Last week saw the price of crude oil inch closer to $140/ BBL. Some economists believe the price rise is mainly due to the world oil supply shortfall of about 4 million barrels per day [MBPD]. Proof of the shortage can be seen in the production numbers of the largest US multi-national oil companies ExxonMobil (NYSE:XOM) and ConocoPhillips (NYSE:COP), which fell 11% in Q1 2008. Last week Saudi Arabia agreed to increase crude oil production by 500,000 BPD to offset world shortfalls. So critical is the shortfall and the sensitivity of the gasoline price, that last week the US Senate defeated the Climate Change bill. Experts predict a crisis in 10 years when Iran curtails exports due to depleting crude oil production rates.
The US consumes about 21 MBPD of crude oil of which 5,102,000 BPD of crude oil is produced domestically. A typical refinery produces about 44% gasoline, 22% diesel distillates, 9% Jet fuel, 4% heavy fuel oil, 4% liquefied petroleum gas (LPG’s) and 17% other products. In 2008 US gasoline consumption is expected to be about 9,308,000 BPD of which 9,100,000 BPD is produced domestically.
The price of gasoline, currently hovering around $4.00 / gal, can be reduced by lowering demand in three ways. First, we can be drive less often and car pool. Second, we can seek alternate modes of transportation, such as public transit. Third, we can use another motor fuel as an alternative to gasoline, one that is not produced from crude oil.
The alternatives to gasoline motor fuel include diesel, propane, ethanol, methanol, CNG (compressed natural gas) and hydrogen.
To be acceptable as a replacement for gasoline motor fuel, the alternative must be;
a) Competitively priced compared to gasoline.
b) Produced by non crude oil refining multi-nationals.
c) Available in existing reserves for a minimum of 10 years at current rates of consumption.
d) Available in sufficient quantities to displace 25% of current annual gasoline volumes of consumption.
e) Available from countries of low political risk and low risk of supply disruption.
f) Available from multiple sources.
g) Currently in a surplus status.
h) Currently available at existing fueling stations nation wide.
i) Ideally available at fueling stations not owned by multi-nationals with crude oil refining interests.
j) Compatible with existing motor vehicles with minimal conversion cost.
k) Environmentally friendlier than gasoline.
l) Cheaper than gasoline on a BTU basis.
m) Equally efficient on an energy conversion basis.
n) Safe to use.
o) Possess state and federal regulatory approvals for motor vehicle fuel usage.
The motor vehicle fuel that meets the criteria above is CNG (compressed natural gas).
The historic BTU ratio of natural gas to crude oil is 6 MCF to 1 BBL crude oil. At today’s natural gas prices, this equates to a price of about $72 / BBL. With crude oil priced at $140 / BBL, CNG is selling at a discount of about 50%.
The cost of CNG in Utah is about $0.74/ gal and about $2.50 /gal in California compared to $4.00 / gal gasoline. World locations and prices are available on the web site CNG Prices.com
Natural gas is found underground sometimes in the presence of crude oil, sometimes in the presence of LPG liquids and sometimes alone. Exploration and drilling companies currently engaged in natural gas exploration and production include Encana Corp (NYSE:ECA), Enerplus Resources (NYSE:ERF), Talisman Energy (NYSE:TLM) and Forest Oil (NYSE:FST). Natural Gas is also found in coal deposits known as Coal Bed Methane (NYSE:CBM). Exploration, drilling and coal companies currently engaged in CBM development include Consol Energy (NYSE:CNX), CNX Gas Corp (CXG), EOG Resources (NYSE:EOG), Duvernay Oil [DDV], Nexen (NXY) and Ember Resources [EBR].
In 2004, natural-gas-fired plants accounted for less than 20 percent of electricity generation in the United States, while coal-fired plants accounted for about 50 percent. The natural gas share of generation is projected to rise to 22 percent in 2015. After 2015, higher natural gas prices, along with tax incentives for clean coal technologies, are expected to discourage the construction of new natural-gas-fired plants in favor of coal-fired plants, leading to a decline in the natural gas share to 16 percent and an increase in the coal share to 57 percent in 2030. U.S. natural gas consumption for electricity generation is projected to peak in 2020 at 7.2 trillion cubic feet, followed by a decline to 5.9 trillion cubic feet in 2030. This will make more CNG available for motor vehicle use in the future.
To displace 25% of today’s rate of US gasoline production with CNG and not affect current consumption, requires an annual increase in natural gas production of 5 TCF.
The US conventional natural gas reserves increased by 12 TCF in 2007 over 2006. The untapped US / Canadian Utica Shale Gas reserves are reported to hold 24 TCF of recoverable natural gas. The untapped US Marcellus Shale Gas reserves are reported to hold168 TCF of recoverable natural gas. The proven reserves of the Alaska fields are estimated to hold 35 TCF and the Arctic Mackenzie Delta are estimated to hold 9 TCF.
From the years 2005-2007 the US consumed 22,010,596, 21,653,086 and 23,057,969 MMCF per year, respectively.
From the years 2005-2007 the US production increased 18,927,095, 19,381,895 and 20,151,218 MMCF per year, respectively. From the years 2005-2007 the US imported 4,341,034, 4,186,281 and 4,602,035 MMCF per year, respectively.
Current US reserves of CBM are estimated to be 700 TCF (trillion cubic feet) of which 100 TCF is recoverable. Canadian reserves are currently estimated to be 528 TCF and assuming 75 TCF is recoverable. At a consumption rate of 4.98 TCF per year, there are adequate CBM resources available to displace 25% of the US gasoline requirements for about 85 years.
98% of all US natural gas imports in 2007 came from the politically stable countries of Canada, Mexico, Qatar, Equatorial Guinea, Algeria and Trinidad (93% from Canada, Mexico and Trinidad).
Of 181 million US registered cars, trucks, and buses, only 0.017% or 30,000 vehicles are fuelled with CNG. To convert an existing gasoline fuelled vehicle to CNG, it takes only a few hours. The cost of a conversion kit and tank is about $3,500. The state of Utah offers a tax credit of $3,000 per new or used vehicle converted to CNG. Questar (NYSE:STR) not only supplies CNG but it is provides storage and dispensing facilities at existing service centres in Utah and Wyoming. Every state in the US provides an internet listing of CNG dispensing locations. Environmentally, when compared to gasoline vehicles, CNG vehicles reduce:
- Carbon monoxide [CO] by about 70 percent
- Non-methane organic gas [NMOG] by about 87 percent
- Nitrogen oxides (NOx) by about 87 percent
- Carbon dioxide (CO2) by about 20 percent
All Federal, provincial and state government agencies allow CNG powered vehicles.
CNG, which is 90 percent methane, has a much higher octane rating than gasoline, allowing for higher compression ratios and therefore greater efficiency in the engines that use it.
By lowering the demand for gasoline by 25% the price at the pump should drop significantly. Also, displacing 25% of the US refining capacity of gasoline production, it will force multi-nationals to reformulate their crude oil intake to produce more diesel motor fuels from less costly crude types, thereby in theory lowering the price of diesel as well.
Will America take up the challenge of switching to CNG vehicles?
Disclosure: I have shares in ECA, ERF-UN, TLM, EOG, DDV, and EBR.