Perspective: The Marcellus Shale Boom as an Impetus for Technology Development

Strengthening domestic energy production has been a very hot topic for some time now, and for good reasons, such as drilling affect in the communities and environment, opportunities and consequences of developing an economy. American dependence on crude oil reserves from traditional foreign sources has become a more precarious situation with diminishing supply, skyrocketing demand, and geopolitical instability. To meet the energy needs of coming generations the charge is being led to bolster U.S. production, particularly with alternate and
non-traditional energy sources. The natural gas extraction in the Marcellus Shale is an extremely valuable asset to petrochemical, which can convert ethane into a feedstock for their manufacturing processes in the downstream of the value-chain. Many chemical related business could indeed achieve lowest cost position in the world; thus strengthening our economic engine. Remarkably, many of the concerns and challenges associated with “Marcellus Shale” could be solved thorough chemistry related innovations and technology development.

One of the biggest windfalls for American energy in recent years has been the discovery of expansive natural gas reserves in the Marcellus Shale region of the Northeastern United States. Many of the most recent estimates peg recoverable gas supplies in the Marcellus at over 150 trillion cubic feet, with some experts suggesting a far more extensive untapped supply.

Of course, ongoing technological improvements in extraction methods continue to grow this figure. Much of the gas is found in shale deposits at depths of 7,000 to 10,000 feet which, in the past, made for a prohibitively high cost exploration and removal process. Areas which were not commercially viable for gas wells fifteen years ago are now able to be exploited thanks to advances like directional drilling, where bore holes can penetrate laterally at the target depth to magnify accessibility to local gas. As the promise of unlocking a torrential supply of domestic energy in close proximity to the demand-intensive regions in the Eastern U.S. has become a reality, both public and private sector investment has surged.

And with more R&D going into extraction methods, we have seen improvements in environmental impact as well as increased supply. The primary and most efficient means of natural gas extraction in the Marcellus region is hydraulic fracturing (“fracking”). Hydraulic fracturing is actually a well-established technology, coming into broader commercial use in the mid-20th century. Recent years, however, have seen an explosion in new fracturing technology. According to IP Spotlight, the U.S. Patent and Trademark Office between January 2008 and August 2011 received more than 1,100 U.S. based patent applications which mention fracturing. This is an 80% increase over the previous 3-1/2 year period. This jump is a product of the shale gas boom – one that produced 140,000 jobs and more than $11 billion in value added in Pennsylvania alone in 2010.

On a basic level, fracking involves boring deep into shale formations and using very high pressure fluids to create fractures (or expand existing fractures) in the rock. This releases the trapped hydrocarbons for extraction. There has been no shortage of speculation as to the impact of the traditional fracturing process on local communities and water supplies, and the environment as a whole. These effects must necessarily be left to the experts to determine. What is certain now is that shale gas is a mainstream concept and a booming business, and the U.S. stands to benefit from better access to cleaner fossil fuels. What matters now to business is how they can find the safest way to exploit this resource without missing the boat. The most effective way to reach that goal is through innovation and investment in new technology.

And the more recent proliferation of the extraction process, investment, research, and regulatory pressure seems to be generating plenty of tech growth and secondary industry. Shale gas is a rapidly changing landscape. Areas like western Pennsylvania and Ohio are seeing new construction for wastewater treatment plants which process used fracturing fluids from gas wells. The plants typically operate under permits from state environmental agencies, which impose standards for use of new filtration and treatment technology. A competitive field of energy producers is striving to be the leader in the region by stepping up innovation. Chesapeake Energy, one of the largest gas producers, recently announced a new process which will allow used fracturing fluids to be recycled for new drilling at up to 100% efficiency, reducing both the burden on local water supplies and the need for wastewater processing installations. A new type of fracking method is also emerging, development from oilfield and shale gas giants like Halliburton and Schlumberger. “Super fracking” is based on several improvements to the existing process. New materials are being used to hold open shale cracks at the site of the fracture which allows a greater flow of hydrocarbons for a longer period of time. New types of pipe fittings for wells are making extraction much less time intensive and sparing about half of the surface water needed in the traditional process. And traditional plastic “valve” materials
which, in the past, have had to be recovered in an expensive process after drilling are being replaced with new disintegrating materials. A Texas company called Jadela Oil is even experimenting with a waterless fracking process.

Natural gas itself is cleaner than other hydrocarbon fuels, which makes growing supply even more attractive and conducive to new tech. Burning natural gas for heat energy emits 30% less carbon dioxide than petroleum and 45% less than coal. Nitrogen oxides are reduced by two-thirds and sulfur oxides by nearly 99% compared to coal combustion. A rapidly growing supply of a cleaner hydrocarbon fuel is spurring new technology. Research is progressing in fuel cell technology which could expand on already robust electricity generation applications. Transportation is another promising sector. The U.S. is seeing growing fleets of government, public transit, and shipping vehicles powered by compressed natural gas. The Department of Energy speculates that a switch to natural gas in the U.S. transportation segment would reduce carbon-monoxide emissions by at least 90%, carbon-dioxide emissions by 25% and nitrogen-oxide emissions by up to 60%. There are even expectations to use natural gas in aviation, with estimates of 60% improvement in efficiency while decreasing harmful emissions.

