Everything You Know About U.S. Oil And Gas Is Wrong

 |  Includes: UNG, USO
by: Modeled Behavior

Wedged in between my attempts to meet actual professional commitments I have been trying to get a handle on what the Shale Oil and Gas revolution means for the U.S. There are so many takes, almost everyone is pushing an agenda and those who don’t speak and write in a petrol-head jargon that makes economic analysis read like Hemingway.

Are we really headed for Saudi America? Are the Extraction Analysts right that this is bigger than anything anyone has ever seen? Are the Peak-Oil-Pessimists right, that this is just a minor blip? Are the Quant-Pessimists right that demand for NGL cannot support the capital costs of extraction and bankruptcy for must extractors is imminent?

As I dig deeper it looks more and more like “everyone is wrong” or at least everyone has working assumptions that are more detailed analysis from someone else shows to be wrong.

Take this from Jim Hamilton who is known to the blogosphere and is obviously brilliant and well informed.

A bigger factor in the U.S. [Total Oil Production] increase since 2005 has been natural gas plant liquids (hydrocarbons with a higher energy content than methane which can be separated out from methane at natural gas processing facilities) and other liquids (chiefly biofuels).

. . .

The figure below breaks the U.S. NGL numbers down into specific components. A molecule of ethane has 2 carbon atoms, compared to only one for methane, the basic component in pure natural gas. Although ethane has a higher boiling point and more energy than methane, you’d still have to bring ethane down to a Fahrenheit temperature of 127 degrees below zero to make it a liquid. You can’t drive your car with ethane, and it’s currently almost exclusively used to make ethylene for the chemical industry.

In fact you can drive some car on anything from methane to tetracosane (24 carbon atoms). Yet, chances are that your car does currently run on ethanol, which is basically ethane with an oxygen atom stuck on. (OH swapped for H).

Now, to use the ethane coming out of the ground it would have to be refined into ethanol and indeed there are refiners who do this. However, they do not sell the ethanol into the gasoline supply because it is illegal to do so.

Though no one admits as much even a mild cynic might suspect that it is illegal because ethane-to-ethanol is cheaper than corn-to-ethanol, and much cheaper as ethane prices collapse. Ethane-to-ethanol would also reduce the feedstock for ethane-to-ethylene that the Petrochemical industry uses. This is just one example of the knots in the hydrocarbon web.

Another particular example that shows how knotty this is, is that much of what is coming out of the ground in Eagle Ford is pentane. It can be called: lease-condensate, ultra-light crude, naphtha or natural gasoline, depending on who is naming it.

Since its very close to the gasoline we use it, it would seem like a great resource. However, at current, it's something of a headache because a refinery can only output so much of a given product at a time. If too much naphtha is coming out of the crude stream then the whole stream has to be slowed down.

A refinery is designed to run 24-hours a day to make up for capital costs and so slowdowns can be outrageously expensive. Hence, the gasoline like crude is selling for a discount and some folks are reportedly refining it in the field.

It so close to gasoline, that you can do this with a set-up that is easier than brewing your own beer – and probably better tasting. Though the output here is not always “strictly legal.”

I hope to get more insight on what the likely ways forward are going to be, but as it stands no one seems to be offering a complete big picture.