08 January 2010 16:12 [Source: ICB]
The US is chock full of natural gas and Brazil has sugarcane fields aplenty. How are these countries pushing the boundaries of energy production?
Rex Features/Chris Eyles
But if you have it, make the most of it - that's the key message from two industry associations, continents apart but joined in this common philosophy. These are America's Natural Gas Alliance (ANGA) in the US and the Brazilian Sugarcane Industry Association (UNICA).
The US likely has around 100 years of natural gas reserves as a result of recent shale gas discoveries and advanced extraction methods, according to ANGA, the members of which represent over 40% of US natural gas supply.
"We are confident that we now have a 100-year supply of natural gas that continues to grow for domestic use, based on over 20 [trillion cubic feet - 566bn m3] used annually today," says David Trice, chairman of ANGA and non-executive chairman of US oil and gas firm Newfield Exploration, in an interview with ICIS.
"Through most of my career, it never got beyond an eight-year supply. This sea change in natural gas has only occurred over the last three years. Back then, we'd be asking: Where will the natural gas come from to meet demand? Today, the conversation is about: How can we create demand because we have so much gas?" he says.
Natural gas is the primary feedstock for the production of petrochemicals in the US. Natural gas is also used in gas-fired power plants to produce electricity. There are also nearly 70m residential, commercial and industrial natural gas customers in the US.
The proliferation of gas discoveries and enhanced extraction methods used in major shale formations across the US such as the Barnett (South), Marcellus (Northeast) Haynesville (South) and Woodford (Central) shale regions, among others, have boosted natural gas supply.
"The industry has proven that the Barnett Shale and others across the country continue to produce and even expand. We have transformed the landscape of North American natural gas," notes Trice.
US energy giant ExxonMobil's announced acquisition of major US natural gas producer XTO Energy for $31bn (€22bn) on December 14 confirms the power of the shale story. XTO has large exposure to the Barnett, Woodford and Marcellus shale areas.
"We now have a 100-year supply of natural gas"
David Trice, chairman of ANGA and non-executive chairman of Newfield Exploration
"We'll have the infrastructure in place today to handle more natural gas-fueled combined-cycle plants. If we're serious about reducing CO2 [carbon dioxide] emissions, gas has to be part of the equation," Trice says. "Natural gas is at least 50% cleaner than coal in terms of CO2 emissions and much cleaner in terms of NOx [nitrogen oxides], SOx [sulfur oxides] and other emissions as well."
The US has around 440GW of gas-fired electricity capacity and about 320GW of coal-fired capacity. However, natural gas is only utilized at 25% of its capacity.
And as a transportation fuel, natural gas would be ideal for heavy trucks, says Trice.
"Heavy trucks can't run on batteries, but they can run on a combination of LNG [liquefied natural gas] and CNG [compressed natural gas]. If we do that, we can make a real dent in the amount of oil we import while also reducing greenhouse gas emissions and urban pollution," he says. "We have natural gas right here in North America, and we can create lots of jobs."
Natural gas for industrial use, such as by chemical facilities as a feedstock, is expected to rebound from depressed levels, but is not considered a growth market in the US.
NATGAS VOLATILITY TO DAMPEN
As more natural gas supply comes on in the years ahead, price volatility is expected to dampen.
"Because of the sea change we've seen in onshore natural gas production from shale formations, we've added stability to the mix," says Trice.
From 2002 to 2008, there was significant volatility in natural gas prices, with prices at times spiking to well over $10/MMBtu.
Ten years ago, roughly 30% of US natural gas was produced in the Gulf of Mexico.
"Every time a hurricane headed to the Gulf, gas prices went up," says Trice. "But because of surging US production onshore from shale gas formations, today, offshore gas production is down to only about 10% of production."
In addition to the US shale formations, there are additional tight gas sand plays as well as two major shale plays being developed in Canada, Trice points out.
"There are many different companies developing these plays and as they compete for market share, that will bring supply to the market and dampen volatility," he says.
ExxonMobil's acquisition of XTO Energy for will significantly boost its exposure to US shale gas.
"The companies that have a lot of cash on their balance sheets are moving into these plays, and that will also add more stability," says Trice.
ANGA is undertaking a study into whether the industry could raise production from almost 60 billion cubic feet (bcf)/day level to between 70-75 bcf/day.
"I am confident that we can boost production of this tremendous resource right here in America," says Trice.
Meanwhile, UNICA, the Brazilian sugarcane association, is aiming to push local sugarcane production to new heights to meet the country's energy and fuel needs, as well as increase fuel exports.
