By Yossie Hallander

Link to OpEd

The fracking revolution is still largely misunderstood by the oil and gas industry. It helped the US attain a measure of independence from imported oil but even today we import about 6.5m barrels a day, equivalent to one-third of US consumption.

However, the current low price of oil is making many shale operations unprofitable, causing massive lay-offs and threatening to bankrupt many companies in the oil patch. US oil production is declining again.

Here is where oil and gas companies get it wrong. The fracking revolution is not about oil; it is about natural gas and natural gas liquids such as ethane and propane.

Most fracking wells produce more hydrocarbons, in the form of natural gas and natural gas liquids, than oil.

That is one of the main reasons the price of these energy sources has collapsed. In many cases, the wells have been shut down, or the excess of these gas and liquids are flared, or burnt off, into the air.

The solution is to use them in the transportation sector, specifically to turn natural gas into alcohol fuels to run millions of vehicles that are already on the road. This will increase the revenue from each fracking well and the industry will become profitable at oil-price levels under $50 a barrel.

The US is awash with natural gas. Last year, the average Henry Hub price per million British Thermal Units — the standard industry benchmark for gas contracts — was $2.61. This was equivalent to about a third of the of cost of oil calculated by the calorific measure over the same period.

However, in the most important shale-oil regions the price is even as low as $1.

The price of natural gas liquids is much lower still and is often measured in cents. Sometimes it turns negative.

Much of this resource continues to be unexploited. In 2014, drillers flared 288.7bn cu ft of gas, compared with 91.2bn in 2000. That amounts to more than $10bn worth of natural gas simply wasted.

Of course, cheap natural gas has become a favoured fuel for power generation as coal-fired plants are slowly phased out. But the transition is costly and time-consuming. Even if natural gas reached 100 per cent adoption (something that is not likely to happen in the next two decades) it would only replace $28bn of coal-related costs a year.

The largest opportunity is to replace $135bn worth of imported oil a year, or more than $300bn of oil used overall, largely in the transportation sector.

Natural gas has been used as a vehicle fuel for years, in compressed form known as CNG. It is mostly used in larger vehicles such as refuse trucks and city buses. The fuel is an ideal replacement for the diesel market and should grow in the coming years.

But it is not a solution for the gasoline or petrol markets. Passenger vehicles that run on CNG cost thousands of dollars more than their gasoline-powered counterparts. Conversions of the current fleet are similarly expensive.

Even so, there are 250m gasoline cars, trucks and SUVs on US roads today that could potentially run on alcohol fuels like ethanol and methanol.

Most ethanol in the US is derived from corn. However, ethanol could also be produced from natural gas at prices much lower than gasoline. Methanol, for example, is already made from natural gas.

As part of taking economic advantage of low commodity prices, the conversion of gas could be done close to the wellhead and, once converted to liquid, there would be no need to expand pipeline infrastructure to transport it.

The most convenient aspect of fuel derived from the conversion of natural gas to alcohol is that it can be used immediately in more than 19m flex-fuel vehicles already on the road.

These are factory-built to use any combination of gasoline or ethanol blends up to E85, the specification for a fuel blend containing 85 per cent of denatured ethanol fuel and 15 per cent gasoline.

Additionally, tens of millions of other gasoline-only vehicles could potentially be modified to run on alcohol fuels simply through software changes to the on-board computers.

There is no need to wait decades for a new fleet of high-tech vehicles, or massive taxpayer investment, to bring alcohol fuels based on natural gas to market.

The current US fleet is ready to consume cheaper fuels, as shown by the many E85 stations in the country that earn higher revenue and margins on their ethanol-based E85 fuel sales than gasoline.

All that is needed to make this a reality is the will, and the vision, to diversify our transportation fuels market.

The result would be an entirely new revenue source for oil and gas companies, increased employment, a reliable, cheaper price for consumers and a stronger and safer US economy that keeps more of its fuel expenditures at home.

The opportunity is right beneath our feet.

Yossie Hollander is co-founder of the Fuel Freedom Foundation and founder of Our Energy Policy Foundation, a non-partisan group that promotes fuel choice in the transport sector

 

Read more: http://www.fuelfreedom.org/wp-content/uploads/Yossie-Hollander-piec...

