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U.S. Oil and Gas Put Squeeze on Alternative Energy

by | published August 17th, 2012

Normally, when oil and gas prices accelerate on both sides of the Atlantic, alternative energy sources come into focus and become a big part of that “energy independence” discussion.

Well, not this time.

During the run up to mid-$4 gas and $147 a barrel oil in 2008, many assumed these costs would continue to advance. That made alternative sources – especially renewables such as solar, wind, biofuels, and geothermal – more attractive to investors, politicians, and energy enthusiasts.

Alternative sources are more expensive than conventional oil, gas, or coal. They are, however, more environmentally friendly. Paying those higher costs was regarded as a tradeoff for cleaner energy sources and a reduction in emissions.

That view has changed. And it’s part of the reason why I’ve recently avoided alternative energy companies like First Solar (Nasdaq: FSLR), Canadian Solar (Nasdaq: CSIQ) or SunPower Corporation (Nasdaq: SPWR) in my Energy Advantage portfolio.

It is hardly a convincing argument anymore, especially during a sluggish economic recovery. The economic downturn has made reliance on more expensive energy sources a difficult proposition to accept.

Yes, increasing oil and gas prices should reduce the spread between conventional and renewable, thereby providing stronger arguments for change. And proponents argue that alternatives provide an enhanced advantage given that they can also be domestically produced.

Just don’t bet on these arguments holding up this time. Here’s why.

The main difference in the current environment is the huge unconventional oil and gas reserves existing in the United States. Both are energy “game changers,” transforming the energy balance and expectations of sourcing well into the future.

I’m speaking here of shale and tight oil and gas, coal bed methane, bitumen, heavy oil, and oil sands. Each of these requires much greater commitments of energy to produce energy (so the “Energy Returned for Energy Invested, or EROEI, is worse) that do conventional oil and gas.

That means there is a cost premium added to the overall increase in oil and gas prices now underway.

The caveat is the amount of reserves available. The large amount of unconventional oil and gas existing on the American market, buttressed by synthetic oil flows from the oil sands in Canada, is transforming the energy balance.

And this transformation is dramatic.

Foreign Imports Wane in New Era of American Energy

In 2012, the U.S. is likely to import a smaller amount of its daily crude oil needs than at any time in decades. Preliminary figures could put that as low as 49% of domestic demand. To put matters into perspective, we were looking at 67% only three years ago.

The picture for gas is even more optimistic.

Five years ago, I remember sitting in a policy meeting at which the consensus pointed to 15% of U.S. gas needs being imported as liquefied natural gas (LNG) by 2020. Today, we are poised to see American LNG exports comprising some 9% to 12% of the world market in 10 years or less.

Shale gas alone has provided what looks like a century or more of gas reserves; very little was estimated in the early 2000s. Today, the U.S. market could increase gas production by 25% each year for the foreseeable future without tapping anything beyond what we already know is extractable.

Now nobody will do that, of course. It would destroy the market and drive every operator out of business. But knowing that it could be done is a major restraint on prices. Those prices will rise over time as major new demand sources for gas are phased in. These include:

  • The significant ongoing shift from coal to gas for electricity production;
  • Greater reliance on gas for feeder stock in petrochemical manufacturing;
  • The coming LNG export push; and,
  • Increasing use of natural gas as a vehicle fuel.

All of which brings us back to today’s subject.

Undercutting the Alternative Energy Argument

With the movement to exploiting unconventional domestic sources of oil and gas, one of the primary arguments in favor of alternative energy is undercut. Absent any major breakthrough in technology (inverters for example, that would dramatically decrease the loss of electricity from solar and wind generation), the cost differential will remain.

Despite the rise in oil and gas prices, alternatives will still be more expensive to utilize, even before considering the infrastructure expenses for delivery and support that would have to be introduced. The rise of shale gas and oil, along with the large volumes of other unconventional reserves present, make a move to alternatives less likely.

Concerns about the economic recovery remain paramount, given the major position held by energy – both its availability and its cost. Once concerns about a double dip are over, Europe appears to have its house in order and financial cliffs are avoided, we may approach this differently.

And genuine considerations about environmental stewardship may again become central to the discussion. But some of those concerns have come into focus with the recent announcement that carbon emissions have reached a 20-year low in the United States.

This month, the U.S. Energy Information Agency cited “low-priced natural gas” as the primary driver of the steep emissions decline, as natural gas is replacing more-carbon intensive coal as a greater source of electricity generation.

