Assessing the Impact of the Diffusion of Shale Oil and Gas Technology on the Global Coal Market Frank A. Wolak Program on Energy and Sustainable Development (PESD) and Department of Economics Stanford University November 7, 2017
The US Shale Oil and Gas Boom Shale oil and gas technology is most economically important innovation in the energy industry in past 30 years Shale gas boom in US began around 2007 Shale gas production in US in 2007 (first year data was collected) was 1,300 billion cubic feet (BCF) Shale gas production in US in 2015 more 14,000 BCF or more than 50 percent of US dry gas production Shale oil boom in US began around 2010 US oil production was 5 million barrels (BBL) per day in 2008 US oil production was 10 million BBL per day in 2015
Coal: The World s Fastest Growing Fossil Fuel Growth in Global Energy Supply 2000-2012 in MTOE 1600 4.15% Millions of Tons of Oil Equivalents (Mtoe) 1400 1200 1000 800 600 400 200 0-200 Average annual growth rate from 2000 to 2012 2.64% 1.11% 2.81% 7.18% Coal Crude Oil Natural Gas Nuclear Hydro Geothermal, solar, etc. -0.42% Source: IEA, 2014 3
Sources of Global Coal Supply in 2014 in MTOE China is Coal Importer (approximately 5 percent of consumption)
Non-OECD Country Energy Consumption 1990-2012 in MTOE Low Cost Energy (Coal) Drives Economic Development in Non-OECD Countries 3500 3000 2500 Coal overtakes oil Mtoe 2000 1500 1000 Coal Crude Oil Natural Gas Nuclear Hydro Geothermal, solar, etc. 500 0
Real Fossil Fuel Prices in $/MMBTU 1997-2015 Daily Real BTU Prices by Fossil Fuel Source $ / MMBTU (Oct 2015 price)
Coal to Gas Switching in Electricity Sector 2001 to 2014 Increasing Role of Gas in US Power Sector Share of Total US Generation by Input Fuel 60% 50% 40% 30% 20% 10% 0% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Coal Gas Nuclear Hydro Renewables Other In April 2012, Coal provided 34% and Natural Gas 32% of Total US Generation
At same $/MMBTU price, natural gas-fired electricity is typically cheaper Average heat rate of coal-fired unit significantly larger than that for combined-cycle gas turbine (CCGT) unit Heat Rate = MMBTU of input fuel required to produce 1 Megawatt-hour (MWh) of electricity Average Heat Rate of coal unit could be twice that of CCGT generation unit Even if $/MMBTU price of coal is less than price of natural gas, economics could favor natural gas 12 MMBTU/MWh x $2/MMBTU coal = $24/MWh from coal 7 MMBTU/MWh x $3/MMBTU gas = $21/MWh from gas Variable O&M cost for coal > Variable O&M cost for gas $/MW of capacity cost for coal-fired power unit greater than $/MW of capacity cost for natural gas-fired unit
GHG Emissions Benefits of Coal-to-Natural Gas Switching Start of Rapid Growth in Shale Gas Production Most of reduction due to coal-to-gas switching
US Shale Oil and Gas Revolution and Global Coal Market Low natural gas prices in US have led to coal-to-natural gas switching in US electricity sector and reduced US GHG emissions Reduced US coal use, lowered US coal prices, which increased coal exports to Europe From 2009 to 2013 coal use in Europe increased and only recently it has begun to fall Coal consumption in Europe recently fell in part because of a significant decline in European natural gas prices due to reduction in global oil prices Coal consumption, particularly in developing world, remains strong
US Shale Oil and Gas Revolution and Global Coal Market Liquified natural gas (LNG) is marginal source of natural gas in continental Europe LNG price must recover cost of liquefaction at origin and cost of re-gasificatin at destination (typically adds about $2/MMBTU to $3/MMBTU to delivered price Persistent natural gas price differences between regions with domestic shale or conventional gas and those that rely on LNG imports Creates opportunities for increased sales of displaced coal in markets without domestic natural gas Research Questions: What is impact of diffusion of US shale oil and gas technology on global coal market? How much does diffusion of shale oil and gas technology reduce global GHG emissions?
