental conflicts. This is not because Latin American petroleum has unusual properties, but because the region is uniquely “secession-proof”: there have been no separatist conflicts in Latin America for over a century. I explore two possible explanations for this anomaly: the region’s long history of sovereign statehood, which may have caused national borders to become more widely-accepted; and obstacles to the mobilization of indigenous groups along ethnic lines.

As a few of Chris' commenters point out, I think the obvious counterexample is Bolivia, where there are genuine and long-standing secessionist (and ethnic) tensions between the poorer, more indigenous highlands and the wealthier, whiter lowlands (where, incidentally, most of the natural gas is to be found). It is to be seen how these ultimately play out.

It also reminds one how sample size is an such obstacle to any sort of meaningful statistical analysis in international relations or development.

Dan Rather on fracking gas

I just got around to watching a Dan Rather Reports piece on fracking, which aired a few months ago (now available on iTunes). It doesn't have any revolutionary new information, but is an interesting and serious journalistic piece on both the energy potential of shale gas and recent claims of groundwater pollution from fracking across the U.S. Features extended interviews with Chesapeake CEO Aubrey McClendon and a Wyoming farmer whose wife began suffering neurological problems after a gas well was drilled into the Bakken shale below their property. Recommended.

This also brought me back to Geoff Styles' post on shale gas and water safety, which has since generated a somewhat contentious body of comments. Geoff originally concludes that there isn't anything to worry about since fracking generally occurs at great depth and is isolated from surface water by thick layers of impermeable rock. Commenter Bartman then narrows down to two plausible pathways for surface water contamination - poor well casing/cementing and disposal of resurfaced frac water.

What doesn't look good to me is the industry's apparent attempts to obstruct further scientific testing of claimed contamination. Bartman's selection of plausible pathways sounds right to me, but I'm hard-pressed to think of a reasonable argument for not testing groundwater to see if fracking chemicals are in fact surfacing there. If they are, there is clearly a problem that requires further investigation. And if there is really nothing to hide, I wonder whether fighting against scientific inquiry and transparency is really the best PR strategy for shale gas interests in the long run.

Can't quit "dirty power" cold turkey

In response to an over-enthusiastic Earth Day petition, the always-thoughtful Geoff Styles thinks through the following:

What would it mean if every power plant burning coal, oil or natural gas shut down today and remained idle? The short answer is chaos and social collapse, but let's take a quick look at why.

Here are a few of his facts for the numerically inclined:

As it turns out, all renewable sources plus nuclear generated a bit over 1.2 trillion kilowatt-hours (kWh) last year... Unfortunately, it's also less power than the US has generated in any year since 1966.

If we adjust for energy:GDP, then 1979, with its net generation of 2.25 trillion kWh, looks like a more appropriate basis of comparison to the economic work that our current zero-emission power output could do. The problem is that the US population has grown by 84 million people since then, and our economy, expressed in constant dollars, is more than twice as big as in '79--even after last year's contraction.

The wind, solar and geothermal power sources we've focused intensely on expanding accounted for just 2% of the electricity we used last year. Double them, and then double them again (10 years?) and that's still only 8%, compared to the 69% we got from fossil-based generation last year.

The argument almost makes itself, but he makes it well. And rightly doesn't even bother with the triviality of a similar argument for fossil transportation fuels.

North American shale: game-changer?

Attractive graphic of shale gas reserves in North America, along with an article on where gas from the massive Marcellus Shale will go, who is building new pipelines, the importance of transparency and proactive communication on the environmental impact of fraccing, and how the Marcellus Shale could change the game:

Van Atta said that ideally it will not be a zero-sum game for the natural gas industry... "Marcellus will be a true game changer if its vast apparent wealth can be leveraged into much higher penetration of natural gas in the overall energy mix in the Northeast market. To accomplish that may require a unity of purpose beyond that which the fragmented natural gas industry can produce."

Fraccing videos

Speaking of unconventional gas, here are some good videos from API illustrated the hydraulic fraccing process. Via Geoff Styles, who explains why we shouldn't worry about fraccing contaminating our drinking water.

More money on unconventional gas

Schlumberger’s $11bn acquisition of Smith International is big news in the oilfield services sector, and Cyrus Sanati thinks it’s all about unconventional gas:

“There is I don’t think any doubt that long-term shale gas is going to be one of the big new energy sources both in the U.S. and overseas,” Andrew Gould, Schlumberger’s chief executive, said in a conference call with analysts on Monday. “Smith’s capacity to serve that market in North America is of great interest to me.”

