Hui Shan

Job Steward at NrgEdge. If you are an Energy Professional (Oil, Gas, Energy) contact me for opportunities
Last Updated: November, 12 2018 02:01:25 AM
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Renewable Energy
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Due to shortage or limited availability of oil and gas, companies today are evaluating how they can harness alternative energy sources. The alternate fuel market is targeting hydro and thermal power plants, however solar and wind are catching up fast as preferred energy sources. There are still reservations about nuclear energy considering the risk of nuclear waste or manufacturing of nuclear weapons. However, strategies are shaping up to minimize the risk and maximize the profitability potential. Until then, sources such as solar and wind are being focused upon more and new sources like biofuels are explored extensively.

How will the shift towards alternate energy impact traditional oil and gas market?

There have been huge investments in the different alternate energy avenues by most of the big oil majors. These heavy investments on various alternate technologies by big oil majors and other oil companies around the world indicates a positive outlook towards the scope of clean fuel energy. However, the feasibility of its application is still questionable. Whether or not it will be able to meet the energy needs of the world while upholding its profitability is a question that is bothering the world.

Let us understand what the shift means for the companies in the energy sector.

Rate of employment

Among all renewable energy sources that have been studied, bio energy has been most influential. The fuel is created and transported within a confined space. The work is extremely labor-intensive and hence scope of employment increases. Hydropower and wind power will generate job opportunities during construction and project development phase. However, once the unit is commissioned only few operational staff will be required to perform the operational work. 

Enhanced cost-efficiency

Traditional energy is more expensive than renewable energy. If renewable energy can be produced on large scale, it can eliminate the gas shortage. Even other forms of renewable energy are much cheaper in comparison to traditional oil and gas sector. The cost benefits will be transferred to the consumers and they’ll be able save considerable amount on utility bills.

Improved Brand Image

It makes good business sense to make a move from traditional energy resources to renewable ones. The environmentalists have been arguing about the negative impacts of using and overusing the non-renewable source of energy. The shift towards alternate energy will boost the brand image of the traditional oil and gas company.

Higher market penetration and Mass access to energy 

Due to dependence on fossil fuels which are non-renewable sources and expensive, a significant number of people in the world have no access to power. A chunk of people in Asian and Sub-Saharan Africa area are still using traditional biomass for cooking. However, if the alternate energy can completely replace the traditional oil and gas then it will have a deeper penetration into the market and majority of people will have access to it.

Ethical Investment Avenue

Renewable sector is considered as an attractive and ethical investment avenue for the ones who wish to invest outside traditional channels and are futuristic in outlook. The rising investment on alternate energy is impacting the job creation and community cohesion, which is again a positive move.

How the alternate energy is transitioning the oil and gas?

Big oil companies and other oil companies are making practical, well-researched, and steady approach towards renewable energy spanning from solar panels to genetically engineered algae. However, there are still many companies which are in research/experimentation phase and do have a concrete plan in place.

The pathway to clean fuel technology that operates with efficiency and profitability is getting paved. More than 100 countries in developing as well as developed nations have set a clean fuel target and are working towards it. The European Union has set a goal to meet its 20% energy requirements via renewable sources by 2020.

The world has acknowledged climate change and are working together to shift from carbon-intensive to carbon-neutral environment which might pave the way for generations to come.

Renewable energy Energy sector Oil and Gas
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In 2018, the United States consumed more energy than ever before

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Primary energy consumption in the United States reached a record high of 101.3 quadrillion British thermal units (Btu) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. The increase in 2018 was the largest increase in energy consumption, in both absolute and percentage terms, since 2010.

Consumption of fossil fuels—petroleum, natural gas, and coal—grew by 4% in 2018 and accounted for 80% of U.S. total energy consumption. Natural gas consumption reached a record high, rising by 10% from 2017. This increase in natural gas, along with relatively smaller increases in the consumption of petroleum fuels, renewable energy, and nuclear electric power, more than offset a 4% decline in coal consumption.

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Petroleum consumption in the United States increased to 20.5 million barrels per day (b/d), or 37 quadrillion Btu in 2018, up nearly 500,000 b/d from 2017 and the highest level since 2007. Growth was driven primarily by increased use in the industrial sector, which grew by about 200,000 b/d in 2018. The transportation sector grew by about 140,000 b/d in 2018 as a result of increased demand for fuels such as petroleum diesel and jet fuel.

Natural gas consumption in the United States reached a record high 83.1 billion cubic feet/day (Bcf/d), the equivalent of 31 quadrillion Btu, in 2018. Natural gas use rose across all sectors in 2018, primarily driven by weather-related factors that increased demand for space heating during the winter and for air conditioning during the summer. As more natural gas-fired power plants came online and existing natural gas-fired power plants were used more often, natural gas consumption in the electric power sector increased 15% from 2017 levels to 29.1 Bcf/d. Natural gas consumption also grew in the residential, commercial, and industrial sectors in 2018, increasing 13%, 10%, and 4% compared with 2017 levels, respectively.

