Everyone's so excited about Japan's successful extraction of natural gas from methane hydrates trapped in crystalized formation under the sea floor. The headlines are certainly promising, and we've had numerous requests to delve into the subject for our premium subscribers.
I usually like to outline new opportunities, but this time I see more risk than reward: we've known about these methane hydrates for a long time; It's too expensive; the infrastructure requirements are massive; the technology for commercial extraction is too far way; and the environmental impact is a very dangerous unknown. This may be the stuff of the future, but a future that is too distant to attract enough investment outside of countries like Japan, which is desperate enough to make it work and willing to spare no expense to achieve commercial viability.
Earlier this month, Japan successfully extracted gas from a layer of methane hydrates 1,000 feet below the seabed in the Eastern Nankai Trough. To do this it lowered an excavator to the seafloor about 1,000 meters below the surface where it separated solidified methane hydrated into water and natural gas and then transported the gas up to the surface.
Methane hydrates are crystalized water molecules containing methane, which is the key element in natural gas, and they are prevalent beneath the seafloor and underneath Arctic permafrost. This methane is the result of the action of methanogenic bacteria on sediment over thousands…
Everyone's so excited about Japan's successful extraction of natural gas from methane hydrates trapped in crystalized formation under the sea floor. The headlines are certainly promising, and we've had numerous requests to delve into the subject for our premium subscribers.
I usually like to outline new opportunities, but this time I see more risk than reward: we've known about these methane hydrates for a long time; It's too expensive; the infrastructure requirements are massive; the technology for commercial extraction is too far way; and the environmental impact is a very dangerous unknown. This may be the stuff of the future, but a future that is too distant to attract enough investment outside of countries like Japan, which is desperate enough to make it work and willing to spare no expense to achieve commercial viability.
Earlier this month, Japan successfully extracted gas from a layer of methane hydrates 1,000 feet below the seabed in the Eastern Nankai Trough. To do this it lowered an excavator to the seafloor about 1,000 meters below the surface where it separated solidified methane hydrated into water and natural gas and then transported the gas up to the surface.
Methane hydrates are crystalized water molecules containing methane, which is the key element in natural gas, and they are prevalent beneath the seafloor and underneath Arctic permafrost. This methane is the result of the action of methanogenic bacteria on sediment over thousands of years. The methane is kept in an ice form where appropriate combinations of temperature and pressure exist.
Japan's waters are estimated to hold enough methane hydrates to supply the country with natural gas for a century. The Nankai Trough alone could supply Japan for several decades.
Extracting methane hydrates and then converting this into natural gas is an expensive long shot, but Japan is willing to take the gamble because it doesn't have any other fossil fuels to speak of. Still, the Japanese think they are only five years away from commercial extraction of natural gas from methane hydrates.
This is the headline news: If Japan can extract natural gas from methane hydrates in a commercially viable way then we're looking at another global revolution because there's barely a corner of the world where they can't be found. According to the US Geological Survey, we're looking at a global methane hydrates volume that could contain between 10,000 and 100,000 trillion cubic feet of natural gas.
This is the reality: commercially viable reserves are probably only a fraction of traditional oil and shale gas reserves.
The US is also funding over a dozen research projects and has had one semi-successful test-run in Alaska.
Here's the timeline of what's been done so far:
• 2002: A Japanese research consortium conducts its first methane hydrate production tests in Canada in the MacKenzie Delta at a BP-Chevron joint venture project
• 2008: The Japanese consortium and BP-Chevron develop a partnership with Canadian and US government research institutions and Germany and India successfully sustain a 6-day methane production test using depressurization; high costs hinder further efforts at seafloor extraction
• 2008: China rolls out $100 million in funding for research into methane hydrate extraction
• 2010: Norway's University of Bergen develops the CO2 injection and exchange method for methane extraction
• 2011: Japan's JOGMEC and ConocoPhillips partner with the US Department of Energy for CO2 injection testing in Alaska's North Slope, with initial successful results released in mid-2012
• 2012: Japan's JOGMEC begins its first offshore methane hydrate-extracted gas production testing in the Nankai Trough
• 2012: Norway's Statoil publishes a study concluding that methane hydrates are a major energy resource for the future
• 2012: BP signs agreements with the US Department of Energy for additional depressurization testing
• 2012: Germany's IFM-GEOMAR-SUGAR consortium announces plans to begin field productions tests in 2015
• 2013: Japan successfully extracts its first natural gas from methane hydrates
• 2013: India announces plans to begin extraction of methane hydrates in the Bay of Bengal before the end of the year, estimating 1,900 trillion cubic meters of methane-hydrate-trapped natural gas
The Technology Spread
All the necessary technology exists, but it's too expensive to use, and the only currently feasible technology carries too many environmental risks.
The existing technology is depressurization:
This is the one everyone's banking on for now in terms of commercial viability. It's the technology that Japan is using, and the same technology used in Canada in 2007-2008.
The process is to drill a well bore into the hydrate and remove the water from the formation to reduce the pressure on the methane hydrate. Typically this requires destabilizing the hydrate using a chemical mixture, which breaks the hydrate down into water and gas that is pumped out of the formation. The intention is to spark a chain reaction with the low pressure causing adjacent hydrates to decompose into water and gas and thus cause a "flow" throughout the formation.
