Office of Fossil Energy

Marcellus and Manufacturing Development Conference 2019

April 9, 2019

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Statements of Assistant Secretary for Fossil Energy Steven Winberg as prepared at the Marcellus and Manufacturing Development Conference 2019 in Morgantown, WV on April 8, 2019

 

 

Thank you.  I appreciate the opportunity to speak to you again — and to be back in West Virginia. 

 

I’m especially honored to take part in the Marcellus and Manufacturing Development Conference, and to talk about what the Department of Energy is doing – and more specifically, what my office and our National Energy Technology Lab are doing – to open up opportunities for the Nation, the Appalachian region, and West Virginia communities.

 

So, thank you for having me today. 

 

West Virginia is one of America’s most energy-rich states.  It’s the nation’s second-largest coal producer, and the largest producer in Appalachia.  Last year, coal production in West Virginia rose right at 5 percent over 2017.

 

West Virginia also ranks in the top 10 natural gas-producing states, producing 1.6 trillion cubic feet in 2017.

 

So, West Virginia is not only “wild and wonderful” – and beautiful – it’s a powerhouse rich in natural energy resources with huge potential for economic growth and expansion. 

 

But it wasn’t long ago that people looked at West Virginia and saw it as ground zero in the war on coal – with business investment drying up and state deficits as far as the eye could see. 

 

Today, though, we’re seeing hopeful signs – and new potential for economic growth, especially when it comes to energy development and the industrial and manufacturing opportunities that could flow from that development. 

 

Of course, some communities are still hurting.  But, today we have a President who recognizes the reality – and embraces the fact – that we have vast domestic energy resources in the United States — including coal, oil, and natural gas — and that we need to develop, produce, use, and export them.  We have a President who wants to undo overly burdensome regulations on fossil energy.  And we have a President who is committed to creating opportunities for those workers and their families in West Virginia and Appalachia who are still struggling. 

 

The good news is that we’re seeing signs of a turnaround in West Virginia.  Consider these numbers from a recent piece in the Wall Street Journal.  In January, West Virginia saw a revenue surplus of $180 million for the first time in years.  Income increased 5.3 percent during the first three quarters of 2018 – outpacing the 4.3 percent rate nationally.  Business investment is up – and so are wages for durable manufacturing jobs – just over 7 percent.

 

Those are amazing accomplishments – and energy development has played no small role.  And when it comes to that development, we’re seeing in West Virginia what happens when the focus in Washington is on reducing or modernizing regulations, spurring innovation, and growing our economy.

 

As Secretary Perry has said, “By regulating less frequently and more sensibly...we can innovate more.”  And innovation opens up opportunities – that’s especially true in a state like West Virginia, with an enormous energy and industrial potential. 

 

So, today I want to talk about some of those opportunities for West Virginia, and for the entire Appalachian region. I also want to talk about what the Department of Energy and this Administration are doing to support and encourage the development of our oil and natural gas resources, and to strengthen coal – R&D that can expand those opportunities. 

 

First, let’s look at natural gas in Appalachia – which, if it were an independent country, would be the third-largest natural gas producer in the world.

 

As you know, a lot of Appalachian gas is particularly “wet” – meaning it contains substantial volumes of natural gas liquids, including ethane, which can be separated from the gas and converted into plastics, antifreeze, and other products we use every day.  Until recently, we were seeing a surplus of ethane, and it was priced pretty low – with spot prices hovering within a dollar per million BTUs of the Henry Hub natural gas spot price on a heating-value-equivalent basis.

 

But with increased demand driven in part by the construction of new domestic ethane crackers and strong growth in exports overseas – by the way, the U.S. is the world’s top ethane exporter – ethane prices have increased both in real terms and relative to other natural gas plant liquids, like propane.

 

So, not only have we seen a rise in the value of ethane being co-produced with natural gas in Appalachia, its abundant supply here makes the region an attractive location for the build-out of an Appalachian petrochemicals industry. 

 

As many of you know, we released a report at the end of last year that examined the potential for a new ethane storage and distribution hub.  In that report, we noted that over 95 percent of America’s ethylene production capacity, which uses ethane as a feedstock, is located in Texas and Louisiana.  Those locations are exposed to devastating weather events like hurricanes, which have disrupted the petrochemical supply chain’s ability to meet downstream manufacturing demand.  Hurricane Harvey took 60 percent of U.S. ethylene production offline for weeks. 

 

So, expanding the petrochemical asset base beyond the Gulf Coast would enhance the geographic diversity and reliability of this vital industrial sector.  And Appalachia – with its abundant resources and extensive downstream industrial activity – could offer a highly competitive advantage and help the U.S. gain global petrochemical market share.

