Tag Archives: natural gas

The “LNG Fix” Becomes Law

6 Aug

The federal government’s bureaucratic and sometimes Byzantine procedures for enacting new laws can achieve the proper results. It may not be pretty or swift, but it does work.

Case in point. In the closing days of July, immediately before an existing deadline, both houses of Congress passed and President Obama signed another stopgap highway bill (H.R. 3236) that extended funding for much need highway and transportation projects through October 29th.

Included in H.R. 3236 was an obscure revenue provision equalizing excise tax rates for liquefied petroleum gas, liquefied natural gas (“LNG”), and compressed natural gas—the so-called “LNG fix.”

The LNG fix provision, buried among a host of other disparate add-ons, was the culmination of years of effort by the natural gas vehicle industry to eliminate the unfair disadvantage of taxing LNG used as a vehicle fuel. This anomaly placed a significant financial burden on high horsepower vehicle operators (especially long-haul truckers) switching from diesel to LNG.

During the last five years, driven by tighter emission standards and the enormous volumes and lower prices for natural gas produced by hydraulic fracturing, both compressed natural gas (“CNG”) and LNG have made tremendous strides in penetrating the high horsepower engine fuels market. Because LNG burns cleaner, is lower in cost compared to petroleum alternatives, and now reliably produced domestically, it has become an attractive fuel for heavy-duty tucks, rail locomotives, and maritime vessels.

Traditionally, the federal excise tax on liquid fuels is assessed on a “cents per gallon” basis. The federal excise tax for both LNG and diesel is 24.3 cents per gallon. The federal excise tax on CNG is 18.3 cents per energy equivalent of a gallon of gasoline.

Unfortunately, the simplicity of a straight “cents per gallon” tax methodology creates a problem when the energy content of the alternative fuel is significantly different. The fuel containing less energy per gallon is disadvantaged because a greater volume must be used to get the same amount of energy output.

Specifically, LNG has an energy content of about 74,700 Btu per gallon while diesel’s is about 128,700 Btu per gallon. In order to get the same energy output, you use more gallons of LNG in comparison to diesel, hence you pay more in federal excise taxes. For LNG, it means effectively paying what amounts to 41.3 cents per gallon of LNG or nearly 70% more than diesel.

Similarly, propane produces only 72% of the energy output of gasoline, but is taxed at the same 18.3 cents per gallon rate.

The new “LNG fix” tax rate will become effective on January 1, 2016. By taxing the fuels based on an energy equivalent rather than a pure volumetric basis, tax parity is achieved. This then allows both LNG and diesel to be taxed at the same 24.3 cents per gallon, but it’s a diesel gallon equivalent (“DGE”). In other words, the cents per a gallon having the energy equivalent of a gallon of diesel.

The cost difference is not inconsequential. For an LNG fueled truck travelling 100,000 miles each year using 20,000 DGE, the annual fuel tax under the existing code is $8,262. Under the new energy equivalent tax code, the operator will pay $4,860 annually or $3,402 less per year.

As our country takes steps to reduce air emissions from road vehicles, locomotives, and marine vessels and realize the economic advantages of our lower cost, reliable, domestically produced fuels, building tax parity among fuel alternatives is the right thing to do. This change in the tax code doesn’t ensure that LNG will replace petroleum based liquid fuel, it simply levels the playing field.

It also proves that despite what may be a convoluted legislative process, persistence and reason can sometimes overcome Washington’s political partisanship and gridlock to deliver beneficial results for all of us. We will all benefit from the “LNG fix” for years to come.

Beyond commodity prices –the story on midstream oil & gas opportunities in 2015

26 Jan

The January 22, 2015 edition of “Oil & Gas Monitor” contains the full version of this post. I urge you to view it at: http://www.oilgasmonitor.com/beyond-commodity-prices-the-story-on-midstream-oil-gas-opportunities-in-2015/8483/

The latest news covering the oil and gas market for 2015 focuses almost entirely on the detrimental effects of low prices on exploration and production, making it easy to miss the bigger picture. Just as the fluctuations of the stock market do not reflect the entire state of the US economy, commodity oil and natural gas prices do not tell the whole story of our industry. Even in the face of a 50% drop in the price of a barrel of oil, and a reduction in natural gas prices, opportunities still abound for investment, especially in the midstream segment.