Research Strategy I Specify spatial equilibrium model of global coal market that accounts for Major producing regions (26 regions) Major consuming regions with particular focus on US and China (23 regions) Land and Ocean Transportation between regions Models of price-responsive demand for coal in terms of energy (Gigajoules (GJ)) and price of coal in ($/GJ) Models production cost and transportation costs in terms of weight (Tonnes) Allows for export constraints and transportation link constraints in coal movements Allows for capacity constraints on annual production from producing region
Research Strategy II Allow for price-elastic and demand for coal in regions with potential for coal-to-natural gas switching Significant installed coal-fired and natural-gas fired generation capacity required in consuming region This is only the case in a few industrialized regions US and European Union (EU) Econometrically estimate own-price elasticity of demand for coal and cross-price elasticity with respect to price of natural gas Eight future natural gas price scenarios in the US and EU Baseline, continued boom, and end of boom Coal export constraint from Western US limits Powder River Basin coal s ability to compete in vast Asian market Use model to measure impact of relaxing this constraint Potential for China to act as a monopsony in global coal market to limit upward pressure on domestic electricity prices Use model to explore impact of this behavior by China
Outline of Model Structure Price-taking Producing Regions (Can allow for quantity-setting behavior in general model) Three types of consuming regions Inelastic coal demand regions with little or no ability to substitute away from coal Price elastic coal demand regions with ability to substitute away from coal into natural gas for electricity production Monopsony coal demand regions with ability to exercise market power against domestic suppliers (Only implemented for China) Dollar per tonne transportation costs between producing and consuming regions Base case model maintains existing 11 Million tonnes (MT) per year capacity constraint on west coast coal port Counterfactual model relaxes port constraints
No Potential for Coal-to-Natural Gas Switching in China
Potential for Coal-to-Natural Gas Switching in US Page 1 of 1
Potential for Coal-to-Natural Gas Switching in EU Page 1 of 1
China as Swing Player in Global Coal Market Price Arbitrage Drives Chinese Imports Import Advantage - $/metric ton 45 25 5-15 -35-55 -75 Monthly Differentials Between Qinhuangdao And Imported Coal Landed in Guangzhou and Resulting Import Levels 18 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07 16 14 12 10 8 6 4 2 0 Million Tons Imports Russia Indonesia Australia QHD-NEWC QHD-INDO QHD-RUS Source: R.K. Morse and G. He, The World s Greatest Coal Arbitrage: China s Coal Import Behavior and implications for the Global Coal Market, PESD Working paper, #94, 2010.
Chinese Coal Imports and Exports
Long-Term Drivers of Chinese Coal Imports (More than 65% coal-fired) 2016 1,600 2000 (If current trends continue) Installed Capacity in California is approximately 60 GW Installed Capacity in the US is approximately 1,100 GW
West Coast Coal Port to Provide Chinese Coal Imports Major New Plans for PRB Exports Arch and Peabody have proposed new ports to export up to 84 mt of coal from the US west coast Asia Powder River Basin produced 423 million short tons in 2011 Abundant, cheap reserves, BNSF and UP rail networks New ports could supply Asia with cheap, low-sulfur coal 37
Cognitive Dissonance for West Coast State Politicians 36
Estimating Coal Demand in US and EU Estimate conditional (on total fossil fuel generation in region) demand for coal given price of coal and price of natural gas Functional form for demand curve ln(qcoal rt ) = β r1 ln(coalp rt ) + β r2 ln(gasp rt ) + β 3 ln(fossilgen rt ) + α r + ɛ rt QCoal rt is the quantity of coal in GJ consumed in region r in quarter t, coalp rt is the price of coal in dollars per GJ in region r in quarter t, gasprt is the price of natural gas in dollars per GJ in region r in quarter t, fossilgen rt is the total amount of fossil-fuel generation in terawatt-hours (TWh) in region r in quarter t αr is a region-specific fixed-effect ɛrt is a mean zero disturbance term.
