Natural Gas...A Game Changer?

Natural Gas ... A Game Changer?

Excellent article, Mr. Mutasem. Concise (less than 500 words), straight to the point, and posing leading questions that do deserve answers. I have more questions that also beg answers. With your kind permission, a sampling follows.

Are qualified engineers participating in decision loops at every hierarchical level?
Is the feedback we get absolutely reliable, i.e. complete and truthful? Where has our ability to dream gone to? How do we select our “best and brightest”? Are our accomplishments recognized by those who count? Do we really understand at what point concepts become facts? Do we all have a thorough working knowledge of mathematics and how to apply this knowledge? Do we fully accept that a negative answer is just as valid as a positive one?

The foregoing are based on experiences. If a novel concept is reduced to practicality, proven by demonstration, mathematically confirmed, and has passed the required tests to prove financial and commercial viability, then surely it should move towards full-scale demonstration. But no, there it is, languishing in limbo. Why?

Alan E. Belcher.

In Ontario over the last few years there has been a Government driven push to eliminate coal as a source of electrical generation. The arguments for this are both environmental and economic. Ontario has no coal deposits of its own therefore all of the coal burned must be shipped to the power plants from the USA or from Western Canada. Secondly reducing sulphur and nitrous oxide emissions from these plants requires expensive retrofits of scrubbers and other technologies. Other emissions from burning such large quantities of coal are mercury and arsenic and other issues such as city smog influenced this decision I am sure.
Estimates of premature deaths from burning coal vary but some studies put it as high as 1000 per year which, if that is to be believed has a large health care cost associated with it.

So Ontario is phasing out coal and will not be constructing any new coal plants. However it is interesting to note that a large part of the replacement capacity installed is natural gas fired - mostly highly efficient combined cycle plants such as the ones at Halton Hills and the Hearn site in the Toronto docklands. Some windmills have been installed. The bulk of the power comes from nuclear plants which do and will for the foreseeable future - be the backbone of the grid.

I can see that with many old coal plants in the US reaching the end of their useful lives plus the requirement for cleaner alternatives will drive most utilities to natural gas and to the life extension of existing nuclear plants. The coal industry is not concerned particularly since it can export all the coal it can dig out of the ground to China and India.

It is in fact what most utilities are doing and with the prospect of a glut of US supplied natural gas this is almost certainly the way things will unfold. Now how long that glut will last and what effect that will have on gas prices remains to be seen.

Much of the gas is being produced as a by product of drilling for the higher value petroleum liquids contained in shale deposits. That is the case in the Bakken field. My industry insiders tell me that if drilling were being done for natural gas alone the investment will not repay itself at current natural gas prices. That will eventually cause gas prices to rise and therefore the cost of gas fired generation to rise. As a counter to that possibility large LNG terminals are being constructed to export US natural gas. Of course that means you can also import it and since there are many countries with abundant supplies of natural gas who would be only too pleased to export it to the North American gas grid then in my humble opinion gas prices are going to be low for a long long time.

So - an excellent article. I suspect the future will be in high efficiency combined cycle gas plants coupled with base load nuclear and hydroelectricity where available with a bit of wind and solar thrown in to keep the renewables camp happy.

It is like walking a political tightrope.

Malcolm

Hi, Len,

“Have you spent as much actually meeting EPA emissions regulations as you have trying to buy politicians?”

You were right the first time around so I have taken the liberty of removing the “(sorry, “lobby” LOL)” from your post. I believe that “buying” is the most appropriate term here. My answer is “Yes” for the emissions side and a definite “No” for the purchase of politicians, or their political favors.

The foregoing might well point to one of the many stumbling blocks we have run into. However, I feel that there is a deeper and more pervasive factor at play here, namely the lack of reliable feedback. Reading between the lines, I think the article’s author is also basing his concerns on this same point.

All too often I have quoted references that later proved to be flawed in some way. In a few cases I have become acquainted with the authors of such material and I am more than satisfied that what was passed on was done so in good faith and without any intention of causing harm. I can only conclude from these experiences that their sources of information were also flawed.

