Navigant Research Blog

Is Natural Gas a Key Solution to China’s Air Pollution Problem?

— January 12, 2016

The recent air quality Red Alert issued by Beijing on December 8, 2015 has again drawn everyone’s attention to China’s notorious air pollution caused mainly by burning coal. As a cleaner alternative to coal, natural gas has become a focus of China’s energy reform. In 2014, the Chinese State Council  announced an ambitious target of increasing natural gas consumption from around 6% to above 10% of the total energy mix by 2020. Despite China’s determination, the road to a natural gas boom will likely be bumpy due to the risk of timely supply development and the challenge of forming a competitive market.

Supply Development

To support the projected growth of natural gas consumption, China is counting on its unconventional shale gas resource. China has the largest shale gas resource in the world (almost twice the size of shale resources in the United States), but development has been slower than expected. By the end of 2015, the production capacity of Fuling shale gas—the only shale gas field under commercial development in China—had just reached 0.48 bcf/d (billion cubic feet per day), less than 3% of the country’s total natural gas consumption. China also lowered its 2020 shale production target by half to 2.9 bcf/d. Even with a lower target, to increase the shale gas production sixfold in 5 years will require tremendous investment and innovation that will need to equal or exceed the shale gas revolution in the United States. Whether shale gas will become the main driver for natural gas consumption in China is still uncertain.

In addition to domestic production, China also needs natural gas imports through pipelines and liquefied natural gas (LNG). China currently operates two pipelines that import natural gas from Central Asia and Myanmar. The China-Myanmar gas pipeline has been severely underutilized since it began operation in 2013. The Central Asia Gas pipeline has also experienced frequent winter supply disruptions. Although a new pipeline from Russia will increase the import capacity, the lack of stable pipeline import will likely persist due to the geopolitical uncertainty. On the LNG side, since the regional LNG price is currently linked to oil prices, high price volatility will be a constant challenge to Chinese buyers. The current low LNG prices also pose challenges for LNG suppliers looking at serving the Chinese market. In general, cost and supply reliability are the two major factors that serve to place a cap on future levels of natural gas imports in China.

Chinese Market Development

The lack of a competitive market is perhaps the biggest challenge to China’s natural gas industry. Unlike in the United States, where natural gas prices are determined by the market, Chinese natural gas prices are determined by the national government. Since the natural gas prices do not promptly reflect market dynamics, natural gas sellers often have to operate at a loss while natural gas consumers sometimes prefer cheaper alternative fuels. In addition, China also needs a robust natural gas transportation system that can distribute natural gas in a timely and efficient way across its vast area. Currently due to the limited access to pipeline gas and lack of storage facilities, gas shortages are common. The recent gas supply crisis in Beijing highlights the vulnerability of the natural gas system. Whether China can boost gas consumption will depend on infrastructure development and market maturation.

2015 marked China’s slowest growth rate of natural gas demand in more than a decade, casting further questions on the prospect of achieving the country’s national target by 2020. Unless immediate actions are taken to address the challenges on both the supply and demand side of the Chinese market, the role of natural gas to fight air pollution might yet prove some ways off in the future.


Boom Times Gone for the Oil Industry

— January 11, 2016

refineryMoved by growing concerns of global climate change and cheap natural gas, the coal industry has faltered over the last decade. Though moving away from coal is a positive development for the environment, the economic impacts are negative for the regions that produce coal. A consequence of progress, the transition from coal to cleaner electricity generation resources will eventually extinguish coal-dependent economies. Like the coal industry, the crude oil economy is beginning to witness negative economic impacts stemming from global climate change concerns and competing cheap and clean alternatives.

Oil has many uses outside of fueling engines; however, a vast majority of global crude oil production is indeed used for this purpose, with light duty vehicles (LDVs) being crude oil’s largest consumer. Every year, the fuel economy of the average LDV in use improves due to fuel efficiency regulations that govern over 80% of the global LDV market and general consumer interest in fuel cost savings. In addition, electricity has now cemented a foundation where all other alternative fuels have failed and is growing more attractive each year. Currently, electricity fuels a mere fraction of a percentage of the total miles driven by LDVs globally but its continued growth is a near certainty. Both fuel efficiency improvements and electricity stand to blunt demand for oil moving forward despite stable, low oil prices.

Beginning in the middle of 2014, the oil price dive has sustained through 2015 and is unlikely to abate in 2016 (and perhaps beyond). The once-historic high prices of oil have given way to technological innovation that has made extraction from oil shale competitive with conventional resources, opening up vast reservoirs in North America and potentially the world. The tapping of North America’s resources alone—alongside little to no growth in global oil demand—has created an oil glut and the resulting low price.

The outcome is a gradual retreat from oil, with dependent economies suffering the most. OPEC members are running deficits and Russia is now considered the worst performing midize economy in the world. In North America, economic indicators in Alaska, Canada, and North Dakota are not positive. Preliminary data from the Bureau of Labor Statistics (BLS) shows that in the United States, employment in oil & gas extraction has fallen 8% since October 2014, the largest drop since employment in the sector fell over 7% from the end of 2008 to the end of 2009.

A New Normal

However, unlike the end of 2009, growth is not ahead; the new normal is real. While OPEC members continue to produce without limits in efforts to price out North American drillers, these drillers are more resilient than anticipated and have prepared wells for when prices rise. The fact that North American drillers can easily turn production on when prices rise is likely to marginalize gains in oil prices for quite some time unless a severe shortage in global oil supply emerges or demand skyrockets. The former is much more likely than the latter.

