This speech gives some good insights behind the global drive to natural gas. The critical bottleneck, though, is cheap synthesis gas (syngas) production which accounts for 60% of the gas-to-liquid process (natural gas to FT diesel/naphtha, methanol and DME).........
A Vision of A Natural Gas Economy
Richard Flury, Chief Executive, Gas & Power A paper presented to the world's first online energy conference, Energy Resource 2000, in association with the World Energy Council
May 2000
Last year, I was delighted to take up a new role within the BP Amoco group to lead the establishment of a major new business division, Gas & Power.
We were already one of the world's largest producers and reserves holders of natural gas - No. 1 in North America and the UK - and we had substantial positions in downstream gas markets and in power and liquefied natural gas, with sales exceeding $ billion a year.
Following the combination with ARCO, our position in gas has been further enhanced. Gas marketing volumes have increased by 25%, gas reserves by 30% and gas production by 38%.
The creation of Gas & Power as a fourth business division for the gGroup was not part of a gradual progression. It marked a step change in the way we see our business growing in the future.
We are responding decisively to the need for cleaner, lighter fuels and broader energy solutions within what are rapidly changing and competitive marketplaces.
That provides some context for the subject I have chosen to talk about today - our vision of what we consider to be the dawn of 'the natural gas economy'. Let me start by sketching out what I mean by that term.
Gas is becoming of ever greater importance to the development of world, regional and country economies.
There are many factors at work - the world's plentiful gas supply sources, continued technological innovation, The desire for less carbon-intensive fuels and the need for cleaner air in urban areas, and the desire to secure lower-cost energy through more open, deregulated and competitive markets.
It is increasingly possible to obtain both economic and environmental benefits from use of natural gas. This trend is expected to accelerate as technology for power generation, space heating, chemicals manufacture and transport continues to advance.
Looking into the future, one can now envision an economy powered principally by natural gas.
This 'gas economy' would be supplied from a truly global market consisting of large gas reservoirs geographically spread but linked to consumers by low-cost pipelines and/or cheap and scaleable LNG facilities, or possibly through long-distance, high-voltage electricity conduits or large tankers carrying liquid products manufactured from gas.
In this world gas would be the principal fuel for electricity generation in high-efficiency combined-cycle gas turbines.
The chemicals industry would in large part be based on gas feedstock, using gas-to-liquids and/or gas-to-chemicals process technology.
Gas could also power the transport sector, first as compressed natural gas (CNG) in applications such as buses and taxis, and later as the primary feedstock for onboard fuel cells.
Fuel-cell fuel could initially be manufactured as clean diesel and/or methanol in gas-to-liquids plant. Later gas could be used as the fuel to generate hydrogen for direct use in onboard fuel cells.
The technologies for delivering this vision of the gas economy have now largely been invented, but not all have been demonstrated at scale and many technical issues remain to be solved.
Nevertheless, implementation of the vision has already started and the rate of market share growth for gas is likely to progress first for heat and power generation, second for gas-to-chemicals and lastly for transport fuels.
The trend to market liberalization and deregulation, which is now well under way on a global scale, is removing a key impediment to the development and use of natural gas. What was previously considered a 'premium fuel' by governments centrally directing their energy economies is now a fuel source competing on its own terms.
All this is not to say that oil in particular, or indeed coal, will not continue to be an important component of the energy mix. But we do see the growth in gas as an essential component in developing a much-needed bridge to a renewables future.
Indeed, our major investments in solar energy, where we are the world's largest producer of photovoltaic panels, signal our belief and commitment to that future. My colleague Mark Hammond from BP Solarex explains this further in his e-paper to this conference.
But it is gas that will make the biggest contribution to the developed and developing world as they (and we) seek to balance the often conflicting aims of growth and environmental performance.
So much for vision. What are the practical realities that we see that lead us to this view?
Ever since the first caveman stumbled out of his cave, coughing from wood smoke, humanity has been looking for cleaner fuels and cleaner ways to burn them.
The invention of new technology - the humble chimney - was a pretty good start.
It's a very serious point when you consider that the World Health Organization estimates that around five million people die prematurely every year as a result of cooking on open fires.
With all the talk about ecological disaster, we often forget how far we have come. When coal replaced wood it was progress of a kind. Coal had greater calorific value and thus produced more heat from less bulk. Crude oil too, when refined, produced a highly flexible series of products.
These are now considerably cleaner burning than they used to be. For a start the sulphur content is much lower. This process will continue. Indeed cleaner gasolines and diesels are at the heart of BP Amoco's strategy in the oil sector.
Yet we in the company believe that natural gas is a key fuel for the future - indeed the fuel of the future.