US Coal Demand Estimates (1) VARIABLES log coal consumption Standard Errors Central Region log coal price -0.0892 (0.0110) East Region log coal price -0.524 (0.0280) Gulf Region log coal price -0.282 (0.0202) Rocky Mtn Region log coal price -0.308 (0.0250) South Region log coal price -0.149 (0.0159) Central Region log gas price 0.0587 (0.0105) East Region log gas price 0.274 (0.0293) Gulf Region log gas price 0.185 (0.0181) Rocky Mtn Region log gas price 0.00616 (0.0179) South Region log gas price 0.124 (0.0140) Log total fossil gen 0.698 (0.0178) Constant 8.150 (0.319) Observations 740 R-squared 0.975 Arellano (1987) robust standard errors in parentheses Model Estimates Using Quarterly Region-Level Data from EIA
EU Coal Demand Estimates (1) VARIABLES ln coal consumption Standard Errors log coal price -0.304 (0.116) log gas price 0.182 (0.0991) log total fossil gen 1.520 (0.390) Constant 2.530 (4.285) Observations 112 R-squared 0.988 Arellano (1987) robust standard errors in parentheses Model Estimated Using Annual Country-Level Data from IEA
Choosing Natural Gas Price Scenarios Global Landed LNG Prices in $/MMBTU from 2009 to 2016 Price in $/MMBtu 0 5 10 15 20 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Date (Month-Year) Japan Spain Lake Charles Korea UK Cove Point
Choosing Natural Gas Price Scenarios During 2011 (baseline year for model) just as shale gas boom is starting have an impact on natural gas prices Natural gas prices in US were in $4.50/MMBTU to $5/MMBTU range Natural gas prices in EU were in $9/MMBTU to $10/MMBTU range During 2016 (last year of data available) Natural gas prices in US were in $2.00/MMBTU to $3.00/MMBTU range Natural gas prices in EU were in $4/MMBTU to $4.50/MMBTU range Define Natural Gas Price Scenarios by (Counterfactual Price)/(Baseline Price) in Each Country US Relative Natural Gas Price Scenarios (0.5, 0.75, 1, 1.25) EU Relative Natural Gas Price Scenarios (0.5,1)
Overview of Counterfactual Simulations Calibrate non-econometrically estimated parameters to match 2011 actual values (See Appendix 1) All econmetrically estimated parameters are kept fixed in calibration Starting values for model calibration based on best available estimates of these parameters Upper and lower reasonableness bounds placed on calibrated parameters Use calibrated model parameters to solve for baseline model solution Compute counterfactual solutions for each of 8 natural gas price scenarios Solve with and without west coast port export constraint imposed Also solve with China acting as monpsony buyer (results reported in paper)
Overview of Counterfactual Simulations Each counterfactual is defined by three characteristics Model solution concept used to calibrate parameters China price-taker (Cmp) or Monopsony (Mnp) Model solution concept used to solve for counterfactual equilibrium Cmp or Mnp Whether or not west coast coal export constraint is imposed (Cons or Open) For value of these three characteristics the model is solved for 8 counterfactual natural gas scenarios Focus on a comparison of Cmp-Cmp-Cons and Cmp-Cmp-Open scenarios Report all results as percent changes relative to baseline solution: Coal consumption in US and EU, Delivered Prices to Consuming Regions, Production and Prices in Producing Regions
Conclusions from Cmp-Cmp-Cons Modeling Results I All shale oil and gas boom scenarios, (P US Cnt/P US Bse) < 1 and/or (P EU Cnt/P US Bse) < 1, predict larger coal consumption reductions in all EU and all US consuming regions except Rocky Mtn Cheap Powder River Basin coal in Rocky Mtn region implies no coal-to-natural gas switching is economic, even at current natural gas prices Unilateral natural gas price reductions in US or EU yield larger in absolute value coal consumption reductions than same magnitude joint natural gas price reductions Eastern US coal competes in European market, so lower US coal prices imply more US coal sold in EU
