The Next Holy Grail

Over the years, I have probably been asked more often about the possibility of using water or air as a fuel source than any other topic. Could a car run on water? How about air? The public is perpetually infatuated by promises of cheap, abundant energy. Those who make such claims capture the imagination, and often the media headlines. The goal is usually to attract investment dollars, and these claims often go hand in hand with a solicitation for money.

A year and a half ago a British company called Air Fuel Synthesis (AFS) announced that it was producing gasoline from thin air. The media lapped it up, proclaiming it “the holy grail of the emerging green economy” and incorrectly claiming that burning the fuel produces “no emissions whatsoever.” I received a number of inquiries on this particular company, and I addressed these claims in Investors Beware of Fuel from Thin Air.

This past week I started to receive a number of inquiries about another press release that hinted at cheap, abundant energy. When I see a lot of interest in a particular story, I try to address the claims in a post as I am going to do here today.

These due diligence forays should be of interest to energy investors, because I detail how to dig past the press releases to find the truth underneath the hype. The purpose of these types of press releases is to garner attention and draw funding, and you, as an investor, want to know whether it is the opportunity of a lifetime or a fast way to lose your money. Of course you also want to know if this is a legitimate competitor to fossil fuels, in which case you may want to start thinking about shifting some money around.

Fueling Up With Seawater?

This time the proclaimed fuel source isn’t thin air, but rather something else that is exceedingly abundant: seawater. I started to get inquiries about this story right after it came out last week to sensational headlines such as this: Goodbye, Oil: US Navy Cracks New Renewable Energy Technology To Turn Seawater Into Fuel:

After decades of experiments, US Navy scientists believe they may have solved one of the world’s great challenges: how to turn seawater into fuel.

The development of a liquid hydrocarbon fuel could one day relieve the military’s dependence on oil-based fuels and is being heralded as a “game changer” because it could allow military ships to develop their own fuel and stay operational 100 percent of the time, rather than having to refuel at sea.

First of all, turning seawater into fuel is something I can do with a battery and two pieces of wire. An electrical current breaks down the water into hydrogen (a fuel) and oxygen. Scientists have been doing this since 1800, and the process was used commercially throughout the 1800’s to produce hydrogen. But that doesn’t necessarily mean this is a viable process for producing transportation fuel.

Very Basic Thermodynamics

Most people aren’t familiar with thermodynamics, but they are very important for understanding these sorts of claims. Water is the product of combustion, as is carbon dioxide. They represent the products of energy use, and are not suitable as fuel unless modified. When someone refers to water as a fuel, that’s like saying that the spent ashes in your fireplace are fuel. No, they were fuel, and with a large amount of effort and energy could be converted back to fuel. But the large amount of energy required is the catch.

When natural gas, biomass, coal, oil, etc., are burned, the products are heat plus carbon dioxide and water. For the combustion of methane — the principal component of natural gas — the reaction is:

CH4 + 2 O2 → CO2 + 2 H2O + heat

Or, in plain English:

Methane + 2 Oxygen → Carbon Dioxide + 2 Water + heat

The heat in this reaction can be used to produce work, in an engine for example.

We can reverse those reactions to produce a fuel from carbon dioxide and water that we can then burn again, but the laws of thermodynamics say that this will always require a greater input of energy than is generated from burning the fuel. This is important.

In other words, to produce 1 British thermal unit (Btu) of a liquid fuel from carbon dioxide and water could require the input of 3 or 5 or 10 Btus of external energy. Another way to think about it is that the heat that is produced in the above reaction will always be insufficient to drive the reaction completely back to methane. If this wasn’t true, then perpetual motion machines could exist.

So this much we can say without further investigation: Whatever the US Navy is claiming, we know the energy it is producing from seawater requires a greater outside input of energy. No ifs, ands, or buts. No catalyst can get around this fundamental issue. Yet none of the press releases I have seen discuss this very important bit of information.

The question then becomes “When might it make sense to consume more energy than you create?” The answer to that is that even though it might not make sense thermodynamically, it might make sense economically. If natural gas is $5 per million Btu (MMBtu) and gasoline is $25/MMBtu, then consuming 3 Btus of natural gas to make 1 Btu of gasoline is a winner economically.

The implications of producing fuel from a combustion product like water are that you need to have a cheap source of energy input, and the output has to be valuable. Imagine for a moment that the Navy had access to extremely cheap electricity, and that what it really needed was a gaseous or liquid fuel. In that case, the electrolysis of water may be economically viable. But it will always be a loser in a thermodynamic sense.

So with that in mind, let’s look beyond the “game-changing” hype and see what the Navy actually accomplished.

The Navy’s Claims

It took a bit of digging through press releases before I could identify the researchers involved, which then provided me enough information to go to the patents and scientific literature. If you really want to get past the hype, you have to drill down into the scientific publications.

