Chevron Follows Exxon Mobil's Natural Gas Play

Chevron today announced the the acquisition of Atlas Resources, which greatly expands its production and reserve bases in both conventional and non-conventional natural gas. This is very much mimics Exxon Mobil's acquisition of XTO, which we've written about before. This latter acquisition is being blamed for the significant under performance of XOM.


If the United States is serious about reducing greenhouse gas emissions and reducing our dependence on foreign oil, then windmills are not the answer. To paraphrase Dorothy, "Toto, I've a feeling we're not in Holland any more." One way to make a significant dent in our carbon emissions would be to generate more of our electricity from natural gas rather than from coal.


Pacala & Socolow's 2004 article in Science laid out the concept of "stabilization wedges," meaning different ways of building up a significant wedge-shaped reduction in carbon emission by combining strategies like conservation, better buildings, and a changed fuel portfolio. It's still a fine article to read for its way of formulating solutions.


They write that it is possible to reduce the nation's carbon emission rate by 1 GtC per year (1 Gigaton of carbon=1 billion tons of carbon) by swapping gas baseload power for coal baseload power in electricity generation. In 1996, according to the Energy Information Administration, natural gas accounted for about 14% of electricity generation, whereas the proportion rose to 24% in 2009. Both Exxon Mobil and Chevron project rapid growth in demand for natural gas to 2030.


Natural gas power plants generate 1,135 lbs. of carbon per megawatt-hour of electricity generated, which is one-third to one-half the level of a coal-fired plant, depending on the grade of coal used, according to MIT research. As it is, many plants switch between coal and gas fuel sources at the margin. For example, in 2009 when natural gas prices fell sharply due to recession and inventory overhang, gas supplanted coal in many plants. However, the idea of this stabilization wedge would be to switch the baseload capacity to gas versus coal, which means replacing 1,400 gigawatts of 50% efficient coal-based capacity with new, natural gas plant.


Were this to happen, gas production would go up by a factor of four from 2004 levels, according to Pacala and Socolow. What's keeping this kind of meaningful change from happening? First, it's easier to feed political pork to renewable fuel mandates, especially running up to the recent midterm elections. Second, companies are reluctant to invest in their basis businesses with a long-term horizon, and it's much easier to focus on share buybacks and financial engineering. Third, and most telling according to most researchers, is the failure to establish a carbon tax that would serve to internalize some of the externalities associated with dirty fuel sources like coal.


Some industry researchers were proposing carbon taxes of $40-$50 per ton. Now, along come some researchers from MIT who have a patent and pilot operations for natural-gas based, solid oxide fuel cell plant that they say will have the lowest lifecycle costs per killowatt-hour over straight natural gas or coal-based electricity. What's the problem besides the lack of a scaled-up plant? The capital costs are said to to be 3-4x those of conventional plants. Absent some sort of carbon tax, it will always be the case that pulverized coal will continue to be the cheapest fuel source, but one that has high environmental and public health costs. The MIT folks say that a carbon tax of $5-$10 per ton would be sufficient to switch the economics to their unconventional gas plant. Unfortunately, there seems to be little political will to start switching over from King Coal.


I get very concerned when I hear about shale gas and other unconventional sources as being our salvation, and I also believe that carbon sequestration is equivalent to having a high school biology class learn anatomy by doing brain surgery. There are much easier ways to make a dent in our carbon budget, and a switch to gas in power generation is a solution with which we already have a lot of experience.

The bets placed by Exxon Mobil and now by Chevron reflect, in part, some of these strategic market dynamics.