Oil & Gas and Electricity - Stepbrothers and Stepsisters
In the first edition of this blog, I noted that “the electric sector underpins every other essential industry sector, and it also relies on many of them. I…think of the overlaps like the Olympic rings – all interlinked, with some overlapping more than others.”
For the next several editions, I’ll continue to focus on each critical infrastructure sector in relation to the electric sector because electricity – which began to be deployed as a service close to 150 years ago – has enabled the progress, convenience and abundance that are hallmarks of modern life. Thereafter, I’ll get into the overlapping policy issues in more detail.
For those of you who may have noticed a delay in publication for this edition, I took a week off last week so we could finish up our family vacation, prepare to move houses, and get ready for our girls to start school this week. I’ve found that major events often seem to collide in life! And that might be a good segue (or at least a middling one) into the overlap between the oil & gas sector and the electric sector. According to the federal government, these two are actually “subsectors” of the broader energy sector. While understandable that the feds would want to think of energy all on one bucket, these two sectors (I’m going to stick with that heading) are very much distinct in terms of their history, methods of delivery, and operations.
This has been a tough one for me to tackle – it is extraordinarily complex. And, I think because I have circled around the oil & gas sector for years, but never worked directly in it, I’ve had a harder time than in previous blogs distilling (refining?) the history and nature of the sector. Full disclosure…
Before going into the history, it’s important to note that the use and functions of oil (petroleum and other related solids) and natural gas have diverged in modern times, but discovery of both as energy sources stemmed from our need as humans to illuminate and heat our world.
Of course, I should have known that the beginning of the oil & gas sector began well before I thought it did. In this case, and for the first time in the lifetime of The Essentials blog…drumroll please…the Romans are no where to be found. Long before the Romans came into power, humans used naturally occurring asphalt for construction – as long as 4,000 years ago. And then the Chinese dominated early drilling and transporting, starting around 1,700 years ago using simple drills on bamboo sticks and bamboo pipelines to transport unrefined petroleum and siphoned natural gas (not called that until later) for both heating and for the distilling of salt. In the 900s, oil fields were discovered and used near modern Baku, Azerbaijan. A century before that, Persian chemists took the lead in figuring out how to distill solid bitumen into kerosene for heating. Monks in Southern Italy coined the term petroleum to cover both solid and liquid forms that were variously called naphta, asphalt, and bitumen. The gas forms of hydrocarbons were not widely used until after the 1700s, when their modern names came into being -- natural gas or methane gas being the most common.
Before I briefly discuss the industry’s development in the modern era, it’s important to mention why petroleum (now often referred to as oil) and natural gas were in the ground in the first place. I find it fascinating that oil, natural gas and coal are formed from the anerobic decomposition of buried plants and animals after millions of years. These plant and animal remains were put under intense pressure and heat within the earth’s crust as it naturally shifted and evolved. These factors caused the remains to change form and coalesce, depending on their particular circumstances – forming a solid (coal), a liquid (oil), a gas (natural gas), or a combination, like in the case of naturally occurring asphalt, which has some elements of both a liquid and a solid.
We think of coal as a separate industry, so I will not touch on it much here except to note that, at the beginning of the modern era, in 1836, a form of gas derived from coal illuminated Baltimore homes and businesses. The coal-to-liquid and coal-to-gas industry had largely played itself out later in the century as methods to more easily extract, refine, and use liquid and gas forms of fossil fuels overtook the more cumbersome process of converting coal into other forms.
I barely remember my biology and chemistry classes from high school and college, but I do remember being taught about photosynthesis, which is the process by which certain plants/trees and oceanic algae/animals turn solar energy into chemical energy that is stored inside themselves and later metabolized to keep them alive. A byproduct of this process is oxygen. Through photosynthesis, these organisms maintain the earth’s oxygen levels. What I did not remember at all is that the energy released in combusting fossil fuels is photosynthetic in origin. It makes sense. The byproducts released from such combustion are different, however, and include carbon dioxide and methane emissions – hence concerns raised over the last 30 years about their contributions to climate change.