 

In fact, DOE’s Energy Information Administration (EIA) projects that by 2025, ethane production in the Appalachian Basin will reach 640,000 barrels per day – which is 20 times greater than it was in 2013.  And a 2018 IHS Markit report concluded that the Appalachian region has sufficient ethane to support up to five world-class ethane crackers – facilities that convert ethane to ethylene, which, of course, can then be used to make other products.

 

We’re seeing the market move in that direction, with Shell now constructing a $6 billion cracker in Beaver County, Pennsylvania and PTT’s planned $10 billion cracker plant in Belmont County, Ohio.  PTT’s project just received its air and water permits from the Ohio EPA, and we expect to see a positive final investment decision on that project this year. 

 

Now, this isn’t a new or novel concept to have a petrochemical industry in the Appalachian Basin.  In fact, the first commercial ethane cracker in the United States was built in Clendenin, West Virginia, by Union Carbide in 1920.  However, as oil and gas production moved down to the Gulf Coast so did the petrochemical industry. 

 

But, with the massive growth of production of natural gas and natural gas liquids in Appalachia, it only makes sense that we build on that foundation by maximizing the value of the ethane that is being produced in Pennsylvania, Ohio, and West Virginia as a feedstock for a new Appalachian petrochemical industry.

 

And if that comes to pass, this area could reap enormous benefits – according to a recent American Chemical Council report, more than $35 billion in capital investment could flow into Appalachia; 100,000 jobs could be created and supported; nearly $30 billion in additional annual revenue could be generated; and over $1 billion per year in state and local tax revenue. 

 

Industry and government need to work together to fully realize this opportunity.  For our part, I can tell you that Secretary Perry has talked to the President about this, and the President is very excited about it.  And we will continue to shine a bright light on this opportunity in discussions here at home and abroad.  We will also continue to reach across federal and state agencies to help ensure that government is creating a positive environment for private investment in Appalachia. 

 

A number of departments and agencies have a role here.  With regard to DOE, potential private-sector investors can take advantage of our loan guarantee program.  There’s a two-part application process involved.  Part I involves basic information about the project. 

 

The second part is more involved – requiring detailed information about third-party supply and off-take agreements that support revenue and cost projections; Engineering, Procurement, and Construction (EPC) contracts; and detailed construction budgets, for example.  It also requires technical information, including engineering reports, for instance. 

 

Now, shining that bright light I mentioned includes assigning someone from DOE to work with government and industry stakeholders.  That person is Ken Humphreys.  He’s our point person for those who are interested in exploring these opportunities.  And for those who may want to take advantage of our loan guarantee program, he can walk you through the process.  Ken’s here with me today so you can put a face with his name.  

 

At the end of the day, what we’re looking at is the opportunity for a truly transformative industrial renaissance in West Virginia and Appalachia – and we want to work with state, local, and industry stakeholders to realize this enormous potential.

 

I have mentioned a couple of times the need to shine a bright light on this Appalachian petro-chemical growth opportunity.  The DOE will do its part but everyone in this room needs to help. 

 

I am amazed and a little disheartened when I talk about this opportunity to family and friends in the Pittsburgh area where I lived for 30 years before moving to DC.  They know little or nothing about it.  Some have a vague recollection about hearing about some project that Shell is building but they have no idea how huge this could be for this region.  So please, help us shine that bright light!  It does make a difference.

 

So now, if you will allow me, I’d like to talk about some of the other initiatives in the DOE fossil energy portfolio that will .provide broad benefits to the nation as a whole – and particularly in states like West Virginia and regions like Appalachia. 

 

So, I’d like to turn for a few minutes to explain how our R&D can help to ensure that we can realize the full potential of our vast oil and gas resources.  A lot of our focus is on ramping up our big data and machine learning efforts and capabilities to increase oil and gas production, with a focus on unconventional resources.

 

So, let’s look first at upstream production and development, where one of the biggest hurdles has to do with the rapid decline curve in shale oil and gas wells after initial production. 

 

For example, let’s say that a well yields two million cubic feet of natural gas per day in the first year of production.  By the second year, it drops to 600 thousand cubic feet per day and continues to decline over time.  There will come a point when – if gas prices are too low to justify leaving the well in production – an operator may prematurely plug and abandon the well, leaving valuable resources in the ground. 

 

Right now, for instance, we’re only getting about 10 to 12 percent of the resource out of the ground in unconventional reservoirs.  If we could figure out how to increase that to 20 percent (or more) that would be a huge win — another shale revolution without having to drill any more wells. 

 

So, new applications of machine learning and data analytics may be able to process and interpret complex data streams in real time to enhance decision making — and increase production of our unconventional resources. 

