MIT Future of Natural Gas Study

MIT Future of Natural Gas Study

To view a full copy of this report, please visit
MIT Future of Natural Gas Study To view a full copy of this report, please visit natural-gas-2011.shtml

Advisory Committee Members
MIT Future of Natural Gas Study Advisory Committee Members Thomas F. (Mack) McLarty, Chair – President and CEO, McLarty Associates Denise Bode – CEO, American Wind Energy Association Ralph Cavanagh – Senior Attorney and Co- Director for Energy Program, Natural Resources Defense Council Sunil Deshmukh – Founding Member, Sierra Club India Advisory Council Joseph Dominguez – Senior Vice President, Exelon Corporation Ron Edelstein - Gas Technology Institute R. Neil Elliot – Director, Regulatory and Government Relations, GTI John Hess – Chairman and CEO, Hess Corporation Jim Jensen – President, Jensen Associates Senator (ret.) J. Bennett Johnston - Chairman, Johnston Associates Vello A. Kuuskraa –President, Advanced Resources International, Inc. Mike Ming – Oklahoma Secretary of Energy Theodore Roosevelt IV –Managing Director & Chairman, Barclays Capital Clean Tech Initiative Octavio Simoes – Vice President of Commercial Development, Sempra Energy Gregory Staple –CEO, American Clean Skies Foundation Peter Tertzakian – Chief Energy Economist and Managing Director, ARC Financial Corporation David Victor – Directory, Laboratory on International Law and Regulation, University of California – San Diego Armando Zamora – Director, ANH- Agencia Nacional de Hidrocarburos

Study sponsors American Clean Skies Foundation MITEI/donors
MIT Future of Natural Gas Study Study sponsors American Clean Skies Foundation MITEI/donors Hess Corporation Agencia Nacional de Hidrocarburos (Colombia) Gas Technology Institute Exelon Energy Futures Coalition

Remaining Recoverable Natural Gas Resources (Excludes unconventional gas outside North America) Describe the components of gas resources: Reserves; reserve growth; YTF; unconventional Note the considerable uncertainty shown by the error bars Total resource volumes in our assessment 16,200 TCF Ca 150 years of current consumption Wide range fom 12,400 TCF to 20,800 TCF Does not include unconventionals outside North America, because of huge uncertainty; could be of the order of 6,000 TCF Significant concentration of resources in Middle East (Qatar and Iran) and Russia Gas at least as concentrated as oil – with long term geopolitical implications Resource development a function of country policies Widespread unconventionals could change the balance Tcf of Gas

MIT Future of Natural Gas study

Global Gas Supply Cost Curve (Excludes unconventional gas outside North America) Breakeven Gas Price* $/MMBtu Explain what a supply curve is: All future remaining resources As a function of prices at export point which yield 10% real returns for gas development A primary input into integrated modeling to be described next Outside North America gas business still immature Only slightly more than 10% of Ultimate Recovery produced to date (ignoring unconventionals outside NA) This is why major resources still undeveloped and very low cost – contrast with oil Transportation costs are a major component of final cost of delivered product Again in contrast to oil The reason for regional markets and slow historical growth of global trade Tcf of Gas * Cost curves based on 2007 cost bases. North America cost represent wellhead breakeven costs. All curves for regions outside North America represent breakeven costs at export point. Cost curves calculated using 10% real discount rate and ICF Supply Models ** Assumes two 4MMT LNG trains with ~6,000 mile one-way delivery run, Jensen and Associates

U.S. Gas Supply Cost Curve
MIT Future of Natural Gas Study U.S. Gas Supply Cost Curve Breakdown of Mean U.S. Supply Curve by Gas Type Breakeven Gas Price* $/MMBtu Breakeven Gas Price* $/MMBtu U.S. Gas resources ca. 2,100 TCF 100 years at current consumption In a range of 1,500 TCF to 2,850 TCF Still considerable uncertainty despite maturity – especially around shales Right hand panel breaks down into component parts: Unconventional comprised of CBM, tight gas and shale Shales far “newer” but dwarf previous unconventionals Shale resources mean 615 TCF, with range of 420 to 870 TCF Estimates change on weekly basis – emphasizing uncertainty Note that shale resource has “undercut” conventional supplies in terms of cost This explains rapid decline in conventional production But conventional resources still considerable And unconventional technology will be applied in conventional situations Tcf of Gas Tcf of Gas * Cost curves calculated using 2007 cost bases. U.S. costs represent wellhead breakeven costs. Cost curves calculated assuming 10% real discount rate and ICF Supply Models

