Natural Gas

Exxon Mobil has released their annual “Outlook for Energy report, a 43-page survey of what the global energy market holds in store up to 2040.

With vast global reach in the energy market and more money at their disposal than many small countries, Exxon Mobil’s research is arguably as good as any bank or government research anywhere in the world. Best of all, it’s free, and for those of us in the metals markets, holds some interesting predictions that could have far-reaching effects on our industry.

Firstly, the report is based on the premise that the global economy will continue to grow, but at varying rates. The energy major sees OECD economies expanding by about 2 percent a year on average through 2040, as the United States, European nations and others gradually recover and return to sustained growth. Non-OECD economies will grow much faster, at almost 4.5 percent a year.

In large part this will be driven by demographics, as OECD countries and China will have static or falling populations by 2025, while India and Africa will continue to have rapidly growing populations with large numbers of workers in the productive labor force, as this graph shows:

Source: Exxon Mobil

This economic growth and the improved living standards it enables will require more energy. Exxon Mobil expects global energy demand to be about 30 percent higher in 2040 than in 2010.

In turn, improved efficiencies and better energy management spurred by the cost of CO2 emissions will temper this rise in power demand. For example, GDP in OECD markets is expected to double by 2040, but this will be achieved while energy demand remains flat. The cost of CO2 emissions will be part of the driver to switch from coal to natural gas, but the lower cost of natural gas from non-traditional sources such as shale beds and the lower cost and greater energy efficiency of gas power electricity generating plants will also play a significant part.

Core to the firm’s prediction is that natural gas will become the second-most widely used source of energy in coming years, overtaking coal by 2025. Not only are natural gas plants cheaper to build, but they are very much more energy efficient than coal or even nuclear energy. According to the report a new turbine-powered coal or nuclear plant is about 40% efficient, meaning 60 percent of the energy released is lost, whereas gas-powered plants can be 60% efficient, contributing to their green credentials as well as cost of production.

Continued in Part Two.

–Stuart Burns

Back in September, MetalMiner interviewed Andrew Browning of the Consumer Energy Alliance about the future of US energy policy, including the role shale gas plays in the energy supply. When asked about fracking specifically the shorthand for “hydraulic fracturing, the practice of blasting through shale rock with a “cocktail of water and chemicals to access the gas Browning responded with this:

“I think the issues that people have [with fracking] are really fixable. If the industry concentrates on constant improvement and best practices on wellhead integrity, on cement specifications, on reducing use of open-water pits, on recycling water¦it’s something that industry can address and is addressing right now.

A large concern and the rallying cry of many environmental/consumer advocacy groups — is that the chemicals in fracking solutions (such as hydrochloric acid) are polluting water supplies. It turns out Halliburton, a leader in fracking technology (and a firm with more than its fair share of media vilification) released a new and what they claim to be safer cocktail to use in fracking. The thing is: Halliburton released it months ago, according to a CNNMoney report.

So why wasn’t there more mainstream buzz about this? Seems the only thing the media’s picked up on is the constitution of the new cocktail: it’s apparently made of products from the food industry. Edible? Not really. (Although a Halliburton exec reportedly drank some as a PR stunt.) However, it does use “acids and enzymes involved in food production, reportedly making it safer.

One thing seems clear, and it speaks to what Browning said in September: cleaner, more efficient and more effective innovations begin and end with the industry itself. This mantra spans across other industries as well (oil and steel come to mind), and there are examples to support it.

Verenium, for example, is a Calif.-based enzyme producer that has entered the fracking market by producing a replacement for hydrochloric acid, which in itself “is normally used to eat away at guar, a foam the industry uses that initially helps pry the rock open, according to CNNMoney.

On the wastewater front, another company called Fountain Quail from Canada has come up with several mobile, wastewater-purifying solutions, including the ROVER system. Fountain Quail claims that the outcome of these types of processes is water “that meets federal drinking standards, and a solid waste product that can be transported to a proper landfill.

