Navigant Research Blog

Waiting for the Methane Hydrates Boom

— November 20, 2013

Even as the heralded natural gas energy revolution is still gearing up, the natural gas vehicle industry may be looking ahead to the next revolution.  While shale gas is having a significant impact on U.S. energy economics, some in the natural gas truck and bus industry are already eyeing the potential that methane hydrates could secure natural gas as the energy source for transportation in the 21st century.

During the research for my upcoming report, Natural Gas Trucks and Buses, methane hydrates came up twice in conversations, which made me curious as to how real this prospect is.  Methane hydrate (also known as methane calthrate) is methane trapped inside a water molecule, so that the molecule is flammable.  Estimates for the quantity of methane available in methane hydrates vary widely, from 100,000 trillion cubic feet (tcf) to 100 million tcf of methane.  Worldwide methane consumption was 113 tcf in 2010, according to the U.S. Energy Information Administration.  As my colleague Sam Jaffe wrote in a recent blog, though, the methane hydrates revolution is far from a certainty due to environmental and economic concerns, as well as a lack of mining infrastructure.

The Next Revolution?

The Canadians, rich in shale gas, ended their research into methane hydrates this year, which makes the Japanese the leader in R&D on mining technologies.  In March of this year, Japan produced 120,000 cubic meters of gas from methane hydrates in a 6-day offshore test.  On October 31, the Japanese officially requested that the U.S. collaborate on developing mining technologies, with a target of production beginning in 2018 or 2019.

In terms of politics and energy consumption, 2018 seems like a long way off.  But natural gas power plants can take up to 3 years from design, approval, and construction to operation, and most vehicle manufacturers are already planning or actively working on 2017 model year vehicles.  That’s why methane hydrates are coming up in conversations now.

What isn’t clear is whether the research into methane hydrates mining can get political support before the shale gas revolution has run its course or before biomethane and coal seam gas become economically competitive.  Clearly, in Canada, the answer is no.  Now that methane hydrates are known to exist and have been proven technically minable, countries with the means and needs for new energy sources (Japan, Germany, South Korea, and perhaps even China) are likely to push ahead to improve the economics of this potential new revolution.  If methane hydrates can be recovered in an environmentally sustainable and economically viable way, they are unlikely to remain underwater for long.

 

Fuel Cell Market Gets Real

— November 5, 2013

Is there such a thing as “the fuel cell industry”? The industry is really a collection of disparate applications and markets.  What exactly do companies focused on passenger cars, uninterruptible power, energy storage, residential power, or forklifts have in common? One thing that the hosts of this year’s Fuel Cell Seminar & Energy Exposition, in Columbus, Ohio, hoped they had in common was the supply chain, which is Ohio’s strength in this sector.  And, one thing I learned at the Seminar’s plenary sessions is that there is there is no fuel cell in the world that doesn’t have an Ohio component in it.

Beyond that, these markets have quite different stories to tell on where they are in the technology development timeline and where they are going.  But the one theme I heard repeated in Columbus was realism – realism about the need to reduce costs to compete in the commercial market.  Two companies, Honda and American Electric Power, stressed that fuel cell technology is ready, but the costs must come down to compete against the many other clean, efficient options available.  Honda’s Bill Konstantacos spent much of his talk  touting the advantages of its gas and hybrid vehicles, which seemed rather off topic, until the point was made that fuel cells have to compete with these technologies, and will not be adopted just because supporters think fuel cells are the best zero-emissions option.  Reducing costs brings us back to the supply chain, since that is where the costs are going to come out at this stage, more so than from any basic research and development.

