There are reasons for natural gas to become more important over time. It burns much cleaner and cheaper than oil. There is a lot of it stranded, too small to warrant a dedicated pipeline or LNG facility. But innovation is helping..
First, two articles that argue for a short-term and a long-term rise in natural gas prices respectively. First the short-term:
- Natural gas prices should jump in the coming months if historical trends materialize, Nick Majendie, a portfolio manager at Canaccord Adams says. Mr. Majendie points out that over the past 10 years, the price of natural gas surged within six months of the ratio of oil to natural gas surpassing 12.6 times. The ratio most recently breached this level on July 25. It was the fifth breach since August 1998.
- “Our observations would be that the average gains of 67% in natural gas prices to the high in the following six months are impressive,” Mr. Majendie says. “However, it should be pointed out that the percentage gains have been sequentially lower on each of the four occasions prior to the latest breach of the 12.6 times ratio.” Natural gas prices rose 34% gain within six months after the last breach on January 25, 2008. The gain was as high as 96% after the breach of May 19, 1999.
And the case for the longer-term:
- In late 2006, China for the first time in its history became a net coal importer. This changed the dynamics of the world’s energy market. Korea and Japan, previously importers of Chinese coal, were sent scrambling for alternative sources of energy. What they found in the winter of 2007 was LNG for $18-$20/BTU. China too was a willing buyer.
- The coal scramble was also felt in Europe. Australian coal was bottlenecked and/or kept in the Asian region. Power outages in South African coal mines made the situation worse for Europeans as they lost out on significant supply. What followed was a ramp in coal prices as coal was shipped off the east coast of the U.S. to willing buyers in Europe.
- Fast forward to today and enter Russia. Russia’s invasion of Georgia is a dangerous precedent. Russia controls over 25% of Europe’s natural gas and in the winter of 2006 used it as a weapon against Eastern Europe. Russia’s true intent today may very well be to take further control of the world’s energy market. Does one really believe that the Russian government cares anything about 70,000 ethnic Russians living in the mountains of Georgia?
- If China’s coal deficit is greater today than it was just one year ago and the geopolitical situation is worse, one could conclude that liquefied natural gas [LNG] in the winter of 2008-2009 will fetch a minimum of last year’s $18-$20/BTU.
- Last year was the year natural gas became a global market. This year it will be reinforced. The market for natural gas has changed and so should one’s perspective.
- As one watches the price of natural gas collapse in the U.S., is it possible the price remains near $8.00 this winter as Asians and Europeans pay more than two times that price?
It’s a good question, the last one. We have reported on a play for American natural gas in UNG, and of course our Asian natural gas play is InterOil.
Boone Pickens is also a fan. Not only does he hold 3M shares in InterOil, he also came up with a plan, the Boone Pickens energy plan, part of which is converting cars to running on natural gas (something which is relatively common in certain countries already).
Innovation is helping as well, there are new technological means by which to make that possible:
- A Texas company says that it has developed a cheaper and cleaner way to convert natural gas into gasoline and other liquid fuels, making it economical to tap natural-gas reserves that in the past have been too small or remote to develop.
- The company behind the technology, Dallas-based Synfuels International, says that the process uses fewer steps and is far more efficient than more established techniques based on the Fischer-Tropsch process. This process converts natural gas into syngas, a mixture of hydrogen and carbon monoxide; a catalyst then causes the carbon and hydrogen to reconnect in new compounds, such as alcohols and fuels. Nazi Germany used the Fischer-Tropsch process to convert coal and coal-bed methane into diesel during World War II.
- A Synfuels gas-to-liquids (GTL) refinery goes through several steps to convert natural gas into gasoline but claims to do so with better overall efficiency. First, natural gas is broken down, or “cracked,” under high temperatures into acetylene, a simpler hydrocarbon. A separate liquid-phase step involving a proprietary catalyst then converts 98 percent of the acetylene into ethylene, a more complex hydrocarbon. This ethylene can then easily be converted into a number of fuel products, including high-octane gasoline, diesel, and jet fuel. And the end product is free of sulfur.
- “We’re able to produce a barrel of gasoline for much cheaper than Fischer-Tropsch can,” says Kenneth Hall, coinventor of the process and former head of Texas A&M University’s department of chemical engineering. Hall says that a Fischer-Tropsch plant is lucky to produce a barrel of gasoline for $35 but that a much smaller Synfuels refinery could produce the same barrel for $25. Under current fuel prices, such a plant could pay for itself in as little as four years, the company says.
