Navigant Research Blog

Oil Price Crash Rocks Producers’ Worlds

— December 22, 2014

The effects on U.S. consumers of the steep decline of oil prices in recent months have been very welcome: in mid-December, average nationwide gas prices dropped below $2.50 a gallon, leading some analysts to predict a very green and merry Christmas.

The geopolitical ramifications, however, are much less benign.  They can be seen most visibly in Russia, where the value of the ruble is collapsing and the economy is slipping into recession.  The impacts of a crippled economy, clobbered by plummeting oil prices and economic sanctions over the annexation of Crimea, on the government of Vladimir Putin are impossible to predict.  But Russia in chaos is not a good thing for international security.

The December issue of Navigant’s NG Market Notes examines the likely implications of the current price dive on the global oil and gas industry.  Below is a rundown on the consequences in three critical OPEC countries.


Plunging oil prices have deepened Venezuela’s economic crisis, bringing “massive shortages of basic goods, the world’s highest inflation rate, and a steep currency devaluation,” according to Bloomberg Businessweek.  The decline poses a serious threat to the government of President Nicolas Maduro, who has attempted to continue Hugo Chavez’s program of massive socialized welfare and subsidized prices.  In mid-December, Fitch Ratings downgraded Venezuela’s credit rating to “CCC,” which signals a strong possibility of default.  Low oil prices also deepen Venezuela’s dependence on China, which has lent some $40 billion to prop up the faltering Venezuelan economy through loans and other credits.  Venezuela now exports about 540,000 barrels of oil a day to China, most of which is unprofitable because it goes to repay Chinese loans.


Overruled at the November OPEC meetings in its bid to push the producing countries to cut production, the Islamic Republic of Iran has moved to the paranoid phase.  Oil minister Bijan Zanganeh declared, “The prolongation of the downward trend of the oil price in world markets is a political conspiracy going to extremes,” according to the British newspaper The Telegraph.  Iran’s currency, the rial, has lost 8% of its value against the dollar in recent weeks as Iran copes with not only plummeting oil prices, but also the crippling effects of economic sanctions from Western nations over its pursuit of nuclear weapons technology.  The impact is also being felt in neighboring Syria, where the Assad regime is propped up in the country’s 4-year-old civil war by support from Shi’ite Iran.  Iranian officials have insisted that support for Syria will continue.  But the steep price fall “will break Iran’s back, not just the level of support for Assad,” a Syrian businessman told Reuters.

Saudi Arabia

Perhaps the most significant effects of falling oil prices can be seen in the Kingdom of Saudi Arabia, the world’s biggest oil producer for decades until being overtaken by Russia and, more recently, the United States.  The Saudis, who can produce oil from their desert fields at a cost of as low as a few dollars per barrel, have calculated that, at least for the time being, they can endure the effects of very low-priced oil.  In so doing, they are choosing to price other, higher-cost producers out of the market.  Already, production in the North Sea and western Canada is jeopardized, although the common notion that the Saudis are waging a “war on shale” by making U.S. shale oil production uneconomical is probably wrong.  U.S. shale producers can still make money with prices as low as $30 a barrel, according to Morgan Stanley.  How long Saudi Arabia can put up with oil below $70 a barrel, however, is an open question.  The desert kingdom has spent billions on defense, largely with U.S. material, in the last 5 years.  According to RBC Capital Markets analyst Helima Croft, whose calculations were presented on, if prices persist at around $75/barrel, Saudi Arabia’s government reserves could be depleted by 2018.


As Coal Declines, Low-Emissions Engine Plants Spread

— December 22, 2014

In September, the world’s largest reciprocating engine power plant was completed in Jordan.  IPP3, as it’s called, has 38 Wärtsilä 50DF engines, with a total capacity of 573 MW in the extreme desert conditions of Jordan.    The plant uses tri-fuel engines that can run on natural gas, heavy fuel oil, and light fuel oil.  They can start and ramp up to full capacity in less than 10 minutes, and they can do this multiple times a day without any maintenance cost impact.

The modular nature of the plant also allows it to operate at peak efficiency (45%-50%) across its entire output range by shutting down individual engines as needed and leaving others at high load.  In addition, the plant will enable Jordan’s existing turbine plants to operate more efficiently, as they will be used for baseload while IPP3 fills in the gaps where there is fluctuation in demand.

Reliable, Flexible, and (Relatively) Clean

IPP3 is fitted with a nitrate (NOx) control system for reducing emissions and meeting strict environmental health and safety guidelines set by the International Finance Corporation.  The plant follows international requirements for sulfides and particulates as well, and it is expected to produce 35% fewer carbon emissions than an existing steam turbine plant would if both used heavy fuel oil.  IPP3 will also have a close to zero usage of water once gas is employed as fuel, minimizing its environmental footprint.