New Markets for Natural Gas

Other speakers also veered off-topic, promoting their own fuel or technology in addition to fuel cells.  Thus, we had Kathryn Clay of the Drive Natural Gas Initiative touting natural gas vehicles – and, in spite of claims that natural gas infrastructure might be a pathway to hydrogen infrastructure, this does not seem likely.  That said, I credit H2USA, the group developing a road map for U.S. hydrogen infrastructure rollout, for getting the natural gas industry on board with its efforts.  Fuel cell vehicles that use hydrogen from reformed natural gas can offer another domestic market as U.S. gas supplies increase.  It will not be until the latter part of this decade at the earliest, but the U.S. natural gas industry has to be making long-term plans on how to utilize the supplies from the U.S. shale gas boom beyond the export option.

I was surprised to see fuel cell vehicles (FCVs) placed in a very prominent role in the seminar’s plenary sessions.  FCVs have long played an outsized role in the public face of fuel cells, thanks to the (mostly contrived) battle between FCVs and battery electric vehicles, and because the media finds it more exciting to talk about cars than power boxes.  Frankly, this is not helpful to the rest of the fuel cell world because it creates an impression that the technology is not yet ready for prime time when, in fact, more than 28,000 fuel cell systems were shipped in 2012.  Still, there was some news on the FCV front – Honda has finally committed to introducing a new FCV in 2015 (its FCX Clarity is from 2008) and Toyota has said it is on track to produce its first production FCV in 2015.  Add to that the commitment in California to fund hydrogen fueling during the next 10 years, and there is continued momentum in the FCV arena.  It just requires being realistic about the timeline: Navigant Research’s report, Fuel Cell Vehicles, marks 2020 as the tipping point for this market.  In the meantime, other fuel cell applications are quietly making inroads into their respective markets.

 

Questions in Shale Gas Export Boom

— October 18, 2013

Boosting U.S. producers’ plans to export shale gas to the energy-thirsty nations of Asia, the U.S. Department of Energy (DOE) last month approved a plan by Dominion Resources to build a natural gas terminal at Cove Point, on the Chesapeake Bay in Maryland, to export up to .77 billion cubic feet a day (bcfd) to Japan and India.  Estimated to cost $3.8 billion to build, the facility could start shipping gas in 2017, the company said.

Cove Point is the fourth U.S. facility to receive federal approval to export liquefied natural gas (LNG) to countries that do not have a free-trade agreement (FTA) with the United States.  According to the Oil & Gas Journal, there are 19 other non-FTA export applications under review at the DOE.

The approval “is good news on many fronts,” Dominion CEO Thomas Farrell said in a statement, “including the thousands of jobs that will be created, the boost in government revenues that will result, and the support it provides to allied nations.”

Good For Everyone

Indeed, the natural gas industry sees the coming boom in exports to Asia as a windfall that will shore up the U.S. trade deficit, fuel a long economic boom, usher in a new era of energy independence and prosperity, and, who knows, maybe even end the conflict in the Middle East.  Earlier this month, the Energy Information Administration (EIA) announced that it expects the United States to be the world’s leading exporter of petroleum products, including oil and natural gas, in 2013, surpassing Saudi Arabia and Russia.

While that’s good news for the U.S. energy sector and for the U.S. economy in general, the brilliant scenarios being painted by natural gas proponents obscure some less comfortable realities.  For one thing, the Asian premium –  the elevated price paid by countries in Asia Pacific, particularly Japan and South Korea, the world’s two largest LNG importers – is unlikely to last.  “We do not want to pay the so-called ‘Asian premium,’ and the shale gas revolution will play an important role in narrowing that gap,” Jang Seok-hyo, CEO of Korea Gas Corp., told a Washington Post reporter at the 22nd World Energy Congress last week, in Daegu, South Korea.

Technology advances are likely to reduce the cost of liquefying and transporting natural gas, and as more gas gets shipped overseas, eventually, a globalized market of the sort that exists today for crude oil will emerge, normalizing prices across regions and eliminating the sharp cost advantage enjoyed today by U.S. producers.  Being “the Saudi Arabia of natural gas” is great, but you can’t expect importers to pay a 400% markup forever.

