Falling Natural Gas Prices, Bio-Based Opportunity

Think that falling natural gas prices mean bad news for bio-based technologies? Don’t bet on it. Opportunity may be knocking, you just have to answer.

By JIM LANE, Editor & Publisher, Biofuels Digest

Jim LaneOn the chance that you were engaged in interstellar travel or cryogenically frozen over the past two years — U.S. natural gas prices and global oil prices have completely decoupled, for the first time in living memory. For a long, long time, a barrel of oil cost just around 10 times the cost of a million BTUs of natural gas or about 70 percent more on a BTU basis.

Today, a barrel of oil is available at 50 times the cost of a million BTUs of natural gas. In addition to oil prices rising, primarily as the result of Middle East tensions and rising demand from developing countries, there has been, in the U.S., a massive drop in natural gas prices owing to the impact of new technologies for liberating gas from shale.

For chemical plants that utilize natural gas as a feedstock, it means opportunity, and they have responded vigorously. Recently, Dow unveiled plans for a new $1.7 billion, 1.5 million-metric-ton steam cracker in Freeport, Texas, that will start producing ethylene in 2017, part of a $4 billion investment by the company in expanded U.S. production in response to falling feedstock prices.

Only last month, Shell announced a strikingly similar $2 billion project in Pennsylvania; Chevron Phillips (a joint venture of ConocoPhillips and Chevron) is planning a project in Texas; Formosa Plastics has announced a $1.7 billion project in Texas; and another liquid natural gas project was announced by Freeport Development. LyondellBasell and Occidental are also looking at major projects along the Gulf Coast.

Falling Feedstock Prices?

The catalyst for economic activity should be a watched carefully by bio-based growers, whose technologies currently are scheduled to produce liquid fuels and chemicals at prices competitive with anywhere from $30 to $100 oil. Nothing is scheduled to compete with $20 oil, which is where oil prices were the last time natural gas was available for $2 per MMBTUs, back in 2002.

Many have described the divergence between natural gas and oil as a temporary phenomenon that will return to equilibrium because of a slowdown in development of gas projects. But high oil prices encourage more drilling, and natural gas is a byproduct of those projects. Fully 75 percent of the increase in U.S. gas production this year is expected to be a consequence of increased oil drilling, according to Bloomberg Business Week.

The Key Takeaway

Processing technology investments follow cheap feedstock, and transformational processing technology is a liberator of value by unlocking low-cost feedstocks that were previously untappable.

That is one of the reasons why technologies from the likes of Enerkem, Terrabon, INEOS Bio and Fulcrum, which utilize zero-cost municipal solid waste, remain highly prized, and may push the Enerkem and Fulcrum IPOs over the finishing line this spring.

The problem there is the abundance of aggregated feedstock. Generally speaking, the projects contemplated by the developers range from 10 to 30 million gallons, and that is generally a function of the transportation cost for the feedstock, which generally must be brought in by truck, barge or rail.

For biofuels, we are reminded that feedstock yield intensification is an absolute must for expansion — both in providing lower overall costs (while providing sufficient return to the grower) and in providing larger concentrations of biomass that will make larger projects more feasible. Larger projects have lower technology costs — and attract more attention from end-use fuels and chemical companies who, on the whole, have been generally underwhelmed by the scale of proposed biofuels operations.

Are there other potential winners in the bio-based space from high oil prices and falling gas prices? What’s your take? Please feel free to comment below! Copyright 2012; Biofuels Digest