Variation in Shale Well Performance and Per-Well Economics
MIT Future of Natural Gas Study Variation in Shale Well Performance and Per-Well Economics IP Rate Probability (Barnett 2009 Well Vintage) Impact of IP Rate Variability on Breakeven Price (BEP)* (2009 Well Vintages) P20 P50 P80 Barnett IP Mcf/d BEP $/Mcf 2,700 $4.27 1,610 $6.53 860 $11.46 Fayetteville 3,090 $3.85 1,960 $5.53 1,140 $8.87 Haynesville 12,630 $3.49 7,730 $5.12 2,600 $13.42 Marcellus** 5,500 $2.88 3,500 $4.02 2,000 $6.31 Woodford 3,920 $4.12 2,340 $6.34 790 $17.04 Shale gas economics hard to pin down There are as many estimates as there are Wall Street energy analysts And costs continue to evolve as a function of continuous improvement on one hand, offset by industry cost pressures on the other Major point here is the very large variability in performance, within and between major shale plays There is the increasingly well-understood distinction between sweet spots and goat pasture But also considerable variance well to well Statistically predictable, but individually unpredictable A substantial proportion of the wells in any play are subeconomic This is both a problem and an opportunity The larger point is that this is an empirical business at this stage Much science and technology work required to rationalize development decisions in the long term We believe that the government has a role in underpinning research to ensure optimum long-term development of this vital resource IP Rate: Mcf/day (30-day avg) * Breakeven price calculations carried out using 10% real discount rate ** Marcellus IP rates estimated based on industry announcements and available regulatory data Source: MIT, HPDI production database and various industry sources

Key Environmental Issues Associated with Shale Gas Development
MIT Future of Natural Gas Study Key Environmental Issues Associated with Shale Gas Development Primary environmental risks associated with shale gas development Contamination of groundwater aquifers with drilling fluids or natural gas On-site surface spills of drilling fluids, fracture fluids and wastewater Contamination as the result of inappropriate off-site wastewater disposal Excessive water withdrawals for use in high-volume fracturing operations Excessive road traffic and degraded air quality Breakdown of Widely-Reported Environmental Incidents Involving Gas Drilling; Slide shows a consolidation of results from a number of fairly recent reports on incidents associated – or thought to be associated – with shale drilling Not comprehensive, but encompasses most significant incidents Cause and effect not always clear, so much uncertainty in interpreting results Overall number of problems significant, but very low compared to number of wells drilled (42 incidents vs tens of thousands of wells) No known examples of fraccing into water zones – this is not an issue Most significant problem is gas leaking into shallow aquifers This is not a function of shale drilling per se – but intensity of shale development in new areas has brought this into focus Can be fixed going forward with more stringent control of cement jobs. Water usage is not a major issue and is easily managed Water disposal only an issue in “new” areas – particularly Marcellus Widespread introduction of recycling is reducing the problem substantially Water distribution lines and recycling can massively reduce truck traffic

Recommendations MIT Future of Natural Gas study
For optimum long-term development, need to improve understanding of shale gas science and technology Government-funded fundamental research Industry/govt collaboration on applied research Should also cover environmental research Determine and mandate best practice for gas well design and construction Create transparency around gas development Mandatory disclosure of frac fluid components Integrated water usage and disposal plans Continue to support research on methane hydrates Shale gas development has been extraordinarily rapid by any standards, and especially so in oil industry context Still largely empirical – understanding of science has not kept pace Very complex problems of fluid flow and resource measurement Concerted effort required to ensure that development is optimized in the public interest Strong case for enhancing overall well drilling and completion practices, particularly with respect to well-cementing Environmental issues of shale gas development can be managed, but more transparency and coordination is necessary Methane hydrates could one day be the next shale story But no commercial interest at the moment means government programs should continue as was done successfully with unconventionals in the past