So what makes this plant important?  It’s important because before IPP3, Jordan’s utility professionals had never contemplated the installation of a reciprocating engine plant, preferring to generate baseload power through combined-cycle gas turbine (CCGT) facilities, which have peak efficiencies of 55% to 60%.  It’s also important because many utility professionals around the world, not just in Jordan, are looking for a solution that is reliable, offers fuel and operational flexibility, is quick-starting and efficient across a wide range of loads, and consumes less water and produces fewer emissions.

Reciprocal Benefits

And, as in Jordan, many other utility professionals are choosing reciprocating engines.  Wärtsilä alone has been installing an impressive number of large gensets recently.  For example, a 175 MW gas engine plant was completed by Wärtsilä in South Africa for Sasol, one of the country’s largest industrial companies, in December 2012.  The company is also in the process of building the 200 MW Pesanggaran Bali power plant, which will be the largest engine-based power plant in Indonesia when it is completed in 2015.

In the United States, Wärtsilä has been contracted to supply a 56 MW Smart Power Generation power plant in Oklahoma, and the company is expected to install a 50 MW plant in Hawaii on the island of Oahu, pending approval of the Hawaii Public Utilities Commission.  There is also a 225 MW plant being proposed in Texas and, reportedly, another 225 MW plant already under construction in Oregon.  All of the plants in the United States will be used to balance wind and solar generation on the grid.  With cheap natural gas, emissions standards, and the grids around the world becoming increasingly unstable, it appears that reciprocating engines’ stock is on the rise.

For more detail on the future of reciprocating engines, please see Navigant Research’s report, Natural Gas Generator Sets.


The Global Biofuels Industry: A Promising Future

— December 17, 2014

As I described in my previous blog, the global biofuels industry faces an uncertain future amid declining crude prices and a surge in shale oil production in key markets like the United States.  Creating even greater uncertainty, the Environmental Protection Agency (EPA) recently announced that it is abandoning 2014 rulemaking around production quotas for biofuels under the Renewable Fuel Standard (RFS2), a clear concession to the controversy that has plagued the rule in recent years.

While these shifts will likely further dampen investor appetite for biorefinery projects focused on producing biofuels for ground transportation, the industry continues to advance on several fronts.

By Air

The commercial aviation industry, for example, has played an important role in driving research and development investment as well as providing a strong demand signal to producers.  More than 25 international carriers from all global regions have tested or piloted biofuels programs in the last 3 years.  These efforts have resulted in more than 60,000 biofuel miles flown according to Navigant Research’s report, Aviation and Marine Biofuels.

 Commercial Airline Biofuel Miles Flown by Flight Type, World Markets: 2008-2013 

(Source: Navigant Research)

Earlier this month, Boeing completed a test flight using a blend of 15% green diesel – a synthetic, drop-in substitute for diesel – and 85% petroleum jet fuel.  To meet growing demand, several high-profile, dedicated biojet biorefinery projects have begun construction.  Led by the Oslo Airport’s commitment to receive 660,000 gallons of biojet fuel beginning in March 2015, emerging bioports also demonstrate a commitment to ensuring that biofuels play a permanent role in future aviation.

The advantage commercial aviation offers the advanced biofuels industry is consolidated infrastructure and like-minded potential off-take partners.  According to the International Air Transport Association (IATA), 1,600 airports worldwide fuel 95% of the world’s flights.  This compares to more than 161,000 gas stations in the United States alone.  This lowers the capital needed to invest in infrastructure to bring fuel to the customer and streamlines contracting opportunities that should accelerate commercial deployment of biojet fuel under favorable market conditions.

By Sea

The U.S. Navy is also moving forward with its goal of sailing its Great Green Fleet in 2016, a fleetwide overhaul aimed at integrating energy conservation into the U.S. fighting fleet, in part by powering ships and aircraft using biofuels.  In anticipation, the Navy has procured nearly a half million gallons of advanced biofuels to support early testing and certification initiatives.  Biofuels were also included in the Navy’s annual procurement for bulk fuels this year for the first time ever.

But non-road transportation applications are not the only area where biofuels are gaining ground in energy applications in recent months.

Primary Energy

In the developing economies of Sub-Saharan Africa, Southeast Asia, and Latin America, the wide availability of biomass, combined with limited access to reliable sources of energy, provides significant opportunities to expand the utilization of bioenergy as a primary energy source.  Conversion of agricultural waste into biogas that is consumed in gas-fueled generator sets, for example, can help anchor community microgrids.  These opportunities build off an already established tradition of utilizing biomass for traditional energy (e.g., burning wood or dung for cooking and as a source of heat) and well-established technological processes.

