Natural Gas as a Transportation Fuel: Overview and Context

Benjamin Schlesinger and Associates, LLC Bethesda, Maryland

2013 Summer Meeting of the Freight, Marine and Planning Committees Transportation Research Board

The National Academies Washington, DC – July 18, 2013

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Outline

u  Introduction u  Gas supply: shale gas (and shale oil) u  Gas demand in crisis – transportation and other ‘new’ uses u  Conclusions.

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Here, ‘gas’ is methane = natural gas (compressed or liquefied), not liquid propane gas (LPG), natural gas

liquids (NGLs) or gasoline

BSA – 29 years of gas and energy advisory services.

u  Economics, pipeline tariffs, contracting, price risks. –  Research & training –  Negotiation of gas contracts –  Due diligence – Review for lenders

in financing of LNG, power plants, gas storage

–  Expert in courts & arbitrations, testified in 16 jurisdictions.

u  600+ assignments u  27 countries.

Cients: Energy buyers & sellers, electricity and heating plants, gas and oil pipelines,

banks, governments, universities.

Expertise Major Assignments

Power generators Lenders Pipelines/traders LNG projects Regulators Expert testimony

UNECE European pipelines GdF Suez, Repsol, BG Eastern Europe West African pipeline Sonatrach (Bechtel) Japan gas utilities

Mitsubishi Philippine NPC

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Despite all the words and numbers, people still don’t really grasp this.

u  The ship arrives. u  Were it a country, domestic shale-

fields would be the world’s 3rd largest gas producer.

u  Many policy, economic, academic and environmental studies are very outdated, e.g., from Internet/Google.

u  Shale ‘debate’ is lost on most people.

4

Estm. US Shale Gas Production, Bcf/day

0

5

10

15

20

25

30

2000 2002 2004 2006 2008 2010 2012

Rest of US Bakken (ND) Eagle Ford (TX) Marcellus (PA and WV) Haynesville (LA and TX) Woodford (OK) Fayetteville (AR) Barnett (TX) Antrim (MI, IN, and OH)

Source: EIA Administrator Adam Sieminski, 5/2013.

US has added 4.6 MBD equivalent of shale gas production since 2001.

1.1 2.0 2.7 4.2

2.7 3.7

11.5

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2.0

4.0

6.0

8.0

10.0

12.0

14.0

Holland Norway Qatar EU, Total Venezuela Iran Saudi

MB

D, e

quiv

alen

t

Annual US shale gas production (just the growth)

Source: BSA 2013, from BP Statistical Review 2013 & EIA (est. shale production).

Gas Production, 2012 Oil Production, 2012

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…plus: over 2 MBD rise in US shale oil production, so far.

How long will North America’s big hydrocarbons price gap persist?

Source: BSA 2013, from EIA, CME-NYMEX, July 12, 2013 Settlements. 6

$0.00 $2.00 $4.00 $6.00 $8.00

$10.00 $12.00 $14.00 $16.00 $18.00 $20.00 $22.00 $24.00

Jan-

01

Mar

-02

May

-03

Jul-0

4 Se

p-05

N

ov-0

6 Ja

n-08

M

ar-0

9 M

ay-1

0 Ju

l-11

Sep-

12

Nov

-13

Jan-

15

Mar

-16

May

-17

Jul-1

8 Se

p-19

N

ov-2

0

Henry Hub Futures

Henry Hub Acutals

WTI Actuals

Brent Actuals

WTI Futures

Brent Futures

High crude oil prices attract rigs away from gas-prone shale fields.

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1.0

2.0

3.0

4.0

5.0

6.0

7.0

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9.0

Jan-

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Jan-

07

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11

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Jan-

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WTI/HH Actuals WTI/HH Futures

Oil Rigs/Gas Rigs

u  Past: Crude prices rose while gas prices fell, until crude prices averaged 6x gas price in 2012 – drillers moved off to oily shales: –  Eagle Ford, Texas –  Bakken, North Dakota –  Utica, Ohio

u  Today: $96 crude oil is 4x gas ($16.55/MMBtu versus $4.10).

u  Outlook: Oil prices and oil drilling rigs both at 3-to-one over natural gas, until gas production falls and its price rises.

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Crude Oil-to-Gas Ratio

Price of crude / gas (actual)

Price of crude / gas (NYMEX futures)

Rigs drilling for crude / gas

Source: BSA 2013, from CME-NYMEX, futures at 3/28/13, Baker Hughes U.S. weekly rig count.

US production of tight oil and NGLs is now rising as dramatically as natural gas did.

u  Emerging shale plays are forcing new technologies: –  Multi-well/multi-stage –  Recycling of return waters –  New tech (dry fracking, CO2).

u  Major challenges: –  Low gas and NGL prices (tends to

self-correct) –  Pipeline bottlenecks, both gas and

oil (flaring) –  High cost of rail –  Environmental & safety issues? –  Skilled labor shortages.

