Energy, Security, and Climate

One interesting feature of the U.S. hydrocarbon boom is the widening gap between the industry’s interest in drilling for oil and other liquids versus dry natural gas. It’s all about economics: the disparity in prevailing market prices and outlook between these commodities is dictating companies’ willingness to sink money into, and bear the risk of, trying to produce them. The two graphs below show industry expenditures on exploration and production (E&P) in North America relative to crude oil and natural gas prices, courtesy of the U.S. oil services and drilling equity research team at Barclays Capital. Surging prices for both goods starting around 2003 sparked a boom in spending, which roughly tripled between 2002 and 2012. Figures 1 and 2: North American E&P spending vs. benchmark U.S. crude oil and natural gas prices As the two figures show, the surge in gas production from the investment boom helped swamp benchmark natural gas prices at Henry Hub, Louisiana, reflecting a glutted market. Benchmark West Texas Intermediate (WTI) oil prices, in contrast, quickly rebounded to around triple-digits after their epic collapse in 2008-9, and remain far above long-term inflation-adjusted historical averages (despite having to contend with a glut of their own at the WTI pricing hub of Cushing, Oklahoma). Looking at oil- versus gas-directed rotary rig counts in the United States makes it clear just how much more drilling activity is occurring here right now relative to the 1990s (Figure 3). There are about twice as many rigs deployed today as there were a decade ago. In absolute terms, drillers favored gas between 2002 and 2009, moving hundreds of rigs into production. But with natural gas prices down for the count, and with the rapid resurgence of the price of oil, North American operators are overwhelmingly choosing to channel their investment into the hunt for liquids. Figure 3. Rotary rigs in operation in the United States since 1989 (including oil- vs. gas-directed) The substitution of gas for oil-directed drilling activity has been a defining reversal in U.S. hydrocarbon production over the last three years. Whereas just a few years ago nearly 90 percent of rigs were looking for dry gas, that figure’s plummeted to 24 percent—and oil-directed rigs now make up three-quarters of the total. Figure 4. Percentage of oil- versus gas-directed rotary rigs in operation in the United States This picture could change if gas prices were to move high enough to justify companies increasing their budgets for gas drilling again, which could set off a scramble for those contractors able to quickly get rigs back into gas plays. But for the time being, it’s oil, not dry gas, that operators are interested in, not surprisingly, given the price differential. Either way, the aggregate picture is of a country where drilling is at full tilt. Even Hollywood wants in on the action.

I have a new paper (PDF) in Climatic Change that explores the climate consequences of natural gas as a bridge fuel. [Update: The article is now behind a paywall. If you don’t have access, you can download an unformatted pre-print version here.] Here’s the abstract (followed by a discussion): Many have recently speculated that natural gas might become a “bridge fuel”, smoothing a transition of the global energy system from fossil fuels to zero carbon energy by temporarily offsetting the decline in coal use. Others have contended that such a bridge is incompatible with oft-discussed climate objectives and that methane leakage from natural gas system may eliminate any advantage that natural gas has over coal. Yet global climate stabilization scenarios where natural gas provides a substantial bridge are generally absent from the literature, making study of gas as a bridge fuel difficult. Here we construct a family of such scenarios and study some of their properties. In the context of the most ambitious stabilization objectives (450 ppm CO2), and absent carbon capture and sequestration, a natural gas bridge is of limited direct emissions-reducing value, since that bridge must be short. Natural gas can, however, play a more important role in the context of more modest but still stringent objectives (550 ppm CO2), which are compatible with longer natural gas bridges. Further, contrary to recent claims, methane leakage from natural gas operations is unlikely to strongly undermine the climate benefits of substituting gas for coal in the context of bridge fuel scenarios. I’m not going to go through the details of the paper, but I want to discuss some of the physical intuition that underlies it, and add some explicit comparisons with a couple other papers that have garnered a lot of attention (and that motivated this work). The underlying explanation for the results on methane is intuitively straightforward. When one models mitigation scenarios, peak temperatures are typically realized many decades after greenhouse gas emissions (and intensive natural gas use) have fallen deeply. That’s because the climate system has a lot of inertia. This means that it’s the long-term impact of methane -- known to be much smaller than its short-term impact -- that really influences peak temperatures. That weakens the