Monday, August 21, 2006

CO2 Capture and Storage doesn't always add up

BP's Frontiers magazine, April 2006, contains an interview with BP Chief Scientist Steve Koonin and a discussion on carbon capture and storage. BP are to develop a 350 MW combined cycle gas turbine to be fueled from hydrogen. A special process will convert natural gas into the clean-burning hydrogen fuel and CO2. BP announced with some environmental enthusiasm that the CO2 will be captured and pumped underneath the North Sea into the Miller field, safely separated from the atmosphere. Unfortunately, while the project is technically impressive, financially responsible and socially valuable for securing our future energy supplies, it is highly doubtful that this development is environmentally positive.

BP tells us that pumping some 1.3 million tonnes each year of CO2 into the old Miller field will have an "added bonus" of increasing the amount of crude oil produced from the reservoir. The additional production will be "up to" 40 million additional barrels of crude. These additional barrels are barrels that would otherwise have been stuck underground.

Perhaps the additional 40 million barrels from Miller will mean that 40 million barrels from elsewhere will not be produced. If so, we can relax and join in BP's environmental enthusiasm. But what if not? What if all other production will continue anyway, and instead BP just added 40 million barrels of oil to the total amount of crude that will ultimately have been produced, most of which to end up as CO2 in the atmosphere?

This second (I feel safe in saying more likely) scenario means that the CO2 cost of the "added bonus" of "up to" 40 million additional barrels must be taken away from the atmospheric benefit of capturing the CO2 in the first place. How does the overall balance look?

Roughly, one barrel of oil, after refining into components and the various parts combusted in air, equates to around 400 kg of CO2. This is a rough figure and depends on the kind of crude, refinery efficiency and fractions, but we're not an order of magnitude out. So up to 40 million additional barrels of crude gives us, roughly, up to 16 million additional tonnes of CO2 .

BP tell us that they expect to pump around 1.3 million tonnes of CO2 each year into Miller. That means for more than the first 12 years of operation, the CO2 capture operation will have put more CO2 into the atmosphere than if it had never been built. It could have vented the CO2 to the atmosphere, saved the cost of the additional equipment and the energy required to run it, and left the extra crude in the ground.

It could be that all the oil comes out after 12 years, or at some complicated rate relative to the CO2. Perhaps so, although the economics are likely to mean that one would engineer the extra oil to come out as quickly as possible to generate revenue (see below). Also, to be fair, BP did say the figure was "up to" 40 million barrels. They could get less, in which case the CO2 payback will be that bit sooner. But how soon? In fact, how long will the plant run? For longer than 12 years one would hope. Surely this depends on the economics - how do they look?

The article inevitably takes the opportunity to importune governments to step in to address the additional costs of sequestration. Somewhat odd, then, that this project is going ahead already and others are in the CO2 CCS pipeline. Perhaps BP's share of the value of 40 million additional barrels of oil, around US$3 billion at today's prices, might help to offset the sequestration costs? That might keep the plant going, at least while the additional production flows. After that, perhaps it would be financially wiser to turn off the plant.

Shame about the atmosphere.

Thursday, July 27, 2006

Energy efficiency is a false target

You don't need to read much about energy or climate change before the goal of greater energy efficiency is stated, usually without any further analysis or justification. The United Kingdom's long-awaited and much researched Energy Review, published July 14th 2006, asserts the same goal. Unfortunately, the goal might have the opposite effect on climate change to that intended.

The only figure that will affect climate change is our absolute rate of greenhouse gas emissions. How many people it took to put the molecules of CO2 in the atmosphere, or where they were living at the time, is entirely irrelevant. We will get no points for reducing our per-capita use of energy if there are simply more of us, and no points for merely reducing the rate at which our emissions increase.

If we are to avoid explicit population controls and rationing, then surely improved efficiency is to be welcomed as a way to reduce emissions? Not necessarily. The problem is that efficiencies can drive down costs and thereby increase consumption. The net effect of efficiency is not always obvious. In very general terms, as a society our industrial and domestic efficiencies have never been higher - along with our consumption.

This effect is well-known in economics as Jevon's paradox.

As an example, consider the efficiency of the airline industry. As it improves, the price per seat falls. Those that flew before notice a cost saving and the industry uses fewer resources servicing them, but soon a slew of new customers arrive who find the price affordable. Consumption rises. In the same vein, as we improve the performance of battery-powered devices, electric cars, lighting and so forth, expect new applications to appear that will help us reach new heights of consumption.