- Texas A&M University licensed its approach to Synfuels and partly owns the company, which has been operating a $50 million demonstration plant in Texas since 2005 and says that it is close to signing a deal for its first commercial refinery near Kuwait City.
- Synfuels president Tom Rolfe says that the company has developed some proprietary components and catalysts, but he adds that much of the approach is based on off-the-shelf technologies. He says that Synfuels’ main advantage is the efficiency by which it breaks down and reassembles hydrocarbon molecules. “Nobody has achieved as high a conversion rate of natural gas into acetylene as we have,” Rolfe says.
- Ali Mansoori, a professor of chemical engineering and physics at the University of Illinois at Chicago, says that the process seems far less complicated than those found in a Fischer-Tropsch plant. “The numbers reported for conversion efficiency and selectivity look quite promising,” he adds.
- But Synfuels isn’t alone in trying to make GTL more economical. Gas Reaction Technologies, a spinoff from the University of California, Santa Barbara, has developed a process that converts natural gas into bromine-based compounds that are later converted into liquid fuels.
- The goal for both companies is the same: to tap into natural-gas reserves that are too small or too remote to economically access with a dedicated pipeline. Much of this gas is a by-product of oil extraction. The World Bank estimates that more than 150 billion cubic meters of natural gas–equivalent to the combined gas consumption of France and Germany–are flared or released into the air every year by oil companies that have no economical way of getting the gas to market. The resulting greenhouse-gas emissions are a major contributor to climate change, the World Bank adds.
- “With our technology, you can go into the field and process that natural gas into gasoline,” Rolfe says. “Now it’s a liquid, so it can be sent in existing oil pipelines. There’s a huge opportunity for this in places like Russia, the Middle East, and South America.”
- There is also opportunity in Alaska’s North Slope, where oil giants such as BP have been considering GTL projects as a way of getting natural gas to market as a by-product of oil extraction. BP spent $86 million on a demonstration Fischer-Tropsch plant in the late 1990s, with the idea that natural gas could be converted into diesel and mixed with crude oil being shipped through the 1,200-kilometer trans-Alaska oil pipeline. But the BP project never proved commercially viable.
- Shirish Patil, a professor of petroleum engineering at the University of Alaska Fairbanks, says that the high cost of Fischer-Tropsch and rising oil prices now have the industry tilting toward building a dedicated natural-gas pipeline. But lower GTL costs could change that. “If there’s any process that removes some of the steps of Fischer-Tropsch and reduces overall cost of conversion, that will certainly bear out in the economics,” Patil says. “And it’s the economics that will prevail.”
- Rolfe says that Alaska is certainly on Synfuels’ radar. “We’re working with the state of Alaska to use our plants as an alternative,” he says. “The Fischer-Tropsch solution for the North Slope is not elegant at all. It’s like getting an elephant up there to do your hard work, when all you need is two or three thoroughbred horses.” Rolfe adds that a Synfuels refinery can be self-sufficient in remote areas because half the natural gas it taps can go toward power and heating requirements of the plant while the rest is converted into fuels. And unlike a Fischer-Tropsch plant, no hard waxes or toxic by-products result from the Synfuels process.
- Synfuels estimates that only 200 of the 15,000 gas fields outside North America are big enough to justify the high capital costs of a Fischer-Tropsch plant. A handful of such plants exist today, including a Shell refinery in Malaysia and the Mossgas plant in South Africa. Another two plants are also under development, in Qatar and in Nigeria.
- Devinder Mahajan, a chemical engineer with the Brookhaven National Laboratory, in New York, says that the industry will be somewhat skeptical until Synfuels has a commercial plant in operation. “There are a lot of investors out there who would put the money in if it has the claimed advantages over Fischer-Tropsch.”
- But such interest is building. In January, Kuwait-based AREF Energy Holding invested $28.5 million in Synfuels for a minority stake in the company and exclusive rights to market the refineries in the Middle East and North Africa. Rolfe says that sales interest is also building in Australia, Argentina, Egypt, and Kazakhstan.
- Hall hopes that the last quarter of 2008 will be a “breakout” year for Synfuels and how it is perceived by the major oil companies. He understands, however, the industry’s reluctance. “In this industry, everybody wants to be first to be second when adopting new technology. The Fischer-Tropsch process is at least proven. They know it works.” By contrast, he says, Synfuels’ approach, “hasn’t been proven because there aren’t any big facilities out there.”
And if these opportunities are a little to early days, one can always look at Fuel Systems Solutions (FSYS), a maker of converters that let normal cars run on gas. Too bad it has rallied already in a comprehensive fashion.
And we will have something to report on a company that does a similar thing with coal pretty soon, we hope.