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Natural Gas Overview — Why is Methane a Clean Fuel?

Introduction to Methane

What we call natural gas is mostly the chemical compound methane (95% or more; the rest is ethane or longer carbon chains). Methane, which comes out of the ground as a gas, is produced when microorganisms known as methanogens feed on organic matter in environments with little or no oxygen. It is abundant, seeping out of your garbage, landfills, and swamps. Also, everywhere you find oil, you find methane, usually in a pocket above the oil deposit. This methane emanated from the same organic material (dead plants and animals) that produced the oil. Methane can be captured where it naturally occurs or produced in a controlled environment like an anaerobic digester. After it is captured or produced, it is cleaned (by removing carbon dioxide and other liquids); compressed to a higher pressure; odorized (it’s odorless and lethal in high doses in its natural state); and piped into our homes, power plants, and factories for heat and power.

Clean Combustion

Methane, like all fossil fuels, can be combusted (reacted with oxygen) to form energy and water. In fact, a large and growing part of our electricity supply comes from methane. It is the simplest fossil fuel — a single carbon atom with four hydrogen atoms, or CH4. Compare that to diesel fuel, which is a soup of long-chained carbons with sulfur and other molecules attached.

The basic methane combustion reaction is:

CH4 (methane) + 2 O2 (oxygen) = CO2 (carbon dioxide) + 2 H20 (water) + energy

Because of its simplicity and lack of additional compounds, methane is the cleanest of the fossil fuels to combust. When we say cleanest, though, we often mean different things. In terms of the production of carbon dioxide (i.e., the major greenhouse gas), methane has the lowest density, meaning we get more energy per unit of carbon dioxide than we do with other fuels. It releases 29% less carbon than oil, 43% less than coal, and 20-30% less lifecycle carbon than oil when used as a transportation fuel. In addition, unlike other fuels, methane combustion results in basically no NOx (nitrous oxide), SOx (sulfur dioxide), or particulate matter being released into the atmosphere. These gases are all dangerous to our health and regulated under the Clean Air Act.

Fossil fuels and their energy density:

natural gas (51.6 kJ/g) > petroleum (43.6 kJ/g) > coal (39.3 kJ/g) > ethanol (27.3 kJ/g) > wood (16.1 kJ/g)

It should be noted that methane, by itself, when released into the atmosphere, is a potent greenhouse gas. It captures heat [70 times] better and thus, by weight, is 70 times as dangerous as carbon dioxide. This is why it’s so important to flare methane to ensure that it is completely combusted into carbon dioxide. It also means that it is critical that the infrastructure to transport methane — drilling sites, pipes, and tanks — minimizes any leakage into the air. Otherwise, the benefit of transitioning from coal to natural gas (in terms of greenhouse gases) would quickly be lost.

The Age of Methane

The increased use of methane in the US, predominately replacing coal, has stabilized if not actually lowered our level of emissions, and the retirement of old coal power plants is eliminating one of the country’s largest polluters.

Energy transitions typically move from a lower density fuel to a higher density fuel. We moved from wood to coal to oil, and now methane is creeping up, passing coal to become the second largest source of energy in the US. While denser, it is also a gas, which presents logistical issues for transport and storage.  Nonetheless, I think we will eventually make the transition from oil to methane, at least in the US, before renewables ultimately take over in the second half of this century. And when they do, it will be because technically they are a better fuel — i.e., more energy dense.

EIA-Chart

Global Dynamics

As discussed, methane, being a gas, presents a transportation challenge. The US has a vast network of pipelines, and Russia pipes compressed natural gas into Europe and China from their vast reserves. However, in order to physically move natural gas, as opposed to transferring it via pipeline, you need to cool it to a liquid (at -260 degrees Fahrenheit), at which point it becomes liquified natural gas, or LNG (in it’s compressed form, it’s called compressed natural gas, or not surprisingly, CNG). Once liquified, it can then be transported via ship.

