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Strategic Advisors

Fossil fuels vs. Biofuels the give and take dance: natural gas transmission to transesterification

Fossil fuels vs. Biofuels the give and take dance: natural gas transmission to transesterification

Discusses the balance between fossil fuels and biofuels and how they relate to each other in the energy market. Important to understand for the purposes of base load versus peak load sourcing and Renewable Portfolio Standards.

A Long History with the Natural Gas Industry to a New Future with Shale Gas Formations

I’ve been involved as an investor and analyst in the natural gas industry since 2005, and have witnessed the beneficial application of technology in the industry lead to substantial economic changes in the industry.  Hydraulic fracturing and horizontal rig technology applied to non-conventional natural shale gas formations like the Marcellus, Barnett, Bakken and Haynesville have led to significant growth in upstream and downstream economic activity in several North American regions.   Advances in technology have lead to gas that was discovered, but considered non-exploitable coming to market in massive quantity, so much so that the Henry Hub spot price of natural gas has this year dipped to an all-time low below $3/MMBtu ($2.96, 12/31/11).


In 2003 and 2004, the known natural gas reserves in the Marcellus Shale were largely considered unrecoverable.  At the end of 2011, in a span of just 7 years, at least 8 major integrated oil and gas firms were actively bringing Marcellus gas to market.   Technological innovation and research, coupled with beneficial market economics made the unachievable possible, in less than a decade.


Energy Past, Present, and Future

In 2012, similar dynamics are at play in the renewable fuels and biorefining sector.  Active research and partnership, spurred by the 2007 Energy Independence and Security Act, is occurring to test and develop commercially viable renewable fuel integrated operations.   Innovation is rapidly occurring is several areas, including cellulosic biofuel sourcing, refining optimization, and genetic engineering of organisms to better support large-scale commercial biorefining operations.   Several large-scale (and publically traded) commercial biorefineries will come online in 2012, perhaps establishing some economic credibility in the biorefining sector.


The US EPA envisions 18.7 billion gallons of fuel from biological, non-fossil sources coming online in 2012.  Much of this potential capacity has already been contracted out to existing old-guard integrated oil operations like Chevron, BP and Shell, to the US Navy, and to the aviation industry (Alaska Air, United and American Airlines).

Despite the rapid innovation, the economic support to the biofuels industry has been nascent and sporadic.  This is understandable, given two factors:


1. The current massive supply of natural gas and resultant low prices forecast substantial price declines in Natural Gas Spot rate in the near-term future





2. The fact that biofuels have not been produced on large commercial scale, outside of demonstration facilities to this point


Because of the above factors, in addition to others, transition from a fossil-fuel based global energy economy to a biofuel based economy will be a slow give-and-take dance, dependent on global governmental support, liquidity in the financial markets, and the price dynamics at play in the oil and gas market.


It’s going to be a dance that plays out over decades, and the reality is that biofuels and fossil-fuels are tightly coupled, and are not adversarial.   To successfully transition to a new energy future, biorefining will need the cooperation of the fossil fuels industry, and both will need to take joint, collaborative approaches to regulation, public relations and financing innovation.


There is still substantial potential for energy independence in the fossil fuels industry, particularly in the natural gas segment.  Natural gas will likely become a more predominant source of energy generation in the decades to come.  At the same time, research, partnership and cooperation with the biofuels industry will be necessary for the world to usher in a new energy future, while causing minimal disruption to industry.

I’m excited by the amount of activity in the natural gas sector, and equally as excited by the innovation and breakthroughs occurring in the biorefining sector.  There is a lot of new, pardon the pun, groundbreaking occurring in US shale formations, and the advances in the biorefining sector, are, to say the least, groundbreaking as well!


Our work aims to guide readers to the financial opportunity in both areas!



January 3, 2012

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