Being environmentally efficient, ultimately, takes time. Are the products and solutions we see above the final answer? No. Are the as safe as possible? Likely not. But that doesn’t mean private sector innovators such as Halliburton aren’t moving as quickly as they can to fill the niches and get solutions to market. They do so because, quite frankly, it’s in the company’s best interest. If the market as a whole begins demanding certain standards, there will be firms hungry to fill the need.

–Taras Berezowsky

After looking at Mexico and Argentina in the first post of this series, let’s look across to Europe.

Poland and France: Give Gas a Chance

Two countries have significant reserves: Poland, at an EIA-estimated 187 trillion cubic feet; and France, at 180 trillion cubic feet; both have enough to make them gas independent for decades, if not longer. But as environmental concerns have halted development of French fields, the fear is Poland could go the same way. That would be a shame from an environmental as much as an economic point of view.

Much of Poland’s power is generated from home-mined coal; a switch to gas, even shale gas with its associated methane leakage, would be a cleaner option. In addition, Poland is reliant on Russia for two-thirds of its natural gas, a relationship Poland is desperate to reduce. Major Western oil companies have bid for and secured some 90 leases this year, so the true extent (and commitment of the authorities) will become clear within the next year or two.

All Shale China

Lastly, China. The EIU tells us China may eventually produce more shale gas than any other country. By some estimates it has the world’s biggest reserves: EIA reckons there are 1,275 trillion cubic feet of shale gas in China, nearly 50 percent more than the second-ranked US. If this is correct, China’s shale gas reserves are a dozen times greater than its conventional gas resources and a potentially huge boon to a country heavily reliant on GHG-polluting coal for power generation.

Bringing in foreign technology and know-how will be critical. The new Five-Year Plan gives high priority to developing shale gas, and the major state energy companies Sinopec, PetroChina and China National Offshore Oil Corporation will be tasked with meeting those targets. In 2009, China and the US signed an agreement designed to help China measure its shale gas reserves, encourage “technical co-operation, and promote Sino-US investment in shale gas in China. State-of-the-art drilling technology allows US companies to complete shale gas wells in a matter of weeks, whereas CNPC took 11 months to complete China’s first well.

The fear, rightly, among Western firms is the lack of intellectual property rights. Whatever assurances are given, it’s almost guaranteed that Western firms’ techniques will be rapidly copied elsewhere and the West’s involvement in domestic Chinese shale gas development will be relatively short-lived. Even though the EIA’s estimates have not been backed up with extensive surveys on the ground, the probability is China’s shale gas will be vigorously developed in the first half of this decade as the country seeks to reduce its dependency on imported energy sources. The extent of reserves and impact on the Chinese energy scene are, however, as yet uncertain.

When you look at the extensive potential for shale gas — and the above examples are by no means the only ones — the casual observer cannot but be impressed by the speed, ingenuity and entrepreneurial spirit shown by small US firms that, in the space of a few years, transformed the US energy scene. It seems unlikely that even with the technology now established, any of these other sources will be developed with equal dynamism.

–Stuart Burns

You would think the discovery of large — and I mean huge — gas reserves would be a major boon for any country. Just look at the transformational impact the US shale gas discoveries have had on the US energy landscape, not only allowing the generation of cheap and relatively low GHG electricity, but also allowing the US to double exports of higher value Liquefied Natural Gas (LNG) to Asian markets. The US is not alone in having shale gas and oil reserves, yet in some other markets the challenges almost appear to outweigh the possibilities.

Mexico’s Got Potential – And Some Roadblocks

Mexico’s national oil and gas firm, Pemex, began producing shale gas from its Emergente 1 well, in the township of Hidalgo, Coahuila, this year. Although the well is exploratory, and produces only 2.9 million cubic feet per day of gas, it is potentially the first of many aimed at realizing the development of Mexico’s vast reserves. The country has only 12 trillion cubic feet of natural gas reserves, but according to an Economist Intelligence Unit report, the US Energy Information Administration (EIA) estimates Mexico has the world’s fourth-largest deposits of shale gas, after China, the US and Argentina.