System Studies of Gas Futures
MIT Future of Natural Gas Study 13 System Studies of Gas Futures Emissions Prediction & Policy Analysis Model Strength: explore market interactions Limitation: some industry details beneath the level of market aggregation Influences on U.S. Gas Futures Size of resource base, and cost Greenhouse gas mitigation Evolution of international gas markets Development of technology over time Introduce the systems studies. Tell their purpose: to explore the role of gas under carbon constraint, and influences. 13

U.S. Gas Use, Production, Imports & Exports No New Climate Policy
MIT Future of Natural Gas Study 14 U.S. Gas Use, Production, Imports & Exports No New Climate Policy 14

Carbon dioxide emissions pricing scenario
- 50% reduction to 2050 in industrialized countries - 20 year time delay in large emerging economies - no constraint elsewhere

16 U.S. Gas Use, Production, Imports & Exports Price-Based Policy (50% by 2050, No Offsets) 7.5 $/Mcf 13.3 $/Mcf 16

International Market Evolution
MIT Future of Natural Gas Study 20 International Market Evolution 5.7 $/Mcf 11.4 $/Mcf 7.5 $/Mcf 13.3 $/Mcf Global Market Regional Markets 20

Global Gas Market & Geopolitics
MIT Future of Natural Gas Study 21 Global Gas Market & Geopolitics Global Gas Market in 2030 Recoverable Shale (2009 use) More liquid, integrated global markets In U.S. economic interest Reduce security concerns Recommendations Support market integration, supply diversity Aid transfer of shale technology Explain forces leading toward a more integrated, liquid global market. Us picture to show increased imports into the U.S. Explain why (cheaper elsewhere). Make arguments in text below. Lower gas price in the US. But import dependence. Suggest possible effect of shale elsewhere (not studied in the systems studies because data is poor), but suggest the effect on markets and security issues if development proceeds worldwide. 21

Years Payback for CNG Light Duty Vehicles ($1.50 gallon of gasoline equivalent spread) “The U.S. natural gas supply situation has enhanced the substitution possibilities for natural gas in the electricity, industry, buildings, and transportation sectors.” It goes without saying that the supply profile you just heard about has had and will have an impact on US gas demand. Importantly, it has enhanced substitution possibilities for gas uses. I am going to highlight a few of these for you in Electricity Industry Buildings – both commercial and residential Transportation

Industrial Gas Demand 4.5 Tcf CLICK 6.3 Tcf 7.4Tcf
MIT Future of Natural Gas Study Industrial Gas Demand Conv. Boilers 22% CHP/Cogen 14% Industry represent 35% of total gas demand. Manufacturing is X% of industrial demand and boilers, conventional and cogen, represent 36% of manufacturing demand. We look here at boilers, primarily because EPA is in the process of developing emissions regulations for industrial boilers. Two drivers affecting demand for gas boilers 1) Modernization of current gas boiler fleet 2) Potential for substitution of older coal boilers with new efficient gas boilers Gas boiler efficiencies pre % 2004 standard 77-82% super boiler % CLICK First graph depicts gas boiler modification payback. There is an annualized savings for super efficient boilers of 20%, with a payback period years reduce gas use Next we compared the cost of retrofitting coal boilers to comply with new EPA air pollutant standards for boilers currently being developed to replacement costs for efficient gas boilers and super efficient gas boilers. As you can see in this graph, replacement of coal boilers with super efficient gas boilers is cost effective and there is a CO2 benefit. Conversion of all coal to super efficient boilers would increase gas demand by close to one tcf per year. Process heating 42% 4.5 Tcf Manufacturing 85% 6.3 Tcf Industry 35% 7.4Tcf 23

Industrial Boiler Replacement Costs
MIT Future of Natural Gas Study Industrial Boiler Replacement Costs Net Present Value Costs (millions $) Competition with Coal Boilers After Compliance with MACT Standards

Replacing existing coal boilers and process heaters with new efficient gas boilers could lower costs for meeting EPA MACT standards

