Navigant Research Blog

Natural Gas Flaring: Time to Turn a $30 Billion Waste Stream into Profit, Part 2

— May 22, 2017

Part 1 of this blog series covered the state of natural gas flaring; this post examines specific developments allowing stakeholders to put the gas to use.

Flaring, the intentional burning of excess natural gas, contributes a great to deal to climate change. Therefore, this practice is regulated across the globe in the hopes of meeting climate goals. But is regulation necessary? Ideally, this wasted gas would be put to profitable, efficient use, limiting the need for specific flare gas regulations. In fact, several developments are pointing toward the profitable use of associated gas, including improved gas-to-liquids (GTL) technologies, improved onsite combustion technologies, and access to electricity offtakers through microgrids. Consider the following:

  • GTL technologies are improving rapidly. Notably, small-scale GTL players like Velocys, CompactGTL, and many others have commercially available products that convert natural gas into a variety of liquid products, including diesel and methanol, among others. These products have generally higher local value than natural gas and can be transported easily. This points to more opportunities in the developing world—much of which relies on liquid fuels, but has limited access to pipelines. GTL technologies have been held back by low oil prices, but become quite economical in many cases when oil costs over $50 per barrel—a scenario playing out with more regularity.
  • Improved combustion technologies, including natural gas reciprocating engines and microturbines, are opening new opportunities. Manufacturers like Caterpillar and Cummins offer dual fuel generator sets (gensets) that can mix natural gas into oilfield diesel generators. Meanwhile, microturbine vendors like Capstone Turbine offer units as small as 30 kW that can run on a wide range of fuels. GE’s Jenbacher gensets, well suited to handle the variable composition and impurities in associated gas, account for more than 450 MW of installed associated gas generation worldwide.
  • Access to new electricity offtakers through microgrids has the potential to put flare gas to use. Improvements in solar, storage, and microgrid controls technologies make microgrids a popular phenomenon—though such microgrids often call for a consistent baseload fossil fuel source to optimize generation. This is a good match for wellhead gas, which is produced with a relatively consistent output. Various companies are developing microgrids tied to oil & gas production, from Horizon Power in Australia to Mesa Natural Gas Solutions in the United States.

Global Opportunities

As a measure of global opportunities, consider developments in two key markets: Nigeria and Indonesia. Both major oil-producing nations, these countries rank No. 7 and No. 12, respectively, on The World Bank’s flare gas ranking list, accounting for a collective $2 billion in wasted gas (based on the $5.61 per million Btu measure previously outlined).

Nigeria has an aggressive strategy of 75% electrification by 2020 and recently released minigrid regulations that encourage decentralized generation. This, combined with continued oil & gas growth, points to opportunities for the $1.5 billion of wasted flare gas.

Indonesia, meanwhile, recently released new rules that incentivize wellhead power developments—provided that they are close to gas fields and to existing transmission lines and consumers. With more than $500 million in gas flared there, this regulation will open opportunities for microgrid developers, generator vendors, and other stakeholders in distributed power. With billions of dollars of gas going up in smoke and technologies and regulations pushing for efficient generation, opportunity looms large in flare gas alternatives.


Wärtsilä Acquires Greensmith: Genset Manufacturers Expand Their Role in the Energy Cloud

— May 19, 2017

This week, Wärtsilä announced its acquisition of Greensmith, highlighting a significant trend: generator set (genset) manufacturers are acquiring systems integration and controls capabilities. As this trend continues, the companies are embedding themselves ever deeper into the distributed energy paradigm outlined in Navigant’s Energy Cloud.

Hybrid/Storage Plays

Wärtsilä of Finland is a major global producer of larger reciprocating engines for power generation and marine uses. Yet, genset manufacturers in a variety of segments have been building relationships with storage and controls companies. This strategy can be considered both defensive and offensive in the fast changing genset industry, as explained below. Some specific moves since 2015 are shown in the following figure.

Generator Manufacturers with Publicly Announced Hybrid/Storage Plays

(Sources: Navigant Research, Company Press Releases)

In addition to Cummins, Caterpillar, Wärtsilä, and Doosan, other generator manufacturers, including General Electric (GE) and Aggreko, have announced storage offerings developed either internally or by undisclosed vendors. Most of the above companies also offer solar PV solutions in conjunction with their installations, whether through partners, through distributors, or directly.

There is clear appeal in genset/storage/PV hybrid systems. PV provides clean daytime power at cheapening costs, while gensets provide flexible baseload on demand for nighttime hours and fluctuations in demand. Solar production forecasting, as in the cloud monitoring systems developed by CSIRO, can adjust the operation of gensets to improve integration and save fuel costs (often a significant few percentage points). Storage then provides multiple benefits: in addition to smoothing out PV production, batteries can optimize genset operation, allowing for fuel savings, smoother operation, and sometimes even elimination of redundant gensets.

Defense and Offense

With the latter fact in mind, this acquisition/partnering strategy can be thought of as playing defense—acquiring a backfill revenue source for what may be a declining need for number of systems on any given project. Consider the example presented by Wärtsilä here. Of the six gensets in the “spinning reserve by engine vs storage comparison,” two have become redundant with the addition of battery storage, since the storage provides the spinning reserve formerly afforded by the gensets. If vendors see lower genset sales in cases like these, they may jump at the chance to backfill with sales of controls, storage, or PV.

Apart from its defensive aspects, this strategy also has significant offensive upside. As power production becomes ever more decentralized, genset manufacturers with solid distributed energy resources (DER) strategies will be well positioned to capture market share. There exist major opportunities in microgrids and virtual power plants—indeed, all across the Energy Cloud. As the core technology providers of thousands of legacy microgrids, genset vendors are both driven and well suited to serve a major role in the future of electricity.


