Category Archives: Energy

A World Awash in Natural Gas

Economic and National Security Implications of the

Coming Energy Revolution

“The world should take note of the dramatic increase in estimates of unconventional sources of natural gas in North America and elsewhere, perhaps the greatest shift in energy reserve estimates in the last half century”.

  • So writes former CIA Director and now MIT professor John Deutch in the January-February edition of Foreign Affairs. According to Deutch, technological advances have made vast amounts of natural gas available. Specifically, this is due to using “fracking’—blowing up hard, often shale, rock, and new capabilities in horizontal drilling.
  • As recently as two years ago we had no idea there were vast natural gas resources in unconventional reservoirs like coal seams, tight sand, and shale in the US and elsewhere. Natural gas has transitioned from being a “dwindling” to an abundant resource.
  • The development is a boon for consumers interested in affordable energy, for environmentalists wishing to reduce carbon dioxide emissions (much less than oil or coal), and for governments that hope to reduce the political and market power of today’s major oil/gas producing countries.
  • Countries that import natural gas (NG) should anticipate much lower prices as more sources become available than exist in today’s tight market. No longer will the world be dependent on a few nations—Iran, Russia, Qatar, Turkmenistan, Saudi Arabia—that control the bulk of conventional natural gas reserves.
  • Countries that derive huge revenues from the export of NG must anticipate dramatic reductions of demand and a corresponding loss of geopolitical influence. Demand for oil will also drop as NG substitutes more for petroleum, causing negative impacts on oil producing nations and having a very positive economic impact on oil importing countries.

The Technology

  • NG today is extracted principally from gas fields located in porous rock, tapping into the natural pressure of the reservoirs. Unconventional sources refer to “tight gas” found in impermeable rock formations, shale gas, or coal-bed methane absorbed into coal seams. Very difficult and costly to extract, or at least it has been.
  • Two technological advances make shale gas economically feasible to produce: horizontal drilling and hydraulic fracturing (“fracking”). Wells are dug vertically up to 12,000 feet underground, and the drill is then steered horizontally for several thousand feet or more. Fracking fluid  is injected at high pressure, perforating the formation and creating cracks in the shale, allowing the trapped NG to escape.
  • The new technology has driven down the cost of producing unconventional NG below what it now costs to extract NG from conventional sites! Enormous quantities of NG in shale deposits throughout the U.S. especially, but also in other regions of the world, have become commercially recoverable.

Extent of U.S. and Global Unconventional Natural Gas Reserves

  • In 2007 the DOE Energy Information Agency estimated US NG reserves to be around 250 trillion cubic feet. Estimates today place that at least at 700 trillion cubic feet; Amy Myers Jaffe puts the reserves at 1,000 trillion cf (“Shale Gas Will Rock the World”, WSJ, May 10, 2010). It could be as high as 2,500 trillion cf! Whatever, the potential reserves are enormous.
  • North America thus has sufficient NG that can be tapped economically to last for more than 200 years. In fact, the continent will likely shift from becoming a major importer of NG (through LNG tankers or pipelines) to a major exporter. Shale gas operations are also opening up in east and west Europe, currently major importers heavily dependent on shipments from Russia, Libya or Algeria.