Buildings: Full Fuel Cycle Energy/CO2 Source: Electricity + 194%
MIT Future of Natural Gas Study Buildings: Full Fuel Cycle Energy/CO2 Energy Consumption CO2 Emissions 2.7X Source: Electricity + 194% Ton CO2 per 100 MWh of Useful Energy Residential/commercial sectors account for 40% of total energy consumption in US. Buildings. 55% of US natural gas demand Focus here on efficient use of energy for buildings, specifically focus on efficiency standard setting by DOE which has historically set standards based only on site efficiency or discrete appliance efficiencies inside the envelope of a building In 2009, NRC recommended that DOE move to source efficiency standards – full fuel cycle – as opposed to site. DOE is working on this now. Important to natural gas compared to electricity where there are dual fuel appliances – hot water heaters and space conditioning. CLICK Lower left hand graph is a comparison of so-called site vs. source efficiency for residential furnace. This graph is of energy Walk through energy consumption, forget the units for the moment. Corresponding CO2 impacts where if you look at FFC, CO2 emissions from electric furnaces are 2.7 times those of gas furnaces. Site: Gas +10% Fuel Energy per 100 MWh of Useful Energy + = Source Energy Site Energy 26 26

For buildings, a move to full fuel cycle efficiency (site vs. source) metrics will improve how consumers, builders, policy makers choose among energy options (especially natural gas and electricity). Efficiency metrics need to be tailored to regional variations in climate and the electricity supply mix.

Gas-Oil Price Differential
MIT Future of Natural Gas Study Gas-Oil Price Differential If the current trend of large oil-gas price ratios continues, it could have significant implications for the use of natural gas in transportation. Move to opportunities for natural gas in transportation Over the last several years of high oil prices, the ratio of oil to gas prices has been consistently higher than the standard rules of thumb. Continuation of this trend could be positive for natural gas as a transportation fuel We looked at direct uses of natural gas in transportation– CNG and LNG And conversion of natural gas to liquid fuel

Years Payback for CNG Light Duty Vehicles ($1.50 gallon of gasoline equivalent spread) Payback times for US light duty vehicles are attractive when— used in high mileage operations have sufficiently low incremental costs Globally 11 million ngvs on road, 99.9% are CNG CNG cheaper on energy basis but significant upfront vehicle costs. For a variety of reasons these costs ore much higher in US than elsewhere. Factory produced vehicles incremental cost in US $7K,, Europe $3700 K After market conversion $10K US $2500 K Singapore CLICK Slide is illustrative looks at payback period assuming a $3k incremental cost (blue bar) and a $10K (green) for miles per year (left graph) and per year (right) 3K conversion cost 35k per year, payback 1.8 years. Read finding Again this is illustrative, In reality, the rule of thumb is a 3 year pay back period for significant market penetration. - For 3 yr payback time, incremental cost for US light duty CNG vehicles needs to come down to around $ 5 K for high mileage operation and less than $ 2K for average mileage operation 12,000 miles per year 35,000 miles per year $ 3,0000 $10,0000

LNG Long Haul Truck Limitations
MIT Future of Natural Gas Study LNG Long Haul Truck Limitations Low temp onboard fuel storage Fueling infrastructure with competitive pricing High incremental cost and lower resale value Mitigation in hub-to-hub Note about LNG vehicles, last finding on this slide, GHG value is lower than for CNG vehicles due to energy losses in liquefaction, methane emissions from fueling/operations Current incremental cost $70K, payback relatively short (4 years) but fueling infrastructure/operational/r esale market issues

Conversion of Natural Gas to Liquid Fuels
MIT Future of Natural Gas Study Conversion of Natural Gas to Liquid Fuels CLICK Cartoon demonstrates that there are many pathways for converting natural gas into liquid fuels, each with pros and cons. Conversion to diesel and gasoline for example – both drop in fuels that can be used in existing infrastructure , which is a major plus, require much more processing than other options. We looked more closely at methanol, largely because there is currently large scale industrial production of methanol and it is an alcohol like ethanol, with which we also have experience. Also has lower GHGs than gasoline (not a lot) and is cheaper. Lowest cost -- $1 per gge lower than gasoline at $2.30/gallon excluding taxes. Substantially higher today which increases the price spread. Could be good for methanol but also could provide incentives for the drop in fuels. Methanol needs modest changes to engines and infrastructure as it is more corrosive than gasoline. Bottom line: could be energy security benefits, very modest CO2 benefits, continued price spread between oil and gas helps, in addition to support for flex fuel vehicles , we think the govt needs to do a serious comparative study of natural gas derived transportation fuels compared to petroleum and biofuels. Natural Gas Reformer Synthesis Gas Catalyst Methanol Diesel DME Mixed Alcohols Gasoline Ethanol

