MIT Future of Natural Gas Study 1. 2 To view a full copy of this report, please visit ...

MIT Future o f Natura l Gas S tudy 1


To view a full copy of this report, please visit

www.web.mit.edu/mitei/research/studies/natural-gas-2011.shtml

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• Hess Corporation• Agencia Nacional de Hidrocarburos

(Colombia)• Gas Technology Institute• Exelon• Energy Futures Coalition


5 MIT Future of Natural Gas Study

Remaining Recoverable Natural Gas Resources(Excludes unconventional gas outside North America)

Tcf of Gas

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Global Gas Supply Cost Curve(Excludes unconventional gas outside North America)

* 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

Tcf of Gas

Breakeven Gas Price*$/MMBtu


U.S. Gas Supply Cost Curve

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

Breakeven Gas Price*$/MMBtu

Breakdown of Mean U.S. Supply Curve by Gas Type Breakeven Gas Price*$/MMBtu


Variation in Shale Well Performance and Per-Well Economics

* 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

IP Rate Probability(Barnett 2009 Well Vintage)

IP Rate: Mcf/day(30-day avg)

P20 P50 P80

Barnett IP Mcf/d

BEP $/Mcf

2,700

$4.27

1,610

$6.53

860

$11.46

Fayetteville IP Mcf/d

BEP $/Mcf

3,090

$3.85

1,960

$5.53

1,140

$8.87

Haynesville IP Mcf/d

BEP $/Mcf

12,630

$3.49

7,730

$5.12

2,600

$13.42

Marcellus** IP Mcf/d

BEP $/Mcf

5,500

$2.88

3,500

$4.02

2,000

$6.31

Woodford IP Mcf/d

BEP $/Mcf

3,920

$4.12

2,340

$6.34

790

$17.04

Impact of IP Rate Variability on Breakeven Price (BEP)*(2009 Well Vintages)

10MIT Future of Natural Gas study


Key Environmental Issues Associated with Shale Gas Development

Primary environmental risks associated with shale gas development

1. Contamination of groundwater aquifers with drilling fluids or natural gas

2. On-site surface spills of drilling fluids, fracture fluids and wastewater

3. Contamination as the result of inappropriate off-site wastewater disposal

4. Excessive water withdrawals for use in high-volume fracturing operations

5. Excessive road traffic and degraded air quality

Breakdown of Widely-Reported Environmental Incidents Involving Gas Drilling; 2005-2009

• 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

Recommendations

MIT Future of Natural Gas study

13 13

• 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

System Studies of Gas Futures

MIT Future of Natural Gas Study

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U.S. Gas Use, Production, Imports & ExportsNo New Climate Policy

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Carbon dioxide emissions pricing scenario

- 50% reduction to 2050 in industrialized countries

- 20 year time delay in large emerging economies

- no constraint elsewhere

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U.S. Gas Use, Production, Imports & Exports Price-Based Policy (50% by 2050, No Offsets)

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7.5 $/Mcf13.3 $/Mcf


MIT Future o f Natura l Gas S tudy

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19

20 20

Regional Markets

Global Market

7.5 $/Mcf13.3 $/Mcf

5.7 $/Mcf11.4 $/Mcf


International Market Evolution

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Global Gas Market & Geopolitics


Global Gas Market in 2030

Canada388(3.0)U.S.

862(22.8)

Brazil226(0.7)

France180

(1.73)

Libya290(0.2)

Algeria231

(1.02)

S. Africa485(0.2)

Poland187(0.6) China

1,275(3.1)

Australia396(1.1)

Mexico681(2.2)

Argentina774(1.5)

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

M I T F u t u r e o f N a t u r a l G a s S t u d y22

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.”

M I T F u t u r e o f N a t u r a l G a s S t u d y 23

23

Industry 35%

Manufacturing 85%

7.4Tcf

6.3 Tcf

4.5 Tcf

CHP/Cogen 14%

Conv. Boilers 22%

Process heating 42%

Industrial Gas Demand


24

Competition with Coal Boilers After Compliance with MACT Standards

0

5

10

15

20

25

Industrial Boiler Replacement CostsNet Present Value Costs (millions $)


25

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


26

Buildings: Full Fuel Cycle Energy/CO2

26

Energy Consumption

CO2 Emissions

Electric Furnaces Oil-Fired

Furnaces Gas-Fired Furnaces Air Source

Heat Pumps Ground Source Heat

Pumps

101.0 120.5 111.1

41.7 30.3

213.2

16.3 9.6

87.9

64.0

Fu

el

En

erg

y p

er

10

0 M

Wh

of

Us

efu

l E

ne

rgy

Site Energy

Source Energy

Electric Furnaces Oil-Fired

Furnaces Gas-Fired Furnaces Air Source

Heat Pumps Ground Source Heat

Pumps

74

45

27 31

22 To

n C

O2

pe

r 1

00

MW

h o

f U

se

ful

En

erg

y

Site: Gas +10%

2.7X

+ =

Source: Electricity + 194%


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

If the current trend of large oil-gas price ratios continues, it could have significant implications for the use of natural gas in transportation.



5 years

1.8 years

17 years

5.9 years

Years Payback for CNG Light Duty Vehicles ($1.50 gallon of gasoline equivalent spread)

$ 3,0000

12,000 miles per year 35,000 miles per year

$10,0000

Payback times for US light duty vehicles are attractive when—• used in high mileage operations • have sufficiently low incremental

costs

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



Conversion of Natural Gas to Liquid Fuels

CatalystSynthesis Gas

ReformerNatural Gas

Ethanol

Diesel

DME

Methanol

Gasoline

Mixed Alcohols


Natural gas priceMethanol

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

Methanol/Gasoline Cost Comparison


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


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

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;…



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



Improving Safety and Operation of NG Infrastructure* Improved data quality* Minimize environmental footprint

Improving the Efficiency of NG Use* Micro-CHP/low HPR,…



Federal Funding

GRI FundingSteady over 15 years

Time limited tax credit Gas produced

under tax credit

Gas produced after tax

credit

RD&D Spending

backup



43

TX LAMS

AROK

NM

AZ

CA

NV

OR

WA

ID

MT

WY

ND

SD

MN

IAWI

IL

MOTN

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)


44

Coal to Gas Fuel Substitution Benefits Vary by Region


45

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


46

Large Scale Penetration of Intermittent Wind in Short Term for ERCOT

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.

Gas Peakers

NGCC


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.

Large Scale Penetration of Intermittent Wind in Long Term

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).

Process-ing; 37.1

Transmission and Storage, 43.2

Distribution, 29.9 Field Production, 134.2


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.

CO2e Emissions from Gas Systems, 2008 reflecting EPA’s 2011 revisions (teragrams)


A detailed analysis of

the growing

interdependencies

between the gas and

electric infrastructures

should be conducted.

Natural Gas System/Infrastructure


Steps Involved in Completing Wells and Protecting Ground WaterFeet Below Surface Key Steps in Well

Completion Process

1.Acquire necessary well permits

2.Prepare well site

3.Drill and case well

i. Drill and set conductor casing

ii. Drill through shallow freshwater zones, set and cement surface casing

iii.Drill, set and cement intermediate casing

iv.Drill, set and cement production casing

4.Perforate and fracture well

5.Flowback fracture fluid

6.Place well into production

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