ultimate impact of methane. In particular, gas is never worse than coal for peak temperatures, even with 5 percent leakage, regardless of the choice of emissions target. I explore a wide range of scenario pairs that differ only in their relative use of coal and gas. In every pair, peak temperatures are higher in the cases that feature coal than in those that feature gas. This is a consequence of the phenomenon that I just mentioned: because peak temperatures lag the decline of conventional fossil fuel combustion by several decades, the effect of methane leakage largely dies out (loosely speaking) before it can influence peak temperatures much. All of this is compounded by the fact that, if one wants to keep to an aggressive emissions target, a natural gas bridge can’t last long. A short bridge means relatively little in the way of methane leakage, and a relatively small impact on peak temperatures as a result. This corollary of this result, though, is that using gas as a bridge instead of keeping coal around a bit longer (assuming the same path for zero-carbon energy in both cases) doesn’t make much of a difference to carbon dioxide emissions if you’re trying to stabilize concentrations near 450 ppm. The bridge is simply too short for the distinction to be large. Some of these results change a bit when you’re looking at scenarios that stabilize carbon dioxide concentrations around 550 parts per million. Extreme methane leakage can now be more consequential for peak temperatures, because the natural gas bridge is longer, allowing for more methane to be emitted. (Lower leakage rates of 1-2 percent, consistent with mainstream estimates, are still of only minor consequence.) At least as important is that substituting gas for coal in the context of such targets can be far more consequential (because fossil fuels without CCS can stick around longer). The upshot is that, even with an aspiration to keep carbon dioxide concentrations below 450 parts per million, transitioning from coal to gas may be valuable as hedge in case an ultimate transition to zero-carbon energy occurs late. Comparisons with Howarth et al. and Wigley These results differ from those in two papers on natural gas and methane that have garnered particularly widespread attention for their alarming results. Robert Howarth and colleagues combined high estimates of methane leakage with a focus on 20-year warming potentials to conclude that natural gas is worse for climate change than coal. The new Climatic Change paper shows that the 20-year horizon is completely inappropriate for discerning the impact of methane leaks on peak temperatures. Tom Wigley raised a similar concern about Howarth et al. in a paper published in 2011. (He kindly helped me replicate the results in his paper.) To avoid Howarth’s reliance on global warming potentials, he constructed a scenario in which natural gas use rises strongly through 2100 and then declines through 2200, ultimately ending at approximately present levels. He then estimated the impact of methane emissions on temperature profiles over the course of his scenario, rather than on a particular time horizon, finding that methane negated any warming benefits for many decades. But there is an important limitation to that paper: natural gas use is never phased out in its scenarios. (They are not stabilization scenarios.) That makes it impossible for that paper to discern the impact of methane leakage on peak temperatures. (Temperatures never peak in the paper’s scenarios.) My new paper was originally motivated by a desire to address this issue. The result should cool down some of the alarm that the earlier paper generated. Limits and Directions for Future Work My new paper looks strictly at the climate consequences of bridge fuel scenarios. It does not dive into two other critical questions: Are such scenarios technologically, economically, or politically plausible? And what are their economic, security, and environmental costs and benefits? Both questions are massive and are essential to address. The paper says nothing about whether pushing into natural gas in the short run would make it more or less likely for the world to make a timely transition to zero-carbon energy after that; in-depth study of the plausibility of different pathways is essential to addressing that. Moreover, peak temperatures are only one criterion by which scenarios should be judged. Comprehensive assessments need to take issues like economic cost and local environmental consequences into account. I can’t stress this strongly enough: My paper does not say that any particular pathway is "better" or "worse" or "preferable". It explores some important properties of theoretical paths that have been widely discussed but poorly investigated. In doing that, it shows that recent studies have tended to overestimate the importance of methane, but that, at the same time, some commentators have given too much credit to the potential value of natural gas as a bridge fuel for achieving stringent climate goals. Taking things to the next level, and understanding how a near-term shift to gas might affect long-term trends and outcomes, will require considerably more in-depth work on how gas fits into economic and political systems.