As discussed in the United Nations’ report, The State of the Biofuels Market: Regulatory, Trade, and Development Perspectives, the developing world remains a significant growth opportunity for biofuels.  Biofuels used in off-grid cooking applications to industrial power generation continue to gain traction as key target opportunities for ethanol fuels, biodiesel, and emerging advanced biofuels.

Bio Niches

Supply chains to support these opportunities have begun laying the early foundation for an emerging global bioeconomy centered on renewable biomass for economic activities, including commodity and food trade, the IT and automotive industries, and environmental technologies.

While the refocus of investment away from ground transportation applications to a wider range of opportunities will mean less biorefinery capacity built through 2020, these niche opportunities are expected to result in the development of specialized capacity expansion in spite of cheap and plentiful oil.


Alaska Leads the World in Microgrid Deployments

— December 17, 2014

Many utilities view microgrids as a threat, due to intentional islanding and/or the effects of reduced customer load on long-term revenue projections.  However, a small but growing number of utilities view the microgrids they own and operate – known as utility distribution microgrids (UDMs) – as the next logical extension of their efforts to deploy smart grid technology.  As I’ve noted earlier, the developed world can learn interesting lessons in this field from the developing world.

Navigant Research’s new report, Utility Distribution Microgrids, shows that the total UDM market represents over $2.4 billion of economic activity today, with the bulk of this investment flowing into projects located in the Asia Pacific region.  As noted in an earlier report, Microgrids, North America is the overall market leader.  Yet, when it comes to utilities, both Asia Pacific and Europe are ahead in near-term deployments and related implementation revenues.  All told, under the base scenario, Navigant Research expects the UDM market to reach $5.8 billion in annual revenue by 2023, growing at a compound annual rate (CAGR) of 10.2%.

However, there’s one important exception to this market generalization: Alaska.

Across the Tundra

“Over the last decade, Alaska has quietly emerged as a global leader in the development and operation of microgrids,” declared Gwen Holdmann, director of the Alaska Center for Energy and Power at the University of Alaska Fairbanks, in a recent interview.  A particular focus has been hybrid conventional-renewable-storage systems, networks that have “logged more than 2 million hours of continuous operating experience for these types of systems,” according to Holdmann.  The state boasts a portfolio of somewhere between 200 and 250 permanently islanded microgrids ranging from 30 kW – about the size of a city block – to large remote hydro systems over 100 MW in size.  These microgrids, many in operation for over 50 years, provide electric power service exclusively to isolated rural populations.  Total capacity exceeds 800 MW, the largest installed base of microgrids in the world today (though China may overtake Alaska by the end of next year).

Holdmann clearly takes pride in what Alaska has accomplished with these scattered, isolated hybrid power systems, which tap fuels as diverse as wind, solar, hydro, biomass, and tidal currents, along with diesel.  While other pundits may point to New York, California, or Hawaii as the centers of North American microgrid development, Alaska has been developing cutting-edge microgrids for quite some time.  “The State of Alaska alone has invested over $250 million in developing and integrating renewable energy projects to serve these microgrids, – far more per capita than any other state in the country,” Holdmann said.

Integration Experts

The advent of advanced technology deployment to these rural systems has forced Alaska utilities and developers to become expert in microgrid development and operation.  By far the greatest challenge was, and remains, the high-penetration integration of intermittent renewables, such as solar, wind, and hydrokinetic, with traditional diesel or natural gas fueled electric power generation.  Nevertheless, Alaskans have repeatedly achieved higher renewable penetration levels than nearly any other place in the world, under incredibly harsh conditions, including daylight hours that shrink to a couple hours a day in the winter and winds that can exceed 100 miles an hour – enough to literally tear apart many conventional wind turbines not designed to stand up to such speeds.

Many Alaskan utilities have set up voluntary goals to reach 70% or 80% renewable penetration within the next 8 to 10 years.  Kodiak Electric Association, which serves Kodiak Island on the southern coast of Alaska, reports that it has achieved 99.7% renewable energy penetration so far in 2014, using a hybrid wind/hydro/diesel/battery/flywheel microgrid.

Mainland U.S. utilities could learn a lot from the innovators up north, where the smart grid is already delivering on the promise of a more cost-effective and sustainable power grid today.


Blog Articles

Most Recent

By Date


Clean Transportation, Electric Vehicles, Finance & Investing, Policy & Regulation, Renewable Energy, Smart Energy Practice, Smart Energy Program, Smart Transportation Practice, Smart Transportation Program, Utility Innovations

By Author

{"userID":"","pageName":"Smart Energy Program","path":"\/tag\/smart-energy-program","date":"11\/29\/2015"}