Even in light of the plunge in oil prices and cuts in upstream investments, the U.S. Energy Information Agency expects oil and gas production to continue to hold steady and may even potentially rise in 2015.

In order for the producers to monetize their reserves, the production must be moved to market. Designing, permitting, and constructing these facilities is challenging and the ability to deliver the planned projects safely, on time, and on budget, is a key requirement. Speed to market for these gathering, processing, and pipeline companies is essential.

Companies with the experience and know how to develop and implement strategies for delivering these projects, from inception, permitting, and construction, will be in demand. Whether it’s knowing how to traverse a wetland, culturally significant geography, remediating existing brownfields, or employing the best sustainable development practices for the project, employing firms with the proper knowledge and technical capabilities needed to deliver under difficult conditions is essential.

We don’t lack for oil and gas sector investment opportunities, and success will follow those companies who can muster the understanding, skill, and experience needed to capitalize on these challenges.

Meet the Future – Methane Hydrate

17 Mar
Untitled

Flame over methane hydrate and its clathrate crystal structure.
(Source: United States Geological Survey)

If you’ve been involved in the energy sector for as long as me, you’ve undoubtedly heard endless speculation and debate over the direction of our energy future. Specifically, what energy source is capable of succeeding coal, oil, and natural gas? Most often, this discussion is framed as,”How will we displace our use of carbon-based supplies?”

But, have you ever stopped to think about what the energy future would look like if, rather than barreling off the downslope of Hubert’s Peak, we discovered how to commercially tap a vast new source of the cleanest of hydrocarbons–methane? And, what if that new supply of natural gas had nothing to do with hydrofracturing? Then what?

That’s the question more people may soon be asking if ongoing research results in more reports, such as the one this week from Japan. Methane hydrate, which can be found just under the earth’s surface throughout much of the world, is that exciting new energy source.

Methane hydrate is a naturally occurring chemical compound in which molecules of methane (natural gas) are embedded within ice, forming “clathrate.” A precise combination of temperature and pressure must exist for the unstable hydrate to form. As a result, it is extremely difficult to capture the methane before the hydrate dissociates into water and natural gas.

Although the compound is sensitive to temperature and pressure conditions, methane hydrate has been found throughout the world both on land, particularly in the arctic, and beneath the sea. Areas where the continental shelves transition to the deep ocean appear to provide favorable conditions for methane hydrate formation.

Scientists and engineers worldwide are diligently working to provide us with the keys to unlocking this new source of natural gas. In fact, over a decade ago, the U.S. government passed into law the “Methane Hydrate Research and Development Act of 2000.”

The Department of Energy (“DOE”) leads the R&D programs and coordinates an alphabet soup of federal agencies and departments including, the BLM, BOEMRE, NOAA, NRL, NSF, and USGS researching methane hydrate. DOE is tasked with expanding our understanding of methane hydrate so that ultimately it may be developed as a viable energy resource.

Other countries including Canada, China, Japan, Norway, and South Korea as well as academic institutions and private companies, including such energy giants as BP, ConocoPhillips, ExxonMobil, have hydrate research projects underway. Following Fukushima, Japan with relatively few domestic energy resources, is especially keen to discover how to harvest methane hydrate.

As with most any fundamental research, from an outsider’s perspective, progress appears to move at glacial speed. However, such broad-based interest and allocation of resources doesn’t materialize unless there is significant potential for a major breakthrough in technology. When the understanding of methane hydrate progresses to the commercial development stage, it will usher in an energy revolution greater than the current “fracking revolution.”

