Is natural gas the answer?
Posted July 8, 2009 at 1:17 pm 
Filed in: Reformed oil man T. Boone Pickens joined Senators Harry Reid (D-NV), Orrin Hatch (R-UT) and Robert Menendez (D-NJ) at a press conference on Capitol Hill today to announce the introduction of the NAT GAS Act. A summary of the bill is available, but this story from Bloomberg summarizes it well. The measure would increase and extend government financial support for the purchase and production of natural gas vehicles as well as refueling stations.
Pickens, once the head of Mesa Petroleum, built his reputation on financial dealings in the oil industry during the 1980s. Reporters occasionally referred to him as “the real life J.R. Ewing”, a reference to the ‘80s television series, Dallas. As head of Mesa, Mr. Pickens lead a tremendously successful company with oil production assets in the Gulf of Mexico and American Southwest that was once among the nation’s largest independent producers of oil and natural gas.
Today, Mr. Pickens is more familiar to Americans for his TV ads regarding the energy and climate policy debates and for his proposed solution: The Pickens Plan. The plan proposes to use wind power to displace natural gas from the electric power sector, and then use the newly displaced gas to displace oil in the transportation sector. You can read about his plan in very (very) general terms here.
For Democrats and the majority of the media, lining up next to a converted former oil man has proven to be irresistible. Natural gas burns about a third cleaner (in CO2 terms) than refined petroleum products, and replacing gas in the power sector with wind would also generate substantial emissions reductions. Such a climate-friendly plan for increased energy security being trumpeted by a reformed oil man has Democrats jumping out of their seats to stand with him.
Unfortunately, there is an unfortunate drawback to the Pickens Plan: it can’t accomplish anything it promises.
Anecdotally, this is evident from the number of times Pickens himself has scaled back his initially-ambitions plan. At the outset, Pickens announced a strategy to build the world’s largest wind farm, to be located in the Texas panhandle. This and other wind assets-connected to a few hundred billion dollars of interstate transmission lines-would be the backbone of a new wind energy corridor that would displace natural gas use in the electric power sector. At the same time, Pickens was extolling the virtues of compressed natural gas passenger vehicles like the Honda Civic GX and the bargain basement-price of compressed gas that could fuel such vehicles. All told, the Pickens Plan set out to reduce U.S. oil imports by about 40 percent within 10 years.
By the end of last year, however, the plan had already been dramatically scaled back. Instead of displacing oil in passenger vehicles, Pickens was then arguing that natural gas made the most sense for fleet vehicles and long-haul freight. Then, just last month, Pickens announced that the world would have to wait for America’s first mammoth wind farm. Apparently building a few thousand miles of transmission is just as hard as you might think (according to FERC, just 14 lines have been built since 2000 that physically cross state borders).
And now, in this Politico op-ed today, Pickens lays-out his latest revision. In it, he states that the national energy goal should be to “move cars and light trucks to battery or hydrogen as quickly as possible.” With this we concur. Electrification of short-haul transportation has the potential to generate massive reductions in U.S. oil use and dramatically improve U.S. energy security. But, that is where our agreement ends. Pickens goes on to state that “We’ll get there, but a battery will not move an 18-wheeler….By providing incentives to change 350,000 heavy trucks from diesel to natural gas, we can cut our oil imports by about 4 percent.”
Yes, you read that correctly. And, no, it is not a typo. The Pickens Plan, which continues to be touted as “the only plan on the national agenda to meet [President Obama's goal of eliminating U.S. oil imports from the Middle East within 10 years], immediately reduce our dependence on foreign oil, and buy ourselves the time to develop more advanced renewable fuels,” will apparently meet its lofty goals by reducing U.S. oil imports by 4 percent. (In fact, in reviewing the numbers, it is difficult to see how converting 350,000 long-haul freight trucks to natural gas would reduce U.S. oil imports by much more than 2 percent.)
So, to tally the score: there will be no mammoth wind farm and no substantial reduction in oil consumption anytime soon. And yet, senators proudly stood side-by-side with Mr. Pickens to introduce a bill that will offer a $12,500 tax credit to natural gas passenger vehicles, a $64,000 credit to heavier vehicles, and a $100,000 tax credit for natural gas refueling stations. The bill would allow 100 percent of cost of natural gas vehicle manufacturing facility placed in service before Jan 1, 2015, to be expended and treated as a deduction, and it allows states and municipalities to offer tax exempt bonds to finance natural gas vehicle projects. In short, Senators Reid, Menendez, and Hatch support a bill that offers fiscal incentives to natural gas vehicles that far greater than those offered to almost any other vehicle technology.
All this comes in spite of the fact that Senator Menendez-the bill’s lead sponsor-isn’t even in favor of drilling for natural gas! And since wind power certainly won’t be replacing gas in the power sector any time soon, we would, indeed, need to do quite a bit of drilling to put natural gas into our cars. Such a massive expansion in gas production might be feasible given U.S. onshore reserves of unconventional gas, but offshore production would likely be needed as well.
And yet, purely from an energy security standpoint, it is not even clear that the Pickens Plan would achieve positive results-even if it worked exactly as Pickens claims it will. In short, we see two main problems. First, the price of natural gas is every bit as problematic as oil prices. See the chart below for the NYMEX forward month contract history. For consistency, we have converted the prices to a BTU basis. Although natural gas prices remained below those of oil during the 2008 price spike, that clearly has not always been the case. More importantly, the volatility of natural gas prices has tended to exceed the volatility of oil by a wide margin.
Secondly, why would America choose to take natural gas out of combined cycle gas plants and burn it in internal combustion engines? Combined cycle gas plants achieve efficiency levels of 60 percent, which, when combined with the lower carbon profile of gas, results in an emissions reduction of about 75 percent per unit of electricity generated versus the existing coal fleet. Comparatively, CNG vehicles offer just a 45 percent benefit compared to the existing passenger car stock (factoring in the fuel-economy advantages of new CNG cars versus the existing ICE stock).
It seems like we can do better, and we can. Electrification of transportation can achieve far greater reductions in oil consumption, and it can do so based on a highly diverse range of fuel sources–including natural gas.
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