How far back could this go? Anyone’s guess. Is the well-water tainted? The engineers and scientists, and the journalists, lawmakers, and pundits have all been “drinking” from this same well. Indeed, this could be a serious situation that we must all address without delay, in one way or another.

Alan E. Belcher

Does anyone have a clue why the power market strugles to get $35 per megawatt hour?

A most interesting observation Fred - about a new natural gas cartel forming. I guess we will call it OGEC - Organisation of Gas Exporting Countries. The advent of large scale LNG facilities in many countires including the USA make possible the shipment of LNG in the very same way that oil is shipped. That means to me as a non-economist that the price of LNG and therefore natural gas will become traded as a world commodity just like oil. In many applications gas is a direct replacement for oil and for automobiles engines will run just fine on it.

In North America until very recently gas was in short supply but that whole situation has changed. Now whether the Bakken, Marcellus, Three Forks and other shale gas fields live up to their promise is another matter. I suspect they will at least for the next few years. That holds out the possibility that the USA will become a major exporter of LNG. Russia also has major natural gas fields and may be very interested in the OGEC cartel to fix gas prices by regulating supply just as OPEC has done since the 70's. With the discovery of large shale gas fields under Poland Russia could lose control of the gas supply monopoly it has on Eurpoe and may be looking for a better way to control gas prices. OGEC would fit the bill even if they have to get in bed with the US.

Now wouldn't that make an interesting membership. Russia, USA and Algeria?

Malcolm

Kerry, Of course. All the immense efforts of Governments to have us stop using electricity results in a decrease in demand for the product. The price goes down when you have more supply than demand. That is what we have. Add to that the fact that many large consumers of electricity now make their products overseas. Closed factories do not use electricity.

So not at all difficult to understand why it is hard to sell at $35/MW.hr It is the obvious and only possible end result of electricity conservation.

The next result will be utilities going out of business and power plant closures. That will decrease supply of course.

Malcolm

“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”

“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.

http://www.prosefights.org/pnmrate/firstsolar/110630_003.mp3

Google 'admiral william h payne' for details

http://www.youtube.com/watch?v=XNFK_fBwDQk&feature=g-vrec&context=G2f421f1RVAAAAAAAAAg

Malcomb,

Your response is pretty obvious, but misses the point. At $35 per MWH, most utuilities can't even cover their production costs. How can they, or why are they continuing to sell power at or below their production costs? That is the point of the question. The laws of supply and demand aren't nearly as black and white when it comes to electricity and protected distribution territories for electric utilities. Yes, there is currently a surplus of power generation, but based on the forthcoming EPA rules that will shutter dozens of coal plants and take thousands of megawatts offline, why are these power generators not trying to recover some of the costs to meet the new EPA rules now? Seems to me, if they wait until the last minute, we are all going to see some huge rate increases basically all at once.

Kerry,

I was an energy trader for five years last trading in 2003 so it has been a while. This said $35/MWH dollars is profitable. Combined Cycles can easily do 7000 heat rates. Doing the math with $3 gas give a $21 fuel cost and $14 spark spread. A $14 spread is adequate to cover the cost of O&M and ownership of a combined cycle plant.

It is not quite this simple construction costs are sunk costs so with three dollar gas and $7 O&M it appears that any price over $28 would allow some recover on the investment. In the case of a Nuclear unit its lifetime cost of generation is likely over a $100/MWH however almost all that cost is sunk cost with fuel only a few dollars. Using $7 (just a wag) as its fuel cost anything over that level is recovering some of the capital invested. But it is more complex than that for the Nukes the technology and regulatory framework is not suited to cycling. Once construction is complete a fueled unit will likely run flat out 24x7 without regard to price which can crush off peak prices in areas with significant nuclear generation. Wind mills are similar they generate when the wind blows with little regard for price unless like several ISO the generator will be charged to generate when it is not needed and is over the scheduled quantity and can profit more by shutting down than generating which typically a off peak only event.

Anyway Coal, Combined Cycle natural gas, Wind, Nuclear all have a positive cash flow at $35 in a weak economy with excess capacity one should expect low prices. Currently with Natural Gas being on the margin and $14 spark spread is more than adequate to keep them running.