Consider the potential impact of methane hydrate as an energy source. The U.S. MMS (now part of the BOEMRE) estimated that there is somewhere between 11,000 and 34,000 trillion cubic feet (“Tcf”) of methane hydrate under the continental shelf in the northern Gulf of Mexico. About 6,700 Tcf of that may be commercially viable to extract. (from DOE/NETL publication, “Energy Resource Potential of Methane Hydrate”)  According to the Potential Gas Committee, the total U.S. natural gas resource base, not counting methane hydrate, is slightly over 2,000 Tcf…enough to meet our needs for the remainder of this century.

Assuming a typical recovery rate of about thirty percent of that 6,700 Tcf quantity, the U.S. could double its total natural gas resource base with methane hydrate from the Gulf of Mexico alone. In other words, the U.S. would have enough natural gas to satisfy demand at existing levels during this century and most of the next.

Clearly, we are a long way from being able to commercially produce substantial quantities of natural gas from methane hydrate. There is much we don’t know about the compound and technical challenges to safely and responsibly produce it are considerable. But, as the news from Japan indicates, progress continues to be made.

To some, such as 350.org, the prospect of massive new supplies of natural gas is the death knell for reducing man-made global CO2 emissions. Nothing is more frightening. But, I tend to believe just the opposite. It may be the world’s best prospect for reducing global CO2 levels.

Scientists tell us that reducing CO2 emissions in the developed countries isn’t the key to lowering GHG levels worldwide. The focus must be on developing countries. Absent economically viable alternatives to coal and petroleum fuels, these countries will follow the historic path of the developed nations by using the cheapest, most readily available energy sources. There must be suitable substitutes for coal and petroleum.

Wind and solar are intermittent and exorbitantly expensive in the context of developing markets, therefore cannot be deemed viable substitutes. Nuclear is a good base load energy source, but initial capital expenses for its development price it out of the reach of most developing nations.

Like it or not, natural gas is the only abundant, reasonably priced alternative that can compete with cheap coal. By emitting less than half of the CO2 of conventional coal, developing regions using more natural gas results in a viable way forward for those concerned about climate change.

We are not yet capable of tapping the potential of methane hydrate, but just as the decades long scientific and technological research that brought about hydraulic fracturing and horizontal drilling, the basic research on this exciting new frontier presses ahead. Glimpses of the energy future appear to reveal even more natural gas.

Mr. President…Congratulations! You’ll need more energy this term.

10 Nov

 

Congratulations Mr. President. You pulled off an incredible election win, defying the pundits and earning another four years in the White House.

Let’s face it though, your election win is historic because it was the most money ever spent to maintain the status quo. The operation of the Constitution through the Electoral College gives the appearance of an impressive victory, but the popular vote belies that result. You weren’t handed a mandate and you face virtually the same hopelessly deadlocked Congress. Wall Street isn’t exuberant either.

Nevertheless, savor the moment. But, you’ll need to keep the victory lap short.

Clearly, your most pressing agenda item is the dreaded “fiscal cliff.” You’ll likely be spending a good deal of time ensuring that our financial problems don’t morph into another Greek-style economic crisis. Along the way, you’ll probably attempt to implement some spending cuts and tax reforms, tweak Obama care, face down the Iranians, strike a few more al-Qaeda, and keep China and Russia in check . If you stop to think about it, the global financial collapsed you faced on your first day on the job back in January 2009, looks like just another day at the office.

So where can you boost the energy level, build a few bi-partisan bridges, and increase the prospects for a successful encore term? Try energy. No, not one of those caffeinated drinks so popular with the millennials. (By the way, don’t let Sasha or Malia get a taste for those.) Real energy.

OK, energy wasn’t your strong suit during the first term. You promised to stop the rise in sea level, create a green economy,  implement Cap and Trade, support carbon-free technologies, promote clean coal, unleash the hounds of enforcement at EPA, and promote zero emission electric vehicles.

