2008 January 13 Sunday
Liquified Natural Gas Not Replacement For Declining Reserves?

Currently the wholesale cost of natural gas in the United States is below $8 per million BTU. US natural gas production is in decline. Most natural gas in the world is used fairly near where it is produced or is only transported by pipeline. Matthew Simmons of Twilight In The Desert fame (arguing that the official Saudi oil reserves are greatly above the actual and that the Saudi oil production is near peak) says in an interview that cooled liquified natural gas transported by ship might never scale up as a replacement for domestic natural gas production declines.

BC: We’re probably in more serious a situation than most people would realize, and it’s no better with natural gas. Switching gears for a moment, do you think the rise of LNG will be enough to keep up with declines in natural gas discovery and subsequently in natural gas production?

MS: Well, first of all, the problem with LNG is that if we try to develop a spot market out of LNG, the odds of it ending in bankruptcy are about 90%.

BC: Who goes bankrupt?

MS: All the players. The cost to produce and distribute LNG is so high that to make LNG work in any sort of financial reality, you would need a 25- or 30-year guaranteed supply. And then you can amortize it over 25 or 30 years. If you’re going on a spot supply, you’ve got to write it off over 10 years and then you’ll need $40 per million BTU to make the economics work. The other thing is that about 35% of the hydrocarbon value gets chewed up in the process of cryogenically freezing natural gas, transporting it, and then re-gassing it.

BC: In your opinion then, LNG is not an economically viable solution. We won’t do it.

MS: We shouldn’t do it. But it turns out that high-quality natural gas – sweet, high-quality natural gas – is just like sweet oil. It’s basically in decline.

The more I learn about what is known about fossil fuels reserves the more pessimistic I become about the economy in the next 10 years.

To create LNG processing facilities requires capitalists at two different ends of a shipment path to agree to a massive investment in facilities which would take decades to pay back. So one needs to be very certain that a supply is going to exist at an originating end before plunking down big bucks at the receiving end. European OECD natural gas production might peak in 2008. Worse, Russia is the major external source of natural gas for Europe and Russian oil and natural gas fields look like they are approaching production peaks as well. LNG requires a large reservoir of natural gas at the originating end. Even if such a reserve or two exists in the Middle East the United States is not the only potential customer for that natural gas. China seems more likely to put together the capital needed to get it because the Chinese can make the investment as a political decision.

If natural gas can't replace oil then how about coal? In the United States the combined reserves of coal companies are less than a quarter of the coal reserves the US government thinks the US has. The Energy Watch Group expects world coal production to peak around 2025. Similarly, CalTech professor David Rutledge thinks coal production will come much sooner than official reserves numbers would lead one to expect. Well, coal is the cheapest fossil fuel source of electric generation energy and accounts for over half of US electricity while natural gas accounts for almost another 20%. Coal and natural gas production won't just collapse. Their production declines will happen gradually. But can we build up nuclear and wind as replacements at the rate at which coal and natural gas will decline? The answer is not clear to me.

I used to just be worried about Peak Oil. Now my worries extend across the entire range of fossil fuels.

Share |      By Randall Parker at 2008 January 13 04:16 PM  Economics Energy


Comments
Engineer-Poet said at January 13, 2008 11:50 PM:

In other words, Jimmy Carter was right, he was just 30 years too early to get the public ear.  (Hey, I was listening.  I even got right what he got wrong.)

The ghosts of all of the energy-efficiency initiatives stymied or vetoed over the last 15-20 years are going to be haunting us very soon.  What's the payoff of insulation in saved heating costs when natural gas is $4/therm?  Huge, I would expect.  But better building standards were pooh-poohed as builders said "Let the market decide" on the one hand, and pushed out cheap tract houses with no attempt to market efficiency on the other.

The easy opportunities come during construction.  Now it's going to be hard, expensive, and very, very painful.

