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Arctic Leaf

Bipolar, manic depressive and natural gas

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Although a bit bipolar concerning the data, the editors of Real Clear Energy published a useful graph and narrative on Tuesday. It showed the slow, steady increase of natural gas use in the U.S. over the past few years. The graph and narrative noted a 33% increase in vehicle fuel consumption since 2007. More good news for those who support natural gas, given its ability to reduce GHG emissions: the editors reported that the T. Boone Pickens’ “Natural Gas Highway” appears to offer hope that the trend will continue upward. Indeed, the EIA indicates that natural gas will increasingly substitute for gasoline in the truck, bus and rail freight sectors. So much good news! However, don’t open the champagne yet!

Now the bad news! Despite the increasing popularity of natural gas, over the next 25 years, the editors suggest it will only replace or displace 3% of the nation’s oil budget. What a bummer! But, paraphrasing Frank Sinatra (the noted oil man turned singer), when you have “your chin on the ground, there’s a lot to be learned, so look around… [we’ve] got high hopes…all problems just a toy balloon, they’ll be bursted soon, they’re just bound to go pop”…cause we’ve got high hopes.

Thanks Frank. Now, back to the editors. They correctly advised their readers that we, as a nation, will “never make any real progress until we start using liquid methanol and ethanol in regular passenger cars.” I assume the editors mean that we should increase the amount of ethanol in our cars. All of us now use at least 10% ethanol when we fill-er-up. Some of us, if we are lucky and have a flex-fuel vehicle (over 17 million of us do, but likely don’t know it), can use E15 and E85, assuming we can find a station with the necessary pumps. With the exception of a few states, such pumps are relatively few and far between. Sales of E15 and E85 constitute only a small share of the fuel market.

Why? Neither ethanol not methanol is a perfect fuel. Yet, study after study indicates that, on most dimensions, they are better than gasoline. Both are cheaper, both are generally environmentally superior and both emit less GHG emissions. Competition with gasoline from both would allow the U.S. to become less dependent on oil imports and add to our nation’s security. Over time, opening fuel markets to consumers by adding choice would likely help stabilize, and even reduce, the price of gasoline and limit its frequent nonstructural cycles.

As a former dean of a major School of Public Policy, I would gladly supervise a Ph.D. thesis or an “independent” student study concerning consumer decisions relative to the purchase of gasoline vs. replacement fuels, particularly ethanol and the acquisition of new or the conversion of existing cars to FFV status. The student could start off with some reasonable, contextual assumptions and/or hypotheses. For example:

1. Consumer decisions about alternative fuels often must be speculative, given the fact that oil companies, most times, prohibit their franchises from adding a replacement fuel pump or require them to put the pump in a hidden sidebar location.

2. There are sufficient anecdotes that price management is also a barrier to the development of competitive fuel markets. Data descriptive of the life cycle of ethanol suggests that costs for production, distribution and sales would permit ethanol to compete well, price-wise, with gas. However, anecdotes suggest that producers, distributors, blenders and retail stations — including independent stations — often raise or lower the price of gasoline relative to replacement fuels, which often impedes real consumer choice. There are no angels here. Retail stations carrying E85 have been known to raise its price to capture extra revenue.

3. Although the gap is narrowing in light of technological improvements, replacement fuels, including ethanol, get less mileage per gallon than gasoline. But, as noted earlier, the costs at the pump, if recognized in the price per gallon, generally work out in favor of ethanol. However, consumers find the calculations difficult to make without the addition of simple signs at the pump, a willing and patient station attendant, or an app in your hand. As a rule of thumb, replacement fuels should be at least 22% cheaper than gasoline to cement the deal for a knowledgeable consumer.

4. Despite EPA studies and approvals to the contrary, groups mainly associated with, supported by or historically favorable to the oil industry have planted the worry seed in car owners’ minds. E15 and, likely E85, they say, will damage engines that are actually built to use both. Saying it often enough has likely made many consumers consciously or subconsciously avoid replacement fuels like ethanol. The best answer to bad speech — whether written or oral — is good speech. Yet, only a handful of writers, editors, TV and cable anchors have responded to negative stories and rumors about replacement fuel safety.

I could go on. But I am over my word limit. Thank you, Real Clear Energy, for making me manic depressive — my friends would say it’s a rather normal state. I hope the brief comments by your editors will be discussed over and over again by others and stimulate strategies to increase the use of natural gas based ethanol, and someday soon, the legalization of methanol.