Methanol/Gasoline Cost Comparison
MIT Future of Natural Gas study Methanol/Gasoline Cost Comparison Natural gas price Methanol production cost per gge Cost reduction relative to gasoline per gge $4/MMBtu $1.30 $1.00 $6/MMBtu $1.60 $0.70 $8/MMBtu $2.00 $0.30

The potential for gas to reduce oil dependence could be increased by its conversion…into liquid fuels…methanol is the only one that has been produced from natural gas for a long period at large industrial scale. The US government should implement an open fuel standard, requiring tri-flex-fuel capability for light-duty vehicles.

Public and public-private funding for natural gas research is down substantially even as gas takes a more prominent role. Consideration should be given to restoring a public-private RD&D research model – Industry-led portfolios Multi-year funding RD&D Spending

NG Research Needs/Opportunities
MIT Future of Natural Gas study NG Research Needs/Opportunities Improving Economics of Resource Development * Analysis/simulation of gas shale reservoirs * Methane hydrates Reducing environmental footprint of NG Production, Delivery and Use * Water * NGCC with CCS * Fugitive emissions

MIT Future of Natural Gas study NG Research Needs/Opportunities Expanding current use and creating alternate applications of natural gas * Power generation: integrated understanding of power/NG systems with large deployment of intermittent sources, DG, smart grids; better modeling capability (e.g. hybrid top-down and bottom-up);… * Mobility: end-to-end analysis of multiple pathways to liquid fuels, integrated with vehicle and infrastructure engineering data;…

MIT Future of Natural Gas study NG Research Needs/Opportunities Improving Conversion Processes * Process improvements: novel membranes for separations, more selective catalysts-by-design for synthesis, reduced process heat through integration,… * New process technologies: low-T separation, new less energy-intensive materials,… * DOE “Industries of the Future” program

MIT Future of Natural Gas study Improving Safety and Operation of NG Infrastructure * Improved data quality * Minimize environmental footprint Improving the Efficiency of NG Use * Micro-CHP/low HPR,… NG Research Needs/Opportunities

RD&D Spending GRI Funding Steady over 15 years
MIT Future of Natural Gas Study RD&D Spending GRI Funding Steady over 15 years Gas produced after tax credit Federal Funding Time limited tax credit Gas produced under tax credit

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TX LA MS AR OK NM AZ CA NV OR WA ID MT WY ND SD MN IA WI IL MO TN AL FL GA SC NC VA WV OH MI IN PA MD DE NJ NY CT RI MA ME NH KY Scale: 100,000,000 MWh MWh coal generation, heat rate <10,000 MWh coal generation for pre-1987 plants with >10,000 heat rate Existing NGCC capacity operating at 85% capacity factor minus 2008 actual MWh generation (FDNP) Scale and Location of Fully-Dispatched NGCC Potential and Coal Generation (MWh, 2008) Start with electricity CLICK Takeaway from this graph Gas generation 41% of nameplate generation capacity, more than coal, but only 23% of generation More specifically, highly efficient NGCC plants operating at around 41% capacity factor designed to operate at around 85% Gas fuel has typically had highest marginal cost, tends to get dispatched after other fuel sources for power generation Since we are looking at gas in a carbon constrained world, we wanted to see what the carbon impacts might be of changing this dispatch order to dispatch that unused NGCC capacity over coal generation which tends to be less efficient and more carbon intensive US has enough spare NGCC capacity to displace coal generation and reduce CO2 emissions without major capital investment US map identifies potential surplus, not actual surplus, which needs to take into account peak demand, operating reserves, transmissions constraints, and other operational considerations Legend Green efficient coal Purple inefficient coal Blue, potential surplus NGCC 43

