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When Natural Gas Replacing Diesel in Frac Jobs

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By EconMatters

With China slowing down, and a recessionary GDP projection (below 3%) for the developed world in the next two years or so, many analysts are also projecting far less bullish commodity prices.  Due to the very limited export capacity, the price outlook of the land-locked U.S. natural gas (Henry Hub) is even gloomier without the cushion of more robust demand from emerging nations. 

 

After hitting a decade low of $1.90/mmbtu last April, Henry Hub (HH) natural gas price has managed to climb almost 80% to $3.398 on Jan. 14.  Unfortunately, the same factors tanking natural gas to below $2.00 -- increasing production from unconventional sources via new technologies such as horizontal drilling and fracking, mild weather, weak domestic demand and economic environment – are still alive and well.     

 

Further Reading - Heat Wave Can't Get You $8 Natural Gas in 2012

 

 

Production has been rising despite a 46% drop of gas rig count during 2012 -- According to Baker Hughes, the natural gas rig count was 434 as of January 11, 2012, vs. 811 at the start of 2012.  Natural gas working inventories already hit a record-high level in early November, and the EIA now expects natural gas consumption to stay relatively flat year-over-year in 2013 with continued production growth.

 

 

 

But low natural gas price is actually good news not only to the domestic chemical and manufacturing sectors, but also bring in more jobs as many foreign companies are considering moving operations to the U.S. to take advantage of the lower energy costs.  This has not escaped the attention of no other than the oil industry itself.  Apache Corp. (APA) just came out and said it has partnered with Halliburton (HAL) and Schlumberger (SLB) to find ways to use natural gas to power hydraulic fracturing.  Caterpillar (CAT) was able to develop dual-fuel kits that would allow the engines to run on diesel while idling and natural gas when they are pumping at high RPMs.  Reportedly, Schlumberger is testing a system using compressed natural gas (CNG), while Halliburton is using liquefied natural gas (LNG).

 

Frac is one of the most energy intensive processes in the oil industry.  According to Apache, only 1% of drilling rigs and zero full frac spreads are powered by gas.  In 2012, the industry will have used more than 700 million gal of diesel to pump sand and water during fracture stimulation. That’s $2.38 billion spent on diesel at a recent average of $3.40/gal.  Converting the process to using field gas would reduce fuel costs by 70% thus driving down the per barrel cost of oil.  Furthermore, by replacing diesel with gas to fuel frac jobs, the US would import 17 million fewer barrels of oil each year. 

 

With some of the plays such as Marcellus profitable even at $2/mmbtu, it is no wonder that Fadel Gheit at Oppenheimer recently lamented that “natural gas prices will be dead for at least two more years.”  Even the commodity perma-bull Goldman Sachs had to lower its 2013 natural gas price target from $4.25/mmbtu, to $3.75.

 

In this price environment, a straight-forward natural gas investment such as the UNG or even producers would not be that good an idea unless you are in it for the long haul.  The better investment (and less volatile) prospect would be those service technology innovators like the ones mentioned here (Halliburton, Schlumberger, or equipment manufacturers like Caterpillar), since fossil fuels will not relinquish its lead in the end user sectors in the foreseeable future, and that oil companies have resorted to outsourcing technology development to service companies.

 

Where supply/demand forces might fall short, count on technology to bring the world into a new Oil [and Gas] Renaissance.


Further Reading - the New Era of oil Renaissance

 

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Wed, 01/16/2013 - 20:27 | 3160413 THE DORK OF CORK
THE DORK OF CORK's picture

There was a Nat gas (LNG) boom in Spain once.................

 

Now look at the state of it................

 

http://www.youtube.com/watch?v=oyQdm4XEjy0

 Gas is not long term built capital such as a  Nuke , Hydro or even a coal station............it comes and goes like the wind.

You cannot make even make medium term plans with it.

 

 

Wed, 01/16/2013 - 18:46 | 3160015 steve from virginia
steve from virginia's picture

 

Tight gas isn't profitable @ $2/mmcf, sorry.