What you ended up with was spending a few billion dollars on Solyndra, EnerOne, Tesla Motors, et. al., a green job drain to countries such as China and Sweden, Cap and Trade buried by the economy and Congress, threats to bankrupt new coal-fired power plants, about 10,000 Chevy Volts sold, the BP blowout, and a few million homeless residents living without power on the New Jersey and New York shoreline. But that one doesn’t count because it was caused by an errant hurricane, not an anthropogenic rise in sea level.

Yet, believe it or not, energy could be a bright spot this time around. Take advantage of what’s happening in the sector and reach across the isle. I’ll bet that you’ll find more than a few hands extended to you. While you don’t have the budget or political clout to inaugurate grand programs, you can achieve some near-term wins and lay the foundation for realistic future advances. Besides, working families and businesses will thank you for keeping their utility bills and gasoline budget in check.

What’s behind this vision? For starters, domestic oil and gas production has rebounded as a result of hydraulic fracturing. There is a real prospect to import less foreign oil as a result. Jobs of all kind are being created to support the boom in domestic production. The new supplies have driven down the price for natural gas spurring private sector investment in more affordable alternatives to diesel and gasoline. Finally, because it’s displacing coal in power generation, cleaner burning natural gas is reducing the country’s Green House Gas (“GHG”) emissions despite the defeat of Cap and Trade.

So, what should the second Obama Administration do to capitalize on this situation? The fiscal cliff, stubbornly high unemployment, and anemic GDP are casting dark clouds over every aspect of this term. Energy is no exception. Just remember three simple words: Plentiful, Affordable, Reliable.

Start by recognizing that now is not the time to press Congress for climate change programs, a new carbon tax, Cap and Trade, or spending on green washed programs of any type. You need not abandon your long-term desire heal the planet, but the first order of business is to heal the economy. Besides, you have breathing room on GHG emissions since they are currently headed in the right direction, even though it’s for all the wrong reasons. Don’t ever forget that working families and businesses are paying for those GHG reductions with job losses and budget cuts.

Continue exploiting natural gas. It’s creating more jobs than any other business sector, bringing down the cost of heat and light, providing a sustainable competitive advantage to domestic chemical and fertilizer producers, driving private sector investment as an alternative vehicle fuel, and is the most effective means of implementing real progress on reducing CO2 emissions today.

Develop domestic oil. Just as with natural gas, hydraulic fracturing in oil production could yield massive changes in how we meet our demand for oil. Other technological advances promise to unleash vast quantities of shale oil that some estimates place at nearly 5 times greater than the reserves of Saudi Arabia. Don’t deny the country the benefits of access to our domestic resources by limiting exploration and production to private lands.  Pursuing your “all of the above” strategy should include “all that’s below.”

Stop unnecessary regulatory initiatives that create duplicative, burdensome barriers to growth. To be sure, government regulations are needed to protect public health, safety, and the environment. With the advances in extractive technologies such as hydraulic fracturing and shale oil recovery, regulations must evolve to be effective. Since many oil and gas industry accidents are low probability, high impact events, the industry is subject to the most comprehensive regulation and oversight imaginable. These are oftentimes administered at both the federal and state level. That’s why intelligent regulation, not simply more red tape should be the rule.

Obviously, these changes in our energy supply picture will provide significant national security advantages at a time when the global neighborhood isn’t becoming a friendlier place for the US. But energy independence is a political statement not a policy. Look, instead, to increasing our energy stability and security. Take a North American rather than a parochial US view of our national energy security.

Canadian oil is as secure as our own production and we should do our best to ensure that our neighbor prefers doing business with us. Likewise, a North American view recognizes that the Eagle Ford shale formation in Texas doesn’t stop at the Rio Grande river. Similarly, Mexico shares the Gulf with us and they have yet to adequately develop their offshore resources. Rather than looking for ways to build a bigger fence, we should be working with Mexico to build their energy industry. If oil and gas production can create jobs and support the economies of the US, Canada, and Mexico, a fence may become superfluous.