Unfortunately for the oil industry, the amount of oil consumed has not fluctuated with its price. First, the price of oil is expected to have marginal impacts on the price of gasoline depending on where the final product is consumed due to distribution costs as well as local, state, and national taxes. Second, consumers don’t simply want to fill up on gasoline because it’s cheap; they fill up because they have to. Consumers are unlikely to increase the number of miles they drive and will continue to find ways to further minimize or end consumption regardless of how cheap gasoline may be.


Oil Prices Cut Drilling Sector Sharply

— September 17, 2015

Magnifiers_webOil drilling rig numbers in the United States have been declining rapidly, down about 57% from a year ago. The total count was 675 as of last week, up one from the week before. This marks the sixth week that rigs have been added by domestic oil drillers, although the numbers are still far lower than they were at this time last year, when the total number of oil rigs sat at 1,575. The rig count is approaching historic lows: the highest historical rig count was 4,530 in 1981; the lowest was 488 in 1999.

The total quantity of oil produced has not decreased nearly as rapidly as the number of rigs. Due to technology advances and greater efficiency, each rig has been yielding more oil production on average. Additionally, fewer rigs are being shut down in the most productive regions—the Bakken, Eagle Ford, and Permian plays. The U.S. Energy Information Administration estimated a decline of 100,000 barrels per day from June to July. This brought production in June to 9.3 million barrels a day. Overproduction in a tepid marketplace leads to further declines in the price of crude oil.

A Double-Edged Sword

The decline in drill rigs is related to declines in the price of crude oil, which has fallen from $98.15 in August 2014 to $45.63 a year later. Despite the obvious decline in drilling sector jobs, there are benefits to the declining numbers of rigs. Drilling rigs tend to use a lot of fuel, and quite often diesel. Recent regulations proposed by the U.S. Environmental Protection Agency limit the emissions produced by a diesel rig, but the real impact on emissions comes from the declining numbers of engines using the fuel. The decline in diesel use has enormous benefits for other sectors of the economy, including a surplus of diesel fuel to be used for agricultural purposes. Consumers in the United States are experiencing lower retail costs for gasoline and heating oil; worldwide, importing countries are also experiencing economic growth due to the lower cost of oil. Yet, the stronger U.S. dollar prevents this growth from being as dramatic as that in the States. Lowered oil prices are positively affecting many oil-importing countries, while negatively affecting the exporters.

Globally, it appears that the fall in oil prices should have a positive impact. Drastic declines in the price of oil tend to shift extra income to consumers, driving global economic boosts. According to The Moscow Times, whenever the price of oil is halved (as evidenced in recent years 1982–1983, 1985–1986, 1992–1993, 1997–1998, and 2001–2002), it is followed by rapid global growth. The inverse is also accurate, with rising oil prices preceding every global recession in the past 50 years. If trends hold true, the current decline in oil prices could lead to greater economic well-being around the world.

Last week, oil prices began to increase gradually, but a 3-day uptick was followed by a $2.10 fall to $47.10 a barrel. This still marks an increase from the $39.57 price of August 26. Perhaps the decline in oil drilling rig counts will not persist so very long, after all.


In Profit Crunch, Oil Firms Look to Big Data

— June 5, 2015

New_Picture_webAs the price of crude continues to fall and the availability of places for oil companies to store oil shrinks, oil and gas companies are looking for ways to reduce costs and preserve profits. Operational efficiency is a familiar path—one that leads to layoffs, up to 75,000 coming at companies big and small, as reported by Continental Resources. At the same time, some companies are looking inward to big data as a way to make operations and exploration more efficient. We’ve written about the large potential for big data to make buildings, for example, more efficient. And it’s clear that the value of big data lies in its context.

In the case of oil and gas, it is important to keep in mind how diverse this industry is. The use of data in oil exploration and production is wholly different from its employment in oil refining, distribution, and marketing.

Down the Stream

According to the panel members of a recent Cleantech Forum panel on the digitization of the oil and gas industry, there’s scant consensus on data models and formats in single business units, let alone across an entire company or the industry. The spread of digitization is not universal, either. This presents a clear challenge to the industry–data analytics are only useful when the data is consistently collected and, well, analyzed. But it also presents an opportunity. Any company that can figure out how to collect, integrate, and analyze data across the oil and gas stream—from wellhead to gas pump—will be able to unlock the potential of both operational efficiency and optimization. Those gains in efficiency will save money and help the companies achieve their sustainability goals.

A few companies are already testing that promise. WellAware is looking to bring a new Internet of Things (IoT) network for oil and gas, providing customers a view into the production, conveyance, and processing of petroleum products. The Texas-based firm deploys sensors and gathers data from existing monitors to provide visualizations and analytics on system performance. To compete with OSIsoft, an incumbent in oil and gas data collection and historian services, WellAware will provide hardware and advanced analytics—two offerings that OSIsoft either does not offer or outsources.

Human Input

A different approach, one based on large time series data analysis, is offered by Mtelligence Corporation and MapR, a provider of the powerful open-source Hadoop solution. Called Mtell Reservoir, the solution will focus on real-time and historical sensor data analysis to provide system managers operational insight. Given the large volume of data gathered in a drilling operation and the time it takes to load and analyze data, an in-stream solution will have great value.

These big data solutions are poised to give oil and gas operators greater intelligence and insight into operations. However, they don’t close the loop on operations, removing the need for people making decisions. This is due in part to the complex nature of drilling through multifaceted substrates and processing materials of varying quality. Production technologies like directional drilling and fracking have changed the oil and gas business and are in part responsible for the current low oil prices. Data analytics may help to stem the profit losses in the near term.


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