Technology and innovation is developing very rapidly and is touted to present serious cost savings, as well as a reduced environmental impact. Developments like these are interesting, but also raise some important questions. In such a rapidly evolving business, what will gas producers have to do to stay relevant? The next few years should prove to be very exciting, as new technology and investment fleshes out alongside a developing regulatory scheme and a better understanding of the industry. Chemistry is necessarily at the forefront of tech expansion stemming from the Marcellus boom because the natural gas industry is chemical intensive. As natural gas becomes more prevalent, the broader chemical industry is presented with a great deal of opportunity. It will continue to benefit from access to clean, domestic energy, as well as the demand for innovative technology. Recycling and wastewater treatment is highly dependent on chemistry, as are the new technologies in extraction. The high ethane content in Marcellus Shale gas has led to plans for ethane crackers in the region. Renewable Manufacturing Gateway and Aither Chemicals recently reached a deal for a $750 million petrochemical facility which will use shale gas as its feedstock. Clearly, energy development is a sector where chemistry continues to be relevant and our success in energy independence or economic prosperity is still INNOVATION!

Perspectives on Clean Technology

In recent times, there is buzz on “Clean Technology” and everyone chasing to get their slice of the pie. I thought, it would be nice to share some perspectives. Shifting political incentives, credit concerns, funding pressures, persistent energy price volatility, capacity concern and pace of innovation would be the continued theme for 2009!

Climate change threatens to derail development, while business-as-usual development threatens to destabilise the climate. While the debate over climate change appears largely settled, managing this tension will involve a lot more reflection about the trade-off between growth, the mitigation of climate change, adaptation to its effects and delivering alternate/clean-technologies.

Clean Technology is often viewed as a euphemism for alternate energy (i.e. oil or fossil fuel substitute), the fact is “Clean-Tech” includes a wide range of industries and business models that could potentially benefit from secular trends in favor of more efficient use of resources. Effective and efficient use of natural resources are critical due to the global mega-trends such as population growth, climate change, high demand for food, water and energy etc. Chemistry is the essence of modern life and the key players in chemical industry could benefit significantly in “Clean-Tech” in supplying key components or technologies. The key areas to focus on: Solar, Biofuels, Bioplastics, Fuel Cells, Water, Wind, Green Chemistry in general, Battery Technology, Carbon Sequestration, nano-tech or nano-scale high performing materials, and project base financing model etc.

Clean-Tech is not similar to “internet or dot com” where each new user at low incremental cost added more value to whole (after the initial heavy capital deployment); in contrast, dominant players in Clean Technology will be the companies who can execute successfully on a “project basis innovation”. Of course, there are few exceptions life biotech traits or smart metering etc.

A few thoughts on the clean technology arena: (i) I believe, speedy innovation oriented companies will benefit more than manufacturing (high asset) oriented companies. For example, ethanol plant operators versus enzyme suppliers. (ii) Carbon sequestration is a long-term play and the success will depend more on political climate, competing claims on invested capital and available alternates of technology (iii) As a general rule, regulatory initiatives should be the main driver for the financial return or performance of “Clean-Tech” participants (iv) Consumers price of traditional energy (e.g. electricity, gas, diesel, coal price) would dictate the viability of alternate energy or “clean-tech” (v) Arbitrages of elevated commodity price and alternate new technology has to balance out. Government policy will play a key role in commodity price such as corn price to gold price to hydrogen price! (vi) New technology could seduce people like (or, you), “Clean-Tech” funding arrangement are highly uncertain due to high level of capital intensity or ongoing financial commitments for many of the focus areas (not much difference than the feed-in tariff subsidy model). Clean-tech industry and their investment are undergoing a period of transition. Capital markets providing financing to the industry have pulled back in light of ongoing global macroeconomic, credit and liquidity issues. For example, in the first quarter of 2009, they invested only $154 million in 33 young companies, a drop of 84 percent from the last quarter of 2008 when, despite the crumbling economy, they invested $971 million in 67 start-ups, according to PWC/NVCA National Venture Capital Association. This reversal has led to a debate about whether market forces see little future for alternative energy and other green technologies on a large scale, or whether the economic downturn is taking its toll on this industry as well. The debate comes down to this: has the green bubble burst?

The debate over regulatory initiatives in only the beginning and low-carbon or energy-efficient technologies could see an accelerated adoption cycle in the appropriate environment. The Senate Energy and Natural Resources Committee last month approved the American Clean Energy Leadership Act by a vote of 15-8, clearing the way for the bill to come to the Senate floor for debate. While the bill is unlikely to pass in its current form, a few changes found to be relevant for the clean tech industry (i) Overall renewable targets are the same as in prior versions, starting at 3% by 2011 and climbing to 15% by 2021. It appears that energy efficiency can still be used as an offset to renewable target obligations at levels close to those previously discussed (e.g., 26.67%), suggesting that the net renewable requirement for 2021 would be about 11%., next (ii) the Act that was reported out of committee appears slightly watered down from a prior version, which was already not very aggressive on renewable compared to the House bill (Waxman-Markey). However, the bill does include a key positive for energy-from-waste and its exit from committee does set the stage for a bill to move the debate to the Senate floor, where additional changes could strengthen renewables requirements, possibly with more concessions to
nuclear energy and fossil fuels. (iii) The issue on combining the bill with carbon cap-and-trade legislation and it would be interesting see the final outcome!