Len:
Game changer or Enron redux? Various thoughtful studies show a $6 to $8 per MCF cost of shale gas. The claimed 100 year reserves ignore the very steep decline rate from fields that are fracked and assume gas demand stays at 2010 levels, Reality might be ten years reserves.

I caution all decision makers to look at the cash flows of the Chesapeaks and others who continue to hype the shale gas future and raise equity, but are burning cash. If the financial community had insisted on looking at Enron EBITDA, we would not have bid them up to $50 billion, only to lose it all.

Fracking is a nice technological advance, able to produce Btus of fuel at well below the cost of petroleum, but apparently not at the current price of gas. We should not be mislead to drop focus on extracing more useful energy from every Btu of fossil fuel. We should avoid making 35 year investments in any gas burning technology that does not use the energy twice -- that combines production of heat and power with a net electricity heat rate of under 5,000 Btu per kWh.

During the Enron bubble, Dynergy stopped building combined cycle and focused on peakers, most of which barely operate. Don't bet against efficiency again.

Tom Casten, Chair
Recycled Energy Development

As a serious loser stemming from Dynegy’s take-over of Illinois Power (in which I had invested) and the ensuing debacle with Enron I am a bit leery of being instructed by Dynegy - even today.

We've got a couple of very interesting observations above. The one by Murray Duffin of course, and the one by Thomas Casten about making 35 year investments. I've heard some praise for shale gas that definitely had the wrong kind of smell about it, and a few things that don't make any sense at all.

--------------------------------------------------------------------------------
From: "John Sobolewski"
To: bpayne37@comcast.net
Sent: Friday, December 23, 2011 5:48:24 PM
Subject: RE: Much of altenergy may be a scam?

Alternative energy is not economical today and can only survive with massive government subsidies.

So I would not call it a scam but a government ripoff of taxpayers. Obama's buddy and big timeelection contributor Imelt, CEO of General Electric, is laughing all the way to the bank selling windturbines that Obama subsidizes in return for Imelt's contributions for Obama's reelection.

Who says Obama is for the middle class? He gets millions of contributions from Hollywood and Wall Street fat cat millionaires and screws the middle class by rewarding them with OUR tax money.

Where is the media reporting this? Nowhere because they are all part of Obama's fat cat fratrenity.
Most Americans are too dumb to figure this out. I have to say this about Obama - with his media buddies he has a better propaganda machine than Hitler or Stalin ever had.

http://www.prosefights.org/unmineable/unmineable.htm#jss

Response to Sam Mutasem’s Questions

Finally, a stake in the ground! EPA’s Final Rule governing mercury emissions at power plants states the release of mercury shall not exceed 1.2 lbs/TBtu applicable to “Existing – Unit not low-rank virgin coal”. Plants firing lignite are reportedly allowed a slight increase in mercury emissions (1.4 lbs/TBtu) but I could find no reference in EPA’s .pdf file. For the uninitiated TBtu represents 1 Trillion Btu, or 1,000,000,000,000 British Thermal Units.

The following worked examples are based on EPA figures and shows how my company’s contribution could help facility owners meet these targets for a lower investment cost and greatly reduced operating costs. Minor discrepancies are the result of rounding.

The new EPA Rule target for mercury emissions is: 1.20 lbs/TBtu


Case 1 – “Do Nothing” Scenario

EPA’s 2010 Baseline for mercury emissions
is 29 tons/year which translates to 6.62 pounds
per hour per TBtu: 6.62 lbs/TBtu

The plant would have to remove a little less than
82% of the Hg baseline to achieve compliance: 5.42 lbs/TBtu


Case 2 – Plant Efficiency Raised by Heat Recovery

Application of our heat recovery technology is estimated
to lower the baseline emissions by 33% of the baseline: 4.37 lbs/TBtu

Now the plant would have to remove only 52% of the
original Hg baseline to achieve compliance: 3.18 lbs/TBtu


The mercury emissions to be removed in Case 2 are approximately 41% of what would have had to be removed in Case 1, or a gain of some 2.26 lbs/TBtu. A reduced emissions stream allows for a corresponding reduction in capital investment for emissions control equipment plus a reduction in the disposal costs for the effluent stream.