People looking for a way that natural gas could break oil’s stranglehold on the U.S. transport system typically run into forbidding limits. Gas could be used to run power plants that would charge electric cars, but those cars are currently too expensive for most drivers. Gas could be compressed and used directly in automobiles, but limited range and fueling infrastructure are big barriers. Natural gas could also be converted into gasoline or diesel, but the costs and risks of building plants can scare investors. A dedicated band of analysts, advocates, and former policymakers has been pushing another solution: methanol. Methanol is a liquid fuel can be produced from natural gas using technology that is already widely utilized in the chemicals industry. Its advocates claim that it costs a mere $100 to alter a car so that it can use the fuel. And, using current cost estimates, advocates argue that methanol could be produced at a price that would make it a highly cost-effective competitor for gasoline and diesel. Advocates acknowledge, though, that methanol isn’t going anywhere with the current transport system. They argue that legislators should require that all cars be built to take methanol as a fuel – a so-called tri-fuel mandate. That, they claim, would allow methanol to compete on a level playing field, and potentially help replace oil. It’s an intriguing idea, but it needs more flesh on the bones. Introducing a tri-fuel mandate would be politically challenging. Current fuel economy regulations give automakers special credit against their fuel economy obligations when they sell flex-fuel vehicles. If a new tri-fuel mandate replaced this approach, automakers would be forced to take other steps to boost fuel economy instead, possibly threatening margins, and prompting political opposition. At the same time, creating a new market for methanol (the transport sector) would raise the price of methanol and hurt chemicals producers who already use it as a feedstock. They would be reliable opponents of any tri-fuel mandate. Policymakers faced with these sorts of obstacles aren’t going to be swayed by the simple claim that a tri-fuel mandate would “increase competition” and possibly help displace oil. They’re going to want some stronger analysis that persuades them that the energy payoff would be worth the political price. Doing that requires three pieces of analysis that I haven’t seen: What would the all-in cost of marginal methanol supplies be in a world that featured rapidly growing U.S. methanol production for transportation? That cost estimate would need to include not only production costs for new facilities, but also new distribution and storage infrastructure. Simply pointing to the current market price of methanol doesn’t answer that question – that price does not necessarily reflect the cost of new capital investments. How much risk would investors in methanol production face – and what would that mean for likely investment and production? It’s all well and good to claim that, at current natural gas and oil prices, methanol production looks like a good bet. A real-world investor will need to consider the potential risks of lower oil prices and higher natural gas prices. Is it reasonable to expect large investments once one considers how real investors will behave? If not, a tri-fuel standard would probably do little, and policymakers are unlikely to want to pursue one. What would the national benefits of an oil-to-methanol shift be? Or, put a different way, is a shift to methanol similar to increasing oil production, or to cutting oil use? Increasing U.S. production lowers world prices by increasing supply relative to demand, but doesn’t protect the country from volatile oil prices (or reduce greenhouse gas emissions). Reducing U.S. oil demand generally does all of these. My instinct is that, at least for modest volumes, methanol prices are likely to follow gasoline and diesel prices, failing to insulate the U.S. economy from oil price volatility. For larger volumes, I’m less certain. Moreover, different fuel options can have different consequences for vulnerability to short- and long-run price increases. My sense is that methanol would do more to address long-run price increases, but those happens to be a smaller economic vulnerability in the first place. The answers to these questions are particularly important if there’s a chance that a focus on boosting methanol production might substitute for other measures to reduce oil dependence. With advocacy for methanol on the rise, it’s all the more important that these questions be answered. If methanol really is as promising as its supporters claim, then solid answers here might prompt some policy progress. Absent that, I’m skeptical that we’ll see much action on this front.