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MB

D

Source (chart): EIA Administrator Adam Sieminski, June 2013.

EIA’s US Gas Production to 2035

9 Source: EIA, AEO 2013 Reference Case.

US natural gas markets are saturated; need more

places to put gas!

Most near-term surplus gas will be spent replacing coal in aging power plants.

- 20 40 60

10 Source: BSA 2012, coal plants in 20 Northeast and Mid-West states from EIA, plus Ontario; map from AEP.

Newer than 30 years, 12%

30-40 years, 27% 40-50 years, 33% 50 years or older, 28%

Coal-Fired Plants, MW Retiring Coal-Fired Plants

The good news: Replacing old coal with new gas reduces CO2 emissions by 63-72%.

Average Age of Plants

at Retire-ment

No. of Plants

Retired in Each

Year

Total Net Summer Capacity,

GW

CO2 Reduction Replacing

Bituminous Coal with

Gas

2009 50 12 0.5 67.7%

2010 54 35 1.5 69.4%

2011 62 31 2.5 63.3%

2012 56 57 8.9 63.9%

2013 55 14 2.1 71.7%

2014 57 34 4.7 64.4%

2015 57 61 9.9 63.1%

u  GHG reduction due to: –  Chemical advantage: Gas burning

emits 46% less CO2 than coal. –  Efficiency advantage of new gas

CCGTs versus old coal boilers: 55-60% vs. 31-33%.

–  Carbon emissions savings from fuel cycle as well.

u  Other criteria air emissions reduced/prevented, especially sulfur, particulates, oxidants.

u  But the “low-hanging fruit” might all be picked by 2020.

11 Source: BSA 2012, from EIA and Siemens data.

Global firms plan to spend $80 billion on new US gas-based industries.

u  About 100 new manufacturing plants in development: –  Chemicals & petrochemicals –  Fertilizers –  Steel & aluminum –  Tires, plastics –  Gas to liquids

u  Most sited near the Gulf Coast. u  If all proceed, added gas

demand will reach 11 Bcf/day by 2035.

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0

2

4

6

8

10

12

2018 2035 B

cf p

er d

ay

Incremental gas demand

Source: Dow Chemical, 2012.

Natural gas (CNG and LNG) has begun to find markets trucking, rail and ships.

13 Source: Westport Innovations Inc., Vancouver, BC.

Why doesn’t America have 20 million natural gas vehicles by now?

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50

Natural Gas 87 Octane

$/M

MB

tu

Henry Hub Mid & Marketing

WGL Delivery Compression

Road Tax Pump Price

u  Favorable economics since 1980s! u  Natural gas is best used in large

vehicles, high-mileage fleets: –  LNG: Long-distance trucks and

railroads, buses, shipping –  CNG: UPS, Dulles Flyer cabs.

forklifts, compressors u  Lower mileage personal vehicles

will benefit more from electricity: –  $4 natural gas vs. $32 gasoline

(per MMBtu) –  61% efficient CCCTs vs. 26%

efficient piston engines –  No wonder electricity = 79 c/gal!

14 Source: BSA 2011, from NYMEX, EIA data.

In some regions, battery EVs are, in effect, just very high-efficiency NGVs.

u  Production of methanol and gasoline from natural gas (GTL) will also become options, as price differentials remains favorable.

15 Source: Schlesinger / Tesla Motors.

Benjamin Schlesinger and Associates, LLC The Bethesda Gateway 7201 Wisconsin Avenue, Suite 740 Bethesda, MD 20814 Phone: (301) 951-7266 Fax: (301) 951-3381 Visit us at www.BSAenergy.com

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Extra Slides

Gas supplies 27% of US primary energy – coal supplies 42% electricity.

18 Source: BSA 2013, from EIA data for 12-mo. year-ending 10/31/2012.

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Buildings Industry Transport Elec Gen

QB

tu

Elec Sys Losses Elec Retail Renewable Hydro Nuclear Oil Gas Coal

Gas prices among markets differ greatly from one continent to another.

19 Source:  UNECE  WPG  LNG  report,  Chapter  1,  update  courtesy    Ken  Medlock,    James  K.  Baker  III  Institute,  Rice  Univ  .  

Source: IEA World Energy Outlook 2012. 20

LNG exports from the US are sought after for strategic and economic reasons.

Global shale gas may provide a basis to substitute for oil in the future.

0 10 20 30 40 50 60

India and Pakistan

Australia

Europe (excl. Russia)

South America

Africa

China

North America

Total US

Canada Mexico

South Africa Other Africa

Argentina Brazil

Other So. America Poland

France Other Europe

u  Most foreign gas markets are dominated by long-term contracts tied to fuel oil.

u  European, Asian and Russian shale gas resources may remain in place absent: –  Vibrant independent producing

sector –  Technical expertise –  Institutional reform/TPA –  Education.

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Potential Shale Gas, Tcm

Source: BSA 2011, from US EIA.