Arctic Leaf

Natural gas vehicles take the halfway route

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In the early 1990s, California tried to force the introduction of electric cars by requiring that auto companies produce a zero-emissions vehicle in order to remain in the state. The result was Chevrolet’s EV1, which everyone agreed was the best electrical vehicle that could be built at the time. Owners loved them, but somehow the effort didn’t take off.

The infrastructure simply wasn’t in place. The car only had a 70-mile range and drivers spent much of their time worrying about their next charge. Many EV1s ended up on the lots of rental agencies where they attracted little attention. All this, of course, was interpreted by some people as the fault of the oil companies and the auto industry, which didn’t push the case hard enough. The award-winning documentary “Who Killed the Electric Car?” made this argument.

Then three years later, Toyota introduced the Prius, a gas-electric hybrid that gave drivers some breathing room. It was a spectacular success. By not trying to make the technological transition in one giant leap, the Prius introduced drivers to the advantages of electric propulsion without asking them to sacrifice anything in terms of a nerve-wracking search for a refill. In fact, when Toyota brought out the Prius it deliberately left off a home charger so that buyers would not associate it with the failed EV1. Not until several years later did the company release a plug-in hybrid. In both cases, the Prius has been the most successful of all hybrids.

Natural gas vehicles seem determined to avoid the same mistake. This year both Ford and General Motors are releasing commercial NGVs in their light-truck and sedan lines. But they are taking care to make them bi-fuel vehicles that run on both gasoline and natural gas, although they are expensive. (Both companies have been making tri-fuel — gasoline, ethanol and CNG — for many years in Brazil.) 

First out of the box will be the immensely popular Chevrolet Silverado and the GMC Sierra, both full-sized pickups that sold 480,000 and 184,000 last year, respectively, the highest sales mark since 2007. GM is offering bi-fuel versions for every cabin configuration. The 2015 model will offer a 16-gallon gasoline tank and a 17-gallon-equivalent compressed natural gas tank. When both are filled, the truck will have a remarkable range of 650 miles.

Along with that, GM will be releasing a bi-fuel Chevrolet Impala to introduce ordinary drivers to the advantages of natural gas. The Impala will feature an 18.5-gallon gasoline tank and a 7.7-GGE CNG tank. The result will be a 500-mile range.

Not to be outdone, Ford has already introduced a bi-fuel version of the immensely successful F-150 half-ton pickup truck. Released only last November, the company managed to sell 15,000 vehicles across eight models in 2013. That beat 2012 sales by 25 percent. When combined with its conventional gas tank, the CNG boost gives the F-150 an astounding 700-mile range, beating the Silverado by 100 miles. Unfortunately, the price differential for all these NGV models will be about $10,000.

But motorists could see a 2-3-year payback if the price gap between gasoline and its natural gas equivalent holds up. Right now it has settled around $1.50 gap per gallon and has remained there for almost five years. Give motorists the opportunity to save almost half the price on a gallon of gas is bound to make the new bi-fuel models more attractive.

Other developments are also moving in the direction of a transition to natural gas for high mileage vehicles. In 2012, ARPA-E, the federal government’s program for advanced energy research, awarded $2.3 million to GE Global Research, Chart Industries and the University of Missouri to design a gas refueling station for homeowners. GE already makes a $5,000 medium-sized refueling kit for commercial businesses called “CNG in a Box” that takes gas out of the utility pipes and compresses it for fleet vehicles. The target price for the scaled-down homeowner version is $500. The consortium has set a release date for later this year, at which point we’ll find out if they’ve been successful. The launching of such a cheap conversion system that would allow homeowners to tap the natural gas pipes in their house to refuel their cars would revolutionize the whole NGV effort.

Of course there’s always another possibility — converting our abundant natural gas supplies to ethanol or methanol that would fit right into our current gasoline delivery system. Switching to liquids would not require a new on-board gas tank but would simply involve adjusting existing engines so they could run on a variety of liquids — the “flex-fuel” system. Giving motorists the widest variety of choices would let them experiment with different strategies without having to make a giant leap over some technological chasm. That’s what California learned twenty years ago when it tried to rush the introduction of the electric car and the lesson still holds good today.

