Pierre Arbour: The changing energy picture

Written by  //  August 17, 2012  //  Environment & Energy  //  2 Comments

[Editor’s note: See also: Medium-Term Gas Market Report 2012]
(National Geographic) Eleven Nations With Large Fossil-Fuel Subsidies

Alec Baldwin: The Truth About Fracking
9-10 August
Weighing Benefits and Pitfalls of Increased Oil and Gas Production in the U.S.
(PBS Newshour) Two years ago, the U.S imported two-thirds of its oil. Now, imports are less than half of U.S. oil needs. Jeffrey Brown talks to National Resources Defense Council’s Kate Sinding and the Manhattan Institute’s Robert Bryce about increased domestic energy production and whether economic benefits outweigh environmental concerns.
Utah Makes Deal For Private Gas Drilling on Pristine Public Land
(PBS Newshour) White River, Utah, attracts adventurers for its gorgeous vistas and rare solitude. But proposals to drill for natural gas on the public land worry environmentalists and Native American tribes. Ray Suarez tells of efforts by energy companies and the federal government to strike a deal to drill and protect the environment.
19 July
Consensus Report Outlines An Energy Vision And Priorities For Canada’s Energy Future
Ottawa, July 19, 2012 – The Standing Senate Committee on Energy, the Environment and Natural Resources (ENEV) today released a unanimous report [Full report(.pdf)] on Canada’s energy future, outlining an energy vision for Canada based on a clear and responsible path for Canadian energy development and a low- emissions economy.
This bold and comprehensive strategy, Now or Never, draws on the expertise of more than 250 leading energy stakeholders across the country to address the real and urgent challenges Canadians face in the new world energy order. As the committee developed its vision, it witnessed the dynamic transformation of the global energy landscape and considered the implications for Canada. The changes included new technology breakthroughs, major shale gas discoveries, the development of alternative energy sources, new regulatory regimes, the Japan nuclear disaster, and new sensitivity for appropriate social license to engage in resource development. Aggressive competition for international energy markets has also become a major factor.
13 ways to make Canada world’s most ‘energy productive’ nation
The Standing Senate Committee on Energy, the Environment and Natural Resources has launched a new blueprint outlining 13 priorities to ensure Canada ‘will be the most energy productive nation in the world with the highest level of environmental performance.’
The committee sat through hundreds of meetings, spoke to 250 stakeholders and solicited public advice over three years to outline 13 key focus areas for the country.
“We see Canada’s potential as the most productive energy nation in the world, with the highest levels of environmental performance,” said Senator David Angus, Committee Chair. “But we also conclude that there is a great sense of urgency — and we need an energy literacy that includes a profound recognition that energy pervades all aspects of our lives, and is a key element of our social fabric. The future is fraught with peril if we don’t get it right.”
1. Canada must strive for collaborative energy leadership
Canadian provinces are divided on the country’s policy on energy. While Ontario Premier would rather have a weaker dollar than high oil sands exports, the Quebec Premier is against fracking. Meanwhile, Alberta and Saksatchewan Premiers mantras are ‘drill, baby, drill.’ Meanwhile, the B.C. Premier likes gas fracking because it fills the provincial coffers but is ambivalent about laying down oil sands pipeline. All this while, the Prime Minister is often accused of unflinching support of the pro-fossil fuel provinces.
“It is imperative that the Canadian governments begin an ongoing dialogue at the highest political level, setting the long term energy goals and securing the social license from Canadians and the world necessary to proceed,” the report notes. “Energy issues can be a powerful force of national unity or they can be divisive and lead to unrest. The global energy order is changing in such a way that we have to make decisions now. If not, other nations will move ahead of us aggressively to meet the world’s growing energy demands.”
5 June
IEA report sees bright future for natural gas over next 5 years
Natural gas is well on its way to a bright future, according to a new report from the International Energy Agency(IEA) that projects China will more than double consumption over the next five years while lower prices from the unconventional gas revolution will continue to benefit the United States.
The report, Medium-Term Gas Market Report 2012, released at the World Gas Conference 2012, says China will become the third-largest gas importer behind Europe and Asia Oceania, driving a 2.7% average annual growth in global gas demand through 2017 (up from the 2.4% annual growth rate predicted in last year’s report).
During that period, North America will become a net exporter of LNG, while Japanese imports will continue to increase, although by how much will hinge on the country’s nuclear policies.
Medium-Term Gas Market Report 2012, part of a series of IEA medium-term market reports also featuring coal, oil and renewable energy, presents detailed forecasts for the next five years of sectoral demand by region plus supply and trade. An in-depth analysis addresses infrastructure investments in LNG and pipelines.