Coal consumption in the United States fell to 688 million short tons (13 quadrillion Btu) in 2018, the fifth consecutive year of decline. Almost all of the reduction came from the electric power sector, which fell 4% from 2017 levels. Coal-fired power plants continued to be displaced by newer, more efficient natural gas and renewable power generation sources. In 2018, 12.9 gigawatts (GW) of coal-fired capacity were retired, while 14.6 GW of net natural gas-fired capacity were added.

U.S. fossil fuel energy consumption by sector

Source: U.S. Energy Information Administration, Monthly Energy Review

Renewable energy consumption in the United States reached a record high 11.5 quadrillion Btu in 2018, rising 3% from 2017, largely driven by the addition of new wind and solar power plants. Wind electricity consumption increased by 8% while solar consumption rose 22%. Biomass consumption, primarily in the form of transportation fuels such as fuel ethanol and biodiesel, accounted for 45% of all renewable consumption in 2018, up 1% from 2017 levels. Increases in wind, solar, and biomass consumption were partially offset by a 3% decrease in hydroelectricity consumption.

U.S. energy consumption of selected fuels

Source: U.S. Energy Information Administration, Monthly Energy Review

Nuclear consumption in the United States increased less than 1% compared with 2017 levels but still set a record for electricity generation in 2018. The number of total operable nuclear generating units decreased to 98 in September 2018 when the Oyster Creek Nuclear Generating Station in New Jersey was retired. Annual average nuclear capacity factors, which reflect the use of power plants, were slightly higher at 92.6% in 2018 compared with 92.2% in 2017.

More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

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April, 17 2019
A New Frontier for LNG Pricing and Contracts

How’s this for a first? As the world’s demand for LNG continues to grow, the world’s largest LNG supplier (Shell) has inked an innovative new deal with one of the world’s largest LNG buyers (Tokyo Gas), including a coal pricing formula link for the first time in a large-scale LNG contract. It’s a notable change in an industry that has long depended on pricing gas off crude, but could this be a sign of new things to come?

Both parties have named the deal an ‘innovative solution’, with Tokyo Gas hailing it as a ‘further diversification of price indexation’ and Shell calling it a ‘tailored solutions including flexible contract terms under a variety of pricing indices.’ Beneath the rhetoric, the actual nuts and bolts is slightly more mundane. The pricing formula link to coal indexation will only be used for part of the supply, with the remainder priced off the conventional oil & gas-linked indexation ie. Brent and Henry Hub pricing. This makes sense, since Tokyo Gas will be sourcing LNG from Shell’s global portfolio – which includes upcoming projects in Canada and the US Gulf Coast. Neither party provided the split of volumes under each pricing method, meaning that the coal-linked portion could be small, acting as a hedge.

However, it is likely that the push for this came from Tokyo Gas. As one of the world’s largest LNG buyers, Tokyo Gas has been at the forefront of redefining the strict traditions of LNG contracts. Reading between the lines, this deal most likely does not include any destination restriction clauses, a change that Tokyo Gas has been particularly pushing for. With the trajectory for Brent crude prices uncertain – owing to a difficult-to-predict balance between OPEC+ and US shale – creating a third link in the pricing formula might be a good move. Particularly since in Japan, LNG faces off directly with coal in power generation. With the general retreat from nuclear power in the country, the coal-LNG battle will intensify.

What does this mean for the rest of the industry? Could coal-linked contracts become the norm? The industry has been discussing new innovations in LNG contracts at the recent LNG2019 conference in Shanghai, while the influx of new American LNG players hungry to seal deals has unleashed a new sense of flexibility. But will there be takers?

I am not a pricing expert but the answer is maybe. While Tokyo Gas predominantly uses natural gas as its power generation fuel (hence the name), it is competing with other players using cheaper coal-based generation. So in Japan, LNG and coal are direct competitors. This is also true in South Korea and much of Southeast Asia. In the two rising Asian LNG powerhouses, however, the situation is different. In China – on track to become the world’s largest LNG buyer in the next two decades – LNG is rarely used in power generation, consumed instead by residential heating. In India – where LNG imports are also rising sharply – LNG is primarily aimed at petrochemicals and fertiliser. LNG based power generation in China and India could see a surge, of course, but that will take plenty of infrastructure, and time, to build. It is far more likely that their contracts will be based off existing LNG or natural gas benchmarks, several of which are being developed in Asia alone.

If it takes off  the coal-link LNG formula is likely to remain a Asian-based development. But with the huge volumes demanded by countries in this region, that’s still a very big niche. Enough perhaps for the innovation to slowly gain traction elsewhere, next stop -  Europe?

The Shell-Tokyo Gas Deal:

Contract – April 2020-March 2030 (10 Years)

Volume – 500,000 metric tons per year

Source – Shell global portfolio

Pricing – Formula based on coal and oil & gas-linked indexes

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