Coal was the fuel of the 19th century and fired the industrial revolution. Crude oil fuelled the 20th century, with its enormous economic growth. Now natural gas will be the fuel of the first decades of the 21st century.
It is abundant, it is available and it is clean burning. In fact it is the cleanest burning fossil fuel.
But wait, you may say. Are the resources available to increase radically the amount of gas consumed in the world? It already accounts for 30% of fossil fuel consumption. Is there enough?
Yes, there is more than enough. We estimate there are some 5,000 trillion cubic feet of proved reserves worldwide. To put this in perspective, this is approximately equivalent to all the world's current volumes of discovered oil.
Given the fact that for decades the oil industry has not really been looking for gas, we believe that 'discovered reserves' significantly underestimate available gas. However, a significant proportion of this gas is currently 'stranded' and will require technological advances and new commercial arrangements to bring it to market.
I will return to explore some of these technological factors later.
Back to basics
But first I want to go back to a few basics, with a little elementary chemistry and mathematics.
The primary element in all natural gas is methane, reaching 75% or more of the total, with the rest being mostly ethane and 5% other hydrocarbons.
This seems obvious, but we often forget what a simple, extraordinary, molecule CH4 actually is. It is the premier hydrocarbon. No other combination of hydrogen and carbon is as simple as this mix of four hydrogen atoms to one of carbon, fixed in a tetrahedral pattern.
As such methane is the building block of all the other familiar hydrocarbons. It stands at the core of all organic chemistry. When it combusts it releases 212 kilocal/mole of heat, which is why it is used so extensively as a fuel.
So what is so special about that? The answer is that no other hydrocarbon fuel contains so little carbon and produces so little carbon dioxide per molecule when combusted.
So much for the chemistry.
Arguments are put that methane is a more powerful greenhouse gas than carbon dioxide itself and that it should not consequently be released into the atmosphere at all. This is where the mathematics comes in.
There is a great deal of confusion about what are called anthropogenic, or man-made, sources of greenhouse gases. It is certainly true that the world's atmosphere now contains much more methane than it did 100 years ago. Because it is a hydrocarbon, the natural assumption is that it is the oil and gas indu stry that put it there. Yet this is a profound mistake.
Most analysis suggests that all sources of methane, excluding methane sinks and atmospheric increases, amount to 535 billion kilograms a year. Of these, 375 billion kilograms/year are described as anthroprogenic, or 70% of the total.
Let us examine this more closely. In fact, 275 billion kilograms are a by-product of agriculture, the largest categories being enteric fermentation (belching cattle) and rice paddy-fields. Britain's largest man-made methane emissions actually come from landfill sites.
The sources that are actually fossil fuel-related are small by comparison and mostly related to coal mines.
Those directly related to the oil and gas industries are around 10% of the total methane emissions. Indeed, one could say that the hamburger supply chain produces more methane emissions than the oil and gas industry.
The overall point, however, is very simple. The combustion of methane actually turns a greenhouse gas into one that is less potent by a factor of approximately 20.
So, to emphasize the point: methane is the cleanest-burning hydrocarbon.
I do not wish to imply that that there is a single solution to the complex subject of climate change. Rather I would say that, in the absence of a perfect world of zero pollution, natural gas and efficient power generation are undoubtedly among the most effective tools to combat the problem in the short term.
Of course, some 30 years ago the transition to the use of this fuel on a larger scale was impossible. Utilizing this fuel either as a substitute for coal in power stations or for transport was prevented by both a lack of infrastructure and a lack of effective technology.
It is BP Amoco's view that this infrastructure and technological requirement are now being put in place for a revolution in gas consumption.
Natural gas used to have one major drawback as a fuel. Because it is a gas, it is much more bulky than coal or oil for an equivalent energy content. Its transportation was conse uently expensive in terms of infrastructure. Back in the 1930s, the maximum pressure and diameter of a pipeline were limited below 500 psi and 20 inches respectively. The necessary quality of steel was unavailable.
Now, this problem has long gone. Pipeline capacities have increased enormously, with 56-inch diameters capable of handling 2,000 psi now achievable. As a result, by 1925, in spite of a well-explored resource base, there were only six transmission lines in the USA. These linked Chicago, Cleveland, Detroit, Los Angeles, Little Rock and Dallas to six gas-producing regions.
Regardless of the advantages of natural gas, the technological capability to deliver it was unavailable. The same applied to Europe. This has now changed. Trunklines have snaked across continents and become interconnected.
A particularly intelligent gas pipeline pig can now move from Western Siberia, through eastern Europe, down through Italy to Algeria. After a short rest, it can resume its journey back through the Mediterranean into Spain, across France and the English Channel and end up in Scotland.