The changing energy picture
By Pierre Arbour

1 May 2012
Part I

Natural gas
An incredible sea change in the US energy picture has occurred which will have serious consequences for the economies of Canada and Quebec; the price of natural gas has collapsed from an all time high of $14 / MCF in 2004 to $2.00 today thanks to gigantic discoveries of natural gas in the US. By sheer luck, the gas from the shale formations is close to major population centers which eliminates the need for expensive large diameter pipelines and gas storage facilities.

The Utica shale and the more prolific Marcellus shale are mainly found in the states of Pennsylvania, Ohio and New York; with new fracking techniques and a cocktail of chemicals, operators have been able to prove gas reserves that will last more than a hundred years at the present rate of consumption; despite some opposition by locals, exploration and production are continuing at an accelerated rate.
A similar situation exists for oil; the tight Bakken oil formation mainly in Dakota and Montana and also in southern Saskatchewan is producing increasing quantities of oil, which has helped total US oil production to increase by 10% since Obama became president; the Gulf of Mexico offshore production has also contributed to this increase.

Consequences
#1 Natural gas is the most important raw material in the production of plastics and fertilizers; the low price will attract chemical plants which would have located overseas previously; as a matter of fact chemical plants will be dismantled in third world countries to be brought back to the US because gas prices are forecast to remain low for years to come.
#2 Nuclear power plants will not be constructed as hoped, which will negatively impact the Canadian uranium mining industry; all newly built electricity-generating plants will be gas-operated; a form of energy which is much less polluting than coal and less controversial than nuclear. The coal industry will survive because many older power generation stations will not convert to gas because of cost, whilst the pricing of coal will remain weak. Over the long the long term however, coal is going to be gradually phased out as old plants are decommissioned.
#3 For Quebec: the low price of gas implies that liquified natural gas import facilities will not be built on the St-Lawrence River near Quebec city or at Grand Cacouna, thank God! The locals are fiercely resisting exploration for shale gas near population centers; only after the next provincial election will the new government tackle the issue.
The most negative consequence will be on Hydro Quebec which normally exports close to 20% of its electricity to the US; prices for so-called “green” Quebec electricity have dropped because of competition from natural gas. Timing could not be worse as the total demand from the US should drop significantly over the next ten years, just as new hydro projects are coming on stream in northern Quebec.
For western Canadian gas producers of B.C., Alberta and Saskatchewan the future is bleak except for those with “wet gas” (with propane, butane and ethane) which enjoy high demand and good pricing and do not compete with newly discovered US shale gas ,which is mostly dry.
In summary, shale gas discoveries are very good news for the US but not so good for Canada and the province of Quebec.

Part II

Oil and gas
Oil prices are set internationally and do not reflect the present US situation; today, the US is importing 15% less oil than in 2006 owing to a combination of decreased consumption (especially in transportation) and greater domestic oil production. While oil prices have risen from $60/barrel in 2006 to $100/barrel today, gas prices have declined from $12 per MCF (1,000 cubic feet of gas) to $2 per MCF over the same period. In Europe and in Asia, the price of gas is much higher at circa $10 per MCF.
The energy value of each MCF of gas, compared to the energy value of oil, calculated in terms of BTU (British Thermal Unit) is more than one sixth of the BTU content of a barrel of oil. That is, 1/6 of a barrel of oil is the energy equivalent to 1 MCF of gas. Therefore, from an energy equivalence standpoint, gas should be selling at $18.00 per MCF and not $2.00 per MCF as is currently the case. This shows why, over the long term, gas should displace oil in every energy usage including transportation. Indeed, many truck fleets, including a large one in Quebec (Robert Transport) have installed a conversion kit allowing their trucks to run on compressed gas. Eventually, the infrastructure necessary to supply compressed gas will be built, allowing most trucks and buses to be powered by gas, at a great savings to users.

The coal situation
We must distinguish between thermal coal (used in power stations) and metallurgical coal (used to produce steel). Thermal coal is used a great deal in the US and in Alberta in electrical power generation stations.
Mandatory upgrades to older and more polluting power stations usually require the acquisition of a scrubber at a cost of circa $40 million. Although newly-built stations are less polluting, they cannot compete against natural gas at $2 per MCF and are unlikely to continue to be commissioned.
Price of thermal coal per tonne has decreased over the last two years and is now $70 per tonne in the US, while metallurgical coal is currently circa $200 per tonne, making mining metallurgical coal much more profitable.
The surviving coal mines in both the US and Canada will most likely be limited to those producing both thermal and metallurgical coal. To survive, coal mines will need to improve their safety practices for miners and to find a solution to the tremendous damage currently being inflicted on the environment; as for the surviving power stations utilizing thermal coal, they will have to find a solution to dispose of their waste (slag – arising from combustion) in an environmentally safe fashion.