Back to the history -- on a similar timeline to the other critical infrastructure sectors I’ve discussed in previous blogs, the 1800s were pivotal for the oil & gas sector. Several “firsts” occurred then that led to the modern sector we are familiar with today. Scottish chemist James Young took crude oil from a natural seepage in England and distilled it into a lighter, thinner oil that could be burned in a lamp. He also derived these oils from coal and developed a waxy solid from the oil he called paraffin. Young eventually partnered with Edward William Binney to form the first commercial oil works company in 1851, called E.W. Binney and Co. The Canadian geologist Abraham Gesner created a process to refine a liquid from coal, bitumen, and oil shale to compete with whale oil as the primary source for lighting homes and businesses. He dubbed his successful product kerosene. Around the same time in other parts of the world -- Russia and Poland -- others were figuring out ways to refine rock oil (petroleum) from seems. Then things started to accelerate (the following bullets are derived from Offshore-Technology.com):
The first oil well drilled was in the town of La Brea, Trinidad in 1857. It was drilled to a depth of 280 feet by the American Merrimac Company.
While some dispute this, most agree that the first modern oil well in America was drilled by Edwin Drake in Titusville, Pennsylvania in 1859. The discovery of petroleum in Titusville led to the Pennsylvania ‘oil rush,’ making oil one of the most valuable commodities in America.
John D. Rockefeller founded the Standard Oil Company in 1865, becoming the world’s first oil baron. Standard Oil quickly became the most profitable in Ohio, controlling about 90% of America’s refining capacity and a number of its gathering systems and pipelines. ExxonMobil, one of Standard’s successors after it dissolved in 1911, is the world’s ninth largest company by revenue today.
In Russia, the Rothschild family commissioned oil tankers from British trader Marcus Samuel to expand their oil operations and reach more overseas customers. Samuel’s first vessel, the Murex – named after a sea snail – became the first oil tanker to pass through the Suez Canal connecting the Mediterranean Sea to the Red Sea.
The discovery of oil in Masjed Soleyman, Iran, by William Knox D’Arcy led to the incorporation of the Anglo-Persian Oil Company (APOC) in 1907. The British Government purchased 51% of the company to provide the Navy with oil during World War I in 1914. In 1954, APOC became British Petroleum (BP) which is currently the sixth largest oil and gas company in the world.
Another hugely significant event in the history of oil was the development and commercialization of the internal combustion engine. Despite efforts by Thomas Alva Edison and others to encourage the use of electric cars, battery technology was too cumbersome in the late 1800s and early 1900s to enable widespread adoption. With the exponential adoption of internal combustion engine cars worldwide in the 1900s, and once ships began to run on oil and then airplanes literally and figuratively took off using fuel oil in the 1905-1915 period, the race was on for the oil & gas industry explosion we saw in the 20th century.
In the U.S., drilling methods improved and oil finds in myriad places were abundant, beginning in the mid-1800s and continuing today. In the late 1800s and early 1900s, the U.S. and Russia vied for the top spot as oil & gas producing countries. In the 20th century, U.S. prominence as a producer faded with Middle Eastern and South American countries taking the lead and creating OPEC (Oil Producing and Exporting Countries). Fascinatingly, the U.S. in 2021 is again the world’s biggest oil & gas producing country, with Russia second. History repeating itself. Major technological breakthroughs and shale gas finds in the U.S. have made this possible.
Onward to a bit on gas…As mentioned above, natural gas is found in the ground, just like the liquid and solid forms of fossil fuels, and it is also a byproduct of drilling for liquid petroleum. The first commercial natural gas operation was formed in the mid-1800s in Fredonia, New York, but natural gas was not widely used until the 20th century. Natural gas is volatile – it must be kept at a certain pressure to move it. It also cannot be easily stored. Until recently, it was stored in certain natural rock and sand formations. Now, it can be liquified and stored in tanks. Given its heating and cooking properties, the U.S/Canada and Europe invested heavily in natural gas pipelines in the 20th century to make it more widely available. Safety measures such as adding a smell to the odorless gas as well as standardized pressurization, also enabled widespread usage, which continues today. Geopolitical and environmental/climate change pressures, however, are at play and causing some to evaluate other options.