As we observe various players in “clean-tech” arena, some of the questions I would ask:
Ø Can the “Clean-Tech” companies deliver sustainable profit in absence of without ongoing government/regulatory support? (Note: Clean-tech companies bears most of the risk instead of the suppliers. Many chemical companies are component and technology supplier to the so-called “Clean-Tech” companies such as enzyme to ethanol supplier, Photovoltech or thin-film supplier to Solar Panel Manufacturers )
Ø Are the new clean technology companies competitive in absence of scalability or migration to next generation?
Ø How sustainable is their pricing power? Can they capture their fair share of value, volume and market?
Ø Can “Clean-Tech” companies de-risk project for high capital intensity? In absence of “de-risking” the project, can they continually originate their financing?

Is Biodiesel market marked by uncertainty?

The biodiesel market in the U.S. faces important issues; however, biodiesel is a key component of a sustainable future, and the industry will have overcome many challenges. U.S. and global demand for biodiesel has soared in recent years, but growth slowed in 2008 as energy demand and petroleum-based diesel prices fell. U.S. biodiesel production in 2008 rose nearly 40% to 683 million gals, as soaring U.S. exports, mainly to Europe, more than offset a drop in U.S. demand, according to the Energy Information Administration (EIA; Washington). Considering current economy, it’s not a surprise that U.S. domestic demand fell 8% year-over-year in 2008, to 320 million gals. A surge in biodiesel capacity and production was caused by biodiesel mandates under the U.S. Renewable Fuel Standard (RFS), higher fuel prices over the last few years, and a $1/gal biodiesel tax credit, EIA says. The European Union recently imposed tariffs on biodiesel imports from the U.S., which could limit U.S. exports, and EPA has not issued rules for implementing biodiesel blending requirements under RFS, which creates uncertainty for market players. While world capacity and consumption of biodiesel grew on average by more than 50%/year from 2002–07; however, the outlook for the biodiesel market this year remains highly uncertain!

Evonik Starts Up Operations at U.S. Biodiesel Catalyst Plant (May 4, 2009), at its 60,000-m.t./year sodium methylate unit at Mobile, AL. Sodium methylate is a catalyst used to manufacture biodiesel produced from sources such as rapeseed or soybean oil.

On the other hand, a number of Biodiesel/Ethanol producers have filed for Chapter 11 protection; such as:

White Energy Inc. : (Reuters) - Ethanol producer White Energy Inc filed for Chapter 11 protection in a Delaware bankruptcy court on Thursday, citing adverse market conditions, court documents showed. In court filings, the company said that while cost of raw materials to produce ethanol were high, excess supply of ethanol in the market has kept ethanol prices low, resulting in “minimal or non-existent profit margins.” White Energy listed assets and liabilities in the range of $100 million to $500 million in its Chapter 11 filing.

Aventine Renewable Energy (April 08, 2009): Aventine Renewable Energy Holdings Inc. of Downstate Pekin became the latest U.S. ethanol producer obliged to seek Chapter 11 bankruptcy protection Wednesday, as the industry’s once-fat profit margins continue to shrink. Ethanol, an alcohol product made from corn and used as a gasoline additive, got a major boost a few years ago from government regulations designed to encourage use of the product to reduce the nation’s dependence on petroleum. ….

Panda Ethanol (Jan. 28, 2009): Dallas-based Panda Ethanol Inc.’s Hereford Biofuels subsidiary filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the Northern District of Texas.

According to the company, it intends to sell its major asset—a 105 MMgy ethanol facility currently in the late stages of construction in Hereford, Texas—pursuant to a Section 363 sale process, pending approval by the bankruptcy court. The bankruptcy filing doesn’t include the parent company of the Hereford subsidiary, Panda Ethanol.

Verasun (Nov. 5, 2008): VeraSun files for Chapter 11 bankruptcy protection; The recent retreat in corn prices caught one of the nation’s largest ethanol producers offguard. VeraSun Energy Corp. and its 24 subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court in the District of Delaware on Oct. 31, allowing it to enhance liquidity while the company reorganizes.

According to the company, the filing was “precipitated by a series of events that led to a contraction in VeraSun’s liquidity, impairing its ability to operate its business and invest in new and expanding ethanol facilities.” In a statement, the company said it “suffered significant losses in its third quarter financial statement,” citing that a dramatic spike in corn prices attributed to its corn procurement and hedging arrangements resulted in “unfavorable operating margins.”

Many other biodiesel producer are struggling to survive and the the question is what is next!