For example, one of the patents related to this work is Extraction of carbon dioxide and hydrogen from seawater and hydrocarbon production therefrom. That patent confirms that carbon dioxide and hydrogen are being extracted from the sea water via electrolysis. Notably, it estimates the electrical current efficiency of 70-90 percent. In other words, 1 unit of electricity input can be turned into 0.7 to 0.9 units of hydrogen output.

But there are still two steps to go. Once the Navy has hydrogen and carbon dioxide, it can react these over an iron catalyst (adding more energy) to produce light olefins like ethylene.

These light olefins in turn can be processed into longer-chain hydrocarbons in the range of diesel fuel. However, there are also lots of hydrocarbons produced that aren’t suitable for diesel production, and these have to be separated out (at additional energy expense).

What I would say is that this is a technically feasible process (so far it has produced enough fuel to run a model airplane), but quite energy intensive and expensive. Nowhere have I seen an overall energy balance, but it’s going to be very unfavorable. If I had to guess, the process is going to require 5-10 Btus minimum of energy inputs for each Btu of liquid fuel produced.

The Navy’s own press release says the following on the technology claims:

The predicted cost of jet fuel using these technologies is in the range of $3-$6 per gallon, and with sufficient funding and partnerships, this approach could be commercially viable within the next seven to ten years.

The phrase “with sufficient funding” is often the reason these sorts of press releases are concocted. Yes, they can achieve these things, as long as the government allocates them more money. But when I see a predicted cost range like this, my experience is that the higher number is probably the best case number. In reality, I doubt this process could achieve a cost below $6/gallon. Of course with a nuclear reactor on board, maybe the Navy can produce electricity cheaply enough to make the process viable. But it certainly won’t be a panacea, and it’s certainly not going to threaten oil as the dominant transportation fuel.

None of this is meant to denigrate the Navy’s accomplishments here. It is an interesting bit of science and engineering. But there is a vast gulf between what the patents and scientific papers describe, and the hype of the press releases.   

Conclusions

Claims such as the one I have addressed today pop up often in the popular media, aided by ignorance of basic thermodynamics. When it comes to energy, there is no free lunch, and you should be very skeptical about claims that so much as hint that the lunch will be cheap.

In this case, the invention is an energy carrier, like electricity. An energy source must be used to produce it. Oil is an energy source. Journalists aren’t normally scientists, and critical details can be lost in communicating a story such as this to the general public. The result is that the public is led to believe that a new technology has been invented so we can now fuel up with air or water. That’s never going to be the case, as long as the laws of thermodynamics are in effect.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Ray of Hope for Chevron, Speed Bump for Antero

The drizzle of incremental negatives continues for Conservative Portfolio mainstay Chevron (NYSE: CVX), which warned last week in its mid-quarter update that daily first-quarter production has been down 2.5 percent from a year ago during January and February, hurt by bad weather in Kazakhstan, Canada and the US. As a result, earnings excluding a hefty $100 million currency loss and up to $1 billion in asset impairment and other charges could still merely match last quarter’s disappointing adjusted earnings per share, falling somewhat short of analysts’ consensus expectations yet again.

Yet the stock did not get taken to the woodshed on the news as energy shares bucked the broader market weakness, dipping 2 percent and then recouping much of that Friday and today. Chevron’s share price is up 8 percent from its Feb. 5 52-week low, as investors refocus on the nearing completion of mega-projects that are expected to boost its output 20 percent from recent levels by 2017.

Cash flow should surge alongside Australian liquefied natural gas and Kazakh oil even as capital spending declines, leaving more to be returned to shareholders. Ahead of that probable happy ending, the stock’s recent resilience is a hopeful sign. Buy CVX below $125.

Expectations run considerably higher for Antero Resources (NYSE: AR), the fast-growing 2013 IPO in the liquids-rich cores of the Marcellus and the Utica shale plays.

Antero had returned a quick 15 percent since joining the Growth Portfolio in late November, but was recently giving back 3 percent of that today after its own fundamentally strong mid-quarter update. Despite the harsh Northeast winter, first-quarter production is expected to rise roughly 16 percent sequentially and 105 percent year-over-year as the company’s 20 rigs drill increasingly liquids-rich wells. The increased liquids content is driving a 10 percent improvement in realized pricing year-over-year, and the company is further increasing its returns by drilling shorter completion stages to boost the production rate of its Marcellus rates by up to 25 percent.

Annual production in fiscal 2014 is forecast to increase 80 percent from the prior year, and Antero has for the first time set production targets for 2015 and 2016, projecting compounded annual output growth of 45 to 50 percent.

If cash earnings were to grow as fast but Antero’s share price and debt levels didn’t change, by the end of 2016 it would have an enterprise value of just 8 times trailing EBITDA. At the moment, however, this valuation ratio stands at a much more ambitious 32. Buy AR below $62.        

— Igor Greenwald