The same applies to the USA and will soon apply to South America, where lines are moving across the Andes. Add in the Caspian and networks in South East Asia and our capacity to shift natural gas around the world has grown at an extraordinary rate.
This will continue. There are plans for lines across central Asia, lines through the Levant and even lines linking Japan with the whole of the Pacific Rim.
In 20 years' time, there will be few places outside Africa unconnected to major gas provinces.
Meanwhile, the industry is constantly improving its ability to move gas by sea in liquefied form.
First shipped in 1971, LNG has overcome initial fears about its safety and its cost is coming down. It is no longer necessary to see the technology in terms of vast expense and 20-year take-or-pay agreements.
Costs are being driven down, as BP Amoco's latest Trinidad venture has shown. It has set a new industry benchmark for the construction of greenfield LNG capacity and our planned expansion will lower that benchmark further.
Capital costs in the industry have fallen by 25% since the 1970s, from $300 to $225 a tonne.
There is also no reason why LNG should not be traded in similar ways to crude oil, seeking out markets.
We envision a world where smaller and lower-cost LNG regassification facilities are constructed that will see ships making partial deliveries as part of a liquid traded market.
Only last month we became the first major gas company to place a tender for the construction of two LNG ships for which we have neither supply source nor market contractually secured.
The corollary of this is that last month we also purchased a spot cargo of gas from Abu Dhabi for delivery to Spain. This cargo has enabled our new Spanish gas marketing business to fulfil the very first sale to an industrial customer in what was previously a monopoly market but is now open to competitors. This is a good example of the types of opportunity the new gas economy will bring.
So natural gas has overcome its volume-to-thermal-capacity disadvantage and is set to become a truly internationally traded commodity. It is available by sea and by land, not yet universally, but certainly for a large proportion of the planet.
But what has been happening meanwhile to make this cleanest of all hydrocarbons so highly desirable as well as available?
Well, turbine technology has changed, just as pipeline technology did.
This large machine is a state-of-the-art GE H Series turbine that is soon to be installed at our energy park at Baglan Bay in Wales. It is set to perform the four-minute mile of combined-cycle generating efficiency - a thermal efficiency of 60%.
The improvement in the efficiency of turbines has been astonishing over the past decades. Compare this with the thermal efficiency of the standard coal-fired unit at, maybe, 34% and the fuel economy advantages are obvious.
It has taken 30 years for the gas turbine used in jet engines to be adapted for power generation but it has brought a revolution in efficiency. Natural gas has become the generator's fuel of choice for many power utilities.
Back in 1986 there was only 4,500MW of turbine capacity on order worldwide. A decade later the figure was 29,100MW. Currently the annual market for CCGT technology is around 65,000MW.
In terms of replacing older 35%-efficient capacity with 60%-efficient machines, the CCGT is already making a highly significant contribution to the reduction of greenhouse gas emissions. It is also making sure that new generating capacity is less polluting than it might otherwise have been.
The UK's 'dash for gas' was the largest factor in the country's ability to meet its national emission targets agreed at Rio.
With market liberalization and increasing competition in gas and power markets, one thing is certain. If a single percentage point increase in thermal efficiency saves $15 to $20 million in reduced operating costs over plant lifetime, manufacturers are not going to stop improving it.
The research goes on into ever higher levels of efficiency. The CCGT revolution has only just begun. And so far, only 15% of global electricity is generated by gas turbines.
Equally, gas-fired combined heat and power (CHP), which drives overall thermal efficiencies to more than 80%, offers a further opportunity for natural gas.
There is a change in industrial client attitudes to energy management. Market deregulation, increased environmental regulation and the trend to outsourcing are growing.
To get the best out of liberalized gas and electricity markets, industrial energy users are turning to companies with expertise in the field of CHP to solve all their energy management problems.
Companies such as BP Energy effectively remove the complexity of steam and power provision. This allows customers to get on with what they do best. CHP capacity has also been growing rapidly as a result.
But the ability of natural gas to change the landscape of fuel pollution does n t stop with power generation. Owing to its singular role as the simplest hydrocarbon, methane can be turned into liquid hydrocarbons that contain fewer polluting elements.
There are two fundamentally different approaches to this, both produced via a syngas phase. The Fischer Tropsch process produces syncrude, while the oxygenate route produces methanol, dimethyl ether (DME) and dimethoxymethane (DMM). Both these routes offer a new role for natural gas.
The syncrude produced by the Fischer Tropsch process is highly valued for diesel blending and sells at a premium of 30-40% over crude itself. Methanol, DME and DMM are also valuable, for reasons to which I will return.
