Monday, September 03, 2012

Strategic Advantage

A coal-fired electricity generating facility in the US.
How regulation could help the oilsands reduce America’s CO2 emissions without damaging the economy
This article appears in the September issue of Oilsands Review 

By Peter McKenzie-Brown
An important policy paper about the oilsands slipped under the industry’s radar when it was released last June. Prepared by two Rice University academics – Dagobert Brito (an economist) and Robert Curl (a chemist) – the paper urges the US government to make it policy to import more Canadian crude, arguing the practice would reduce long-term greenhouse gas emissions. More immediately, it could benefit the U.S. economy and trade deficit, and promote energy security.

Yes, you read that correctly: Rather than a villain in the action pic, the oilsands could become part of the SWAT team. Refreshingly, Brito and Curl identified the oilsands as a high-powered tool for CO2 mitigation. In fact, making sure Canadian oil flowed south in greater amounts would be a “golden opportunity” to make the switch to greener fuels.

The diversion of oilsands crude to US Gulf refineries could be done in such a way that both the economy and the environment could benefit. Oilsands development could reduce the US trade deficit and ease economic pressure within the United States to produce coal-to-liquid fuels – the most carbon-intensive transportation fuels known.

“Canadian oilsands and the recent discovery of how to exploit the massive deposits of natural gas locked in shale… make it possible for the United States to reduce its dependence on fuels from outside North America without increasing carbon dioxide emissions,” according to the authors. “We propose that the US government develop policies that redirect our carbon usage, and thus our carbon dioxide emissions, away from the electricity generation sector toward transportation fuels by facilitating the development of Canadian oilsands, and offset the resulting additional carbon emissions by shifting the conversion of electrical generation from coal to gas.”

Misplaced Concern
The collaboration that led to this conclusion began about four years ago. Their collaboration, which has resulted in two widely praised technical papers, began with an off-the-cuff comment. During a conversation “Bob (Curl) said ‘If we didn’t have gasoline we would have to invent it because it’s such a valuable way of storing energy,’” according to Brito. Their discussions continued.

Both men are deeply concerned about the impact of carbon emissions on the environment – especially global warming. Their concern was to find ways to reduce carbon emissions without damaging the American economy. As they looked around the energy world, they saw that the United States was in a unique position to take steps that would reduce emissions.

One reality is that natural gas prices had collapsed as new technologies enabled producers to harvest gas from shale. One likely outcome is lower-cost gas for the rest of this century. Given that environment, they believe the first step the United States should take is to shut down coal-fired generating facilities, fueling them instead with natural gas.

According to Bob Curl, “The good thing about using regulation to require electrical generating facilities to switch to natural gas is that while these prices prevail it’s economic to do so. There is no transfer of funds to government. The regulation basically would be that you can only produce so much carbon per megawatt of electricity generated.”

“We believe concern about additional carbon dioxide emissions from Canadian oilsands production is misplaced,” according to their paper. “The strategic advantage of access to this resource far outweighs the extra carbon dioxide from its production, as this carbon dioxide can be more economically offset elsewhere in the economy.”

According to Curl, “people were opposed to the oilsands for reasons which seemed obscure to us. Many people in this country feel that having access to that much oil is bad because it takes the economic and strategic pressure away from our need to innovate technologically. The New York Times is very specific on this.”

Brito added, “Our position is quite different: It is very easy at the current price of natural gas to reduce emissions from electricity generation.”

“When we were preparing the first (of our two papers), we had some discussion about carbon taxes. Our opinion is that the carbon tax is counterproductive. It’s just a large transfer payment to government. It doesn’t actually reduce carbon emissions. Cap and trade would just result in more efficient coal-fired generating facilities having an advantage over the smaller operations, which would then shut down. It wouldn’t actually reduce carbon-generating activity. We have become advocates of regulation because no transfer payments are involved.”

More jobs would be created to deal with the increased flow of Canadian crude. In addition, according to their scenario, the U.S. would have more access to a secure energy source and the opportunity to burn off its abundant natural gas reserves instead of dirty coal.

The next step, they say, is to take whatever steps are economically feasible to forestall the conversion of coal into petroleum liquids. “All our calculations indicate that you can make money by converting coal to oil. The capital cost is where most of the money is. It’s a big chemical plant you have to construct,” according to Curl. Curl, the chemist, who explains the problem in graphic terms. “If you turn coal into liquid fuels, you generate 8/10ths of a ton of carbon dioxide for every barrel of liquid fuel you generate. If oil stays above $60 a barrel, oil from coal remains viable. However, as soon as you place a CO2 charge on that, it makes liquids unprofitable.”