Should we target overall consumption instead? Yes, but we must be aware of another potential problem, ultimately that of social unrest. How should a finite resource be rationed and distributed among a population? We want it all - a stable climate, with the lights on and freedom from the fear that a disgruntled neighbour with fewer rations doesn't overthrow society and break those lights we worked so hard to keep glowing.

Sadly, the call for efficiency repeated by the Energy Review and governments around the world could backfire. More consideration to other effects is needed. Although the treacherous rocks of inadequate energy supplies, climate change and social unrest have been charted by many, no-one appears yet to have understood how to navigate our civilization safely past all three.

Sunday, May 14, 2006

Energy prices: a cure as painful as the disease

Eva Sprunt, President of the Society of Petroleum Engineers, writes in the April 2006 edition of JPT that the cure for high oil prices is high oil prices. She debunks the idea that oil is running out and welcomes the high oil price as a way to ensure that more marginal fields will be produced and that alternatives will be found.

It is not right that we should berate our energy industry. It is vital to our lives; we are all a part of the demand side, the supply side, or both. We depend on hydrocarbons to grow and transport our food, move us (or our friends, colleagues, suppliers or customers) about the planet and in myriad other ways. However, this short-sightedness by a senior member of the oil and gas industry (and similar comments by Exxon-Mobil) is not helpful.

Whether there is any oil left in the ground or not is not the issue. The problem is the price of getting it. If the cure is also high prices, that is a reason not to rejoice but to be dismayed.

Higher prices will no doubt help develop alternative energy sources in a way that no amount of government coaxing could. We may well leave half the oil in the ground as we find a better fuel or feedstock. However, if the price rises are too fast and we blight the lives of people unable to change their economic situation quickly enough, the battle is already lost. Our property prices, industry, service businesses and transport infrastructure have evolved under relatively stable energy prices for too long. Our co-dependencies are too great for a significant and rapid price increase to go un-noticed.

Higher prices might also help mitigate pollution and climate change. This will be, at best, a happy side-effect. The oil industry is busy developing heavy oil, shale and tar sand sources that produce more CO2 than lighter oils per unit of energy. The will to mitigate climate change is too weak and the evidence not widely accepted. Our efforts should be in learning how to live with higher sea levels and perhaps more extreme weather - whether naturally or un-naturally occurring, both seem more likely in the future. Raise the Thames Barrier and don't buy property seaward of it.

Friday, April 28, 2006

Russia must change course to maximize her returns

Russia is fortunate to have 5% of the world'’s oil and a third of the world'’s gas. Nevertheless, her future is murky. The market is changing and requires investment and innovation - two areas in which the Russian oil and gas sector has a poor track record. Russia must invest in technology and improve its business environment if she is to maximize her returns.

The demand for oil and gas has never been higher. In spite of oil prices more than doubling in the last three years, demand has risen, not least from the high-growth economies. China continues to grow at around 10% a year and recently overtook the UK to become the fourth largest economy in the world. China is motoring, figuratively and literally, and as Chinese cyclists take to cars the demand for oil will rise yet higher.

As this demand strengthens, supply is tightening. Downstream spare capacity is low and plant has been offline, putting into question the availability of finished products. In addition, at the peak of the "Peak Oil"’ debate, Jeroen Van Der Veer, Chief Executive of Royal Dutch/Shell conceded in the last few weeks that easy oil production may well have reached its maximum.

As well as problems with raw energy supply, there is now a further premium on energy security. Alternatives are being sought not only to overcome the depletion of traditional sources, but to build in protection against political disturbances.

Amid rising demand, tightening supply and the need for increased energy security, there is a dearth of industry talent. The industry has clearly been caught short. Its response is to innovate -– as must Russia if she is to avoid damaging her interests.

Leaders recently concluded at Davos that there is no shortage of energy, albeit that the new sources are unconventional and more costly. The industry is busy gearing up to exploit new sources such as heavy oil, shale oil, tar sands, remote gas and renewables.

The market has shown little hesitation in bearing the cost of innovation and there is major investment already in place. Large capital projects are underway in Canada'’s Alberta tar sands (a large high-security source for North America) and LNG projects are myriad, with new and existing facilities from the Adriatic to Zeebrugge.

These changes increase the likelihood that in the coming years there will be a large, diversified energy market. This market will be built up from multiple alternative sources, fossil and renewable, with greenhouse gas pollution addressed through technology such as carbon capture and storage. A global LNG market will be served by multiple suppliers. Participation in this market will require significant technical capability and a secure business environment.