Kenelm Digby said at January 14, 2008 4:09 AM:

One strange irony is that British coal production (an industry that employed over 200,000 men as recently as the 1970s), was decimated by Margaret Thatcher for purely political reasons back in the 1980s and 90s.
Britain still has massive reserves of untapped coal.
The so-called hi-tech 'super-pits' at Kellingley and Selby (opened with huge public investment and fanfare in the '70s) wre closed recently.
The Vale of Belvior coalfield in Leicestershire was never developed.

Ned said at January 14, 2008 4:59 AM:

"One strange irony is that British coal production (an industry that employed over 200,000 men as recently as the 1970s), was decimated by Margaret Thatcher for purely political reasons back in the 1980s and 90s.
Britain still has massive reserves of untapped coal."

I think Maggie had some help from the inept communist union leader Arthur Scargill, an avowed admirer of Josef Stalin.

mike said at January 14, 2008 5:28 PM:

Gordon Brown's recent announcement that the UK government is giving the go-ahead to allow new nuclear power stations to be build also suggests that there is substance to the pessimistic predictions about global natural gas reserves.

I'd susupect the Russians have a fair bit of gas left, but with China also competing for Siberian gas reserves, its likely that global gas prices are likely to rise dramatically in the next 15 years.

Randall Parker said at January 14, 2008 7:31 PM:

Kenelm,

Britain's coal reserves are quite small and the British coal industry was subsidized after WWII. Britain still imports coal now because that continues to be a cheaper way to get it.

Also, to the extent that Thatcher's move saved Britain's remaining coal for the future it was a very beneficial move. It is analogous to the environmental opposition to Alaska National Wildlife Refuge development. Those environmentalists are saving that oil for when we will really need it.

mike,

I think the British government feels fear. Don't expect a big increase in Russian gas exports to Europe and in 10 years a decline becomes likely. Here's a slightly later analysis by the same guy (Euan Mearns) with a more pessimistic outlook. All those LNG terminals are going to have a hard time finding suppliers.

Gazprom makes big profits on natural gas from Kazakhstan and other places on their southern borders. For example, see this claim on how Gazprom makes money on transshipments. At the same page at this offset see how Gazprom is trying to reduce domestic natural gas usage by shifting to coal to make more money exporting natural gas. That'll help a little.

Randall Parker said at January 15, 2008 6:39 PM:

Kenelm,

Margaret Thatcher did not alter the long term trend in British coal production. Note how the slope didn't change much in the late 80s.

Kenelm Digby said at January 16, 2008 3:52 AM:

Randall,
When I was at school (many, many moons ago), it was drummed into us regularly by our Geography teacher that Britain had enough coal to last 400 years at he the then rate of consumption.(No, I'm not going to reveal my age!)
This statement was widely promulgated and generally accepted.
Secondly, the graph does show a decline in coal output from the 1920s to present, but this can be easily explained.Prior to the 1960s, virtually every single British home burned coal in the living room hearth, or occasionally in a bedroom fireplace (British houses were notoriously cold) - if you ever visit Britain just count all the domestic chimney pots you can see - every British house built prior to 1970, say, has a coal burning hearth in every room save the kitchen and bathroom (if it had a bathroom that is).
The coal-man with his horse and cart used to be a familiar sight on the British street.This all changed in the mid '60s when the domestic burning of smoky coal was outlawed due to pollution fears.There was a general shift to gas heating - incidetally this was coincident with a shift from coal-gas to natural gas, further decreasing coal demand.
Also, there was a general switch in heavy industry from coal fired plant to oil fired plant (which was inexpensive) at the same time.

Another point, before the Thatcherite privatization of the Central Electricity Generating Board in the 1980s, the CEGB had a pro-nuclear policy, based on PWRs (AGRs were an expensive failure)of an ambitious scale.Only one pWR, Sizewell, was ever built.The ambition was destroyed by privatization as the private generating companies did not want to shoulder catastrophew or decommissioning costs of nuclear.

Randall Parker said at January 16, 2008 2:45 PM:

Kenelm,

David Rutledge at CalTech claims official coal reserve numbers can't be trusted and he argues one can do mathematical analyses of historical production patterns to get a sense of how much coal remains that can be economically mined.

Keep in mind that a resource could be present in abundance while not qualifying for reserve status due to expense of extraction.


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