Oil, Gas And Decarbonization

[Editor's note: A version of this story appears in the August 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

In the competition for markets, the U.S. oil and gas industry has turned the world upside down, surging to place among the top three countries in exports just a few years after re-entering the deepwater trade. In terms of coming to grips with the urgency of addressing and mitigating climate change, however, the gains have been much more modest. The industry must improve its position in the competition for capital and positive public sentiment. Speakers at the annual Energy Symposium held by the Price College of Business at the University of Oklahoma lauded the energy industry for its business accomplishments and exhorted leaders to step up environmental efforts by citing evidence that sustainable business is profitable business.

“The resource is there as long as we extract it in an environmental and economical way,” said opening speaker Dr. Mark Zoback, professor of geophysics and director of the Stanford Natural Gas Initiative at Stanford University “There is almost unlimited potential even if we are only drilling in areas where we are already allowed,” said Zoback. “Recovery of tight oil is still in the single digits [as a percentage of oil in place]. Tight gas is a little better. For the $77 billion invested, we are doing a bit better [than at the start of the shale era], but we have a long way to go.”

There was a strong, if unspoken, implication that the global energy market could move into oversupply. More producers of more molecules will be chasing demand growth that is changing quickly, and in some cases, already facing limited growth.

“The oil and gas industry is in the era of decarbonization,” said Zoback. “The new abundance of natural gas is an immediate opportunity to decarbonize the power-production sector,” While most of the decarbonization attention is on reducing the use of coal and oil to generate electricity, Zoback noted the important potential in heat, not just light.

“Thermal fuels are a significant matter in the developing world,” he said. Natural gas liquids, especially propane, have a significant opportunity to replace wood, charcoal and dung as a fuel for cooking and heating.

“The importance of the industry is carbon capture and storage [CCS]. CCS should not be overlooked,” Zoback added.

Looking more closely at decarbonization of electrical power, Zoback stressed the danger, and potential: “There is 300 gigawatts of coal-fired generating capacity under construction across Asia. To put that into context, that is equal to all the coal-fired plants operating in the U.S. That means that even if we shut all of our coal-fired plants tomorrow, it would only be a net zero for emissions as the plants in Asia come into service.”

Stepping into the Vanguard

It might be surprising that so much new coal-fired generation is being built, given all the gas being produced, and the boom in deepsea LNG. But LNG into India is going for about $7 per million British thermal unit (MMBtu), and coal is costing less than $3/MMBtu.

“However, there are 4 million deaths worldwide a year from indoor air pollution,” he said. “In the developing world that is caused primarily by burning wood or dung for fuel and heat. So [nations have to] account for the health and the quality of gas over traditional fuels. What carbon price does that take? About $22 a ton.”

 Even without a formal global carbon price, there is already action on that front. “India is providing 10 million propane canisters around the country,” said Zoback.

All of those efforts are necessary but not sufficient, said Zoback and other speakers through the course of the symposium. “The only way to reduce CO₂ is carbon capture and storage,” Zoback stressed. “Green energy only reduces the rate of increase in carbon emissions.” He again cited California, which has been vocal about decarbonization. “If California is going to meet its goals, it is going to need lots of natural gas, high standards for automobile emissions and CCS.”

And that is where the oil and gas industry can be in the vanguard. “The current estimate for CCS is 30 million tons a year injected as a super-critical fluid and sequestered,” said Zoback. “The infrastructure required to do that is equivalent to the [scale and volume] of the global oil industry. The only realistic pathway to sequester that much carbon is to inject it into depleted formations. The infrastructure is in place, and the pore space is being created every year.”

Just as the roots of a tree reflect its branches, Zoback’s vision for the sustainable hydrocarbon industry is equivalent volumes of oil and gas out and CO₂ in. “We know where it can go, and we know what we need to do.”

The first steps in that direction are being taken. Occidental Petroleum Corp. is already the largest consumer of CO₂ in the country, said Hilary Moffett, senior director of government affairs. The company consumes 2.6 billion cubic feet per day (Bcf/d), or 50 million tons per year of CO₂ for EOR.