The levels of investment needed to create and operate within this market will be high and in stark contrast to the levels seen in recent years, especially in Russia. There have been notable exceptions, such as Sakhalin, but in general more investment is needed. There is only so long that the over-engineered, but now old and failing, Russian infrastructure can last -– both oil and gas production fell in Russia during the 1990s, in part through poor reservoir management and poor equipment. Investment is also needed in supporting industries, especially power and transport.

This necessary investment will be helped by the right business environment. It is here where most of the innovation needs to happen. Russia is eroding trust in her ability, or willingness, to supply and thereby helping to stimulate a competitive market better able to supply world demand.

As Russia adjusts her contracts with her CIS customers, her heavy-handed use of the gas supply taps will not be forgotten in Europe. As well as the problems in the Ukraine at the beginning of the year, Georgia's supply problems have also not helped.

Whether the cause is terrorism, political manipulation, contractual dispute or mechanical failure, the West mistrusts the flow of energy from Russia. Europe and America are redoubling their efforts to improve their energy security accordingly. The UK is re-assessing its energy options with renewed concern, revisiting a 2003 white paper on energy security. Europe has already re-focused attention on its LNG plans for the Adriatic in direct response to Russia'’s dispute with the Ukraine. Iran has recently been limiting supplies through the Ukraine to Turkey, adding to the impetus of customers to find alternatives.

LNG and GTL will both play a significant part in this drive for diversification. LNG offers the promise to turn gas into a fungible commodity like oil and to create a significant spot market. Aside from releasing customers from the tyranny of a fixed pipeline, GTL could also make large quantities of stranded gas economic, some estimates of which have been as high as 2,500 TCF, a volume even greater than that of Russia'’s recorded reserves.

The market, however, will not change quickly. LNG requires long-term contracts to support its significant capital cost and new capacity takes time to construct. The development of a spot market must also take place in the gaps between these contracts, which will dominate at least the next decade of development. Then there are technical requirements for LNG at compatible calorific value for gasification, which will limit the effective market capacity in the short term before the appropriate plant is in place.

Alternatives are not straightforward and there is some muddled thinking going on. For all the talk of nuclear power, it can only displace gas used for electricity generation. Nuclear power cannot be used as a petrochemical feedstock, nor can it be fed into domestic boilers or car petrol tanks. The time spent creating a viable alternative hydrogen economy is measured not in years but in decades, assuming the technological hurdles can be overcome.

In short, there is obviously a significant opportunity for Russia to take advantage of higher hydrocarbon costs. She has a wealth of assets and access to technology, both home-grown and from abroad, through existing relationships with the super-majors and service companies.

Russia risks, however, failing to realise her full potential by creating an adverse business environment and being blind to competition from an expanded, diversified energy market. She must act to secure trust, put in place a clear tax regime and act against corruption, or risk diminished future returns by reduced participation in the new energy market.

This opinion piece first appeared in CIS Oil and Gas, April 2006

Sunday, January 22, 2006

Who cares about climate change?

We talk a lot about climate change but in reality even what little we are doing to mitigate the problem could well be making it worse. We should be more honest in our intent.

The clearest exposition I have found on the argument that climate change is occurring and that there is a human component is presented by the Royal Society here.

Imagine you wanted to put as much carbon dioxide in the atmosphere as possible. How would you do it? Scavenge as much oil, coal and natural gas out of the ground as you could? Strive to keep the price low? Encourage industrial growth and consumption worldwide? All of the above?

Now imagine you want to do the opposite. Extend the use of nuclear power, encourage renewable energy sources, attempt to reduce demand and trade in carbon credits?

If you really meant it, then you'd also add in the opposite actions of your first list. Sadly, when it comes to our collective actions, we don't really mean it.

Our economy doesn't really care about climate change or emissions reductions. We tinker here and there. Nuclear power, renewables or demand reduction could reduce greenhouse gas emissions, but these are secondary effects to the real reason we pursue these options. What we really care about is energy price and security of supply.

What about carbon credits? Are they, at least, part of climate change mitigation? No. The tax insufficient to stop demand, and I doubt if we would ever stomach the price levels that would affect demand. Recent gas price increases have already called for a reduction in emissions controls. Worse yet, much of the tax take is simply sitting in the coffers of government, whose objective is economic growth. Economic growth increases greenhouse gas emissions. Perversely, the carbon tax could therefore be spent putting more carbon dioxide in the atmosphere.

We can either create economic growth or address climate change. We are not ready to harm the former for the sake of the latter. In turning to technology, we might be able to do the former and the latter together. But we should stop pretending to ourselves that we really yet care, let alone have a plan.