Vexed By Natural Gas

United States natural gas production in 2010, with just one month of data still due for delivery, is set to nearly match the all time highs last seen in the early 1970’s. By averaging 1,871,272.5 million cubic feet per month through November of last year, total US NG production is slated to reach 22,455,270 million cubic feet in 2010. You can compare this figure with the all time high levels seen in 1971, 1972, and 1973 in the figure below. We are getting close. | see: Annual US Natural Gas: Marketed Production 1900-2009.

There are a number of intriguing issues to discuss here. They range from the analytical war between NG Supply Optimists and NG Supply Pessimists, to the new, deep lows that natural gas prices are experiencing on a real basis. Indeed, the inflation-adjusted price of NG at $4.00 for a million btu has sent prices back towards the lows of 10 years ago. Moreover, the spread to oil remains very blown out. Consider that a million btu in oil costs $16.37 (average of $95 dollars a barrel, divided by 5.8 million btu). This means that Americans, who enjoy low NG prices in part because the resource is not exportable (yet) from the lower 48, can take their btu from natural gas instead of oil at a 75% discount. Exciting yes? Well, sort of.

The problem is that the United States doesn’t know, just yet, what to do with its natural gas. In addition, the US economy doesn’t have enough growth in its power and manufacturing sectors to demand more natural gas, that would spur a faster transition away from oil. The result is a kind of stasis, in which a consumption-led economy is still trying to operate with oil. Previous energy transitions, on a historical basis, are instructive here. For example, it took Britain decades to transition from Wood to Coal–even though coal was cheaper on a btu basis. Sound familiar?

The same analytical error that I made in 2007–that the price spread to oil would force more rapid natural gas adoption–is made now, routinely, in investment circles. But the problem of energy transition is a problem of the built environment. Europe and Japan are in position to uptake more NG as their transport sectors also run on power. The United States, however, is not. A revolution–not a thoughtful and slow transition–would be required to shift the gargantuan btu the US uses in oil, over to natural gas. I’ll make an easy prediction: exports of LNG volumes from both Sabine Pass in Louisiana, and from Kitimat, British Columbia will be well underway before the United States–either through public policy or the free market–has transitioned any meaningful new demand to natural gas.

-Gregor

  • timl2k10

    I say, just burn it. How do you use a finite resource sustainably? There is only one “infinite” resource that I know of, solar. If we can modify out lifestyle to live off of the constant solar output we can harness, we will have energy security until the sun dies.
    I would love to see efficient production of synthetic crude via hydrolysis + CO2, driven from solar and wind. well I can dream…

  • RichL

    The gas to liquids potential arb could happen if there is any movement to developing Fischer-Tropsch refineries to convert the gas to liquids. Do you have any sense of whether any serious investment is going into this?

  • Anonymous

    The UK transitioned from coal to NG a lot quicker than from wood to coal. From 1970 it took less than 30 years to go from a coal/oil energy base to coal/oil/NG. The chart’s in Mtoe not btu.

    http://ambergate.files.wordpress.com/2011/02/ukenergyconsumption1970to2009.jpg

  • bdcs

    To be economical, FT plants need to be incredibly large due to economy of scale. Due to the truly spectacular capital costs, FT only make sense in certain cases. Historically this is when the country is cut off from oil, for example, Germany during WWII or South Africa during apartheid. There is currently one (to my knowledge) FT plant being built, which is in Qatar, to the tune of $24 Billion. Shell’s “Pearl” GTL will produce .140 million barrels per day. When Shell decided to go ahead with the project in 2003, the cost estimate was 5$ billion and they get the natural gas for free from Qatar Petroleum. Multiply the capital costs by 5 and add in more uncertainty with the price of NG and you can see why few FT plants are being built. Furthermore, FT produces linear alkanes which make for excellent lubricants (worth more than fuels), but that market is currently saturated and so few gains can be had from selling lubricants vs fuels.

    FT works by converting feedstocks (coal/NG/biomass) into synthesis gas (“syngas”) which is CO+H2. This part is called reforming/gasifying/partial-oxidation. Then the syngas goes through the FT process of making the linear alkanes. The FT part isn’t expensive, but making the syngas accounts for ~75% of capital for the overall process. My Ph.D. in chemical engineering, currently underway, focuses on processes which can make syngas cheaply and effectively from NG helping reduce the cost.

    I don’t expect to see any FT plants under construction in the US in the next 5-10 years, but certainly after that.

    Cheers

    PS. Gregor, will you be attending the MIT Energy Conf this year?

  • gregor.us

    Indeed. And that makes sense, don’t you think, given the nature of coal and ng as powerplant, industrial and heating fuels–as opposed to oil’s embedded role now as the liquid transportation fuel?

    G

  • gregor.us

    Yes, I’ve been looking at coal to liquids for years. One of the persistent hurdles in energy conversion technologies is that they often require and demand a great deal of energy themselves, as part of the process. That hurdle is a reliable guidepost historically and also prospectively.

    G

  • Anonymous

    Quite. And coming up we have 30 years to transition to coal/NG/renewables, with a smidge of liquid transportation fuel left for tractors, ships and the elites! Wood to coal was tough on the UK’s social cohesion (Peterloo, enclosures, Luddites, Chartists, 1848 etc.), as was the transition away from coal in the ’70s (miners’ strike, deep recessions, riots in most major cities). This next one will be a doozy even if it goes as well as possible.

  • http://twitter.com/econosystemic Bryan K. Long

    Gregor, I completely concur with regard to NG for transportation, but what about for electricity production, replacing aging U.S. coal and nuclear plants (esp. in light of unreasonable fears exacerbated by Japan incident)?