Conclusions from Cmp-Cmp-Cons Modeling Results II Small change in both producer prices in US and delivered price across natural gas price scenarios, consistent with flat marginal cost curves for coal production Shale gas boom ending scenarios, (P US Cnt / P US Bse) > 1 and/or (P EU Cnt/P EU Bse) = 1, predict increases in US and EU coal consumption Coal demand in other consuming regions of the does not change because these regions have little, if any, ability to switch from coal to natural gas in short to medium-term
Conclusions from Cmp-Cmp-Cons Modeling Results III Coal to natural gas switching in US and EU in response to low natural gas prices reduces global GHG emissions Every MWh of electricity produced by natural gas instead of coal implies a 1/2 to 2/3 reduction in GHG emissions Differential impacts of natural gas price changes across consuming regions of US due to differences in composition of generation fleet in region For example, generation fleet in Rocky Mtn region composed primarily of coal units, whereas Eastern Region has mix of coal and natural gas units West coast coal export constraint is binding under base case and all counterfactuals, suggesting a market for Powder River Basin coal in Asia Run Cmp-Cmp-Open scenario to assess impact of relaxing west coast coal port export constraint
Conclusions from Cmp-Cmp-Open Modeling Results I All shale oil and gas boom natural gas price scenarios for Cmp-Cmp-Open predict larger US coal consumption reductions than for Cmp-Cmp-Cons scenarios, even in Rocky Mtn region Relaxating west coast coal port constraint leads to a significant increase in western US coal production and decline in coal production in China and India China and India produce significantly higher sulfur and ash content coal Chinese and Indian coal-consuming region demands remain unchanged Local pollutant reduction benefit from reduced use of higher sulfur and ash content coal in these regions At least Western US Coal Industry can be revised by expanding West Coast Port Capacity
Conclusions from Cmp-Cmp-Open Modeling Results II Larger reduction in coal consumption in US and EU from relaxing west coast coal port constraint implies greater global GHG emissions reductions from shale gas boom Natural gas price scenarios for shale gas boom ending yield smaller increases in US and EU coal consumption because west coast coal exports maintain higher US coal prices Scenarios run with plausible own-price elasticiites of demand for coal in China and India still yield a net global GHG emissions reduction from the relaxing west coast coal port constraint Expanding West Coast Coal Port likely to reduce global GHG emissions in near term
Conclusions from Modeling Effort Global coal and natural gas markets are integrated to the extend to which there are possibilitiies for coal-to-natural gas switching in the electricity sector The two markets are likely to become even more integrated as more regions install natural gas-fired generation units and more regions develop domestic shale gas resources Coal-to-gas switching more likely to occur and likely to be larger in regions with domestic shale gas resources This reduces domestic demand for coal, which makes this coal more attractive on international market as a competitor to LNG
Currrent Research I Exploring potential for China to exercise monopsony power in global coal market Strong institutional evidence for this behavior by Chinese government China faces tremendous political pressure to keep domestic electiricity prices low This can be accomplished by buying less Chinease coal to drive domestic purchase price down on vast majority of coal purchased Reduces total coal procurement cost for electtricity supply industry
Currrent Research II Eight LNG producing regions and ten LNG consuming regions Exporting LNG requires a liquefaction facility Importing LNG requires a re-gasification facility Capacity constraints limit exports and imports These facilities must be paid for Wedge between domestic natural gas price in regions that produce gas versus regions that import LNG creates demand for domestic and imported coal Research Question: Assess impact of diffusion of US shale gas as LNG versus shale gas technology on global coal and natural gas markets
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