Republished with permission.

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Agreed. I knew a guy that owned a baloon business and used to power his suburban with Gas. Not sure if it was LNG or propane. In his case he had a distribution system to get his fuel.

I'd like to see the average consumer using gasoline and industrial and commercial shift to LNG.

With a government driving pie in the sky stuff, I don't think we will see it for some time (unless of course the Middle East becomes unstable).

'becomes unstable'

Thinking you mean 'disintegrates' and regresses to a complete stoneage state neighbor.

Actually I'm thinking it already has !

Good replies, Thomas.  I was going to reply to the original until I read yours which covered the CNG/LNG development in the US.  Long haul trucking is working hard on converting, and producing new tractors that run on LNG.  Almost 10% of UPS fleet of 16,000 semi trucks us it.  The big item is getting more stations along interstate routes.  It's coming, but slowly, as you stated.

Sounds good. What are the waste byproducts (if any) of converting NG to alcohol based fuels?

Hi friends!

Here are a few more thoughts I recently shared with my friend at BP.  I thought this would interest you too:

Global ethylene demand to grow 3.3% annually

HOUSTON/EDINBURGH/SINGAPORE, 20th March 2014 – Ethylene production from export-oriented steam crackers associated with advantaged gas-based feedstocks is set to alter the global ethylene markets, according to analysis from energy research firm Wood Mackenzie's new Chemical Markets Service.

"The key competitive differentiator for ethylene producers is access to low cost feedstocks or proximity to local demand. Through 2030, advantaged cracker investments will continue in the Middle East, sharply increase in North America (especially on the Gulf Coast which now has at least ten ethane-based crackers in operation [supplied by producers in Texas, Louisiana and Oklahoma], Canada's largest petrochemical complex in Sarnia, Ontario [with two ethane crackers operated by Imperial Chemicals and NOVA Chemicals which receive the bulk of their ethane and propane supplies from Ohio, West Virginia and Pennsylvania], and ethane crackers in Grangemouth, Scotland and Norway operated by INEOS [which also get their ethane/propane supplies from the Tri-State area]), and then later develop in Russia and The Caspian," says Stephen Zinger, Head of Americas Chemical Research at Wood Mackenzie.

Ethylene producing assets that have access to low cost gas feedstocks, such as the ones in North America, will lead the competition with total ethylene and derivative investment set to reach US$40-50 billion in the next decade. Over the same time period, global ethylene demand will grow by 3.3% per year, on average, according to Wood Mackenzie.

While Gulf Coast and Ontario petrochemical infrastructure (upstream, midstream and downstream) is well developed, the Ohio Valley's infrastructure is deficient only in the downstream area.  Ohio Valley upstream (production) is, arguably, oversupplied, while its midstream (fractionation plus pipeline transportation) is already serving the needs of export markets to Canada and Europe quite well.  As for downstream (polymer production and marketing) in the Ohio Valley, that remains largely undeveloped in spite of favorable demographics (geography and population concentrations:  no blank spots such as west of Texas and north of Oklahoma; north of Ontario, for example).  The craft and engineering skills relevant to polymers are not as abundant and readily available in the Ohio Valley as they are in the Gulf Coast, Ontario, Grangemouth and Norway.

In turn, China will continue to have the fastest demand growth for ethylene and ethylene derivatives and will satisfy this demand through increases both in domestic production capacity (coal-to-olefins and naphtha cracking) and imports from producers around the world with advantaged feedstocks.

Wood Mackenzie’s new long-term ethylene analysis categorizes the transformation of the global ethylene market into three types of market positions; locations supportive of new export-oriented ethylene investments based on advantaged feedstocks (North America (note that the Ohio Valley is the only North American ethane/propane producer that exports), Middle East, and Russia and The Caspian); locations supportive of new ethylene investments which have higher costs due to reliance on naphtha feedstocks but with very high levels of local demand growth (China, India and Southeast Asia); and locations of existing aging assets with a high cost basis that will be subject to rationalization, consolidation, and specialization (Europe, Japan, Korea, and Taiwan).  

"Producers and consumers involved in the global ethylene industry will have to employ vastly different strategies depending on their location in order to be successful," explains Zinger.