 

The industry itself says it needs + $5. Hence the declining rig counts and agony in nat-gas companies such as Chesapeake.

 

Depletion rates on new wells in tight-gas formations are freakish, almost 90% during that first year. Only a handful of wells in 'sweet spots' are productive year over year.

 

The entire tight gas enterprise is a ponzi scheme intended to separate fools from their money ... so far it seems to be working great!

 

Every time I see 'natural gas revolution' I think 'Bre-X' ...

 

 

Wed, 01/16/2013 - 18:32 | 3159943 WhiteNight123129
WhiteNight123129's picture

EconMatters consider this. 5,700 million people in Non OECD, consumption of barrels per year 2.7. OECD 13.7 US at 22 barrels per year per inhabitant, Canada 24. US population 330.

Ok so you move up the production by 10 million barrels, so an incremental 10,000,000 * 365 =  3.65 additional barrels

If the 5,700 million people go to 3.7 barrel per inhabitant per year, so increasing only by 1 barrel the additional demand is 5.7 billions.

Ok now let us assume that non OECD country go only to half OECD that is 6.5 barrel per day, we need an additional 21.6 billion barrels.

Ah and that is assuming that we are NOT depleting the existing fields.

 

Wed, 01/16/2013 - 21:22 | 3160605 Matt
Matt's picture

We do not "need" more oil. Why do they "need" to consume half as much as us? 

Wed, 01/16/2013 - 18:24 | 3159905 trendybull459
trendybull459's picture

Many of you do not understand,government can not control NG and thats why it makes anything difficult to provide its use,they want people to be taxed on oil at 95$,while NG at current prices indicating that oil price must be 24-25$ barrel eqivalent to quantity of 8 m3 of NG,but as said one of the readers the NG price is not trading on futures which is an answer to the oil price high-government markets control via futures market,the fact that 90% of the hedge funds lost in battle with SP500 says about all,i had over 400 companies of exploration and some producers of the commodities,there no on of it since 2008 made even 20% up,after losing back in 2008 okt over 90-95%,you can not run economy on Apples!What people else do not get that rich doing all in order to keep masses from being rich,as result we have now governments world around trying to be capitalists for itself and socialists for us,they fighting with rich at our expense while getting money from rich in order not to fight them!

Wed, 01/16/2013 - 18:24 | 3159899 proLiberty
proLiberty's picture

See slide #34 of the PowerPoint presentation from the IMF:

Middle East and Central Asia, Regional Economic Outlook Update, April 2012

Slide #34 title: Fiscal breakeven oil prices have increased to new highs 

Shows the corner these oil exporting countries have put themselves in with their socialist governments.  Their welfare state breaks down when the world price of oil falls too low.  In the case of Iran, theirs needs USD $117/bbl.

 

 

Wed, 01/16/2013 - 18:27 | 3159924 Seer
Seer's picture

Yeah, they should have pumped themselves dry a LONG time ago!

At least THEY have oil...

Nonetheless, very valuable bit of info you presented.  I've been warning that the bigger problem is Peak EXPORTS.  Those oil exporting countries will also become more oil consuming.

Wed, 01/16/2013 - 21:18 | 3160590 Matt
Matt's picture

It's a good thing these OPEC countries have not been investing their oil revenues into productive assets for the last 50 years, or we'd be stuck buying crap from them even after their oil runs out.

Wed, 01/16/2013 - 18:18 | 3159862 Stormtower
Stormtower's picture

Anyone know why the nations truck fleets IE: UPS, FEDEX, USPS, et al are not converting semi's to run on NG??? I'm not in the trucking business but it would seem that we could save a whole lotta dough & jobs with cheap NG......

Wed, 01/16/2013 - 18:26 | 3159909 Seer
Seer's picture

Because they're in the business of hauling goods rather than fuel?

NG would require a bit more room for tanks, which would likely cut into their hauling capacity.  And, there's not likely a sufficient number of refilling stations.

The probability that these folks haven't already looked into all of this is probably zero.

Wed, 01/16/2013 - 21:16 | 3160587 Matt
Matt's picture

They should look into adding an electric transmission grid over the Interstate highways, like bumper cars, and just have everyone run off the grid. Then, just power the grid with natural gas. Problems, solved!

