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.

Coal’s future

A client meeting yesterday on shale gas monetization began interestingly with questions on coal’s future.  Cheap natural gas and sluggish economic recovery are making it difficult for coal to be a competitive fuel for power in North America.  Overseas, Europe continues to suffer from economic weakness and uncertainty, while emerging economies such as China and India are not growing as fast as they did in the past decade.  Collectively, the outlook is bleak, a number of miners reported disappointing quarterly results this year, and the depressed prices are impacting exporters globally.

But this would not be the first time that the industry’s future has been questioned.  Coal is cheap and abundant making it a very competitive fuel for power and with technology advances in generation efficiency and emissions reduction, it will be difficult to displace coal as Europe is finding out.  Further, although China and India may have recently slowed, they will inevitably drive a disproportionate share of global economic growth in the long-term.  That growth will be fueled by thermal as well as metallurgical coal driving exports from various regions including American miners.

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.