Commerciality Of Hydrate

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Will hydrate be economic?, and, When will hydrate be economic?, with respect to the extraction of methane. Although these are valid questions, there is neither a simple nor a single answer. Although there are world oil prices for different types of natural petroleum, the cost of methane varies from place to place. There are two reasons for this. Firstly, in countries that do not have indigenous gas supplies, the price of gas is the delivered or landed price, which is usually in the form of Liquid Natural Gas (LNG) if no pipeline transport is possible. Secondly, some countries, such as the United States, have low taxes on energy while other countries, for instance in Japan and the European Union, have high taxes. Thus, not only does the floor price of gas vary from country to country, but the cost to consumers varies considerably.

For methane from hydrate to compete on a price basis, it must meet different cost tests in different countries. In North America there are considerable natural gas supplies, and the base price of gas is relatively inexpensive (Table 1). In Japan, however, virtually all natural gas is imported (Chapter 18), and the base price, which is the landed cost of LNG, is higher. The retail price of gas in Japan is extremely high (Table 2), largely to reduce the demand for gas.

Cost Factors

Methane from Hydrate

Conventional gas

Thermal injection

Depressurization

Investment (M$)

5,084

3,320

3,150

Annual cost (M$)

3,200

2,510

2,000

Total production

(MMcf/year)**

900

1,100

1,100

Production cost

($/Mcf)

3.60

2.28

1.82

Break-even wellhead

price ($/Mcf)

4.50

2.85

2.25

Table 1. Economic study of gas hydrate production after MacDonald (1990) National Petroleum Council (1992), and Collett (1998) for the North Slope of Alaska. * Assumed reservoir properties: h=25 ft, (=40%, k=600 md; ** Assumed process: injection of 30,000 b/d of water at 300 F. Thermal injection involves melting hydrate with hot fluid; depressurization involves lowering gas pressure to induce hydrate dissociation (Chapter 10).

Table 1. Economic study of gas hydrate production after MacDonald (1990) National Petroleum Council (1992), and Collett (1998) for the North Slope of Alaska. * Assumed reservoir properties: h=25 ft, (=40%, k=600 md; ** Assumed process: injection of 30,000 b/d of water at 300 F. Thermal injection involves melting hydrate with hot fluid; depressurization involves lowering gas pressure to induce hydrate dissociation (Chapter 10).

Cost Item

U.S. $ per Mcf

U.S. Futures Price*

1.90-3.00

**U.S. 2Q 2000

4.00+

Japan, LNG imported

3.50-4.50

Japan, Industrial

15.00

Japan, Residential

35.00

Table 2. Comparison costs of methane gas. LNG, Liquid Natural Gas; Mcf, thousand cubic feet. (Collett, 2000, pers. comm.). *1998-1999. ** 2nd Q 2000.

Table 2. Comparison costs of methane gas. LNG, Liquid Natural Gas; Mcf, thousand cubic feet. (Collett, 2000, pers. comm.). *1998-1999. ** 2nd Q 2000.

Hydrate production cost projections for the North Slope of Alaska, and by inference hydrate in the Mackenzie Delta area of Canada (Table 1), appear to lie in the commercial range now, although this is a recent development caused by the rising price of gas. The price of gas is liable to increase because indigenous conventional gas from the U.S., Mexico, and Canada (Alberta) will not be able to supply U.S. gas needs by 2005 to 2010 (T. Collett, pers. comm.). Profit margin issues, however, may dictate that conventional gas will be extracted before the higher cost production from hydrate is obtained on a large scale, which would have the effect of delaying methane extraction from hydrate. However, development of permafrost hydrate resources could be profitable soon, but at a lower profit margin than conventional gas.

The hydrate deposits of Japan occur offshore (Chapters 6, 18) and no production cost estimates are publicly available. Nonetheless, the concentrated hydrate deposits offshore Japan occur near shore in relatively shallow water under conditions that are favorable for methane recovery (Max and Dillon, 1998). It is likely that production costs of these Japanese resources can be kept relatively low. Methane from these Japanese hydrate deposits could be commercial there before it is economically feasible in North America because the costs and pricing will allow the maintenance of relatively high profit margins and tax returns. There is also a lack of indigenous gas and a political imperative to become energy independent if possible.

Japan will almost certainly continue to develop its hydrate resources and produce gas as soon as it can. Some displacement of imported gas supplies could take place within a 4 to 5 year time frame, with significant displacement of imported supplies in a 5 to 10 year time frame. The aim of energy independence is a future goal. India and other countries may also choose to develop their hydrate resources for their own monetary, economic, political, or environmental reasons because any methane they recover will not involve large-scale outflow of petrocurrency. In North America and elsewhere where gas can be transported by pipeline from conventional gas fields, commercial development of hydrate is probably further in the future (Chapters 10, 26), on the order of 25 to 50 years. Energy security or development of hydrate to displace other fuels such as coal and oil on an environmental basis, however, may prove to be more influential - perhaps because of government regulation -than a simple cost comparison. This could cause a telescoping of the worldwide development of hydrate resources into a much nearer term regime.

4. EMERGENCE OF GAS HYDRATE AS A POTENTIAL METHANE RESOURCE

Until recently the very existence of natural hydrate was one of nature's closely held secrets. And it has only been in the last several years, culminating with the Offshore Drilling Program (ODP) leg 164 (referred to in papers in this volume, e.g., 7, 11, 22 & 24), that a quantitative data set has been acquired from direct sampling and measurement. The magnitude of the potential methane hydrate resource is apparently huge.

In terms of the likelihood of commercialization, it is often instructive to examine the overall size of a potential resource or economic target and the percentage of the total which would constitute an economic target. Estimates of the Indian hydrate system resource, for instance (Chapter 17), are made on the basis of volume of hydrate per % likelihood of recovery from the total estimate. As an example, if the statistically derived figure for the volume of methane in gas hydrate within the U.S. EEZ of 200,000 Trillion Cubic Feet (TCF) proves to be near reality (and it is the best technical estimate at present), then an economic target of 1% of the resource would be 2,000 TCF.

This figure is about equivalent to 80 years supply at an average consumption of 25 TCF (current U.S. usage is about 22 TCF [U.S. Department of Energy]). An economic target of only 5 % of the estimated U.S. EEZ resource, which is the greatest statistical probability used in evaluation of the Indian resource (Chapter 17), would result in a U.S. supply of about 400 years of natural gas. At an economic target of 10%, gas could displace most other energy sources for a considerable period of time. Because the initial resource appears to be so large, achieving recovery of only a small part of the methane from hydrate would appear to be relatively rewarding, not only on a year-by-year commercial basis, but for the energy security of the U.S. and indeed any country with potential hydrate resources.

A commercially successful strategy for methane production from hydrate, particularly oceanic hydrate, does not yet exist. Indeed, both positive and negative oceanic hydrate resource evaluations have been published. Yet gas hydrate (presumably mainly methane) volume estimates of from 5% to over 80% of pore fill of large volumes of marine sediments have been recognized, and this is encouraging for the eventual development of a hydrate methane resource.

There remain many basic research issues to be resolved prior to the potential exploitation of methane gas from hydrate. We know very little about the naturally occurring material itself (Chapter 25) and how it forms in sediments (Chapter 20). The nature of fluid flow in deep water marine sediments (Chapter 9) is very imperfectly known and vital to reservoir characterization. Current production knowledge based upon conventional gas reservoir performance almost certainly does not describe the conditions of oceanic hydrate deposits.

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