North American ethylene investment renaissance
In the next 10 years, Wood Mackenzie estimates total investment in ethylene and derivatives is expected to reach a record $40-50 billion in North America. In addition, ethane feedstocks to make ethylene have increased from under half of total feedstock for ethylene in 2005 to about 65% of total feedstock in 2013, and are expected to continue to rise to over 80% of total feedstock consumption. 

Thus, it puzzles me why the Ohio Valley remains on the sidelines in the sector of downstream polymer industries.

"The development of shale gas resources in North America has triggered an ethylene investment renaissance, with the abundance of competitively priced natural gas liquid feedstocks, particularly ethane," adds Zinger.

Wood Mackenzie says domestic demand in North America for ethylene derivatives will grow more slowly than the planned ethylene capacity increases, which will lead to derivative exports more than tripling over the next 15 years.

Asia, the most diverse ethylene market 
China will continue to add capacity aggressively, with a significant portion through coal-to-olefins (CTO) plants, resulting in a rise in self-sufficiency.  Although there have been many announced CTO projects, water supply constraints and overall environmental impact will slow the rate of capacity build-up longer term. 

"In the next two decades, China's shift to an increasingly domestic consumer demand driven economy will alter ethylene and derivative demand patterns, but expectations are that growth rates will remain strong," explains Vincent Sinclair, Head of Asia Pacific Chemical Research at Wood Mackenzie.

Over the next decade, the more mature markets of Japan, South Korea and Taiwan will go through a period of consolidation, cost cutting and product value creation to increase their competitiveness, as their export market share to China is gradually replaced by low cost material from the Middle East, North America, Russia and The Caspian. 

“Emerging economies with growing populations including India, Indonesia, Philippines and Vietnam have the potential to become the next rapid growth demand centres in Asia. However, under-developed infrastructure, weak support from local governments and/or lack of abundant feedstock resources will continue to slow the pace of ethylene investments in these countries,” says Sinclair.

Middle East expected to almost double existing capacity 
Advantaged ethane-based ethylene investments drove massive capacity growth in the Middle East throughout the 1990s and 2000s, culminating with significant new capacity additions in 2008-2010.  The Middle East is again expected to almost double its existing capacity by 2030 and remain the largest ethylene derivative exporting region globally.  Forced to change feedstocks by an impending shortage in ethane supplies, projects in Saudi Arabia, Qatar and eventually Oman will adjust feedstock mix to diversify and include LPGs and naphtha. 

"This region has been very dependent on exports of ethylene and ethylene derivatives - a trend that will continue throughout the forecast period," explains Alex Lidback, Head of Chemical Research EMEA (Europe, Middle East and Africa) at Wood Mackenzie.

Russia and The Caspian come alive as Europe restructures 
"After decades of stagnation, the Russia and The Caspian region will undergo considerable change, with plans to add nearly 10 million tons of capacity by 2030," adds Lidback.  "In Russia, capacity expansions are planned in six discrete production clusters across the Western, Siberian and Far Eastern territories."

The region's emergence as a major exporter will place increasing pressure on high cost producers who do not have the benefit of advantaged feedstock. Europe, in particular, will be under considerable pressure with the addition of a neighbouring region with low cost supplies. Its ethylene industry is restructuring due to its weak demand growth, competitive disadvantages and widely available imports from low cost producers in other regions.

"Since Europe is forecast to remain uncompetitive in terms of commodity chemical production, producers will focus on lower volume, higher-value speciality products in order to survive," concludes Lidback. 

Now, for the kicker:

If the price of naphtha and ethane feedstocks for polymer producers in North America are essentially the same, why have virtually all of them switched to ethane?  Ten on the Gulf Coast, two in Canada, two INEOS plants in Scotland and Norway and soon Odebrecht's Mexico plant?  I think that they think naphtha is going to be much higher priced than ethane for decades.

Just last week, Daniel Yergin and T. Boone Pickens both predicted that crude oil (to which naphtha is linked) will be about $48/bbl by the end of the year.  This in spite of downward pressures cited by various pundits: slowing economy in China, new supplies from Iran and maybe Libya, increased production from Russia and the US (together with its exports), etc.

