Spurring natural gas demand with technology

Just within a few years of its founding, the ARPA-E has done an incredible job of identifying critical innovation gaps and funding a number of creative ideas with the potential of delivering disruptive breakthroughs. We can now add speed and timeliness to the organization’s credit.

The continued slump in natural gas prices underlines the commodity’s lousy demand outlook while supply from shale gas basins shows few signs of abating. There is, unfortunately, not much to be optimistic about growth for natural gas demand as one of our recent multi-client studies has explored in great depth. Advocacy around natural gas vehicles has attracted interest but meaningful penetration of natural gas in the transportation sector is limited by a number of technological hurdles. Natural gas storage and compression are two of many such hurdles.

ARPA-E recognized this issue and recently conducted a competition for innovative ideas. Last week, it announced nearly $30 million in funding to over a dozen winners ranging from large companies such as GE, Eaton, United Technologies, and Ford to contract research groups including SRI, REL, and OtherLab. Almost all projects focus on addressing gas compression and storage using a variety of ideas. These and several other technologies will be profiled in our on-going multi-client study on natural gas transportation.

No fracking way?

I’ve always loved a good debate especially when it is conducted in the classical sense with two podiums, open microphones, relevant topics, and informed advocates. National Public Radio recently aired such a debate on hydraulic fracturing, which is the core operation behind the shale gas revolution in North America. Fracking is what industry hands call the process but it has now become the preferred term in both media and popular fora.

You will see that the defendants — a journalist and a policy expert — of fracking lost the vote following the NPR debate. It was unfortunate because the defendants — notwithstanding their distinguished backgrounds — failed to represent fracking in an effective fashion. Both debaters chose to defend fracking as a necessary evil acceptable only because shale gas was environmentally far better than coal, produced more power than renewables ever could, or led to jobs in difficult economic times. In other words, they seemed to implicitly accept the charge made by their opponents — two lawyer-environmentalists — that fracking caused unprecedented environmental damage.

This was a cop out because there is no dearth of hard, peer-reviewed scientific data showing how safe fracking is, how the industry is improving drilling and completion practices to protect groundwater, and how a range of regulations at the state levels are improving transparency, disclosures, and safety.

Replicating the shale gas story globally

The North American success story has motivated a number of foreign countries and companies to initiate efforts toward developing their local shale gas resources. The potential is very promising: a study commissioned by the EIA concluded that nearly 6,000 trillion cubic feet (tcf) of gas reserves are available in 32 countries — far more than the ~900 tcf in the U.S. But it will be challenging.

First, geology and lithology of these international basins are not well understood. Second, landholders often do not own subsurface hydrocarbon rights, which are typically vested in the national government. Third, a number of countries with promising resources suffer from high population densities and scarcity of key resources such as water. For example, the most abundant shale gas reserves in China are located in arid parts of the country. A fourth challenge is the lack of regulatory and process clarity as well as transparency. For example, initial exploration efforts in Romania are beset by local protests and unclear regulatory and permitting processes. Fifth, access to infrastructure and technology customized to local needs are both in their infancy. Finally, investor companies often lack the relevant organizational capabilities and business strategy to run effective unconventional programs.

In light of these challenges and issues, global unconventional resource development will likely require careful planning, extensive stakeholder engagement, and thoughtful design.

The shale gas weekend

Shale gas seems to be the flavor of this weekend wherever one looks.  If the Wall Steet Journal did an editorial defending fracking, the New York Times continued its superb Drilling Down series on shale gas with a piece questioning if the industry was another bubble in the making.

The WSJ editorial was a great point-wise rebuttal of the major advocacy efforts against fracking, while still highlighting the need for industry to be extra-vigilant on safety and environmental risks.  It was refreshing to see an editorial focus on facts versus unsubstantiated opinion.  The NY Times article — based on a ~450-page archive of emails and documents — highlighted concerns around decline curves, asset valuations, economics, and the hype-driven transactional activity.

Shale gas in North America is a nascent yet dynamic industrial enterprise.  It is too early to make calls around a number of uncertainties although they do provide stakeholders — companies, service providers, investors, and regulators — with a framework to evaluate and address these plans.

U.S. as a Natural Gas Exporter?

It’s a far cry from the situation five years ago when oil and gas majors were scrambling to build LNG import terminals in the U.S.  But a lot has changed in the past five years with the shale gas revolution.  So today companies are exploring terminals to export gas from the U.S.

Notwithstanding the promoters’ enthusiasm, it is hard to be optimistic of such ventures for three reasons.

First, although shale gas supply in the U.S. has increased dramatically and more could be produced at short notice if prices rise, natural gas continues to be dominated by three regional markets:  Americas, Europe and adjoining areas, and the Middle East.  Historically, there has been little exchange between these markets.

Second, structural changes in demand such as a global climate change accord are not on the horizon.  A global climate change accord could dramatically drive demand for natural gas, which is a lower-carbon fuel relative to coal and oil and could serve as a “bridge fuel” during the transition to a word dominantly supplied by renewables.

Third, demand growth in Asia, in particular China and India, are not sufficient to justify gas export models because shale gas supplies are not limited to the U.S.  Significant exploration is underway and discoveries are anticipated in the emerging economies too.

ConocoPhillips: An unfair rap?

So ConocoPhillips has not done well on the stock market in recent times.  It also did not help when Warren Buffett described his super-investment in the company as a “dumb” mistake.  Conventional analysis has held ConocoPhillips’ $35.6-billion acquisition of Burlington Resources responsible for its recent woes.  We are not convinced.

For example, ExxonMobil’s $41-billion acquisition of XTO Energy prices out at $15.57 per barrel of oil equivalent.  In comparison, the ConocoPhillips-Burlington transaction was at $17.79 per barrel of oil equivalent, a premium of about 14%.  While any premium in hindsight is too large, this is not as large as analysts make it out to be.

Natural gas in India

Dr. Vijay Kelkar, Chairman of India’s 13th Finance Commission, is an eminent economist and public policy intellectual widely recognized within India as an unrelenting champion of privatization, liberalization, and market-based economic and financial policies.  Over his long and distinguished career in public service, Dr. Kelkar has made numerous contributions to public policy with his revolutionary reports on direct and indirect taxesbeing the most popular.  Even so, he has often gone beyond his official roles to contribute ideas on important issues through his lectures.  Some that come to mind are “growth turnpike” in the Narayanan seminar, financial inclusivity in the Sen seminar, accounting reforms, IMF governance, infrastructure, and, now, a seminal paper on natural gas policy in India.

Briefly, Dr. Kelkar is recommending a free-ermarket for natural gas in India and articulates specific policies toward the same.  He contextualizes these recommendations with an analysis of India’s growing energy needs and its natural gas resource potential, the current policy’s shortcomings, and comparisons with international policies.  This is relevant and timely because of four reasons:

1. Recent geological assessments and discoveries are indicating that India will likely be a major natural gas player
2. India is currently in the midst of the eighth round of bidding for oil and gas exploration and production blocks
3. Existing natural gas allocation and pricing policies are the cause of a major on-going corporate dispute
4. Appropriate gas pricing in an emerging economy such as India will bode well for global demand and supply