The price of guar gum, a product used to thicken food for decades, has been up and down this year.  The gum is made from guar beans grown in India.  The country produces over 1 million metric tons of guar beans and exports nearly half a million metric tons of guar products annually.  Guar gum is also used in medical products and to thicken and bind various products like pills and lotions.  Recently, guar gum has been put to a different use.  Hydraulic fracturing (or fracking), the process by which hard-to-get natural gas is extracted from shale, requires a “gelling” product, a hydrocolloid, to keep cracks open as water and natural gas are pumped back out.  Guar gum has proven to be an economical alternative to other gelling agents used in fracking and less detrimental to the environment.

Indeed, fracking is rapidly becoming the largest market for guar.  Over the past 2 years, the demand for guar gum rose from 250,000 metric tons to 480,000 metric tons per year.  That’s why in March 2012, when the Forward Markets Commission (FMC) of India closed physical guar contracts for the season, drastically reducing exports, an outcry arose.  The Commission’s reason was the rapid rise in guar prices; between December 1, 2011 and March 27, 2012, the price of guar almost quadrupled.  This caused inflation in food prices, especially in parts of India such as the desert state of Rajasthan, where guar is still used as a primary protein source.   Since the FMC’s intervention, however, the price of guar seeds has fallen 7% and the price of guar gum is down 6%.  The market is expected to open for contracts again sometime in the next few months, once guar crops have been sown.  However, potential droughts could mean a short supply of guar, despite high demand.  Prices are expected to soar again as soon as the FMC reopens the guar market.

Due to the highly unstable supply and fluctuating prices of this humble bean, many companies are now exploring alternative gelling options.  TIC Gums, for example, is introducing Ticaloid Guar Replacement (GR) 8700, a complete replacement for guar gum in applications ranging from fracking to food additives.  Other companies experimenting with guar substitutes are Baker Hughes Inc., Halliburton Co., Nabors Industries Ltd., Trican Well Service, and Ashland Inc.

The lack of a reliable, inexpensive hydrocolloid means natural gas markets may not expand as rapidly as initially projected.  Indeed, the pace of natural gas drilling in Pennsylvania has slowed considerably since 2010, from an average of 6 new wells to 4.6 wells per day.  Lower supplies of natural gas would slow the shift away from coal, nuclear, and other forms of power generation.    Finding a synthetic substitute for guar could stabilize price and, therefore, the supply of natural gas.  Once the export ban is lifted, though, impoverished farmers in Rajasthan will enjoy  high-demand from the fossil fuel industry halfway around the world.

With many headlines focusing on the energy and power markets in Africa, and with the announcements of the conference line-ups for Power-Gen Africa 2012 and Clean Power Africa, the attention of the smart energy world is once again firmly on Africa.  Meanwhile, the natural gas gold rush in America has driven a number of speculators to seek the next bonanza.  China, now Africa’s largest trading partner, already has a number of energy investments in Southern Africa, specifically in natural gas exploration and production.

Non-Chinese producers are also moving in.  Australia based Kinetiko Energy, for example, has increased its potential in-place resources at its Amersfoort coal-bed methane gas project in South Africa to 2.4 trillion cubic feet of gas. This is up a whopping 41% from previous estimates. In mid-August state oil company PetroSA signed an agreement with Indian oil and gas exploration company Cairn India Group for crude oil and natural gas exploration in the Orange Basin on the west coast of South Africa in Cape Town.

A large increase in natural gas production in Southern Africa would have far-reaching effects in the areas of demand for coal, nuclear power, and renewable energy.  At present, South Africa relies heavily on coal for its electricity and is increasingly looking at renewable energy projects, though those plans are still nascent.  Eskom, the South African monopoly utility, is also pushing forward plans for a nuclear resurgence in South Africa. Earlier in 2012 Eskom confirmed its plans to move forward with a program to add 1.2 gigawatts (GW) of new nuclear capacity, with initial tenders expected be announced around the end of 2012.

Of the three fuels (coal, nuclear, and renewables), coal would be the easiest to replace and would provide the largest gains in terms of carbon emissions reductions.  A new wave of natural gas could also help unlock a surge in renewable energy, with natural gas plants providing base load power and renewables the peak power – assuming that reliable energy storage was also in place.  The biggest winner, though, could be fuel cells.