Like Exxon’s purchase of XTO, I suspect that the real long-term value here is in exporting unconventional gas technology outside North America, where its potential has barely been tapped. And as a service provider, Schlumberger may be even better positioned than an oil major like Exxon, given the increasing clout of national oil companies, resource nationalism and the increasing difficulty of acquiring underlying resource rights in many countries.

Yara buys Terra

Remember the never-ending CF-Terra-Agrium three-way fertilizer takeover saga? One of the protagonists has fallen to an unexpected outside bidder, Norway’s Yara. The rationale is interesting:

Energy-intensive fertilizer producers in North America have become increasingly attractive, Yara said, because of “structural changes” in American energy markets as a boom in unconventional gas output curbs natural gas prices in the United States.

Yes for now... the question is for how long that trend holds up.

Update: And CF swoops in to outbid Yara and claim the prize... going to show that it ain't over til it's over.

First reactions to Exxon’s big play

Exxon’s $41bn deal to buy XTO energy is the big news of the day. I’m sure there will be much analysis forthcoming from every corner on this one, but here are my quick-hit thoughts from afar:

1. Great timing by Exxon. Everyone is worried about a gas glut from shale and LNG this summer, and while the price isn’t exactly distressed, this is probably about the best moment to pick up a premium large asset like XTO. I continue to admire Exxon’s countercyclical investment strategy, which they execute perhaps better than any other company on earth.


2. Great synergy between XTO’s capabilities in unconventional gas and Exxon’s global reach. Shale gas is still largely a North America story – see for example this WSJ article from tow weeks ago – and clearly has massive geological potential in many other parts of the world.


3. Related to the first two – there may be substantial balance sheet synergies, in that there are attractively priced unconventional gas opportunities out there, but with low gas prices in the near future, XTO lacks the capital and cash flow to take full advantage of them. Exxon, of course, does.


4. I think of Exxon as carrying an enormous cash hoard, so found it fascinating that they chose to do an all-stock deal. Then I looked and saw that they have burned through almost $25bn (net of income!) in the last 12 months, mostly on capex and stock buybacks. Once again… I am hard-pressed to find another company that plays the cycle better.

Update on #4: Cyrus Sanati makes the good point that Exxon did this deal with the treasury shares it bought back - much like it did for its transformative $80bn acquisition of Mobil a decade ago.

Update 2: An eagle-eyed analyst picks out an interesting condition:

Buried deeply in the 76 pages of legalese that is the Exxon Mobil-XTO $31 billion merger is a clause that basically says: If Congress regulates hydraulic fracturing, aka fracking, Exxon gets to back out of the deal.

Exxon is ever conservative, and maybe more of the value is in the U.S. than I thought in #2.

The same analyst doesn't believe this is a concern in the short term, although more for feasibility than because the underlying science is settled:

“It is our understanding that the EPA is already investigating some reports of contamination. We believe congressional leaders will wait to act until more information is available from the EPA and it is unclear when EPA would be able to complete a study,” he says.

I wonder if/how the deal gets unwound if this regulation passes a few years down the road?

Turning Oil Into Salt (3): Intellectual consistency

The authors more than once deride other points of view as lacking intellectual consistency. Sadly, I cannot give them high marks for intellectual consistency themselves. While there is much to like in both their thesis and how they defend it, there are numerous examples where they take both sides of an approach in different parts of the book to suit their persuasive goals.

(I differentiate this from couching arguments in politically/emotionally charged terms, such as referring to Obama bowing to King Abdullah as a “symbolic act of self-denigration.” This is also rampant, and I find it quite irritating for a book aspiring to be a clear-headed policy brief, but I don’t feel dissecting this is worth much further effort.)

One major inconsistency is their selective thinking on fungibility – to them oil is fungible, but corn and other agricultural commodities (and the resources used to grow them) are not.

Second, they dismiss some energy sources up front, only to subtly return to them later. They reject the Pickens Plan to build wind power and run vehicles on displaced natural gas since, despite currently producing 98% of its natural gas consumption, the U.S. only has 3% of world gas reserves and a reserve-to-production ratio of less than 10 years. And yet, in plugging methanol two chapters later, they cite natural gas as one likely feedstock (specifically the 5 tcf of natural gas that is flared each year, especially in Nigeria).

Similarly, they demolish the argument for hydrogen cars based on the energy intensity of producing elemental hydrogen, but later propose a plan to produce methanol from CO2. It sounds win-win, but aside from the energy intensity of splitting CO2 into CO and oxygen, the process then requires… you guessed it… the resulting CO to be reacted with… hydrogen.

Finally, while they generally acknowledge the importance of economics, this emphasis is not consistent through (for example, when extolling the vast photosynthetic potential and CO2-consuming benefits of algae, a more fair-handed author would have felt compelled to at least mention that algae is nowhere near cost-competitive at commercial scale).