China Rising

At the same time, the elephant in the Asian gas market, China, is set to become a major producer of natural gas itself.  According to the EIA, China is second only to the United States in technically recoverable natural gas, and while much of that gas is trapped in remote geological formations even trickier to tap than the U.S. shale fields, the Chinese government is clearly determined to recover it.  In August, officials at PetroChina, the state oil and gas company, said they will accelerate domestic production of natural gas, largely by tapping abundant shale reserves in the interior.  In the first 6 months of this year natural gas production rose by 8.1% over the same period in 2012, and PetroChina President Wang Dongjin said unconventional gas production will reach 2.7 bcfd by 2015, according to Platts.  Aided by foreign oil majors, China could even become a net exporter of LNG.  Chevron is expected to begin production from the massive Chuandongbei field, in Sichuan Province, next year, and expects to produce some 3 trillion cubic feet there duringthe next 20 years.

China’s natural gas industry is still likely to trail U.S. production.  But profits from the expected gas-export boom probably shouldn’t be booked just yet.

 

Alternative Drivetrains Poised for More Growth with Fleets

— September 26, 2013

Light_Ladder_webThe trucking and fleet vehicle industry is facing some enormous challenges but is seeing strong growth this year.  The long-haul trucking industry is facing a well-publicized driver shortage, and all trucks are seeing increasingly strict regulations for emissions, fuel economy, and driver safety.  With the continued slow rebound of manufacturing, automobile sales, and construction, the fleet industry is also starting to feel a bit more comfortable.  Since gasoline and diesel prices are relatively stagnant and economic prospects are improving, is it possible that the momentum felt in the alternative fuel vehicle market for fleets is likely too slow?

The answer to that question is likely to be different for the different types of drivetrains.  There is a tremendous amount of excitement and growth in the natural gas vehicle market, and that momentum continues to be built on a strong economic foundation.  Both the compressed natural gas (CNG) and propane truck markets are generating payback periods that can be as short as about 1.5 years in high fuel use applications.  These short paybacks encourage adoption and can help quickly cover infrastructure as well.  The smaller vehicles that have higher fuel economy see longer paybacks and rely more heavily on government or company efforts to reduce environmental impact – a more tenuous position as the economy rebounds – but fleet budgets remain tight.

Liquefied natural gas (LNG) trucks are more economically challenging.  This is not only a refueling infrastructure challenge.  The trucks also have longer payback periods than CNG trucks with more variance in LNG prices in different parts of the country.  LNG trucks are increasingly likely to feel competitive pressure for fleet dollars coming from CNG rather than diesel (though that is not to understate the competition from diesel).  From a logistic perspective, because of new truck driver “hours of servicerules, it may be that long-haul LNG trucks that have a driving range of 980 miles are not likely to be used significantly different than a CNG truck that gets 870 miles of range.  Trucks are likely to only be used for about 500 to 550 miles before switching drivers, so even with two drivers LNG and CNG long-distance trucks are likely to see similar distances before refueling is required (or at least accessible).

Electric vehicles in fleet markets remain heavily contingent on gasoline and diesel prices.  The cost of operation for a plug-in electric vehicle (PEV) is significantly lower than that of liquid or gaseous fuels, but the acquisition costs remain significant and, therefore, payback periods can be long depending on the drive cycle and the cost of fuel.  The passenger car PEV market is seeing falling prices, but the medium and heavy duty truck market continues to see high costs and low production numbers.  The result is that fleets are likely to have a tough time making a strong case for moving to truck PEVs with long payback periods.  However, PEV passenger cars can be economically beneficial for fleets without easy (or inexpensive) access to CNG or propane, as the cost to install recharging infrastructure remains below refueling infrastructure costs of either fuel.

Overall, the alternative drivetrain market is finding fuels that fit specific niches without significant overlap except in a few specific cases.  It is with this perspective that fleets and manufacturers will gather in Phoenix, Arizona for the Green Fleet Conference.  It will be interesting to see whether current and anticipated gasoline and diesel prices, driver regulations, and potential labor shortages cast a pall over the euphoria.

 

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