Why Natural Gas Vehicles Won't Decrease Oil Dependence, Part II

Includes: BP, CHK, GAZ, UNG
by: Eamon Keane

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My first article in this series discussed how the Pickens' Plan would affect the crude oil picture. Here I'll take a look at whether the natural gas would be available to convert cars and trucks to natural gas.

Figure 1 shows the where the US got its energy from in 2008:

This shows that, even if all transport were natural gas, there would still be a demand for 30% of the energy from oil, principally for industry. There would be (more expensive) workarounds for most of that though.

The petroleum inputs to the transport sector in 2008 broke down into approximately 3mb/d transport diesel, 9mb/d gasoline and 1.5mb/d jet fuel.

Compressed natural gas has the same fuel economy (.pdf) as gasoline. 1mb/d gasoline contains the same energy as 2tcf (trillion cubic feet) per year, which indicates that in 2008 all gasoline would have required 18tcf.

According to this study (.pdf) liquefied natural gas for trucks has 60% of the fuel economy of diesel. 1mb/d diesel is equivalent to 2.1tcf/yr. Since the majority of diesel is used in trucks, this indicates that in 2008 natural gas for diesel would have required 10.5tcf (3*2.1/0.6).

So, in 2008, road transport required about 28.5tcf. The DOE's 2010 Annual Energy Outlook (AER) has this transport demand pegged at about the same level of demand out to 2035.

There are a number of projections for future natural gas demand, such as the DOE, but the October 2009 study (.pdf) from Interstate Natural Gas Association of America (INGAA) has the most detail. Using historical data for natural gas from the DOE, and the INGAA projections for other sectors, we can put the size of this 28.5tcf in context. In 2008 natural gas used in transport was a rounding error, at 0.03tcf. Figure 2 shows this:

I assumed all road transport in 2030 was natural gas fueled, and used linear growth to ramp it up from 2010. The INGAA reference case has power generation increasing by a couple tcf with most of the rest holding steady. The result is that transport has over half the natural gas market.

Figure 3 shows the amount and type of natural gas supply the INGAA thinks there will be in 2030 for the reference case:

A couple of things are readily seen from this. The first is that conventional supply will decline by about 6tcf, which means unconventional has to ramp up just to keep even. The INGAA state:

"Natural gas producers must work harder to develop additional deliverability as decline rates increase and reserves-per-well fall below past levels."

The second thing that is noticeable is that supply is nowhere near the 55tcf needed for current uses and transport.

The INGAA also undertook a high gas growth rate scenario. Here was what supply would be in that case:

Again, nowhere near the 55tcf.

Figure 5 shows that well productivity has been steadily declining over the past 40 years, and that the number of gas wells has to rise rapidly in response. 50% of gas produced today comes from wells drilled only 3.5 years ago. Data here.

Seeking Alpha author Charles Huges Smith reveals a source which says it costs $5-$6m per well that is brought on stream. He also cautions that no one really knows the decline rates or indeed the costs.

In the high gas growth rate case the INGAA estimates that 52,500 annual well completions would be required, versus about 38,500 today. 52,500 unconventional gas wells at $5m per well would cost $260bn per year. Put another way, assuming a 45,000 average annual well completion out to 2030, that would require investment from now until then of $4.5trn.

That's to get to 32tcf, to get to 55tcf or even the 25tcf base case and the 10.5 tcf for the diesel fleet would require more. Which is not to say the investment wouldn't be forthcoming but it would require sustained high prices. If we tried to ramp up natural gas to cover all diesel in say 10 years, you would have serious inflation for drilling rigs and natural gas prices.

To conclude, it seems to me that it would be very difficult to reach even the natural gas production level to cover diesel. If there is literature which goes through the numbers and reaches the opposite conclusion, please provide a link.

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Disclosure: No Positions