Economic and Geopolitical Ramifications of the Natural Gas Revolution

  • Because of the vast availability of unconventional NG, we will see gas increasingly being seen as a cheaper source of power generation than coal, and possibly even nuclear. Natural gas will also soon begin to replace oil, first in the power generation sector (minor player in the US now), but more importantly in the industrial, chemical and transportations sectors.
  • This is likely to cause a serious reevaluation of the value of relying on “renewable” resources, particularly wind and solar, which will cost at least 5 times what power produced by NG generating plants will. However, “hybrid” plants that use both NG and solar to make electricity, will be more economically attractive.
  • Solar and wind will be particularly under scrutiny. At present all sources receive subsidies, but one recent report indicated that NG and oil receive about $0.25 cents per megawatt hour; coal at $0.44; geothermal $0.92; nuclear $1.59; but wind and solar both around $24.00! Critics (such as the CATO Institute) of “forced use of more expensive renewable energy” argue that subsidizing “green energy” in the face of the NG glut will destroy jobs, raise food prices, medicines and consumer goods. Maybe, maybe not, but this may suggest allowing consumers to opt for more expensive green sources on their electricity bills as opposed to mandates.
  • Nuclear will also come under more scrutiny, particularly after the near meltdowns of reactors in Japan following the earthquakes and tsunamis. Geothermal should remain competitive where it currently exists, but costly and speculative very deep drilling projects for geothermal will be less attractive. Expensive and controversial food to fuel schemes such as gasohol will fade away, as they should anyway.
  • Countries that export large amounts of NG will suffer lower than expected revenues and a reduced ability to use energy as a tool of foreign policy. Countries that have been major energy importers will benefit from lower prices and lesser concerns over security of supplies.
  • Countries that currently reap enormous revenues and political influence from exports of oil and gas will suffer (Iran, Russia, Venezuela, Saudi Arabia—my heart bleeds, of course, for them). Amy Jaffe believes that the explosion in NG availability could destroy the oil cartels (OPEC) and certainly reduce the leverage oil exporters now have.
  • Russia will be hit hard, as it must expect a significant drop in revenues it currently receives from NG exports. It will have to rethink major planned LNG facilities (for export), exploration of conventional NG sites located off-shore or in the perma-frost areas, and its fiscal situation. Because of sanctions, Iran has little in the way of NG exports now, so won’t be hurt in that area as much.
  • China is becoming a major NG and oil importer and apparently recognizes the importance of these shifts. Beijing is reportedly using its extensive hard currency reserves to by stakes in or whole companies located in the US and Canada which produce NG.
  • Gas importers stand to reap major gains from the new availability of unconventional NG. Germany, which gets 40% of its NG from Russia, will have much to gain. The developed Asian states—Japan, S. Korea, Taiwan—major importers of NG now, can anticipate much more favorable terms.
  • Planned investments in LNG ports and facilities, coal-fired generating plants, and long-distance gas pipeline projects will have to be reconsidered immediately. Likewise, because of costs and conversion requirements, it will be some time before the U.S. actually “exports” NG. (It will continue to import some despite the new availability simply because it is too expensive to get out of existing contracts).
  • On the positive side, more attention in the US as well as globally will be given to gas to liquid conversion processes, conversion of motor vehicles to Compressed Natural Gas (CNG)powered vehicles, and more substitution in the chemical sector. CNG can power buses, medium-duty trucks and light-duty vehicles that operate in urban environments close to fueling stations. Cars that run on electricity will increasingly be relying on that generated by NG—so isn’t this a form of “fuel switching” for the automotive industry?
  • Experts such as UNR’s John Scire argue that we should massively move to NG to power motor vehicles ASAP, and the personal transportation sector must switch as fast as possible to hybrids, plug-ins and pure electrics. This is not just because of economic rationality but that such a move would reduce our dependence on imported oil, especially from the volatile Middle East.

Environmental concerns

  • There are both plusses and minuses with respect to relying more on gas produced by unconventional methods. Increased reliance on NG will be environmentally beneficial, as the emissions of carbon dioxide are much less than that from coal or oil plants/machinery. However, Deutch and Jaffe are too cavalier in dismissing the negative impacts from fracking, as polluted fluids permeate underground reservoirs and create serious health issues that are only now becoming visible. The documentary, “Gasland”, laying out the many environmental downsides of fracking, is already having an impact. I think the negative environmental consequences can be mitigated, but the industry to date has been slow to address this important concern.

What does this mean for Nevada and the U.S.?

