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.

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.

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.

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?