Natural Gas Flaring: Time to Turn a $30 Billion Waste Stream into Profit, Part 1

— May 15, 2017

In 2015, an energy source equivalent to twice the total global solar production literally went up in smoke. That year, 147 billion cubic meters of associated natural gas was burned at the wellhead, releasing more than 300 million tons of CO2 into the atmosphere. Associated gas is a byproduct associated with petroleum wells, as opposed to wells built for natural gas production only.

What Is Flaring?

Globally, most associated gas is captured and put to use; however, flaring occurs due to a variety of technical, regulatory, and economic constraints. The light from these flares makes up a large part of the Earth-produced light that is visible from space. Indeed, the quantity and value of the gas is substantial. Amounting to 5.2 quadrillion Btu (known as quads), the flared gas would be worth about $30 billion annually if sold on major global markets (assuming a global value of $5.61 per million Btu, which is an average of the costs in the major markets of the United States, Canada, Germany, United Kingdom, and Japan in 2015).

There are a variety of reasons for flaring. In many cases, the amount of associated gas from oil operations is too small to justify the infrastructure needed to economically capture, compress, and transport it. Where it might be burned for electricity, there are often insufficient offtakers within 1- to 10-mile distances, over which electricity infrastructure is often worth building. Some countries, and even some oil companies, avoid pumping from locations that will require flaring, but flaring remains common practice in many cases.

Flaring Regulations and Economics

Flaring regulations take a variety of forms. In most of the world, flaring is regulated at the national level—a practice that has had mixed results. For example, Norway produces one-fifth the amount of oil as Russia, but burns less than one-fiftieth as much flare gas, due in part to stricter regulations. On the other hand, perverse incentives (with unintended consequences) also exist: the coffers in some countries (like Kazakhstan) count on the significant revenue generated by penalties for flaring, making crackdowns less likely there. Another perverse regulation exists in North America, where unlike most of the world, emissions are regulated at the state—or even regional levels—through air quality management districts or other entities. This has the advantage of tailoring regulations to local needs, but can also lead to administrative burdens and a lack of consistency across countries.

The economic choices related to flaring associated gas are complex, and the equations are changing as technologies and policies shift the energy landscape. However, the emissions associated with flare gas are substantial enough to merit scrutiny if countries are to meet their emissions targets for 2020, 2030, and beyond.

Part 2 of this blog series will look at some of the specific developments that will turn associated gas from waste into profits—for technology vendors, energy developers, and oil & gas companies. These developments include improved gas-to-liquids technologies, improved onsite combustion technologies, and access to electricity offtakers through microgrids.


Natural Gas Generation Displacing Diesel in India

— February 7, 2017

Recent developments indicate that natural gas power generation is set to displace growing amounts of diesel in India. Though natural gas represents just 8% of installed capacity, demand is set to more than triple in the 2012-2030 timeframe according to Indian government forecasts. While some of the extra supply will come from increased domestic production, much will come from the doubling of liquefied natural gas (LNG) import capacity through 2025. At the same time, local distribution piping is expanding its reach—one customer at a time.

Natural gas is becoming more attractive for a number of reasons. One is cost; although diesel and coal are both relatively inexpensive and heavily relied on for power, the increased natural gas supplies are expected to bring prices down. The globalization of Asian LNG markets should also bring more stability to gas prices as the fuel moves away from oil indexation to more market-based pricing in Asia. Perhaps more importantly, natural gas has significantly lower emissions than diesel and coal when used for power generation—measured via particulate emissions and greenhouse gases. Alongside renewables, natural gas is seen as a key tool in fighting air pollution in India, which has half of the world’s 20 worst polluted cities.

Diesel generators are one key cause for pollution. Diesels are chosen because they are cheap, fuel is readily available, and they can be relied on to operate when India’s relatively poor grid goes down. (According to the World Economic Forum, India ranks just above the bottom third in quality of electricity supply, though this ranking is slowly improving.) Diesel gensets are ubiquitous in India, with an estimated 90 GW of diesel generators as of 2014 and about 4% of all consumed diesel going to gensets. There is a drive for renewables to displace much of this diesel use, and they are well-positioned to do so due to falling prices of technologies like PV. But where natural gas becomes available, it may often be the preferred choice, especially where reliable power is needed after the sun stops shining.

Proactive Outreach

Diesel remains the de facto choice as a reliable and established solution for residential, commercial, and industrial customers alike. Thus, for distributed natural gas to thrive in India, proactive outreach is required. These companies have recently made headlines with moves in distributed natural gas:

  • Indraprastha Gas Ltd., a gas supplier in Delhi, recently pitched gas gensets to housing complexes and factories as a cost-saving measure. The company says natural gas generation can offer power at 12 Rs/kWh ($0.18) compared to diesel 18 Rs/kWh ($0.27). The company is also in talks to provide electricity as a service.
  • Last year, fuel cell maker Bloom Energy announced a partnership with state-owned GAIL, India’s leading natural gas company. An initial project was announced in Bangalore, presumably with many more to come.
  • Dual-fuel gensets or conversions may also be an attractive option. Genset manufacturers like Caterpillar and Cummins offer gensets or retrofit kits that allow compression-ignited diesel generators to displace half or more of their fuel with natural gas. As natural gas distribution expands, this trend is expected to spread.

As these and other value chain players find new opportunities to supply power or generation equipment, more natural gas infrastructure may follow in India. In this under-electrified growing economy that represents 17% of the world’s population, massive opportunity beckons to the prepared.


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