  • The United States will reap enormous rewards from the vast new sources of natural gas, as it shifts from being a net importer to exporter. The cost of electricity will drop, our dependence on imported oil will decline over time, and environmental impacts of using carbon fuels will drop.
  • We will have decades of NG to rely on while we continue to develop renewable energy sources, with the hope of reducing the costs associated with them.
  • The shift to domestic NG will could significantly improve our balance of payments position as we rely less on imported oil and gas. The leverage exerted by oil cartels or major exporting states will diminish. The perceived need of becoming involved militarily in distant conflicts could decline.
  • In Nevada, the decision by NV Energy to increase its reliance on electricity produced by natural gas in its energy mix looks very prescient, and will enable the company to both reduce rates as well as feel more secure with respect to deliveries of source fuels (perhaps the company also ought to thank SEN Harry Reid for stopping the construction of the 1500MW coal-fired power plant in Ely!).
  • In sum, the vast flows of NG coming to market domestically is a boon for consumers interested in affordable energy, for environmentalists wishing to reduce carbon dioxide emissions (much less than oil or coal), and for governments that hope to reduce the political and market power of today’s major oil/gas producing countries.

Tyrus W. Cobb (”). The author relied heavily on the articles written by John Deutch and Amy Myers Jaffe, and appreciates comments provided by UNR adjunct professor John Scire and NV Energy Executives Michael Yackira and Jeff Ceccarelli.

Obama’s Decision on the Nuclear Posture Review Due Soon

Colleagues: Keith Hansen’s excellent presentation last week on the Nuclear Posture Review generated a number of questions regarding the size of our nuclear stockpile and that of our adversaries and allies. In addition, there were many questions regarding how far President Obama might go in moving to a “No First Use” policy or to “Zero nukes”.
Both seem out of the question now. The article below from the Washington Post Saturday lays out more of the strategic considerations, the bureaucratic infighting, the impact of the Nobel Peace Prize, and the size of global nuclear stockpiles (highlighted and somewhat abridged).
As I looked over the size of current nuclear weapon inventories, I was struck by the fact that between the Soviet Union and the United States we had nearly 70,000 nuclear weapons. What the hell did we think we were going to do with them????
Good background reading on the eve of the announcement of the President’s decision!

Obama must decide degree to which U.S. swears off nuclear weapons

By Mary Beth Sheridan and Walter Pincus
Washington Post Staff Writer
Saturday, March 6, 2010; 12:13 AM

President Obama’s top national security advisers will within days present him with an agonizing choice on how to guide U.S. nuclear weapons policy for the rest of his term.
Does he substantially advance his bold pledge to seek a world free of nuclear weapons by declaring that the “sole purpose” of the U.S. arsenal is to deter other nations from using them? Or does he embrace a more modest option, supported by some senior military officials, that deterrence is the “primary purpose”?
The difference may seem semantic, but such words, which will be contained in a document known as the Nuclear Posture Review, have deep meaning and could dramatically shift nuclear policy in the United States and around the world. The first option would scale back the arsenal’s war role, potentially leading to a smaller U.S. stockpile and taking weapons off alert. The second option would be less of a change, holding out the nuclear threat but still permitting a reduction in weapons. The president was briefed on the document this week and requested additional intermediate options, officials say.
Senior administration officials have indicated that the review is likely to roll back some George W. Bush policies, such as threatening the use of nuclear weapons to preempt or respond to chemical or biological attacks. The review will also point to new ways to cut the Pentagon’s stockpile of roughly 5,000 active nuclear warheads, they say.
The review will “reduce the number and role of nuclear weapons in our national security strategy, even as we maintain a safe, secure and effective nuclear deterrent,” Obama said in a statement Friday marking the 40th anniversary of the nuclear Non-Proliferation Treaty.
But, officials say, after lengthy debate, Obama’s aides have rejected some of the boldest ideas on the table, such as forswearing the option to use nuclear arms first in a conflict, or dropping one leg of the “triad” of bombers, submarines and land-based missiles that carry the deadly weapons.
Obama’s decision on the sensitive issue of U.S. “declaratory policy,” officials and outside experts say, will help determine whether the document is regarded as a far-reaching shift from the Bush administration’s version released in 2001. Lower-level officials trying to craft the language engaged in fierce discussions about how far and fast the administration could alter course without alarming allies.
The Nuclear Posture Review is done at the start of each administration, and it influences budgets, treaties and weapons deployment and retirement for five to 10 years. Expectations for this one have been raised because of Obama’s pledge last year to “put an end to Cold War thinking” and move toward global disarmament — a vision that helped win him a Nobel Peace Prize.
The review, more than a month overdue, reflects the tension in seeking to advance the president’s sweeping agenda without unnerving allies dependent on the U.S. nuclear “umbrella.” The Pentagon is also wary of losing options in a world with emerging nuclear threats from North Korea and Iran, officials say.
Until recently, Obama generally has not intervened in the Pentagon-led process, which also involves officials from the State Department, the Energy Department and other agencies. That has raised concerns among arms-control advocates that the final product will be a cautious bureaucratic compromise.
U.S. diplomats hope the final document will establish the Obama administration’s credibility before a nuclear security summit in April and a crucial meeting in May on the fraying nonproliferation treaty. That treaty is at the heart of Obama’s strategy to combat the most urgent threat today: the spread of nuclear weapons to unstable states and to terrorists. The last such session, in 2005, ended in failure, with many countries accusing the Bush administration of trying to scotch their nuclear programs while maintaining one of the world’s most massive stockpiles. .
The review comes as the U.S. military’s precision guided conventional weapons have gained such accuracy that they can handle many threats assigned to nuclear weapons in the past.
Allies are split