But the best indication that crude prices are set to begin their ascent happened on February 1, 2016.  On that day, 1,800,000 exchange-traded notes worth more than $600,000,000, the Credit Suisse Velocity Shares 3X Inverse Crude Oil ETN (DWTI) were redeemed.  That was the largest single-day redemption in history.

More Appalachian pipelines abuilding:

Columbia Pipeline Group (CPG), a unit of NiSource Inc. (NYSE: NI), today announced a total of $1.75 billion in new investment in infrastructure that will enable it to transport up to 1.5 billion cubic feet per day (Bcf/D) of natural gas fromMarcellus and Utica production areas to markets served by its Columbia Gas Transmission (Columbia Transmission) and Columbia Gulf Transmission (Columbia Gulf) pipeline systems.

The new investments include two significant projects, one of which involves construction by Columbia Transmission of a new natural gas pipeline in Ohio and West Virginia that will enhance its existing infrastructure and support natural gas supply development in western Pennsylvania, northern West Virginia and eastern Ohio.

“We have been a part of Ohio and West Virginia for more than 100 years and have an unparalleled footprint in the Marcellus and Utica production areas,” said Glen Kettering, CPG’s chief executive officer. “These newly announced investments reaffirm our commitment to this important region and will increase the capacity and flexibility of the Columbia Transmission and Columbia Gulf systems to further enhance transportation options for producers in Appalachia. In addition, this investment will further support our commitment to economic growth and development by creating new project-related jobs and generating ongoing tax revenue for local communities.”

The proposed Ohio and West Virginia pipeline, known as Columbia Transmission’s Leach XPress project, is supported by long-term firm service agreements with Range Resources - Appalachia, LLC, Noble Energy, Inc., Kaiser Marketing Appalachian, LLC and American Energy Utica - LLC. The project, which involves construction of approximately 160 miles of pipeline, compression and related facilities on Columbia Transmission’s system, will provide access to multiple Marcellus and Utica receipt points and establish a substantial new header system serving the heart of the Appalachian supply basin.  

Tom,

  I very much appreciate your informative posts. I'm an engineer with a polymer background, in addition to being a SE Ohio Utica landowner/leaseholder. I therefore understand the important linkage between Utica hydrocarbons and the large Ohio polymer industry. My involvement dates back to the earliest days of this exciting development……"The Utica Shale is the best thing to happen to Ohio since, maybe, the plow". Aubrey's comment has proven to be true!

   For a while, Go Marcellus seemed to attract argumentative posts. I much prefer reading informative posts such as yours. Keep up the good work!

Sincerely,

BluFlame

On your bus 'Blu.'

And my thank you as well TMP.

J-O

You're welcome, folks!  I love your questions; they help me learn more too!

One comment in this discussion regarded crack spreads at ethane crackers.  I found a report from Platts/Bentek on the subject published in 2013.  Now, of course, the spreads are even wider.  Here's an excerpt:

Cracker margins for both ethane and propane have hovered above the $1,000/mt (45.35 cents/lb) mark so far in 2013 as feedstock supply is ample and ethane rejection is in full effect. In fact, through the first two months, propane was the highestmargin feedstock because of elevated propylene prices, market sources indicated. The lower feedstock costs have contributed to ethylene contracts being priced at a steeper discount to spot – contracts averaged just north of 48 cents/lb in 2012 – but even going by those numbers cracker margins remain healthy nonetheless. Not bad for an olefins industry that sources say just five years ago deemed $220/mt (10 cents/lb) a good margin. Houston-based Westlake, a maker of polyethylene and polyvinyl chloride, for example, reported its best year in olefins in the company’s history during its February 19 earnings call. Other chemical makers reported similarly stellar performances by their olefins segments, with cheap feedstock a common theme. “The growing production of natural gas liquids from shale gas and oil production has caused ethane to become oversupplied as significant capacity additions in gas liquids processing and pipeline infrastructure brought ethane into the market faster than the North American chemical industry can consume it,” Westlake Chemicals CEO Albert Chao said in the company’s February 19 earnings call. It is then easy to understand why some petrochemical executives including LyondellBasell CEO Jim Gallogly put so much emphasis on the time-to-market element that surrounds this ethylene boom. Those able to expand capacities first are likely to enjoy the most benefit from the feedstock advantage, Gallogly has said in touting the benefits of his company’s debottlenecking projects at two major complexes in Texas. If realized, these projects could expand LyondellBasell’s ethylene production by more than 600,000 mt/year by 2016, based on estimates by the company. This past December, Dow Chemical restarted a 400,000 mt/ year steam cracker near Hahnville, Louisiana. The cracker was idled in 2009 because of unfavorable economics. Dow expects the restart to add $150 million to its pretax profit in 2013 and cut its US Gulf Coast ethylene purchases in half, Liveris said. Dow’s aggressive expansion plans also include building a worldscale steam cracker in Freeport, Texas, by 2017 as well as debottlenecks at Plaquemine, Louisiana and Freeport in the 2014-16 timeframe.