Wed, 01/16/2013 - 20:14 | 3160368 FeralSerf
FeralSerf's picture

Why can't NG be used to fuel locomotives?  Adding some tank cars shouldn't be very difficult.  Neither should the conversions from diesel to NG.

Wed, 01/16/2013 - 20:02 | 3160325 krispkritter
krispkritter's picture

Not sure about that. UPS and Fedex run a lot of semi & tandem rigs in short haul routes between hubs, 1-300 miles plus(I have friends who do this for a living). There would be no problem refueling at those hubs given sufficient infrastructure and tanks could be center mounted on the trailers(enclosed or not), provided they had current safeguards. Given those mileage ranges, there would be no fueling requirements outside their infrastructure. Maybe volatility in NG and/or cost of conversion are still too high? A neighbor drives short-haul oil in ND and says that flaring is rampant, to the point they are going to crack down on it via legislation(EPA and State). A company with a 'portable' LNG solution could conceivably be a player? Ie. on-site conversion and or use. I still find it hard to believe I can have a tri-fuel genset up to 20+KW on my property but a frack site burns millions of BTU's off to rid itself of a product that is not 'profitable' then complains about diesel costs? What am I missing?

 

Wed, 01/16/2013 - 18:12 | 3159849 de3de8
de3de8's picture

If we had a free market and genuine capitalism supply and demand would provide the appropriate indicators for additional (including alternate) technologies and solutions. In reality the system is upside down and inside out. Who in a rigged market will invest only to wind up depth charged (unless your in with the riggers)?

Wed, 01/16/2013 - 18:14 | 3159848 de3de8
de3de8's picture

If we had a free market and genuine capitalism supply and demand would provide the appropriate indicators for additional (including alternate) technologies and solutions. In reality the system is upside down and inside out. Who in a rigged market will invest only to wind up depth charged (unless your in with the riggers)?

Sorry for the double post :(

Wed, 01/16/2013 - 17:17 | 3159606 MrBoompi
MrBoompi's picture

Sure!  We must convert as many energy applications to natural gas now, while the price is at historic lows, so that someone can make trillions when the supplies start to dwindle and the price skyrockets.  (think T Boone)  Anything but solar and wind!  We're such dumbfucks.

Wed, 01/16/2013 - 18:32 | 3159940 trendybull459
trendybull459's picture

Dream on!Untill you get well controlled ny masses government you will be always slaves like now,the Obamcare could long time before to concert most industries into the NG,but his food is rich oil magnats,via oil he taxes people,via NG you would make us long time out of crisis,they want this crisis expended,until they relocate their debit to us and start game from zero,may be reloading Matrix of greeny!In my view NG can be used every where and make people happy,its do not polluting the water and resouces because every of us makes those NG via "puk" and as you know Earth very well absorbs it without cathaclisms,all our problems with government controlling oil price and forcing us to use it because it do not provide for us excess to NG,coal,waterfall and wind energy sources,its all controlled as strategic and on this "thesis" made money while you are enslaved

Wed, 01/16/2013 - 18:20 | 3159870 Seer
Seer's picture

T Boone WAS advocating for wind.  He was suggesting that NG be used for transport: wind doesn't work so well with trucks, though it does do pretty good for boats (water and ice) as well as small carts on a desert floor.  I see no real problem with his TEMPORARY/TRANSITORY solution; and, that's exactly what he also claimed it to be.  Yeah, someone's going to make a killing no matter how right or how wrong something is.  I concern myself only with what is right and what is wrong, and as far as what Pickens was saying I'm thinking that it's as good as any.  Do not, however, confuse this as my believing that it'll be any long-term solution- as long as growth is the primary driver we're guaranteed to run into the brick wall.

Wed, 01/16/2013 - 17:04 | 3159548 Flakmeister
Flakmeister's picture

Replace the word technology with price in the above article, it will then make sense...

