Enabling Hydrocarbons

By Lee

Reading tomorrow’s case (related to “EOR with CSS”, a.k.a. injecting CO2 to improve oilfield yield) got me wondering how often companies get away with implying (or explicitly claiming) positive environmental impacts when the opposite is actually true. As it stands today with how hydrocarbons are consumed, extraction technologies that reduce energy (or really any cost) or improve recovery can ultimately deliver a net negative to the environment.

Consider these fabricated examples:

Company A develops and sells a revolutionary new oil extraction system that takes half the capital and the energy traditionally required to extract hydrocarbons. A portion of these savings would result in cheaper oil prices to end users. If hydrocarbon demand were static, the energy saved during extraction reduces the overall “carbon footprint”. However, the reality is that an uptick in demand occurs, which results in negative externalities that outweigh the relatively small energy savings realized during extraction.

Company B commercializes a technology that eliminates the need to add chemicals to the water required to extract unconventional oil. A need exists because some of the chemicals currently used are hazardous, but O&G producers mitigate risk with engineering controls, containment systems, procedures, etc. However, water occasionally escapes containment (at the wellhead, during transfer, or during reinjection or treatment) and groundwater contamination can occur. Company B’s technology would eliminate these risks. This would result in less pushback from concerned stakeholders and more drilling issuances. O&G producers would also realize reduced COGS from chemical savings and reduced operational complexity. Hydrocarbon production would surge, prices would drop, and end users would consume more. This is not as straightforward as the Company A example, but one must weigh the negative externalities associated with consuming more hydrocarbons against any of Company B’s environmental claims.

There are complicated caveats to this argument, and perhaps some exceptions to this quandary. However, until alternative means of electricity generation and transportation are adopted (or a sound regulatory solution discovered), companies implying environmental benefits must carefully consider the market response and true net effects of introducing their products or services.

The situation is more complicated if a company were using oil and gas producers to bring a technology to market that has additional applications. O&G producers are excellent customers because they have deep pockets and embrace new technology. For example Company C, developing a new water treatment system, could first target O&G in order to quickly commercialize a system that also works for seawater desalination. The company would be enabling hydrocarbon extraction, but the net environmental effect could be positive. Although, measurement of the factors playing into this “net effect” would be extremely difficult.

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About macomberjohnd

HBS Finance faculty interested in sustainability in the built environment including devices, structures, townships, and cities.

One Response to “Enabling Hydrocarbons”

  1. This is a complex and thought provoking set of arguments. Peter Brooks in class posted along the same lines with respect to the Jevons Paradox here: https://innovbusenergyenviro.wordpress.com/2013/09/18/the-dark-side-of-efficiency/

    The Company A math assumes that the elasticity of demand is exactly the same as the cost savings…eg half the energy, half the capital –> 2x or maybe 4x consumption. That’s probably not so but one would indeed like to be able to measure the slope of the line (assuming that something as excellent as Company A technology were to be invented)!

    If I ran Company B I would think real hard about pricing my services so that I captured all of the value created by the technology and the end user paid the same as before, to get energy that was way cleaner than before with respect to the water involved. Assuming that I’m a profit maximizer in Company B. Oasys is a company run by a Harvard MBA with just such a hoped for technology: http://oasyswater.com/

    For Company C, the energy currently needed in desal processes would need to be included in the math. So far desalination is both capital intensive and energy intensive. I’m aware of several privately funded desal plants where commercial users might use 20-25% of the output and pay the fully loaded cost for the whole plant and its output – while residential users consume the other 75-80% but pay a (highly cross-subsidized) price similar to the market price for treated well or river water in their community. Sometimes they have consumption limits or volume based pricing. Water use does not seem to respond to price signals as much as does the consumption of many other goods.

    Here’s an example in Orange County: http://poseidonwater.com/our_projects/all_projects/carlsbad_project A Google search indicates that this project and the pricing scheme are…um…not without controversy!

    We will discuss the water demand and pricing issue a lot more in Woolf Farming and Processing later in October and also in Milwaukee World Water Hub on the last day.

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