The future technology is CO2 injection:
This is a new process that involves injecting warm, pressurized CO2 into the methane hydrate formation in an exchange that would form a stable lattice and liberate the methane to pump it to the surface. What makes this technology more promising is that it sequesters unwanted industrial CO2 while at the same time maintaining the integrity of the methane hydrate formations during the extraction process. We're not there yet, however. The technology is being tested in Alaska as of early last year and we don't have the results yet.
Environmental Considerations
While the Japanese are keen to talk about the environmental advantages of using natural gas from methane hydrates, that is a bit of a misnomer. Natural gas is cleaner than other fossil fuels, but the extraction process is definitely not: there's a lot of carbon trapped inside these methane hydrates, and that would be released during the extraction process. It's more carbon than is released during the extraction of any other natural gas resource.
The trick is in the drilling, and ensuring that drillers don't let the trapped methane leak, which would be an extremely potent greenhouse gas emission. There is already concern about methane hydrates leaking by natural means when they bubble up to the surface as the Earth warms and as permafrost melts. Drilling could compound this exponentially.
And there is a rather frightening precedent here: during the Paleocene-Eocene Thermal Maximum period there was 150,000 years of carbon from methane hydrates released from the seafloor blanketing the Earth and causing radically high global temperatures. This wasn't the kind of extinction on the scale of an ice age, but it significantly altered the diversity of species.
On an environmental level, there is talk of a trade-off. Natural gas is cleaner to burn, for instance, than coal. What everyone wants to know, then, is if the potentially disastrous commercial extraction of natural gas from methane hydrates could entirely replace coal-burning and thus at least balance out the climate equation.
As always, there are divergent opinions on the potential environmental impact. One term that has gained a lot of attention is "runaway reaction"--a situation in which entire deposits of methane hydrates could lose their solid form and release large amounts of methane. This could cause vapor clouds or a loss of surface tension on the ocean right above the release. It would be powerful enough to sink any vessels in the vicinity. Can we control this release? No one's sure.
Some scientists believe that the potential here is for this runaway reaction to basically swallow up any drilling rigs above it. Others believe that hydrates would naturally reform into solids making it impossible to achieve a runaway reaction.
The environmental concerns are mostly surrounding the depressurization technique. CO2 injection techniques could make this more promising precisely because they leave the hydrate intact as a solid. It's not an elixir, but it could end up being about the same amount of environmental risk as conventional hydrocarbon extraction.
Fire Ice: The Cost Equation
Here we need to look at some comparisons: 100,000 trillion cubic feet of natural gas from methane hydrates is a staggering amount-this is double the size of all known fossil fuel reserves combined. US shale reserves, for instance, contain about 827 trillion cubic feet of natural gas. As we noted earlier, it is only likely that a small amount of this is actually commercially viable. There is the opinion, however, that extraction even on a small scale could still be a significant contribution to global natural gas reserves.
Methane hydrates are buried under up to hundreds of feet of mud and stone. The extraction process requires much greater expense and effort than that associated with extracting tight natural gas resources like coal-seam methane and shale. It's so expensive that there is absolutely no reason for anyone to even attempt its extraction.
The infrastructure would also have to be built from scratch. Methane hydrates are spread out quite widely, and thus the infrastructure to extract, separate and process would have to be massive. There's just not enough space concentration here. Only a floating infrastructure would be viable. And while theoretically it would be possible to convert existing and planned floating LNG facilities to handle methane hydrate procedures, we're just getting underway with these LNG facilities and converting them would require billions in investment which it's just too early to risk.
Waiting on Japan
Necessity is the foundation of innovation, and here we must watch Japan closely. It's the only country pursuing this full-on because it lacks less expensive alternatives and has the political will to foot the bill. While the US and Canada are working on technological development to this end, the real impetus is in Japan.
Methane hydrates, stable under low temperatures and high pressure, can disintegrate when removed from those conditions. Right now, Japan is continuing the experiment to determine whether stable production can be reached in the Eastern Nankai Trough, which it estimates holds some 40 trillion cubic feet of methane hydrates.
The government plans to continue the experiment over the coming month to see if stable production can be achieved. We're not there yet. Japan has extracted natural gas, but the production span was short. Still, no expense is being spared to achieve commercial viability.
Bottom Line: This may be a massive opportunity, but it is definitely a massive risk. The technology to ensure safe, commercial extraction isn't there yet, and Japan's (and to a lesser extent India and China's) need is the only thing really spurring this along.
For investors, these are very early days-too early to calculate any meaningful risk-reward scenario. It's also important to note that the presence of methane hydrates is nothing new: this isn't a "discovery"-we've known of their existence and potential for some time. The news is that Japan is desperate.
For now, follow Japan's progress and research that is being conducted by the University of California (Irvine), which has received substantial funding to research the environmental impact of extracting natural gas from methane hydrates. Right now, this team is trying to determine whether it is possible to burn the methane hydrates directly on the seafloor and then trap the carbon dioxide within the crystalized formation using an in situ process. They're not close-yet-but this is the tech to watch. If this proves successful then we can talk about moving forward.
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