With around 681 trillion cubic feet of shale gas waiting to be released in a number of locations (particularly in eastern Mexico), what exactly is the problem, you may say; surely, this is a godsend! Well, yes, except for a few major challenges.

First, the cost and complexity of development. It is estimated the cost could be up to $80 billion and will require the drilling of thousands of wells, in remote areas with little or no infrastructure to transport the gas to users. Mexico has a low rate of natural gas consumption with large areas of the west completely without any kind of grid distribution. It is currently more economical to import low-priced gas from across the US border.

The development of liquefaction facilities to divert the gas for LNG exports has some potential, but at huge investment costs in a global market which will increasingly be awash with US and Canadian producers looking to export their shale gas LNG. Cash-strapped Mexico will have to partner with the private sector in order to realize the potential of these reserves and come up with some imaginative solutions to use the resources wisely.

Don’t Cry For LNG, Argentina

A little farther south in Argentina, the potential seems even larger (at least on paper.) A recent report by the US EIA shows that the country has 774 trillion cubic feet of shale gas reserves, the third-largest in the world behind China and the US. The challenges for Argentina are twofold.

First, oil and gas prices in Argentina are regulated, with the authorities keeping them so artificially low that in spite of significant reserves, the country imports gas from Bolivia. Oil prices, too, are kept artificially low. The basket price for Neuquén crude averaged around US $58/barrel in the first three months of 2011, about half the international level, discouraging investment in developing new sources. Shale gas and oil wells cost about three times as much as conventional oil and gas wells.

The second problem is atrocious labor relations that have resulted in repeated strikes among oil workers. But with unions holding significant political clout and the government more interested in short-term political gain than long term economic development, Argentina’s shale oil and gas reserves face strong headwinds to be developed comprehensively anytime soon.

Check for Part Two of this post tomorrow, covering Europe and China’s shale oil and gas markets.

–Stuart Burns

MetalMiner recently interviewed Andrew Browning, executive vice president of Consumer Energy Alliance, on the importance of the Marcellus shale for natural gas production in the eastern half of the United States. (The segment can be viewed here.) Among other things, Browning mentioned the potential of the Marcellus shale to boost jobs in the US steel sector.

Now, another shale in the US is getting some major press the Utica shale. The Financial Times recently published an article on how the US shale gas industry is giving multiple industries business, among other things. To be clear, the Marcellus shale boundary sits inside the greater boundary of the Utica:

Source: Ohio’s EPA, geology.com

In an interesting set of graphics, one can see that employment in oil and gas production has been on a big upswing since the beginning of 2010 up to today, adding 17,000 jobs in that period. Coincidentally perhaps causally employment in the metals industry has experienced a nearly identical upswing:

Source: Financial Times

The takeaways from the FT’s coverage:

  • The boon for farmers and other landowners leasing their private acreage to the likes of Chesapeake, Exxon and Hess the revenue from these drilling rights leases spurs them to by new equipment, good for OEMs like John Deere, for example.
  • More production capacity for steel tube products, among others, are coming online Vallourec is building a $650 million tube plant in Youngstown, Ohio, expressly for the oil and gas boom in the region.
  • Steel producers like US Steel (and Nucor, among others) are replacing their coal-based energy needs with natural gas in a number of plants easier to do in the US because of price (about $3.60 per million BTUs, compared to $8 in the UK and $16 in Japan, as per the above graph) and the isolated nature of the commodity (the export infrastructure for US gas literally doesn’t exist yet).

However, we must keep in mind that the learning and implementation curves for refining shale gas technology and creating effective storage and distribution systems may be steep ones; several sources say that although investment is rapidly taking place, an economic recovery may not necessarily be on the immediate horizon. This could take years especially if the industry continues to take flack for fracking from environmental groups and municipalities and doesn’t come up with better alternatives fast or at the very least, plausible PR platforms.

