Can Japan Harness Burning Ice?

Includes: BP, COP, CVX, HAL, RDS.A
by: Investment U

By Justin Dove

Japan announced Monday that it has plans to start testing the offshore extraction of methane hydrates by the end of fiscal 2012.

Methane hydrates, called burning ice, are frozen deposits of methane that may be possible to safely extract. Methane is a clean burning fuel, but the gas itself is a source of aggravation to environmentalists.

Although frozen methane deposits are mostly found near the ocean floor, Japan successfully extracted some of these deposits in 2008 by land in the Canadian permafrost. These offshore attempts will be the first of their kind. If Japan can pull it off, the implications could be huge.

Brad Tomer, former director of the Department of Energy’s Strategic Center for Natural Gas and Oil, told Popular Mechanics in 2006 that “there’s more energy potential locked up in methane hydrate formations across the world than in all other fossil energy resources combined.”

Oil Companies Begin Burning Ice Research

With so much energy potential, methane hydrates have certainly gotten attention from the U.S. Department of Energy and the largest oil companies. The research and development isn’t as far along as Japan’s, but it’s gaining steam.

Here are some of the major players and their roles:

  • ConocoPhillips (NYSE: COP) is leading a field experiment in Alaska to test a method of pumping carbon dioxide into these hydrates. The idea is that the carbon would replace the methane with the methane being released for extraction. This method may be attractive to oil companies because they can use waste carbon dioxide that must be extracted from natural gas. The biggest hang-up is that it’s a slow process.
  • British Petroleum plc. (NYSE: BP) is working with the DOE and USGS at testing the viability of the other method of extraction, called depressurization. This method would send a tube into the borehole. By reducing the pressure within the tube, it would melt the methane ice and create a flow of gas. This method would be environmentally safer, since the gas would be contained in the tube. The problem is, it could potentially disrupt the sediment, leading to costly impingement of the tube.
  • Chevron (NYSE: CVX) and Halliburton (NYSE: HAL), along with ConocoPhillips, are part of a large-scale research project in the Gulf of Mexico. This is a three-phase project where the first two phases are aimed at determining the safety issues that these hydrates pose on existing conventional oil wells. The third phase will determine the abundance and locations of hydrate deposits that may be extractable.

If Japan’s experiment pans out, expect these companies to benefit the most from methane hydrate extraction. Keep in mind that this is still 10 to 15 years out according to most analysts.

Creative Ways to Access Natural Gas

David Fessler recently wrote about the trends pushing demand in his liquefied natural gas outlook for 2012. Also, recent developments have emerged with Royal Dutch Shell (NYSE: RDS.A) and its Prelude floating LNG facility that look to help fill Asia’s growing appetite for natural gas.

Japan’s latest development in methane hydrates is further testament to the growing need for natural gas and the creative measures that people are taking to procure these resources.

Unlike the big oil companies, Japan’s motivation is more political than financial. It imports 99 percent of its oil and gas. Although Japan has had this technology in the pipeline for a few years, the Great East Japan Earthquake in March amplified the need for some level of energy independence.

Power outages rolled on for days with no guarantees on natural gas delivery, along with high prices due to speculators. According to estimates, there’s enough methane hydrate off Japan’s shores to supply the country’s needs for approximately 14 years.

Burning Ice Poses Serious Environmental Risks

Japan may want to curb foreign dependence on oil, but there are still doubts about whether extracting methane from the ocean floor would be worth the environmental risks.

Methane is known to trap heat in the atmosphere 21 times more effectively than carbon dioxide. Geologists have linked higher compositions of methane in the atmosphere to mass extinctions in the distant past.

Also, the decomposition of hydrates near the surface of the seafloor could even trigger tsunamis by causing landslides on the continental slope.

Despite these worries, the Japan Oil, Gas and Metals National Corporation feels that the hydrates are safe.

“Can environmental disaster happen by gas hydrate production? The answer is no,” Koji Yamamoto, a project director for the Japan Oil, Gas and Metals National Corporation, told The Asia Times in December 2009.

The jury is still out on effects on the environment and even the profitability of extracting methane hydrates, but Japan is determined to find out first.

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