Before discussing the overlaps with electricity more fully, I would note that petroleum products constitute the base of many industrial chemicals, while natural gas is a primary feedstock for fertilizer (which I touched on in my last blog). Currently, oil powers about 90% of vehicles worldwide and all fossil fuels (including coal) provide 80% of the world’s energy.
In the U.S., fuel oil is only used in power generation 2% of the time, and primarily for peaking – when demand is higher than expected – or in emergencies. The emergency use piece is significant, with large diesel generators often deployed for disaster response as well as for what is called “black start” – to help reenergize electric distribution networks that have tripped off to prevent electrical damage. Historically, places like New England used oil more often as a source for power generation, but other types of fuels began to displace fuel oil as a power source in the late 20th century due to both cost and environmental concerns. Electric utilities still rely on gasoline for their vehicle fleets – while many utilities have plans to switch to electric vehicles or have done so where possible, heavy duty and large vehicles are not yet widely available or deployed.
Natural gas began to be widely used as a power generation source beginning in the 20th century, but until recently was considered to be an “intermediate” form of power. Because it cannot be stored everywhere and because natural gas as a commodity has been subject to significant price fluctuations over the years, until recently electric utilities used in a targeted way to supplement more available and less expensive forms of power like hydropower, coal, and nuclear. However, the advent of hydraulic fracturing, the discovery of vast shale gas deposits and other factors have brought down the price of natural gas in the last two decades, driving more investment in it as a power generation source. Natural gas’s greenhouse gas emissions profile (at least from a power generation perspective) is about half that of coal. So, for both cost and environmental reasons, electric utilities have made a massive switch from coal to gas, with gas now being used 40% of time and coal 20% where it used to be the reverse -- a flip in just the last 10 years.
The two industries are not really set up for this switch – natural gas’s priority has been home heating and the gas industry acts accordingly in an emergency, prioritizing home heating delivery over electric delivery. While LNG has helped with storage where it is not naturally available, LNG is not widely deployed domestically (it is used more for exports). This generally means that the electric sector has to rely on pipeline availability to get its gas in a timely manner, which can be problematic in an emergency such as that seen during Winter Storm Uri in 2021.
The two sectors also grew up differently – they literally work different hours and think differently about reliability and availability. Having said that, natural gas power generators can ramp up and ramp down to absorb the intermittency of solar and wind generation more easily than other generation types. Like other fuel sources in the electric sector, natural is a mixed bag in terms of cost, environmental impact, and reliability. Ongoing discussions are occurring among the two industries and with policy makers on these challenges. I will come back to those in a future blog.
Here are some other ways that the oil & gas sector and the electric sector overlap:
Reliance on transportation. LNG is shipped and transported via train and truck and oil, natural gas, and gasoline is of course piped, shipped, and trucked as well. Utilities still need coal and natural gas for 60% of their power, both of which require transportation.
Reliance on critical manufacturing. If the parts are not available, the oil drills, derricks, pipelines, etc., don’t function, and nor do the wires, poles, and power plants.
Environmental regulation/climate change. Both face significant regulation and scrutiny related to their impacts on water, air, and land – and should continue to collaborate to educate regulators and policy makers on maintaining balance in their operations.
The use of natural gas. Natural gas comprises approximately 40% of domestic electricity generation, as mentioned above. Natural gas use is under pressure relative to its greenhouse gas emissions, a fact that both industries must address.
Reliance on water. Water is essential for all types of drilling and oil & gas recovery. The oil & gas industry also finds water in its drilling processes. Electric utilities also use traditional hydropower and new water-power technologies to produce emissions-free electricity. But the resource can be constrained in drought conditions, especially out West.
Workforce challenges and the knowledge drain that has resulted from retirements in recent years.
Supply chain constraints that impact every aspect of infrastructure deployment and maintenance (see manufacturing components above).
How to best use technology to create efficiencies and minimize expenses.
How to manage the cybersecurity risk that comes with those technology deployments. Both industries are acutely focused on this and are already working together in some ways – that should continue.
I hope I have given you a sense of the breadth of the oil & gas sector and how it differs from the electric sector despite significant overlaps. I know I have just scratched the surface (no pun intended here!) – I learned a lot in doing this one and hope you did too. We’ll come back to some of the policy implications in later blogs.