But U.S. allies are divided about Obama’s vision. New governments in Germany and Japan have embraced it, but some nations are more skeptical. “A country like ours, with a very special experience with its own history, we are maybe more cautious than some other countries,” said Petr Kolar, the Czech ambassador, referring to past Soviet domination.
Kolar said big policy changes such as promising not to use nuclear weapons first in a crisis could embolden other nuclear-armed powers. “My personal perspective is . . . we shouldn’t actually lose the instruments we so far have,” he said. “What’s the change that would be gained by that?”
Another European ambassador said the nuclear review broke ground in even contemplating such a pledge. But he said it was unlikely while NATO was engaged in a major study of its strategy, due out this fall.
Pentagon officials worry that allies such as Japan or Turkey could decide to develop their own nuclear weapons if they thought U.S. protection wasn’t assured. Skeptics — both Democrats and Republicans — also question whether pledges to limit the U.S. nuclear role would have the impact claimed by proponents, because foes probably wouldn’t believe such assertions. “We’re better off when we communicate that all options are on the table,” said Thomas Mahnken, a senior Defense Department official in the Bush administration. “As a practical matter, they are.”
More than two dozen Democrats, led by Sen. Dianne Feinstein (Calif.), chairman of the intelligence committee, have pressed Obama to adopt language saying the “sole” or “only” purpose of U.S. nuclear weapons is deterrence. It would not prevent the U.S. government from using a weapon first but would deemphasize that option in planning.
The Bush administration’s 2001 Nuclear Posture Review pledged to reduce the Cold War role of nuclear weapons. But it discussed planning to build new types of “bunker-buster” warheads. It also proposed developing the U.S. nuclear stockpile based not on the current threat posed by potential enemies but on their future capability to carry out nuclear, chemical or biological attacks.
As part of his declaratory policy, Obama will have to consider whether to break with the Bush and Clinton administrations’ studied ambiguity about whether the United States would use nuclear weapons to respond to chemical or biological attacks planned by non-nuclear countries.
The president is expected to adopt that change, but with an important caveat, officials said. The new policy would drop that threat only for countries in compliance with the Non-Proliferation Treaty, and thus not working on their own bomb.
Leading by example

The immediate effect of such a policy would be limited, because the potential aggressors that most concern the United States are nuclear powers or accused treaty violators such as Iran. But the move could encourage other countries to stick to the rules of that pact, officials said.
One senior official said the review will “point to dramatic reductions in the stockpile” in coming years.
In particular, the review will push for beefing up the deteriorating U.S. weapons complex and nuclear labs so that the Pentagon can be more certain of its weapons’ effectiveness, officials said. That shift will allow the Defense Department to get rid of some of the roughly 2,000 nuclear warheads it keeps as backups to its nearly 3,000 deployed weapons, officials said. There are also more than 4,000 older, inactive warheads in line to be dismantled.
It is not clear whether such reductions would be part of a formal treaty with Russia.