Part III

The end of green energy in the US
Solar, wind and nuclear are not competitive with natural gas at $2 per MCF and unless heavily subsidized, no new wind and solar projects are going to be built going forward. As to nuclear, opposition to the building of new plants is fierce and getting fiercer since the recent Japanese nuclear meltdown.
Wind Power is the least desirable form of green energy; it is erratic, noisy and visually polluting. In winter, in cold countries as in Canada, it hardly produces enough electricity to warrant its operation. It is, however, ideal on off-shore locations with steady wind and mild climate, as in Denmark.
For public utilities, solar power is a non-starter but for individual homes and businesses, photovoltaic panels are becoming  increasingly cost-effective thanks to falling prices due to Chinese competition.

The end of the all-electric car
Drivers of electric cars do not like to hit the road and worry about their battery draining after 80 miles or so. In extreme weather, an electric car uses approximately 40% of its battery power to cool or heat passenger(s); that is not very desirable for Canadians in January or Arizonians in July. Moreover, an all-electric car without subsidies costs 35% more than a gasoline-powered one, adding 10 years to the payback profile.
Meanwhile, cars are mandated to increase their gasoline consumption per mile every year for the next 12 years, whilst being able to be refilled in minutes; an electric car battery needs from four to eight hours to recharge (less with a special charger), which is too slow for most people.
Ironically, an electric car predominantly gets its electricity from coal thermal stations (the majority in the US) and will thus pollute indirectly up to 25% more than a natural-gas operated car. So the future is in hybrid cars (part gasoline and electricity) and of course natural gas-powered ones.

We are at the beginning of the natural gas and hybrid vehicle era
The auto industry will need to reflect this reality by building hybrid cars (particularly for consumers) and natural gas vehicles especially for taxis and rental fleets. Big Oil will have to provide the filling stations needed for consumers; more specialized companies like Clean Energy Fuels Corp. will promote the development of specialized filling stations for trucks, while companies such as Westport Innovations from Canada provide natural gas conversion kits for trucks and buses.
The main task for the US Department of Energy will be to facilitate the conversion of trucks and buses to liquid natural gas (LNG), where the biggest savings will be created. The cost of converting a big truck to LNG is about $40,000 (a cost which will come down as volumes increase). At a current savings of $2 per gallon (and assuming annual gasoline consumption of 20,000 gallons), this investment pays back in one year.
For buses, natural gas is ideal: much less pollution, less maintenance for the engine because it burns clean and no need for filling stations except at the central depot; at $2 per MCF in the US, natural gas will create an important savings for tax payers. In Eastern Canada, the savings will not be as great because the price of natural gas is approximately double the US price, but the savings of fuel costs for trucks and buses will nonetheless be substantial.

 Part IV

U.S. Energy Independence and Ethanol
As part of President Bush’s program to lower oil imports, ethanol from corn was touted in 2005 as a way to promote U.S. energy independence. Eventually, states mandated a minimum of 10% ethanol content in gasoline. However, the U.S. Department of Energy did not point out that one needs 1.5 gallon of ethanol to drive the same distance as 1 gallon of gasoline, while in some cases ethanol would damage car engines.
But the main negative has been the unforeseen consequence on food prices. In 2004, before the start of corn based ethanol productions, corn prices were $ 2.06 a bushel, in 2008 $ 4.06 a bushel and today $ 6.00 a bushel.
The doubling of corn prices from 2006 to 2008 had the unfortunate consequence of nearly doubling the price of Mexican tortillas, a mainstay for poor people as Mexico imports close to 40% of its corn from the U.S. So the Mexican government had to step in to subsidize corn consumption at great cost to the Mexican treasury.
Meanwhile subsidized corn farmers are making a fortune – as much as $ 1.00 a bushel in net margin on a 12.1 billion bushel harvest; ethanol refiners producing more than 1 million barrels a day (oil consumption is more than 19 million barrels a day have seen their margin dropping to 35 cents a barrel which includes the ethanol government subsidy.
The U.S., the biggest producer of corn in the world is devoting 40% of its corn production to ethanol; it is putting food in gas tanks, thus creating a world wide food price inflation. This inflation has been a disaster for poor people in particular and for consumers in general but great for farmers and ethanol producers.
Brazil has a more advanced ethanol program (25% to 100% of ethanol in gas tanks) but utilizes waste from sugar cane (bagasse) which is a far better way of producing ethanol than using a food source as in the U.S.