If anything, the biggest short- to medium-term effect could be a reduction of steelmakers’ raw material price for energy. One would think that could effectively lower steel prices, but based on how easy it is for plants to re-tool or integrate gas-based energy generation for their furnaces, as well as a host of other factors, that remains to be seen.

My colleague Stuart Burns has also published several excellent pieces on shale gas and oil, including Chesapeake Energy’s stake in this shale play and the commoditization and export of the technology involved. Do check them out.

–Taras Berezowsky

Andrew Browning, executive vice president of Consumer Energy Alliance (CEA), speaks with MetalMiner Editor Lisa Reisman at CEA’s offices in downtown Chicago. In this segment, Browning answers questions about current and future infrastructure for domestic natural gas production, and whether it will help the US gain competitive advantage.

MetalMiner has covered the importance of shale gas and shale oil in recent weeks, which not only have a lot to do with the Western world’s energy independence from OPEC-dominated markets, but how their production contributes to a fast-growing chunk of carbon and stainless steel demand.

MetalMiner recently had the chance to speak with Andrew Browning, CEA’s executive vice president, about the organization’s work and the importance of not only advocating for the continued, responsible use of oil, natural gas and other sources, but for a domestic energy policy tying it all together. In the segment above, Browning addresses the infrastructure challenges of producing natural gas on a mainstream level and what it has to do with US manufacturing and economic growth.

Check back in tomorrow for a discussion on the Keystone XL pipeline.

–Taras Berezowsky

Andrew Browning, executive vice president of Consumer Energy Alliance (CEA), speaks with MetalMiner Editor Lisa Reisman at CEA’s offices in downtown Chicago.

MetalMiner recently had the chance to speak with Andrew Browning, CEA’s executive vice president, about the organization’s work and the importance of not only advocating for the continued, responsible use of oil, natural gas and other sources, but for a domestic energy policy tying it all together. In the segment above, Browning addresses the controversial process of hydraulic fracturing, known in shorthand as “fracking.”

The process is controversial mainly because it has been blamed — perhaps not entirely accurately, according to this Wall Street Journal article — for increased methane levels in drinking water, among other things. While Browning stated that the process of fracking is safe, according to the CEA and the natural gas industry, he also hinted at continued room for improvement.

Check in later today for more on the connection between shale gas production and the growth of the US economy.

–Taras Berezowsky

[youtube]http://www.youtube.com/watch?v=PIVNMPwf0Qk[/youtube]

Andrew Browning, executive vice president of Consumer Energy Alliance (CEA), speaks with MetalMiner Editor Lisa Reisman at CEA’s offices in downtown Chicago. In this segment, Browning gives the background on the CEA’s mission, and how the organization views the Marcellus Shale as a key element in the country’s energy production.

As our readers are undoubtedly aware, rising fuel costs are showing no sign of slowing down. Energy inputs play a huge role in metal production and prices, and many producers are taking initiative to secure energy supplies as the markets grow tighter.

There is no one solution or one “go-to” fuel source — and that’s why organizations such as the not-for-profit Consumer Energy Alliance are working with producers, consumers and the federal government toward a comprehensive, sound energy policy for the United States.

MetalMiner recently had the chance to speak with Andrew Browning, CEA’s executive vice president, about the organization’s work and the importance of not only advocating for the continued, responsible use of oil, natural gas and other sources, but for a domestic energy policy tying it all together. In the segment above, Browning gives the background on the CEA’s mission, and how the organization views the Marcellus Shale as a key element in the country’s energy production.

Stay tuned this week for more segments of MetalMiner’s interview with Andrew Browning, covering the controversial process of hydraulic fracturing (fracking), the viability of shale oil as a fuel resource, the importance of the Keystone XL pipeline, and what to expect in the 2012 election.