The key to the gas-to-liquids process is really creating syngas, which accounts for 60% of the costs of the whole process. By mixing methane with oxygen via a catalyst, hydrogen and flammable carbon monoxide are produced.
BP Amoco is involved in a research programme with Phillips, Statoil, Praxair and Sasol. This is focused on reducing the cost of syngas production by 20-30%, which we now believe can be done.
Achieve this target and suddenly the costs of both oxygenates such as methanol and syncrude fall dramatically.
In relation to this, we believe there are huge potential new markets for methanol. This product is currently used in the chemicals industry and there are new markets here for lower-priced methanol, notably in the production of olefins.
Yet the real prize lies in transportation. DME and DMM offer the chance of more environmentally friendly diesel. Methanol can be burnt direct in vehicles or as a fuel for fuel cells.
Of course, natural gas is currently in use in motor vehicles as either compressed natural gas (CNG) or LNG. This a growing market, notably in Egypt where we have developed a significant transport fuel sector based on natural gas, and countries with high levels of urban pollution.
It is not so much that methanol will replace these initiatives. The point is that lower-priced methanol offers another opportun ty to produce a vehicle fuel that is low in pollution.
If we want a world where no carbon dioxide is actually produced on combustion, the alternative is obviously pure hydrogen. This only produces water.
Does this mean that the world is shortly to embrace the 'hydrogen economy' as well as a 'natural gas economy'?
Well, the world will eventually move to a hydrogen economy. But it will take time to develop the technologies needed, such as fuel cells and the safe means to distribute and store hydrogen throughout society.
BP Amoco and ARCO have been working with partners to develop these technologies. However, even when they become available, it will take many years - probably decades - to build the infrastructure and the capacity to replace the very large base that now supplies the world's energy.
That said, the use of hydrogen or its derivatives such as methanol is the most efficient source of 'wells-to-wheels' energy known for transportation. It has the added bonus of being able to manage emissions, such as CO2, centrally, rather than at each individual tailpipe.
Both static power and transport applications of fuel cells are likely to appear - sooner than people think - with distributed power applications already happening and commercially viable cars and buses on the road in 2004 from many major motor manufacturers.
During this transition period, natural gas is one of the best sources for the hydrogen that will be used to build up the hydrogen economy. If the hydrogen is produced at central sites, we have the best opportunity to capture the carbon produced and sequester it.
Eventually, the world needs to move to sustainable, renewable energy sources such as solar or biomass to produce its hydrogen.
As I have mentioned, we are already committed to solar as an energy company. But my initial central point remains.
The objective is to fuel the world with a minimum of carbon dioxide output during the lengthy transition period required to build the hydrogen economy. For that, methane is the h drocarbon of choice. No other hydrocarbon chain can be burnt with such an economy of pollution.
This brings me back to where I began - BP Amoco's Gas & Power division.
BP Amoco and Arco have been active in promoting technology development in all these gas sectors to which I have referred. We are studying in detail the environmental and clean air benefits of the gas economy and are undertaking detailed economic comparisons of the benefits of gas-based technology versus more conventional technologies using other fossil fuels. In addition, we have wide experience in national energy policy issues.
We are studying how national governments can best set regulatory frameworks which will ensure that the benefits of the gas economy are captured in the most efficient manner.
As part of our ongoing work we seek to engage national governments and official bodies in conversations regarding the benefits of the gas economy in order to understand in more detail the issues and constraints of most interest to partners and customers.
Our internal greenhouse gas emissions trading scheme was the first of its kind in the energy sector and we have led the way in demonstrating its framework and process to industry, governments and non-governmental organizations.
We are also extending this activity into understanding how business could play a role in the Clean Development Mechanism to provide cleaner fuels and technology to the developing world.
Our principal objective, as I see it, is to put the parts of the new gas economy together.
Where we have stranded gas, we need to find ways to use it. We need to link the various parts of the supply chain together. The opportunities are now considerable.
We are driving down the cost of LNG. We are driving down the cost of methanol production.
We know the technologies are available to increase the role of natural gas in power production, heat in combined heat and power, chemicals and transport. Those technologies have frequently been invented, but need proof of scale an cost reduction.
We know that by integration of plant and projects, as in Trinidad and Vietnam, we can find more markets for gas by reducing costs.
Needless to say, this fits very well with our company's aspirations in terms of the environment.
So overall, we believe that the gas economy is dawning.
Natural gas is a clean-burning fuel, which is already a major force - through the power sector - in cutting down on carbon dioxide emissions. Pipelines and LNG plants have reached the point where gas can be delivered around the world. Liberalization has opened up the power and gas markets. Gas-to-liquids is close to economic viability.
In short, if you want to think about a pre-eminent fuel in the early decades of the 21st century, it just has to be natural gas. |