Canada Energy Independence and Oil Imports
Canada is importing most of its eastern Canada petroleum needs from overseas and exporting most of its western production including crude oil from oil sands to the U.S.; the import price is set on Brent prices [$118] and the export price is set on Western Texas Intermediate [WTI] which is now $104. Additionally another discount of $20 is taken off our export price because of the Cushing Okla. refinery hub oversupply, which means that we are getting only $84 a barrel while paying $118 a barrel for our imports. This discount should disappear once the Keystone XL Pipeline from Alberta to Texas is completed [after the coming US election?] Meanwhile there is a planned reversal in the Seaway Crude Pipeline System which should lead to a greater convergence between Canadian crude export prices and WTI prices. In the meantime our export surplus is taking a big hit and the Canadian oil producers are being badly short changed.

1 May
Green energy and windmills
Some countries such as Denmark and Holland have had good performance with windmills especially offshore. Elsewhere,the maintenance costs have been prohibitive and energy outputs have always been lower and at higher costs than anticipated. The most serious problem with wind mills, has been their inability to operate in very cold weather as in Quebec and Minnesota; freezing rain and cold often prevent the proper functioning of these giant turbines unless you heat the inside of the windmills which nullify the net energy output.In Quebec , Hydro Quebec pays a heavily subsidized price of 10 cent /KW hour to the windmill operators who cannot make money at that price ,while forcing Hydro Quebec to pay more than their marginal cost of electricity.

Ethanol & Natural gas
28 March 2011
In 2005 George W. Bush’s administration introduced an incentive program to substitute gasoline for ethanol grown from corn as a way to lessen the U.S. dependence from imported oil.  The percentage of ethanol in gasoline would be 10% going to 20% eventually thanks to federal subsidies.
For the consumers it created a less efficient car engines (less acceleration, less mileage) and for the U.S. farmers it was a bonanza as the acreage devoted to corn increased substantially while the price of corn increased 50% over the next three years.
But this literally snatched food from the consumers to help a very expensive program of oil imports substitution.  One unforeseen consequence was the nearly doubling in price of Mexican tortillas which are the main food of the poor, which forced the Mexican government to subsidize corn (40% of corn supply is from the U.S.) to avoid a revolution.  This also started the food price inflation around the world in 2009, which is still raging in 2011.  The U.S. government was led astray by the ethanol crowd (ethanol plant owners, farmers) while a local, abundant and cheap energy resources natural gas could have been substituted from expensive imported oil and costly subsidized ethanol.  Moreover the mechanized harvesting of this new corn acreage and its transportation is adding significantly to U.S. oil consumption.
Natural gas at $4.00 a MCF, on an energy equivalent of 6 to 1 (oil 6, natural gas 1) is costing the equivalent of $24.00/barrel while the barrel of oil before refining cost is $100.00. It is a ratio close to 4 to 1 in favor of gas, which thanks to newly discovered shale gas reserves in the U.S., at the present rate of consumption would last 100 years.
So compressed natural gas would be ideal for motor transport and electricity generation and much cheaper than gasoline and even coal but ignored by politicians and car manufacturers.  However, you need an infrastructure to fill compressed natural gas tanks and manufacturers are reluctant to modify some of their car production into natural gas “users” because they haven’t had the signal from Washington that is subsidizing only electric cars.
Right now politics has trumped common sense in favor of an ill-conceived heavily subsidized ethanol industry; we can only hope that the OBAMA administration will rethink the whole energy policy including the phasing out of polluting and dangerous coal fired generating stations in favor of gas ones.  As for the ethanol industry it may be too late to kill it even if it is proven to be inefficient as an additive and much more expensive for society in general.  Of course the same reasoning goes for Canada where similar policies have been adopted.
Unless we find a way to transform non-food biomass into ethanol, like Brazil does, the ethanol alternative based on corn should be abandoned.

2 Comments on "Pierre Arbour: The changing energy picture"

  1. George Archer June 9, 2012 at 2:50 pm · Reply

    One thought for Pierre Arbour: euphoria over the new discoveries of natural gas in the US may be premature. It is true that the output of gas has increased dramatically but we have yet to see the longevity of the wells. Many of the early wells produced huge amounts of gas then output declined equally dramatically. There is some concern that we will see a sharp spike followed by an sharp decline. It is not a sure thing. George Archer

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