–Taras Berezowsky

Chesapeake Energy is not resting on its laurels as the No. 2 producer of natural gas in the US. So awash is the US with gas following the release of vast reserves from shale beds during the last decade that reserves are reckoned to have increased from 30 years to 100 years of supply, and in the process, prices have plummeted.

Good news then for energy consumers, particularly those that can switch power sources from, say, coal or oil to natural gas. Not least of which because oil and natural gas have lost their historic price linkage, putting natural gas consumers at a significant advantage to oil or oil products.

What Chesapeake Is Doing

Chesapeake recognized this early on and has spent millions converting 100 of its rigs, all its hydraulic fracturing (“fracking”) equipment and almost 5,000 of its fleet of vehicles to run on natural gas. In itself, the firm estimates that will create considerable savings — converting the company’s medium and light-duty trucks to natural gas could reduce fuel costs by up to $20 million a year. Converting drilling rigs and fracking equipment could cut diesel fuel consumption by about 350,000 gallons a day, saving the company about £230 million annually.

But as welcome as such considerable savings are, they do nothing (beyond setting an example) to grow the market for natural gas; so the company has pledged to redirect about 1-2 percent of its forecasted annual drilling budget away from efforts to increase natural gas supply towards projects to stimulate demand. Over the next 10 years, Chesapeake expects to commit $1 billion towards investments to build crucial fueling infrastructure and bring gas-to-liquids fuels to market. Such investment in technology and infrastructure could have a game-changing impact on energy consumers in the US, particularly those firms engaged in the international arena where they are in competition against energy-consuming competitors in other parts of the world, such as Europe.

US vs. UK and Europe

The EU has traditionally been a high-cost energy location, largely due to taxation but also because the region is a net energy importer. Although high hopes for a European natural gas supply renaissance have been voiced from many quarters, the market has been slow to copy the US shale gas model. Paul Stevens, senior energy research fellow at think tank Chatham House, explained why, saying huge optimism for shale gas production in the UK, and elsewhere in Europe, was “misplaced this stage.” The conditions that exist in the US are not the same on this side of the Atlantic. American landowners have every incentive to allow drilling on their property because the law gives them possession of any subsoil resources. In the UK and much of Europe, however, any shale gas would be the property of the state.

Nor does Europe have the infrastructure at present: for example, the US has 199 active rigs in the Barnett Shale Play, a single area of Texas, compared to Cuadrilla Resources, a UK-based company (and the first) with a license to explore for shale gas across 437 square miles of Lancashire, that has just one rig! However, early progress is promising and the firm is expecting considerable success. The British Geological Survey estimates the UK may have 150 bcm of recoverable reserves from shale beds while, interestingly, the US Department of Energy puts the UK’s shale resources at 560 bcm — let’s hope they are right.

Should Chesapeake’s investment in growing the gas market, particularly in developing the gas-to-liquids market, prove successful, we may see not just the fracking and extraction technology make its way over the Atlantic, but a whole downstream business model for the likes of Cuadrilla to copy in the years ahead.

–Stuart Burns

[youtube]http://www.youtube.com/watch?v=GWGWV9Mzed8[/youtube]

MetalMiner Editor Lisa Reisman speaks with Jennifer Diggins, director of public affairs at Nucor, about how the company views, uses and relies on its relationship to natural gas.

Hopefully you’ve gleaned some valuable insight into how Nucor Steel perceives the current policy landscape as it pertains to manufacturing. As we trundle along toward Labor Day, and as companies gear up for the fall, the importance of retaining and creating manufacturing jobs in the US cannot be overstated. As reshoring gains steam and the government flails to get the economy back on track, US manufacturing policy should be a primary focus.

Previous segments of MetalMiner Editor Lisa Reisman’s discussion with Jennifer Diggins of Nucor covered Washington gridlock over the debt ceiling and other congressional shortcomings; EPA emissions regulations; long-term US energy and manufacturing policy; and ethanol subsidies and the role of government.

Look for more content from MetalMiner and Nucor in the coming months.

Disclaimer: Nucor is a sponsor of MetalMiner.

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