Wed, 01/16/2013 - 14:39 | 3158723 the grateful un...
the grateful unemployed's picture

have pos in UNG, because the commodity is better than the company in terms of risk. UNG uses SWAPS rather than futures because the USG through the commodity exchanges, will not allow them to open enough positions to represent all their investors. that could be a two edged sword.

current POTUS is determined to throw money down the electric car rathole, i don't look for significant change for a few years. i also suspect that technology will actually caue a pullback in supply, but ignore supply demand, they are meaningless if you understand the fundamentals.

NG is priced at about half of the same BTU quantity of gasoline. critics complain that NG cannot be adapted to universal highway use, (these same critics ignore all the problems with gasoline distribution including CAFE standards, boutique gasoline, dangerous highway tanker accidents, etc).

the benefits and availability of NG are well known to managers of large fleets, including school and city buses, and trash collection. a search of NG pumping stations provides the dichotomy, there are plenty of stations, its just that most of them aren't public.

the price of NG will rise to a par with other fossil fuels when the availability reaches a certain tipping point and consumers feel comfortable with the product. that alone will double the price of NG. there is already technology to provide home compressors, which would utilitize the gas which the utilities provide.

and you're probably right about technology opening up NG supplies in more areas, reducing the need for long pipelines for distribution.

there may be a better etf than UNG, or buy futures yourself. there is also some NG technology which can convert the NG to electricity on site, (electric grids lose about half the power put into them over several thousand miles)

from an economic standpoint, experts say that NG will only rise when growth (manufacturing) returns, which is happening by the way, but that view ignores the need for home cooling and heating, as the climate gets more extreme. last year about 1/4 of our power use came in one month. 

Wed, 01/16/2013 - 18:00 | 3159803 Seer
Seer's picture

"NG is priced at about half of the same BTU quantity of gasoline. critics complain that NG cannot be adapted to universal highway use, (these same critics ignore all the problems with gasoline distribution including CAFE standards, boutique gasoline, dangerous highway tanker accidents, etc)."

Volumetrically NG is about 30% less energy dense than diesel.

And let's not forget that VOLUME is what enables economies of scale.  The technologies used to deliver gasoline and diesel are pretty much the same, in which case trucking can be said to be subsidized by a larger motoring public.  NG wouldn't likely be able to produce similar effects.

Wed, 01/16/2013 - 23:52 | 3161100 the grateful un...
the grateful unemployed's picture

just going on the figures from the only new car built for NG the Honda Civic.. and while i am 10 miles away from a public station, i am less than 1/2 mile away from the city department yard, which pumps CNG, thats' compressed natural gas, speaking of densities. NG can everything gasoline can do and it can do it better, without refineries. if trucking is subsidized by the larger motoring public why is diesel so GD expensive?

Wed, 01/16/2013 - 21:38 | 3160652 mjcOH1
mjcOH1's picture

Stroke of the pen, law of the land (or at least DOT regulation of the land, which somehow ended up driving the transportation industry rather than law).  Who knows....someday those crazy bastards might require cars to burn corn, and the taxpayers to subsidize it.  Free corn gas for everybody!  ;)

Wed, 01/16/2013 - 14:11 | 3158553 PhotonFanatic
PhotonFanatic's picture

Might take a look at American Power Group, APGI, as it announced on their last conference call the receipt of a $1 million order for their dual-fuel systems to be installed on a fracking rig. Very small company, yet they are doing business with some of the majors already. Word is that the field trials have all delivered as advertised and the company is now reaping the orders.

Wed, 01/16/2013 - 17:46 | 3159745 DoChenRollingBearing
DoChenRollingBearing's picture

Cummins Engine (CMI) is starting to make big engines powered by NatGas.

Wed, 01/16/2013 - 20:47 | 3160497 Kayman
Kayman's picture

Cat has had natgas powered engines since the early 1970's. Generally speaking they were used in stationary generators.

Wed, 01/16/2013 - 17:52 | 3159774 Seer
Seer's picture

Perhaps to run stationary machinery, but to run moving rigs (trucks etc) it' AIN'T going to happen.

I am, however, all FOR the frac fuckers to stop driving up the cost of my diesel.

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