Less than 10 years ago, the US built import terminals to import LNG from abroad. More recently, however, with the discovery of new drilling techniques (i.e., fracking), those same terminals have been re-configured as export terminals as the US is now one of the world’s leading producers of natural gas, along with Russia and Qatar. However, the difficultly and, thus, cost to move it has created a huge pricing disparity around the world. For example, natural gas is routinely under $5/MMBTU in the US, while it can be as much as $20/MMBTU in Japan or China. This has put a huge amount of pressure on producers to export to Asia to satisfy growing demand, as well as on the Asian countries to produce more gas themselves through a combination of the gasification of coal and importing drilling technologies from the US. Just 10 years ago, the US was scared of running out of fuel, but now we find ourselves with an abundance; Asia, by importing fracking technology, could very well find itself in a similar situation.

Energy in 2020 — Transitions and Themes in 4 Graphs

A couple of weeks ago, I was a guest at Northwestern for an energy and entrepreneurship course. The main question that we discussed was where do we see energy markets in 2020? It’s dangerous to speculate in energy, but here are my thoughts in four graphs:

1. Energy Transitions

transitions
Energy is a big, physical problem — it’s about math and physics — you’re not going to “Whats App” the energy market. Thus, energy transitions happen over large periods of time — it’s hard to turn the ship. But there are long-term trends and transitions, and they typically are towards cheaper and denser fuels. The large-scale trends seemingly evident now are that solar and natural gas are on their way up, and coal, nuclear, and petroleum are on the their way down. I think these trends will continue, at least in the US: we’re not going to build any more coal or nuclear power plants, and methane and renewables are growing fast.

2. Oil

oil-Mar2014
To even begin to predict the future of energy, of course it’s important to understand the current and past dominant fuel source — in our case, that’s petroleum. If you had to guess what the price of oil would be in 2020, what would you say? Above $80? Above $120? Or even higher? The majority of the class thought it would be over $120. The day I was there, oil for delivery in December 2020 settled at $77.72. This tells you what the market thinks. As Ahmed Zaki Yamani, the Sauidi Oil Minister, said, “The Stone Age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil.” So it is a demand issue — fewer miles driven, fewer drivers licenses, and greater fuel efficiency will mean less demand for oil. Oil may not be $77 in 2020, but it’s going to be lower than people think—let’s say under $100.

3. Methane

methane
It’s important to remember that $5 methane (natural gas) is the equivalent of a $29 barrel of oil. Methane is cheap, seemingly abundant, and the least CO2-intensive of all fossil fuels. Methane combusts cleanly while diesel produces SOx, NOx, and particulate matter. Just looking at the price disparity and the change in reserves, I think there is a real chance that you see methane pass petroleum in that first graph by 2020.

4. Solar

nrel-solar

Solar is growing exponentially, and when things grow exponentially, we tend to under-predict the consequences, and I think this is true of solar. Gains in semiconductor technology continue to accelerate and have led to a Moore’s Law of solar as it relates to efficiency. It was originally assumed that band gaps would create a physical limit to efficiency. However, physicists have figured out how to stack cells to create complimentary band gaps or multi-junction cells with theoretical efficiencies north of 40%. Photosynthesis is just 11%. Think about that — we’re 4x better than photosynthesis, a process that took millions of years to hone. Solar cells with 50% theoretical efficiency by 2020 seems realistic.

Energy transitions are large-scale and slow-moving, to be sure, but they are real. So again, although it is difficult to try to predict energy markets, I think the four trends above are accurate and here to stay, at least for the foreseeable future.

 

ampCNG Thesis: BTU Arbitrage

In 2010, I was looking for renewable-energy ideas and projects to invest in. I was working with the team at Carbon Solutions Group and learning about the market. To start out, I made a couple investments in traditional solar, which worked well (although the timing was bad as panel prices collapsed just afterward). My original intent was to look at power projects, the idea being that power was going to be much more distributed and smaller scale (In fact, ampCNG’s original name was Aggregated Micro Power, or AMP). Led by the efforts of friends and investors in the UK, we adopted, in part, the same name and set out to pursue power projects as AMP Americas.