The company has invested in 1.6 megawatts of solar power at its producing field near Goldsmith, Texas, and has a joint venture with White Energy in biofuels. Occidental has also invested in direct carbon capture, an eponymous project in Squamish, British Columbia, just up the coast from Vancouver. “This pilot plant with Carbon Engineering [Ltd.] opens a pathway to a carbon-neutral or even carbon-negative barrel of oil,” said Moffett.

The panel underscored the tone set by earlier remarks that natural gas is an essential part of the decarbonization equation, especially in the developing world. “At the Energies Futures Institute [EFI], we are very focused on deep decarbonization,” said Melanie Kenderdine, former director of the energy policy office at the Department of Energy, and former executive director of the energy initiative at Massachusetts Institute of Technology. She is currently a principal at the EFI.

That focus comes naturally. “When I was in the Clinton administration, gas was viewed as a very green fuel. A lot has changed since then. My view now is that gas and renewables should work together. Even large-scale wind and solar will result in periods that require large-scale backup options.”

Kenderdine showed historical data indicating that there have been periods as long as 10 days in which the wind did not blow sufficiently to meet base demand in some regions. That may be mitigated by utility-scale storage, but only after significant time and investment. In the major North American regional wholesale markets, actual storage available today is measured in hours, not days.

“California Independent System Operator has a bit of storage for 14 hours,” said Kenderdine, “but most of it is only 4. PJM [the ISO for Pennsylvania, New Jersey and Maryland] and has storage for only about an hour. When you are talking about 10 days with no wind, you either need 10 days of storage, or 10 days of fuel.”

Wes Mitchell, manager of supply and trading for Cheniere Energy Inc., concurred, offering his perspective from the trading desk. “Five to seven years ago an energy trader would only discuss wind output at a cocktail party, to demonstrate knowledge. Now [the ability to understand wind output] is essential. On peak days the U.S. has 60 gigawatts of wind energy. That is the equivalent of 120 nuclear power plants. But the next day that might be only 30 gigawatts. That’s like 60 nuclear plants being lost from one day to the next.”

He hastened to add, “You never hear about that, which is a demonstration of a market that is working. Gas is there to back it up. It is fascinating to see the volatility in wind output and the ability for gas to fill it.”

Balancing Gas Demand and LNG

The larger question is whether storage is the enabling technology to arrest climate change. Kenderdine does not believe so. “We do need breakthrough technology, but I don’t see that happening by 2030. I only see incremental improvements by then. We need the breakthrough technology by 2050 to meet the climate change goals by then. That could be direct capture. Or hydrogen—from electrolysis, not from steam reforming.”

While acknowledging that LNG exports have gone to a wide range of countries, with more being added every year, Kenderdine cautioned that “69% of LNG exports go to other OECD countries.” OECD has 37 member countries, and is broadly taken to represent the industrialized nations of the world. That reality of exports mostly to other “Western” countries throws some shade on the idea that cleaner-burning gas will quickly and easily displace coal for power generation and perhaps even wood for cooking and heating in developing countries.

Back at the export end of the tanker voyage, the number of liquefaction terminals is growing, with more planned. “There are massive new projects,” said Cheniere’s Mitchell, “and I am talking just about the ones that are actually under construction or approved by the Federal Energy Regulatory Commission, not ones that have not yet gotten to final investment decision.” One came into service last year, two more are due this year, with two more approved. Meanwhile, the price for LNG in Asia has tumbled.

By the time its 6th train is in service at Sabine Pass, and the second at Corpus Christi, Cheniere will have about 8.5 Bcf/d of liquefaction. That is roughly 10% of the entire U.S. gas market, and roughly as big as the entire Canadian market.

“We are now looking at the second and third waves of LNG facilities,” said Mitchell. While he confirmed some projects have sound financials, he added, “it is difficult to see projects that are just extrapolations of current growth rates taken out 10 or 20 years. We could be looking at 20 to 25 Bcf/d of waterborne gas out of the U.S. That final 5 is going to be a challenge to think about. How are they going to get the gas, and how are they going to get it to the Gulf Coast?”

That raised the question of other LNG exporters keen to get in on the boom, particularly the flurry of interest in floating liquefaction vessels. “The lead opportunity outside the U.S. is Qatar,” said Mitchell. “There will be opportunities for gas economies worldwide, and not necessarily in LNG.