Arctic Leaf

Innovation in oil & gas — it ain’t over yet

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To read the newspapers these days, you’d think that all the innovation in energy is involved in bringing down the cost of solar panels or building even bigger blades for windmills. But innovation still continues apace in oil and gas, both in pulling them out of the ground and in finding new ways to use them.

“We haven’t been giving the big oil companies enough credit,” said Dominic Basulto in The Washington Post. “ Sure, we may see their print ads or watch as they tout their accomplishments on TV, but deep down, many of us believe that the brightest minds have moved on to something new in energy innovation. But that’s not true.”

That’s important because if we’re going to use our abundant natural gas supplies to wean ourselves off of foreign oil, we’re going to have to be sure the current superabundance of natural gas isn’t just a flash in the pan. Moreover, we’re going to need innovation in making the transition to methane-based liquid alcohol fuels easier as well.

As most people have heard by now, even our best technologies can’t extract more than about 10-20% out of an oil or gas reservoir from the earth. Simply doubling that rate would give us access to huge, new quantities of domestic fuels.

There’s also a concern that fracking wells will have a much shorter lifespan than traditional gas and oil wells. Then there’s all that natural gas being flared off in the Bakken. Ending that conspicuous form of waste will require some new technology.

All these problems are being tackled through innovation, however, and that’s what Basulto is talking about.

Although everybody knows about fracking — the technology of forcing sand and water into the rock to break it up — few realize that the real novelty that makes up the current upturn in production possible is horizontal drilling, which allows access to entire geological strata without making the territory look like a pincushion.

“Today, drilling rigs are so good that they can punch holes in the earth that are two miles deep, turn the drill bit 90 degrees, drill another two miles horizontally, and arrive within a few inches of the target,” said Robert Bryce, author of “Smaller, Faster, Lighter, Denser, Cheaper,” a book about innovation in the energy industry. But horizontal drilling hasn’t stood still. ExxonMobil has developed an “extended reach” technology that can push outward several miles further deep in the earth. “Extended reach reduces our environmental footprint and in offshore applications will limit our presence in the marine environment,” says the company’s website. It may have been developments like this that prompted President Obama to give a green light to exploration off the Atlantic Coast from Delaware to Florida last month.

The same innovations are occurring with natural gas fracking. Innovators have made an improvement called “sleeve technology” that surrounds the drill bit and allows highly accurate placement of stimulation treatments. The result is that wells can be drilled twice as fast as a few years ago, at a lower cost. With increased precision in both drilling and fracturing, wells are being made more productive as well. Erika Johnsen on Hot Air said, “Data from the Energy Information Administration’s Drilling and Production Report shows that a Marcellus Shale well completed by a rig in April 2014 can be expected to yield over 6 million cubic feet of natural gas per day (Mcf/d) more than a well completed by that rig in that formation in 2007.” That’s a huge improvement in the space of seven short years.

All this is good news for the effort of substituting natural gas-based ethanol or methanol for foreign oil in our cars. After all, one of the fundamental considerations is that there will be enough natural gas around to keep the price reasonable. With so many competing proposals for employing natural gas — electrical generation, the industrial revival, LNG exports, etc. — it’s crucial that we keep expanding production.

So it’s encouraging to hear the news from Clean Energy Fuels, T. Boone Pickens’ baby, which has been building a “CNG Highway” across the country to service long-haul tractor-trailers. CEF has just completed the first leg of this nationwide network, connecting Los Angeles and Houston.

But much of the nation still lies outside the reach of natural gas pipelines and CEF is figuring out a way to serve them, as well. Last month the company opened a filling station in Pembroke, New Hampshire that will be served by a “virtual pipeline” of high-tech tractor-trailers making round-the-clock deliveries. This will allow the station to pump 10 million gasoline-gallon-equivalents (GGE), twice the volume of CEF’s largest existing station. More important, it will open up large areas of the country that have not had access to CNG. This natural gas-based substitute will sell for 30% less than gasoline.

Technology never stands still. Sometimes it forces us to give up things that have become familiar or even seemingly permanent. But as Robert Bryce said, the new technology is usually “faster, smaller, lighter, denser and cheaper.” And in the case of methane-based liquid fuels, it will mean freeing ourselves from foreign oil as well.

Arctic Leaf

Attention Investors: Opportunity for an oil change

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What would you say about an investment opportunity where your product is four times cheaper than the commodity it is trying to replace and there are 77 million potential customers waiting to use it?