The Energy Information Agency forecasts that coal-to-oil conversion will begin in 2020. “There is a lot of buzz about it in this country, yet we wonder why in the world anyone would want to do this. First, the petroleum business is more used to drilling than manufacturing. Second, they’re worried about the possibility of the regulation of carbon dioxide. And to make matters worse, the price of oil is quite volatile. As recently as 2008 oil prices drop below $35 a barrel.”

For environmental reasons, the two academics believe it’s important to discourage companies from going in this direction. However, they have couched their arguments in economic terms.

Of course, the imminent prospect of large-scale coal-to-oil facilities is becoming a bit of a straw man, since new technologies are increasing light oil production throughout North America. For example, in a recent research note ARC Energy’s Peter Tertzakian observed that, after having declined steadily for nearly four decades, in the last three years conventional oil production in Texas has risen from 1 million to 1.7 million barrels per day.

The Rice University academics take the position that Americans are fortunate to be importing oil from Canada. According to Brito, “we contacted some friends who are experts in trade theory. For every dollar of oil that American buys from Canada, we get $.50 back in trade.” In trade terms, this would make bitumen – already a low-cost petroleum resource – an even greater bargain.

“Petroleum is part of the world market,” he added. “We don’t have any illusions about whether oilsands oil will be exported. You guys (Canadians) are going to produce it, and to do that you have two choices. You can send it to the Pacific, or you can send it to the US. And if you send it to the US we can either use it to offset CO2 emissions or not. If you send it to China, they do not have the technologies and systems to use oil to offset CO2 emissions.”

The two academics believe the new pipeline from Cushing to the Gulf will take care of the problem of Canadian oil being bottled up. “The logical thing for Canadians to do is shift their oil to the Gulf coast and from there ship it out as finished fuel.”

Clean Coal?
“If (American governments) put these regulations into effect now, while the price of natural gas is low, they won’t disrupt the power generation industry.” Asked about the impact social policy would have on the coal industry, he said “I hate to put an entire industry out of business, and I wish that coal were clean, but it’s not.” Brito added, “We had to stay inside our area of expertise. Coal mining is simply not one of them. In our paper we couldn’t deal with those issues.”

More than 40% of electricity generation in the United States comes from coal-fired plants, and power utilities buy more than 90 percent of the country’s coal production. Converting electricity generation to natural gas is therefore not exactly a message the powerful coal lobbies in Washington want to hear. Just ask media vice president for the American Coalition for Clean Coal Electricity Lisa Camooso Miller. She worries that converting to other fuels would increase the price of electricity, disproportionately affecting the poor. Nor does she want to see jobs lost.

“We’re committed to ensuring that the future is a clean one, which is why the U.S. power industry invested more than $100 billion in clean-coal technology, reducing emissions by 90 percent in the last 30 years,” according to Miller. “Investments in clean coal technology will provide for the continued use of affordable and abundant coal as an energy source for America.” She added, “It’s important for this country to have a balanced energy portfolio.”

However, clean coal technologies essentially refer to advancements in reducing sulphur dioxide (SO2), nitrogen oxides (NOx), mercury and particulate matter discharges while burning coal. They do not reduce carbon emissions.

The coalition’s website refers to “the coal-based electricity sector’s work to develop and deploy new technologies to capture and safely store CO2 is also evidence of the industry’s commitment to expanding the use of advanced clean coal technologies.” However, it is worth noting that the only large-scale sequestration operation using carbon emissions from an American power plant takes place at the Weyburn field in southern Saskatchewan – an enhanced oil recovery project operated by Cenovus.

Although clean coal methods for removing sulphur, mercury and acids “work okay,” Bob Curl suggested that “schemes for sequestering carbon dioxide are fantasies.” Rather, America urgently needs regulation to “mitigate carbon dioxide sources.” Noting that coal is best understood through chemistry and thermodynamics, economist Bob Brito contends that with present technology there is no such thing as clean coal.

Concerned that a coal-to-liquids fuel industry could rapidly expand, resulting in greatly increased emissions, Curl and Brito believe the United States needs to reallocate resources within the economy in a way that is not likely to occur through market forces – regulation. “Further action will be required to offset carbon dioxide from alternative fuel sources.”

“Two things drove this paper,” Brito added. “One of them was the energy security of the United States. Having Canada right next to us is like having Saudi Arabia next door, except that it’s a Saudi Arabia which respects human rights.” The other was their concern about carbon dioxide emissions, and how that will affect the global environment. “When we looked at the numbers for different nations producing carbon dioxide, it was very clear that the Chinese were just running away with it. If the Chinese go to the same level of per capita CO2 generation that we have in the United States, that alone will increase global CO2 emissions by 50%.”

Briefly put, the two men were thinking globally and acting locally. Convinced that carbon emissions must not get out of control, they developed ideas that would influence emissions in the United States, the world’s second-largest emitter. That sounds like the best place to start.

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