Brazil uses sugarcane to make ethanol - hydrous ethanol for direct use in flex-fuel vehicles (those that can run on either gasoline or ethanol), and anhydrous ethanol for blending into gasoline. Gasoline in Brazil is mandated to have a minimum of 20% ethanol content.
UNICA represents more than 120 sugarcane producers and mills in south-central Brazil, and member companies account for around 60% of all sugarcane ethanol production in Brazil.
Flex-fuel vehicles (FFVs) represent 37% of the total Brazilian fleet of over 8m vehicles today, but UNICA sees that rising to 90% within years as just about all new cars are FFVs.
"With new tax policies, taxes associated with buying an FFV are now 60% of a gasoline-based car. It will be impossible for companies to produce gasoline-only cars," said Marcos Sawaya Jank, president and CEO of UNICA, at a press event in Sao Paolo, Brazil, in November.
The association projects that Brazil will boost its sugarcane ethanol production from 27.5bn liters in the 2008/09 harvest year to 46.9bn liters by 2015/16. About 26%, or 12.3bn liters, of the forecast production in 2015/16 is expected to be exported.
"Oil trades freely on the markets, but not ethanol"
Geraldine Kutas, senior adviser to the president for international affairs, UNICA
"Oil trades freely on the markets, but not ethanol, which is still considered an agricultural commodity," said Geraldine Kutas, senior adviser to the president for international affairs at UNICA. "But companies will have to rethink their policies if they seek to meet certain climate change standards."
LONG-TERM ETHANOL CONTRACTS
UNICA is pushing for downstream customers to employ long-term contracts so that its members can plan for production. And with planned production based on more solid demand targets, price volatility can be reduced.
A renewable energy law in Europe should drive the proliferation of long-term contracts for ethanol starting in 2011, according to Kutas.
"The EU's Renewable Energy Directive could motivate a change in the way trade in ethanol is done," said Kutas, pointing out that the commodity is currently traded mostly on a spot basis. "We hope to see many more long-term [ethanol] contracts in 2011 as companies need to demonstrate and certify that they comply with the directive."
The EU Renewable Energy Directive mandates that by 2020, renewable fuels must account for 10% of all transportation fuels.
Long-term contracts for ethanol supplies would help certify that the fuels are renewable on a life-cycle basis, Kutas said. Ethanol bought on the spot market would not have such required certifications.
"Previously buyers had no interest in setting up long-term contracts, but we believe this EU directive and other policies will change the way business is conducted," she said.
The EU's Fuel Quality Directive, which requires a reduction in fuel emissions by 6% by 2020, could also drive the securing of ethanol supplies via long-term contracts.
And the US may also need to import big quantities of ethanol from Brazil to meet its own advanced biofuel targets set under its Renewable Fuels Standard Program (RFS), said Karim Salamon, head of research and statistics at French trading firm Sucres et Denrees, at F.O. Licht's World Ethanol 2009 conference in Paris, France, in November.
The question is whether Brazil will be able to increase its ethanol production to meet an expected jump in global demand in the coming years, he said.
The US RFS defines advanced biofuels as renewable fuel other than corn ethanol that achieves a 50% reduction in life-cycle greenhouse gas (GHG) emissions requirement.
Sugarcane ethanol would qualify under this standard, according to UNICA, which claims it can reduce GHG emissions by 90% compared with gasoline.
Under the RFS, the US must blend 600m gal (2.2bn liters) of advanced biofuels in 2009. That target will jump to 950m gal in 2010 and 5.5bn gal by 2015.
And what's the next frontier for sugarcane? Power generation, says the Brazilian Sugarcane Industry Association (UNICA).
"We just had a four-hour blackout in Brazil in November, and this was linked to old hydroelectric plants and transmission lines," said UNICA president and CEO Marcos Sawaya Jank at a press event in Sao Paulo in November. "With the Olympic Games coming in 2016, we will need to diversify our energy sources."
The power outage spanned half the country and affected 70m people, according to media reports. Brazil's sugarcane mills produce a by-product called bagasse, which they burn to produce electricity.
All mills in Brazil are self-sufficient in electricity, but only 20% sell it into the grid because of a lack of infrastructure at the mill and in the form of transmission lines, according to Jank, who added that the government must provide incentives for investment. Hundreds of sugarcane mills producing power are "a hedge against a blackout," Jank contended. "Instead of having one huge hydroelectric egg in your basket, you'd have about 250 small eggs spread out between 600-800km [372-496 miles]."
With the proper investment, Brazil's existing sugarcane mills have the potential to produce over 14GW of electricity, or 15% of the country's needs, by the 2018/19 harvest year, versus about 3GW of production today, he noted.
Additional reporting by William Lemos in HoustonRead Doris de Guzman's Green Chemicals blog
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