Does that sound like something that you would like to put your money into? Well that’s the opportunity that awaits anyone willing to invest in the infrastructure and technical changes needed to substitute natural-gas-based ethanol for foreign-fuel-based gasoline in our cars.

A full-fledged prospectus was presented this month by Miles Light, professor at the Leeds School of Business at the University of Colorado Boulder, in a report called “Natural Gas Based Liquid Fuels: Potential Investment Opportunities in the United States,” written for the recent Goldman Sachs Energy Summit.

Professor Light lays out the situation in very clear terms: “Low natural gas prices and new technology present an opportunity to market and sell liquid fuels in the form of ethanol and methanol to U.S. consumers. Per unit of energy, oil is almost four times more expensive than natural gas. This implies a potential arbitrage opportunity to convert natural gas and natural gas liquids into a liquid fuel. In the U.S., 14.5 million vehicles can currently utilize ethanol fuels. These are the so-called ‘Flex Fuel’ vehicles. Another 16.1 million FFV ‘Twins’ can utilize ethanol with a software upgrade, and 46.9 million conventional fuel vehicles can potentially be converted for $150-$250 each. In all, this presents 77.75 million light duty vehicles, or 31.8% of the national light duty fleet, that would potentially purchase natural gas liquid fuel, if prices were attractive.”

You’ve undoubtedly heard the phrase, “If we can capture just 2 percent of this market…” Well, this is it. There are opportunities up and down the line, from auto mechanics performing flex-fuel conversions on conventional engines to major corporations building plants to convert natural gas to ethanol.

What Light is talking about here is the wholesale substitution of a portion of our natural gas resources for the oil we import in order to run our transportation sector. True, we’ve cut down on imports so they now make up less than half of our consumption for the first time since the early 1990s. But what people are missing is that we still pay the same amount for that oil because the price keeps rising. This continues to put a $380 billion dent in our trade balance every year — not to mention that much of this money goes to countries that actively support hostile actions against America and its friends and allies around the world.

So what would it take to make this transition? There’s certainly been a lot of activity to date. However, most of it has concentrated on utilizing compressed natural gas (CNG) and liquid natural gas (LNG). T. Boone Pickens’ Clean Energy Fuels is in the process of building a “CNG Highway” to service long-haul trucks from coast to coast. He’s already completed the first leg from Los Angeles to Houston. Those big 18-wheelers have room for the larger gas tanks and travel fixed routes along the Interstate Highway System that can be serviced by relatively few filling stations.

But passenger vehicles are a completely different matter. They travel everywhere and would require a whole new national infrastructure to fill their tanks. The auto companies have already offered a few CNG models but they haven’t sold well. It’s the chicken-and-egg problem — people won’t buy cars before the stations become common and the stations won’t be built until there are enough cars on the road.

With ethanol, however, there is already an infrastructure in place. The country is presently outfitted with 2,394 gas pumps dispensing E85, a mixture of 85% ethanol and 15% gasoline. (The gasoline is there just to start on cold mornings.) Most of these are concentrated in the farm belt but they’re starting to make their way into major cities on the East and West Coasts as well.

The point is this: these stations have been set up to handle corn ethanol. This is the result of the 35-year government effort to promote biofuels. But Light suggests that these stations could just as easily dispense ethanol made from natural gas. No new technology would be necessary, nor would it require any special permission from the government. (Methanol, which is a little easier to synthesize than ethanol, has a greater toxicity and would require some additional approval from the Environmental Protection Agency.)

So according to Light, this is where the investment opportunities lie. The conversion of natural gas to ethanol is the first and most important step, but Coskata, Inc. already has a working facility and Celanese Corporation is converting coal to ethanol in Indonesia. Light estimates that, at current and foreseeable prices, the return on investment could be as high as 46 percent.

Then there are all the intervening steps. “Alongside the core ethanol production opportunity, there are several related supply-chain developments projects, such as production facility development, ethanol fuel marketing, fueling station upgrades, blending facility expansions, and vehicle update kits,” he writes. All are well within the range of private investment. No government subsidies or mandates would be required.

In other words, the conversion of significant portions of our auto fleet to natural gas presents a whole world of opportunity just waiting for imaginative, ambitious investors to take advantage.

Anybody interested?