Coal to Gas Fuel Substitution Benefits Vary by Region
MIT Future of Natural Gas Study Coal to Gas Fuel Substitution Benefits Vary by Region We then modeled US system and several regions in the country to isolate what is actual surplus NGCC taking into account the reliability and system needs we described earlier. The results vary by region depending on generation mix but nationwide results are as follows: CLICK Note: FRCC, Florida, surplus NGCC could substitute for coal generation PJM around 20% but largest substitution on an absolute basis Regional difference in criteria pollutants reductions as well, look at mercury 48% ERCOT just through substitution Only 14% in Florida although that’s because it has relatively 44

Nationwide, coal generation displacement with surplus NGCC would: reduce CO2 emissions from power generation by 20% reduce CO2 emissions nationwide by 8% reduce mercury emissions by 33% reduce NOx emissions by 32% cost roughly $16 per ton/CO2 The displacement of coal generation with NGCC generation should be pursued as the only practical option for near term, large scale CO2 emissions reductions

Large Scale Penetration of Intermittent Wind in Short Term for ERCOT
MIT Future of Natural Gas Study Large Scale Penetration of Intermittent Wind in Short Term for ERCOT Gas Peakers NGCC Coal Wind The principal impacts of increased deployment of intermittent renewable energy sources in the short term are – the displacement of NGCC generation increased utilization of operating reserves more frequent cycling of mid-range or even base load plants. 46

Large Scale Penetration of Intermittent Wind in Long Term
MIT Future of Natural Gas Study Large Scale Penetration of Intermittent Wind in Long Term Policy and regulatory measures should be developed to facilitate adequate levels of investment in gas generation capacity needed for large scale penetration of intermittent renewables. The development or expansion of electric system models is needed to inform the design of policies that would mandate large amounts of solar or wind generation (important for both short and long-term impacts). Before CLICK Long term impacts For wind Wind assumes a baseload role, need more gas peakers but they are used less, reduces the need for other baseload generation including coal, nuclear and even NGCCs Raises issues about financial incentive for building more gas peaking capacity that will not be used much As such, we recommend CLICK

Natural Gas System/Infrastructure
MIT Future of Natural Gas Study Natural Gas System/Infrastructure DOE and EPA should co-lead a new effort to review and update methane emission factors associated with gas systems, focusing on actual fugitive emissions measurements and cost effective mitigation. Effort should also include oil and coal. CLICK Couple of quick points about gas infrastructure. EPA recently revised its inventories of CO2e emissions from natural gas systems, more than doubling previous estimates. Much of this is from fugitive methane emisisons associated with production as you can see in pie chart At the same time, there has been a lot of issues raised about gas fugitive emissions by recently published highly controversial life cycle analyses studies. We think these issues need a closer look, recommend that DOE and EPA do a comprehensive review and analysis, of methane emissions factors associated with gas systems to include comparative analysis of fugitive emissions from coal and oil. One more point on infrastructure Discussed fuel substitution in power generation as well as impacts of intermittent renewables and gas fired generation. Further EPPA models suggest large increases in gas fired power generation. There will likely be growing interdependencies of the gas and electric infrastructures, increased need for high deliverability gas storage for example. These interdependencies are not well understood and we need much more serious analysis of their implications on investment, policy, etc. CO2e Emissions from Gas Systems, 2008 reflecting EPA’s 2011 revisions (teragrams)

Natural Gas System/Infrastructure
MIT Future of Natural Gas study Natural Gas System/Infrastructure A detailed analysis of the growing interdependencies between the gas and electric infrastructures should be conducted.

Steps Involved in Completing Wells and Protecting Ground Water
MIT Future of Natural Gas Study Steps Involved in Completing Wells and Protecting Ground Water Feet Below Surface Key Steps in Well Completion Process Acquire necessary well permits Prepare well site Drill and case well Drill and set conductor casing Drill through shallow freshwater zones, set and cement surface casing Drill, set and cement intermediate casing Drill, set and cement production casing Perforate and fracture well Flowback fracture fluid Place well into production Turn to the environmental issues associated with shale gas development – which we believe to be “challenging but manageable”. To understand the issues, it is very helpful to understand the steps in drilling and completing a gas well in general, and a shale well in particular Step through the process Some additional important points Protection of groundwater has long been primary consideration in US onshore drilling All activities regulated at State level – with considerable variability Need to understand best practice and promulgate through all state regulations Most important issue in protection of groundwater is quality of cement around surface casing – this has been, and remains, an issue

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