This does not bode well for the prospects of alternative energy.

Sincerely,

Kent

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  1. Tom Stiebler
    August 17th, 2012 at 14:20 | #1

    Hi Kent,
    How do we prevent the bad actors, underfunded shortcut takers etc from causing a potential disaster when working near water sources ?
    Outfits like BP have the same game plan as some on wall street – grab the profits and let everyone else pay for the damage.
    I am aware of the standard disclaimers that the oil/gas are thousands of feet below, but somehow that’s not all that comforting given that if the unexpected occurs there is absolutely no way to undo a polluted acquifer.
    Are any of the alternative fracing methods (such as lpg) viable as solutions ?

  2. Ed Nichol
    August 17th, 2012 at 18:23 | #2

    Kent
    Are there any rough numbers on Gasification to natural gas of garbage/wood waste/brown coal/tar pits ?
    Ed

  3. Tom
    August 18th, 2012 at 08:55 | #3

    Kent,

    I agree with your analysis in the the very short term; however, I would not discount the continued growth of solar energy. Solar is becoming cheaper every day. The cost of PV panels continues to drop (albeit far more slowly than the last 4 years). The largest future cost reductions in solar will happen in the BOS (balance of system) components such as wires, switches, inverters and installation labor which account for 50% of the total cost of a solar system. As these BOS costs drop (as a result of applying existing best of class manufacturing and supply chain optimization techniques), the costs of solar will become commercially advantageous compared to oil and coal. Also, it is safe to assume that price of LNG will increase as export capabilities in the US and elsewhere grow allowing other energy importing countries to drive up demand for the LNG energy source.

    All in all, solar will continue to grow as the costs to manufacture the solar systems decrease and the costs of fossil fuel and LNG sources continues to increase.

    Further, once you add back in the environmental issues associated with extracting oil, nat gas and coal from the ground, I believe it is safe to “bet” on solar as a long term winner. The tipping point for solar as a commercially viable source of energy for the utilities companies is relatively close at hand. My guess is in the next 7-10 years. I say this due to the “exponential growth” capacity of solar. Fossil fuels and nat gas do not have this key growth differential in their favor. Solar will be THE game changer, and yes, fossil fuel companies will survive as well.

  4. enthusceptic
    August 18th, 2012 at 10:19 | #4

    If I should try making a time line for when the different energy sources will be viable, it would look like this: Conventional oil and gas now, later shale oil and gas, but not soon. Much later renewables will be used.
    Thank you, dr. Moors. for mentioning ng for powering vehicles, without talking about dreams of using it in heavy trucks, locomotives or even ships!

  5. eric taylor
    August 19th, 2012 at 15:38 | #5

    Yes, I agree about the money interests dominating the energy utility
    outcome, against solar. Government is supposed to overcome such
    anomalies, but not when government is run by crony capitalist
    interests that sabotage independent government function. I do not expect
    great things from our leaders in Washington, who have not been able
    to coordinate energy policy in a rational way. Natural gas is a
    bright spot in the old energy paradigm that can be exploited, however.

  6. Bev Hammond
    October 31st, 2012 at 18:45 | #6

    Kent–
    In your discussion you’ve overlooked the potential for alternative energy & fossil fuels to develop a mutually beneficial, symbiotic relationship with one another: the co-production of electricity using a geothermal binary cycle turbine to capture and convert the waste heat inherent in the oil & gas extraction process.

    Why would the Oil & Gas Industry want to incorporate geothermal technology in their fields? Because it makes good economic sense. As you said, the EROEI for “unconventional” oil & gas resources will require more and more energy to get out of the ground. An oil or gas company which can generate the electricity it needs for pumping and infrastructure use on site would end up with a lower cost per barrel.

    This concept extends the life of older oil & gas fields. In addition, older, capped-off wells might be reopened solely for geothermal electrical generation–overcoming the major up-front cost of geothermal: exploration and construction. Ironically, oil & gas companies might even qualify for the creation of some carbon credits using this technology!

    The DOE is currently encouraging partnerships between the Oil & Gas Industry and the Geothermal Industry, to work together in installing and producing electricity during the oil & gas extraction process. You can find the DOE’s fact sheet on co-production by searching on Google for “GTP co-production fact sheet.” The website I’ve listed above will guide you to several other sites relevant to the discussion of co-production’s potential for enhancing near-term economic gains.

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