   With these margins, it is difficult to understand the reluctance to build crackers in our geography. Throw in the transportation advantage and it seems like a slam dunk. Of course, will current margins hold the four years it would take to build one of these monsters?? It's a craps shoot.

  Actually, I'm not certain the margins have held since 2013. I believe ethylene prices have tanked in the interim along with ethane & propane.

  

Thanks, Bluflame!

I'll never forget Aubrey Mc's comment.  It's priceless.

For me too, it's really hard to understand why ethane cracker plans for the Ohio Valley are moving at such a snail's pace.  We have advantages found few other places in the world:

*  Something like 55% of the market for polymers w/in 500 miles of Ohio from Minnesota to Maine (that includes Ontario!) and down to Tennessee.

*  Great transportation infrastructure:  highway, rail, barge, pipelines; even air (Rickenbacker is a real up-and-coming international air hub).  Our license plates used to carry the motto "Crossroads of the Nation".

*  We are the Polymer Kings (those on the Gulf Coast are the Johnny-come-lately Polymer Queens!) viz Goodyear (have you seen their fantastic new headquarters?), Cooper, Kelly, Rubbermaid, Bridgestone/Firestone, etc. and of course the University of Akron and Marietta College.

*  Plentiful natural gas and NGL supplies:  20 years?  40 years?  Who knows?  All I know is that it's decades long and estimates always increase with ever-innovative technology; always.  Check out Delphian Ballistics' TriStim perforating gun.

Yeah, there are other areas that are at least as large as the Utica/Marcellus, maybe even considerable larger e.g. Vaca Muerta in Argentina (by the way, Aubrey's American Energy is setting up operations there now), Russia's Yamal (three times as large!) or Yakutia (larger than India).  BUT none of these places have the advantages I noted above that Ohio has, let alone the U.S. and Canada.  Don't get me wrong here:  I have great respect for the competence of Russian engineers and scientists.  But they lack the support of good infrastructure, physical, academic, commercial/marketing, etc.  I know they'll get there.  It'll just take them a lot longer than it will take us.

Advisory on current ethylene pricing trends; looking up?


US ethylene contracts for January settled 1 cent lower with the month's net transaction price at 24.75 cents/lb, market sources said Wednesday.

The decrease sets contracts to their lowest level since Platts first began assessing net transaction ethylene contracts in January 2003, at 24 cents/lb.

The drop is within market expectations of a 0.5-2 cent/lb decrease and follows weakening spot prices and declining prices for feedstocks.

Front-month US spot ethylene assessments averaged 17.711 cents/lb in January, a drop of 1.17 cents/lb from the December average of 18.881 cents/lb, according to Platts data.

In markets, US spot ethylene was assessed Wednesday at 17.75-18.25 cents/lb FD USG for prompt deliveries, up 0.25 cent day on day, based on the latest February bid-offer range at 17.5-18.5 cents/lb MtB Wms.

March was assessed at 18.25-18.75 cents/lb FD USG, also up 0.25 cent/lb, following the 0.5 contango structure seen on Tuesday and given the latest bid-offer range of 17.5-19.5 cents/lb MtB Wms. After close of assessment, three February deals were heard in a range of 18.5-19 cents/lb MtB Wms.

--Pavel Pavlov, pavel.pavlov@platts.com
--Edited by Lisa Miller, lisa.miller@platts.com

I've found that Pavel Pavlov is quite reliable

Tom Pendergast


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