Finally, promote the energy initiative that yields the biggest return on investment of any energy source or program – efficiency. Intelligent conservation and efficiency measures such as home insulation, white roofs, or efficient light bulbs aren’t exciting or attention grabbing, but yield immediate and sustainable results today. Besides, you can’t argue with the saying, “a gallon saved is a gallon not imported.”

The good news, Mr. President, is that you still have some very good energy options to pursue. Even in the face of our severe fiscal and economic challenges, energy can make inroads to economic recovery and national security. Take advantage of the plentiful, affordable, reliable energy supplies available today, champion intelligent regulation, and promote energy efficiency. While these may not be seen as significant legacy initiatives, sometimes leadership demands a steady hand and a workmanlike focus on the fundamentals. That’s exactly what this nation’s working families and businesses could use right now.

Searching for a silver bullet; never firing the gun.

29 Jan

Maybe I’m cynical, but while I was heartened to learn that President Obama highlighted domestic natural gas in his State of the Union address, his campaign to promote an “All of the Above” strategy with the tag line, “Built to last,” appears eerily reminiscent of the last thirty years of Presidential initiatives to address our energy situation.

Presidents and their staffers are very good at crafting an image or brand around their energy policy. Jimmy Carter had his cardigan sweater. George W. Bush lamented our, “addiction to oil.”  Mr. Obama, until last week, was the “green” President: green economy, green jobs, green investments…until they turned red. Now, he is for “all the above” under a “blueprint for an economy that’s built to last.” (I guess speaking in automotive slogans is an aftereffect of the GM bailout.)

Unfortunately, it’s clear that we still lack a rational energy policy, just as we have over the past three decades. To be fair, energy is not a simple issue. It has implications throughout our daily lives, business and the economy, the environment, and national security. Compounding this complexity, energy is by definition, remarkably political in nature. On one side sit the pro energy interests (“drill baby drill”), on the other, the green movement fervently convinced energy is causing worldwide destruction. The majority in middle simply want a stable job and a decent living along with gasoline prices that don’t necessitate a second mortgage.

So what’s a politician do when he has to maneuver between such a political Scylla and Charybdis?  First, deflect the issue by identifying an expedient target. Be certain to be seen standing up for your constituents and publicly denounce the bad guy (think CEO’s of energy companies).  Next look for a silver bullet, no matter how ineffective, to calm fears and give the impression that you’re solving the problem. Finally, coin a catchy slogan so people will remember you in the voting booth.

The public flogging of energy company CEO’s feels good, but that’s been done so often recently that it’s loosing populist appeal. Silver bullets rise and fall faster than GOP presidential contenders. Ethanol, first and second generation cellulosic biofuel, algae derived bio-diesel, electric battery vehicles. Each an interesting concept, but none even remotely capable of addressing our challenges.  Silver bullets are attractive, but notorious for misfiring.

All this leads me to wonder, ” Will be ever get to actually fire the gun?” Why aren’t we defining our energy strategy by means of a classical engineering or business decision model, just as we did to develop the existing pipelines and utilities, our electric transmission grid, and cellular phone and internet access?  That is, let  government lay out the problem, clearly define the rules, and identify the objectives.

Our national energy policy should be defined in three broad parameters. It must lead to plentiful, affordable, reliable energy. Do so in compliance  with all applicable regulations, codes, and standards to protect our health, safety, security, and environment. Continue to support basic research that will lead to new applications, but don’t allow government to play venture capitalist and attempt to pick winners and losers.

Let’s stop trying to identify the silver bullet. Unleash the power of industry and this country’s innate  entrepreneurial spirit to generate multiple options. Test them and let them compete and in the marketplace. The choice of options that best meets our objectives will soon be clear.

A national energy strategy that guides the development of a bandolier of bullets–oil, natural gas, clean coal, nuclear, renewables, efficiency, etc.–will support a gun capable of firing well placed rounds that actually hit the target.