Australia assumes long-term responsibility for Gorgon CO2 capture

This is almost two weeks old (as are many of the things I'm hopefully about to post - I have a long backlog), but still stands as an interesting data point in the aspirational to capture and sequester CO2 emissions.

Largely overlooked amidst all the hoopla over the huge $37 billion Gorgon natural-gas deal in Australia was the thing that may have made it possible in the first place: The Australian government’s willingness to shoulder the long-term liability for storing carbon emissions underground.

That is, one of the reasons that Chevron, Exxon, and Shell finally went ahead with the massive Gorgon project is because they won’t be saddled for centuries with the worry some of the carbon-dioxide could escape, with potentially disastrous consequences.

Under the terms of the agreement, the companies will be responsible for the storage of the carbon-dioxide resulting from the natural-gas project during its operating lifetime and for 15 years afterward, Bloomberg reports. After that, the Australian national and state governments will be responsible.

Releasing companies from the generation-scale liability for stored greenhouse gases certainly makes the project more palatable from an investment point of view (not to mention a short-term political point of view). By the time that liability begins to bite - say 50 years down the road - and the economic benefits have largely been extracted, I doubt voters will look on it so kindly. But ultimately, I have a hard time seeing any carbon sequestration succeed on a commercial basis without the government (or maybe a massive reinsurance firm?) assuming the long tail of catastrophic risk in the scenario that the gas escapes - both environmental, and economic if the world half a century from now effectively measures and prices greenhouse gas emissions.

Also, don't miss Geoff Styles' informed reflections for an insider's perspective on Gorgon.

Lifecycle emissions of LNG

Geoff Styles incidentally tosses off an interesting lifecycle emissions comparison between LNG and gas moved via pipeline:

According to a recent study by Pace Consultants, the emissions from gas liquefaction, LNG transportation, and re-gasification at destination would effectively increase the lifecycle emissions from a combined-cycle power plant by roughly 22%, compared to one running on domestic (pipeline) gas. However, that result would still come in around 40% lower than the emissions from the best coal-fired power technology without CCS, and 60% less than typical coal-fired power plants.

The post is actually on the massive Gorgon gas project in Australia, which Geoff worked on in a previous life, and his comments on mega-projects are also worth reflecting on:

While a variety of factors contributed to Gorgon's requiring something like 33 years from discovery to first production, big energy projects aren't like building a supermarket or office park. Aside from the great patience these efforts require, large sums of money must be spent over a long span of time before the first dollar of revenue can be collected to recoup them. That requires the deepest of pockets and the most meticulous strategic and financial planning. Only governments and the very largest companies--with massive free cash-flow or debt capacity--can pull this off. Moreover, because of the numerous risks associated with geology, permitting and development, a project like this works best when that risk is shared by more than one party, each of which has a portfolio of sufficient size and diversity to absorb the delays that are inherent in such ventures. So while it's true that the oil Super Majors need big LNG projects to bolster reserve replacement and cash flows that are being pinched by the challenges of gaining access to large-scale oil projects in the current environment, the global supply of clean gas from such projects would be much lower, without companies on this scale to develop them.

It is a point well-taken for those who would demonize oil majors - without their ability to execute lengthy projects of incredible technical and economic complexity, our energy supplies would rapidly dwindle and Peak Oil would soon become a genuine concern.

Hungry China

China's voracious appetite for resources continues unabated: securing a $41bn natural gas deal in Australia, restarting oil exploration in São Tome and Principe off the West African coast, and apparently even hoarding rare earth metals.

Update: Apparently the China doesn't have a complete monopoly on rare earth metals, as the linked article suggested - a California mine appears to be reopening and other potential sites and Canada and Australia are being investigated.

Natural gas is not cheaper than coal (in the long term)

Via Green Sheet, Robert F. Kennedy is the latest to call for replacing coal with natural gas in the U.S. power generation mix, because gas is "cheaper and cleaner." Cleaner, yes, but as I've mentioned before, natural gas is only temporarily cheap. There is a supply glut now, but nothing the market can't sort out given a few years, and, as Econbrowser shows, in the long run natural gas and oil tend to converge to similar prices on an intrinsic energy basis. So unless you believe oil is destined to be cheap forever, gas will not be either. It may take 1 year, or 2, or 5, but you can count on gas prices coming back, at which point the economic advantage of coal (any government-imposed price of carbon notwithstanding).

I find it kind of irritating when big names with (apparently) zero understanding of commodity economics sound off on important issues like this - it certainly doesn't help the public debate.