However, such benefits would be easily surpassed by the fact that, along with other waste heat recovery or recycled energy systems, our system produces significant levels of dispatchable electric power. Depending on various site and market factors, the bonus power could be used in its entirety to offset the overheads of operating conventional emissions control equipment, or any surplus might be dispatched profitably.

Privately I share the opinion expressed by many in the power industry that EPA’s specified time-frame of 3 years is far too short.

In closing I should remind readers of one of my previously posted questions concerning accuracy of what is published by the media and others in general. True to form, while researching the Internet I came across the statement that the new limit for mercury was to be 1.2 lbs/million Btu, instead of the correct TeraBtu. Well, give or take a little, what’s a million among friends?

Wishing everyone the Season’s Greetings!

Alan E. Belcher.

At some near future, you guys are all going to have to join the real world as far as units of measure go, and with China graduating 25 engineers for every one in the US, I'd estiamte that time is "very soon".

Alan, I'm on your side. Particularily your comments about the media - being off by a factor of a million and they will never know it. I intended to be jolly , not offensive.

Regarding units of measurement - does not matter much to me. I was trained at the time both SI and British systems were in use so they are fully interchangeable in my world. As far as the public and the media are concerned most people don't even grasp the difference between a milliwatt and a megawatt so what units you use doesn't matter when you are dealing with a largely technically illiterate public. When I hear the media and even many people who should know better use the phrases like "produces enough electricity to power 1000 homes" I realise there is no hope.
In Ontario we are indeed shutting down perfectly viable coal burning power plants that have years of life left in them. The reasons why are outlined in my post above. The Province is moving to cleaner fuels and while I question the costs associated with this effort it will result in a much cleaner generation mix. A major plank in that effort is nuclear power and two refurbished plants will be coming on line in 2012.
While it may not be obvious to many the US is steadily increasing its nuclear power capability. The Tennessee Valley Authority is completing the construction of Bellefonte Unit 1 which was never completed after Three Mile Island. It has already completed all three units at Browns Ferry which are now operating as well as the two plants at Watts Bar. A second plant at Bellefonte may also be completed pending the successful completion of Unit 1.
Life extensions of existing plants are also proceeding and the USNRC has recently approved the Westinghouse APR 1000 for construction in the USA. Several sites in the USA are slated for development using this reactor type. So although natural gas plants are easy to build the cost of power from them will always be subject to the variability of natural gas prices. If you are prepard to gamble that gas prices will always be this low for the life of the plant then then these types of plants offer some advantages. With a nuclear plant once built the running costs are very predictable and generally lower than natural gas plants. Nuclear plants also benefit from low capital borowing costs so the amortized cost over 40 or 50 years is the lowest it has been in many years.
So I think that the coal plants will be replaced by a combination of nuclear and natural gas which is a very attractive combination and is working very well in Ontario. Nuclear provides the baseload backbone of the grid while natural gas combined cycle plants provide power peaking and some base load when baseload exceeds nuclear and hydroelectric capacity.
Of course this set up could get very expensive to operate if natural gas prices increase so there is a bit of a gamble here.
Malcolm

In regard to Len's remark, maybe it'is time to be brusque. I almost always agree with Malcolm. but the problems of the the electricity market in many countries are not due to government intervention, but government inaction. As the governor or Washington (State) once remarked, the government stood by and let Enron and similar organizations and stupid academics and self-appointed experts that I do not feel like nameing today impose a crazy deregulation agenda on us. Here in Sweden when deregulation came in, the largest Swedish utility began to concentrate on Germany, where they announced plans for greening their operations that made no economic or scientific sense whatsoever.

In a long run, genuine deregulation and a genuinely competitive market will produce benefits for all customers served by a given market as compared to full regulation. Fred's complaint is that as part of deregulation, Sweden's market was extended to include Germany, which, though problematic for Fred as a Swede, should have genuinely benefited the sum of customers across both Sweden and Germany IF the market system chosen had included ALL customers and not been restricted to only a very few retailers who add no value to the system, only costs.

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