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Energy Economics and Technology
February 2001
The Energy Minerals Division provides a forum for AAPG members to address developments in mineral and energy economics and in fuels supply and utilization technology. These are closely related. Great discoveries of fossil fuels can lead almost overnight to vast changes in nations' patterns of fuel use - a good example is the exploitation of natural gas and minimization of coal-fired electricity in the United Kingdom following the discovery and development of natural gas in the North Sea. This is a pattern that is being repeated in many parts of the world.
The intertwined manner in which geology, mining technology, transportation systems, politics and coal utilization technology come together to influence the structure of a nation's energy infrastructure and its economic benefits is well illustrated by the story of coal in the U.S. Powder River Basin (principally in Wyoming).
The U.S. Powder River Basin Coal Era - A Case Study. Growth in utilization of Powder River Basin (PRB) subbituminous coal is one of the most significant changes to take place in the supply and economics of electricity over the past twenty years. The development of a significant mining industry in the Powder River Basin began in the 1970s, responding primarily to the need for new power plants to serve the demographic shift and population growth in the southwest United States. Use of this coal was spurred by its favorable SO2 characteristics under tightening emission standards. The unique geologic setting of these coals had a lot to do with the ultimate market reach that the PRB has attained - namely, extraordinarily thick seams accessible by surface (or open-cast) mining. The adoption and refinement of high-productivity earth-moving technology led to unheralded productivity gains, year-after-year in this region. A further technological revolution of sorts took place in the transportation of coal combined with the adoption of more efficient business practices in coal transportation. This lowered the transportation cost considerably. Together, energy could be delivered to distant locations at costs low enough to displace local alternatives. This became a bonanza for companies able to take advantage of it, and over time led to progressively lower electricity costs. The obstacles to using subbituminous coals did not crumble overnight, since its combustion characteristics are quite different from much hotter coals. Yet the lure of lower overall production costs promoted testing, blends and other practices that ultimately led to a far more widespread use of full or partial blends of this coal than had ever been imagined possible. The implications of this shift from one source to another source of coal are far-reaching, affecting not only the cost of electricity to consumers but also the competitive hurdle faced by other potential sources of generation.
The preceding story suggests that where there is a will (to take advantage of fossil fuel supply whose characteristics stand out on a global scale), people will find a way. Yet technology may also drive changes in the other direction.
Natural Gas-Fired Generation - From Shortage to Plenty to Uncertainty. A second story concerns the wild swings in the fuels used for power generation in the U.S., and natural gas specifically. In the late 1970's, an extremely cold winter revealed a shortage in natural gas that had consequences for almost twenty years. Forced to route available supplies to essential uses, the U.S. government enacted provisions to restrict the use of natural gas in large new power plants. At the same time, the government provided incentives for new companies to build smaller power plants of almost any type, including natural gas, thereby setting into motion the "independent power" industry. (The incentives proved to be overly lucrative, and were gradually modified on a state by state basis.) Up until the late 1970s, quite a few plants in the gas-producing regions of the U.S. had been built to take advantage of very low cost natural gas. The price was regulated and set at such a low level that there was little incentive to explore for and develop natural gas, a contributing factor to the winter crisis. The price of natural gas was gradually deregulated, after a complex process that first only permitted prices within states to float, so that by the mid-1980s competitive regional markets natural gas supplies (its "commodity" cost) had been achieved. But the legacy of shortages was still on people's minds and the restriction on use of natural gas in large power plants remained in effect. A great deal of new thinking about the natural gas resource base began in the mid- to late-1980s, drawing in part on such concepts as "reserves growth" (the phenomenon by by which gas reserves in a heterogeneous reservoir had been shown to grow over time as untapped "compartments" were inevitably tapped) and on recognition of new types of deposits and deposits accessible under deeper waters. The government restriction on gas use was repealed, but at first very little came of this. Here is when a revolution in the technology of power generation began to change the economics of power based on natural gas in a manner that had never been contemplated. Borrowing from the advances in the engines used for aircraft, a new technology for using natural gas was the combustion turbine. Not dissimilar from the advances in mining technology in the Powder River Basin, for example, the combustion turbine went through a revolution in its cost and performance. When such a turbine is combined with the traditional "steam cycle" - the basic technology used in coal, natural gas and oil-fired power plants - greater overall efficiencies could be achieved than were ever thought possible. This helped insulate the proposition from potentially high natural gas prices. Equally important, the gas-based units could be built in much smaller sizes and much more quickly than coal plants. Coupled with their lower emissions, they became the system of choice for new generation in virtually all parts of the United States. Only after the summer and winter of 2000 in which U.S. natural gas prices have reached unprecedented and sustained high levels has the wisdom of such a growing reliance on a single type of generation - whose fuel cost can exhibit extraordinary volatility - begun to be questioned. Out of this questioning, different trends in national energy policy could well emerge, with implications for natural gas, coal, nuclear power and renewables.
Committee Objectives
The aim of the committee is to establish forums to investigate different aspects of the multifaceted and ever-changing energy business. EMD cosponsored and organized two sessions at the annual meeting in 1999. One dealt with the electric industry restructuring, implications for trends in the use of natural gas, who was doing what to whom on the merger and power plant acquisition front, and how the transmission of power operates (and contrasts from natural gas transmission over pipelines). The second dealt with stranded gas - gas too far from market to support a pipeline - and the types of technology that can be used to convert natural gas at wellsite to electricity for agricultural and other uses. Members of AAPG are encouraged to take advantage of the opportunity provided by EMD's mandate to explore topics in energy economics and technology that they'd like to know more about. The committee provides an avenue within the AAPG setting for investigating topics that may have a direct or indirect impact on one's business. The United States in particular is currently experiencing a broad natural gas crisis and, in some regions, an acute electricity crisis. These events, viewed in the context of the wide swings in technology, politics and regulations, and geologic knowledge that have taken place over the past 20 years or so may not appear as surprising as they are sudden. The committee has an opportunity to play an especially active and relevant role as the country grapples with formulating a new national energy strategy. Yet the drama taking shape in the United States is not unique, and the committee also encourages international members to organize forums on similar topics. Cross-communication would do much to broaden all of our perspectives.
Jeremy Platt, February 17, 2001