Fuel cells are highly efficient natural gas conversion devices, and with South Africa’s increased interest in fuel cells having an abundant supply of cheap fuel would go a long way to removing market barriers for local adoption.

In the United States, the natural gas boom is simply providing an already powerful economy with increased access to cheaper fuel.  A natural gas boom in Africa, by contrast, could have truly revolutionary impacts in terms of rural electrification, grid stability, and decreased carbon emissions.

The U.S. State Department has been tap-dancing for the last week, trying to quell the outrage over remarks made by Todd Stern, America’s chief climate negotiator, in a speech at Dartmouth.  Stern implied that global, top-down targets for limiting climate change – specifically, the goal of keeping global warming below 2 degrees Celsius – should be abandoned in favor of national initiatives to limit carbon emissions.

“Insisting on a structure that would guarantee such a goal will only lead to deadlock,” Stern said.  “It is more important to start now with a regime that can get us going in the right direction and that is built in a way maximally conducive to raising ambition, spurring innovation, and building political will.”

Representatives of the European Union, and of developing nations vulnerable to rising seas and other climate change effects, spluttered in outrage.

“Suddenly abandoning our agreement to keep global warming below 2C is to give up the fight against climate change before it even begins,” Tony de Brum, Minister in Assistance for the Marshall Islands, told the BBC.  “‘Flexibility’ on our 2C limit would set the world on a path to irreversible, runaway climate change.  For many low-lying island states, including my own, that is not a solution – it is a death sentence.”

Stern quickly backtracked:  “There have been some incorrect reports about comments I made in a recent speech relating to our global climate goal of holding the increase in global average temperature to below 2 degrees Celsius.  Of course, the U.S. continues to support this goal; we have not changed our policy.  My point in the speech was that insisting on an approach that would purport to guarantee such a goal — essentially by dividing up carbon rights to the atmosphere — will only lead to stalemate given the very different views countries would have on how such apportionment should be made.”

“Apportionment” is a diplomatic term for the so-called “firewall” between the economies of the developed world, which have nominally agreed to make major cuts in their emissions of greenhouse gas emissions, and developing nations, which have so far largely avoided such limits, arguing that they should have the same right to unfettered economic development, and to the production of millions of tons of carbon, that the First World has long enjoyed.  That firewall has become somewhat porous, as the emerging economic powers China and India attempt to retain their status as “developing nations” and thus avoid accepting internationally mandated emissions cuts. In that light Mr. Stern’s remarks sound only sensible:  “As a matter of substance, you cannot meet the climate challenge by focusing only on developed countries when developing countries already account for around 55% of global emissions from fossil fuels and will account for 65% by 2030.”

On this, Stern and EU Commissioner for Climate Action Connie Hedegaard are in agreement.

The Coalition of the Unwilling

Unfortunately the firewall debate has become an excuse for countries on both sides to engage in spitball fights while avoiding the monumental task of finding a way out of the carbon impasse.  The recent talks in Bonn, following last year’s Durban climate summit, degenerated into “angry exchanges between rich nations, fast-industrializing ones and those prone to climate impacts,” the BBC reported, as the “coalition of the unwilling” – including the United States, China, India, and Saudi Arabia – blocked the path to further binding agreements on carbon emissions and on financing mitigation measures in the poor, low-lying countries that are already seeing the effects of rising seas, widespread drought, and so on.

“It’s absurd to watch governments sit and point fingers and fight like little kids while the scientists explain about the terrifying impacts of climate change,” remarked Tove Maria Ryding of Greenpeace International.  For all its public commitment to finding a new energy strategy that will confront the realities of global climate change, the Obama Administration has been unsuccessful, to date, in shifting away from the obstructionist policies of the Bush years.  That’s most clearly demonstrated in the fight over emissions from airliners arriving and departing from European airports.  The EU wants to make all foreign airlines subject to its strict carbon trading system; U.S. airlines are fiercely rejecting those restrictions, and are pressuring the administration to file a protest, through the International Civil Aviation Organization (ICAO), to challenge the EU’s authority to regulate non-European airlines.

The natural gas boom in the United States has fundamentally shifted the ground underneath President Obama’s halting energy initiatives, giving the U.S. a domestic source of cheap fossil fuel even as U.S. emissions have actually flattened (largely due to the global recession).  But this unforeseen bounty could easily become an excuse for doing nothing on the larger questions of energy strategy and climate change.