“China now produces half of the gas they need and is developing more. That is on our radar. Also, liquefying gas is hard. Doing it on a ship with dramatically condensed engineering is even more so. It will be interesting to see how that works, to see how these floating units do on reliability standards.”

Brian Moddelmog, vice president of strategic origination at Calpine Corp., noted dryly that “this past winter New England had to import LNG—at $12 per Mcf [thousand cubic feet].” Calpine is one of the largest utilities in the country, with 28,000 megawatts of generating capacity primarily in California, Texas and New England. That capacity is primarily gas-burning, consuming about 2 Bcf/d of gas.

“California is a proxy for what we should expect to see in other parts of the country,” said Moddelmog. “If we can agree on that [model], the market design [for natural gas] becomes the next issue.”

The volumes in domestic pipelines are very much on the mind of LNG exporters. “We need investment in the midstream,” Mitchell stated flatly. “It is one thing to have a beautiful world-class terminal, and a whole other thing to get gas to it. We look for consistency, and we wonder how the midstream is going to support 50 million tons a year of exports, and 100, and 150. What is missing in the big conversations about LNG is the importance of the midstream.”

Sounding dire, Mitchell elaborated, “We cannot get incremental pipes built, if we can’t get greenfield or even brownfield pipes, if all we are left with is looping and compression on existing lines, then the Marcellus will only have a limited role in U.S. LNG exports over the next decade.”

Price ranges and fluctuations are the essential variable for all energy projects. While global oil markets are well established, as are regional gas markets, LNG is in its early days. “Contract terms are literally evolving as I sit here in this chair,” said Mitchell.

He explained that traditionally, LNG was priced against an oil index at 6:1 because of the relative Btu value of crude and gas. “That was always mathematical, not actual,” he stated. As LNG has become a global commodity, it is in the process of developing real price balances based on delivered costs and competition from other fuels.

“Today LNG prices in Asia have nothing to do with oil prices,” said Mitchell. “There is dealing based on price options and destinations. Is LNG priced against oil? Yes. Against Henry Hub? Yes. Against Rotterdam coal? Yes. Eventually LNG will be priced on its own merits.”

Kenderdine noted a fast-approaching inflection point. “Based on LNG projects currently in service or being built, not just project announcements, the volume of LNG worldwide will approximate the total pipeline volumes in the world by 2020 if all those projects are completed.”

Renewable and Gas Collaborate

Regardless of the region, “it is very important for renewables and gas to work together,” said Moddelmog. “Electricity is the easiest to decarbonize. It is not easy per se, but the easiest sector because the others are more difficult. [The] industry is extremely difficult because there are no alternatives for process heat. Transportation is a matter of consumer decisions. There is also consumer resistance in the building sector.”

For example, commercial kitchens and most consumers want gas stoves. They don’t like to cook on electricity.

Even having said that the power generation sector is the easiest, Moddelmog added, “In California, 49% of the generation is gas-fired. Getting to the goal of 60% renewables by 2030? That is a lot.”

Kenderdine emphasized a different set of ratios. “Decarbonization of electricity is important, but in California, [that sector] is only 16% of emissions. The largest sector by far is transportation, followed by industrial, followed by buildings. The focus on electricity is important, but that is not going to get us to our emissions goals, certainly not by 2030. And in the meantime we have to worry about reliability.”

Returning to an idea she mentioned earlier, Kenderdine advocated reusing fossil-fuel facilities to support renewable energy. For example, that could mean using the existing natural-gas distribution system to carry “renewable gas” from agriculture, or as a way to move hydrogen to augment gas-fired combined-cycle generation.

There are several advantages to blending green energy into the existing infrastructure, most obviously, the facility and economy of not having to make major new capital investments.

“Oil and gas companies have a fiduciary responsibility to protect their infrastructure,” said Kenderdine. “We need to understand that.”

Still, she chastised the industry on the same point. Acknowledging that companies have been unwilling to abandon assets, Kenderdine added, “that unwillingness has delayed a response to the existential threat of climate change. Anything we can do to stop creating immovable objects is critical.”