At that time, the US energy market was undergoing a profound shift. Natural gas, which traded as high as $12/MMBTU in 2008, was down to $4/MMBTU. At that price point, nothing is really competitive on a pure cost basis, with maybe the exception of coal. I had also watched the carbon markets whip around and eventually collapse due to the lack of a clear governing policy, so I told myself that our projects had to be profitable in the absence of subsidy. Given those constraints, we couldn’t find much that worked. We looked at biomass, visiting pellet plants and learning about the economics of growing organic material. We considered various waste-to-energy projects — gasification, torrefaction, and pyrolysis.

The problem was that nobody had a system that worked at any kind of scale in any real-world environment, at least not that we could find. We also started looking at anaerobic digestion, which is the production of methane (or natural gas) from waste, often food and manure. I found myself on farms throughout the country, at one point standing on a tarp suspended by only the methane from the 20-feet-deep pit of manure below. The problem with many of these projects, though, was that if they were producing power, they had to rely on incentives, but where incentives weren’t necessary, a power purchase agreement (PPA) from the utility was, and acquiring one of those often took years, if you could get it at all.

Then, through a friend, I was introduced to Fair Oaks Farm, a dairy farm on I-65 in Indiana led by Mike McCloskey. Mike, an industry leader for decades who has invested tirelessly in sustainability through anaerobic digesters and other innovations, wanted to run his dairy trucks off of the natural gas that he was producing from manure on the farm. As we dug into it, we saw that it made sense: diesel fuel was expensive and dirty, and the use of natural gas, especially renewable natural gas, was clean and cheap. After a lot of trips to the farm and Excel spreadsheets, I partnered with Mike and invested in two compressed-natural-gas cleaning stations, a gas-cleaning skid, and a fleet of trucks.

That was two and a half years ago. Today, that project runs 42 trucks on natural gas, most of which is delivered from the anaerobic digester on the farm. We’ve run well over 10 million miles on compressed natural gas and developed a unique knowledge base from being an early adopter. We’ve expanded the network, recently opening stations in Perry, Georgia, and Orlando, Florida. Through our joint venture with Trillium (a subsidiary of TEG), we’re building a dozen more throughout Texas and the Midwest. Natural gas is below $5/MMBTU in most parts of the country. In each MMBTU, there is 7.2 diesel gallon equivalents, which means that $5/MMBTU of natural gas is the equivalent of $0.70 of diesel fuel. Now a lot has to happen to make that natural gas usable — it must be compressed to high pressure and distributed to trucks, and the trucks have to be upgraded, for example — so what you end up with is a price closer to $2-2.50 per diesel gallon or a savings of more than $1.50 per gallon in most cases.

We’ve made progress, but the problem is big. The US burns 41 billion gallons of diesel a year — 28.5 billion of those go into trucks running 173 million miles a year. If the industry built 5,000 stations selling 1M gallons of diesel gallon equivalents we’d replace 5B gallons of diesel or about 17% of the trucking market or about 12% of the overall diesel market. We could do this while consuming just under 3% of our current natural gas production (65.7 bcf in 2013 per EIA). It would save shippers over $5B annually and considering that every gallon of natural gas burned would have little to no NOx or SOx and a reduction of 20-30% in CO2, the impact would be big.

So compressed natural gas makes sense from an economic standpoint, it makes sense from an energy standpoint, and it makes sense from an environmental standpoint (methane, especially renewable methane, is much cleaner than diesel). The big lessons that I’ve learned throughout this process are, to name a few few, (1) that I need to be willing to pivot (in our case, from power to fuels), (2) that turning a project into a company is a way to de-risk a business and an investment, and (3) lastly, if you’re building anything, make sure you are okay (financially, psychologically, etc.) if it takes twice as long and costs 20% more than expected.

The math:
65.7bcf a day of natural gas x 365 days = 23,981 bcf annual production of US
5 billion gallons of diesel * 139,000 BTUs / 1,000,000 BTUs = 695M MMBTUs of energy
695M MMBTUs of energy / 1M MMBTUs per BCF = 695 bcf
695bcf / 23,981bcf = 2.89% of US natural gas production