“America’s good fortune has come despite the unqualified failure of Mr Obama’s most cherished policies on energy,” commented The Economist, in a column noting that both Obama and Mitt Romney, his Republican opponent, lack the vision to craft a realistic energy policy to transform today’s carbon-based economy.  “The lesson of the shale gas boom, after all, is not that government should forswear any part in shaping the energy mix, but rather that innovation and entrepreneurship can yield dramatic results in a short time if the right incentives are in place.”

Moving away from toothless, top-down United Nations mandates in favor of pragmatic progress at the national level may well be the most intelligent way forward for limiting climate change.  But tap-dancing is not going to get us there.

One of the key energy trends that Pike Research has been tracking over the last few years is the rising volatility in the oil-gas price ratio.  Measuring the difference between the price of a barrel of oil and an mmBtu of natural gas, the oil-gas ratio has held relatively constant over the last 25 years, with oil trading at 8 to 10 times the price of natural gas.  While a barrel of oil’s relative energy density to an mmBtu of gas suggests that the ratio should really be about 6 to 1, oil trades at a premium due to global demand and its relative convenience as an energy carrier.

Beginning in 2009, that historical correlation started to disintegrate in the United States, due mostly to a combination of rising global crude prices in response to Middle East and North African geopolitical events and a surge in domestic production from unconventional shale gas.

As illustrated by the chart below, the ratio has reached 50 to 1 in recent months (touching as high as 52 to 1 in April 2012), more than five times the historical average:

As energy commodities, crude oil and natural gas should logically have a high degree of correlation.  In reality, key market differences translate into diverging drivers.  On one hand, oil is a global commodity with macro-level demand drivers, and its price is acutely sensitive to above-ground, geopolitical forces.  Natural gas, on the other, is closely tied to regional markets with prices primarily driven by local forces.

The divergence is significant on many levels, but at the heart of this shift is a fundamental imbalance in energy markets that has yet to run its course.

Writing for the Wall Street Journal, Carolyn Cui explains:

“Customers who burn cheap U.S. natural gas as a fuel currently enjoy a competitive advantage, and buyers of other fuels have a rising incentive to try and switch.  That may eventually narrow the gap again, but it could be a costly and time-consuming process.”

For clean energy, volatility in the oil-gas ratio points to a substantial shift in market dynamics, which even if short-lived, will have substantial implications for cleantech growth over the coming decade.

Consider that one of the key drivers behind the growth in the clean energy sector in recent years was a purported shortage of fossil fuels, specifically oil and gas.  Facing the prospect of Peak Oil and predicted natural gas shortages across the United States just five years ago, stimulus dollars and public policy coalesced around clean energy.  With a scarcity-propelled rise in fossil fuel prices and innovation across the clean energy landscape driving down costs, price parity for grid, fuel, and other applications seemed just around the corner.

While parity can be fleeting, it has been achieved in some applications; in others, a precipitous drop in natural gas prices across North America has raised significant barriers for still growing industries like landfill gas-to-energy (LFGTE), solar, and geothermal, that remain relatively expensive.  As depicted by the sharp increase in the oil-gas ratio, this shift happened almost overnight, and in some instances, caught investors and project developers completely by surprise.  In other applications, such as the use of LNG fuels in place of diesel for captive fleets, lower natural gas prices could actually benefit clean technologies such as biomethane production.

Although the ratio has fallen in recent months, it remains unclear whether a return to the status quo will lead to business as usual or a more permanent diversion will result in a significant paradigm shift.  Some experts argue that current volatility is only a short-term anomaly and that forces will act to bring prices back into their long run equilibrium, while others question whether or not a stable long run relationship between crude oil prices and natural gas prices even existed in the first place.

Amid the uncertainty, many project developers appear to be taking a wait-and-see approach, especially U.S. policy will coalesce behind natural gas away from the traditional fossil juggernauts, coal and oil.  In the first case, unfolding regulations from the EPA targeting coal plants suggest that this shift may be underway; in the latter, time will tell.

While my colleagues Dr. Kerry-Ann Adamson and Dexter Gauntlett and I have examined the natural gas phenomena and its impact on Smart Energy (see Natural Gas – Boon or Bane for Smart Energy?) as well as biogas (see Biogas and the Natural Gas Bonanza), the widening gap between relative prices is certainly worth monitoring.  As Boon or Bane points out, however, it may still be too early to tell which technologies stand to benefit and which may suffer.