 

Now, every basin and formation is geologically different.  So, we’re turning to a more targeted “basin-specific” approach to technology development, where we will be able to look at all kinds of subsurface data – a massive amount of data – to better understand specific basins and increase unconventional oil and gas production.

 

Right now, we’re working to improve well integrity; to revolutionize how well we are able to “see” into the subsurface with seismic imaging; and to increase our understanding of variations in estimated ultimate recovery and other variables in shale reservoirs. 

 

The development and integration of these big data and machine learning tools — coupled with high-performance computing — have the potential to usher in a paradigm shift — from energy production and development to systems operations.

 

Now, when it comes to midstream resource delivery, we’re focused on improving operational reliability and reducing loss from natural gas gathering, transmission, distribution, and storage facilities. 

 

And, as with our upstream R&D, we’re pursuing data science and management tools to improve our natural gas delivery system.

 

We’re also beginning to look at cybersecurity, as well as continuing our focus on reducing methane losses.  And we have several R&D pathways to help us meet these goals and to pave the way for the “pipeline of the future.”

 

At the end of the day, we’re looking at an entirely new tool set for the marketplace with huge potential to provide more reliable information about the performance of critical systems and components.  It creates a number of benefits for industry, and it’s the future of “smart pipelines.” 

 

So, we’re excited about this important research area – and about the potential of this R&D.

Now, we can’t talk about West Virginia’s potential without talking about coal.

 

First, let’s consider some of the bright spots for coal.  True – coal consumption has declined in the U.S, but the Energy Information Administration projects that worldwide coal consumption will remain relatively stable between 2015 and 2040, mainly because of demand in Asia – especially in places like India, South Korea, Japan, and the Middle East, where they’re expected to add 41 GW of new coal-fired electric generating capacity over the next decade.

 

This is good news for our coal exports – and for West Virginia, which produced right at 93 million short tons and exported over 30 million short tons of coal in 2017. And EIA estimates that at least 60 percent of those exports were metallurgical coal. 

 

The macro view provides even more encouragement.  EIA recently noted that last year the U.S. exported 116 million short tons of coal, the second year in a row that exports have increased.  That growth was pretty significant – up from 97 million short tons in 2017, driven by demand in Asia and in Europe. 

 

At the same time, coal still provides around 30 percent of our electricity.  And we’ve seen how critical coal is in vast swaths of the country, most vividly during last year’s extreme cold spell on the East Coast – where it provided 55 percent of the incremental daily generation across the affected region.  We also saw it a couple of months ago, when coal again accounted for over half of the power generation during the Polar Vortex in the Midwest.

 

So, coal will continue to be in demand as a global energy source, and it will continue to be critical to the resiliency, reliability, and stability of the nation’s electricity grid. 

 

But there are challenges, so I want to talk for a few minutes about some of the things DOE is doing to strengthen coal – to ensure its future and, in the process, open new opportunities in West Virginia. 

 

One of the biggest challenges we’re facing is the number of coal plant retirements.  We’re looking at more than 240 retired and planned retirements between 2013 and 2020.  That leaves us with just over 530 units scheduled to be operating after 2020.

 

So, at the Department of Energy, we’re focused on increasing the efficiency and competitiveness of existing plants to extend their lives and ensure that they can operate on an evolving grid. 

 

To that end, we’re working on a suite of advanced processes and technologies to improve the efficiency and competitiveness of the existing coal plants.

 

And, at the beginning of the year, we announced a funding opportunity of up to $38 million for projects to improve the overall performance, reliability, and flexibility of our existing coal fleet. 

 

At the same time, though, we need to begin developing the coal-fired power plants of the future — plants that are cleaner, very efficient, and have a smaller footprint.  And this is our second R&D pillar – an initiative we call Coal FIRST (Flexible, Innovative, Resilient, Small, Transformative). 

 

Now, we’ve been working on new and advanced technologies and processes that will shape the next generation of power plants and help ensure the resiliency and reliability of the grid. 

 

To get there, we’re focused on developing the technologies that will stand up next-generation coal plants.  These future plants will need to be able to compete with other sources of power generation and provide stability and resiliency to the grid.  They’ll also need to overcome siting, operating, and logistical constraints that limit the deployment of large-scale plants. 

 

So, these future plants will:

  • Be small – in the range of 50 to 350 MW;
  • Have near zero emissions;
  • Be nimble and flexible to meet the demands of an evolving grid, with the ability to ramp up and down as demand dictates;
  • Be modular – that means they need to employ advanced design methods that enable faster, cheaper, scalable, and repeatable manufacturing of components that can then be integrated into a combined system, like a power plant.  Think in terms of systems that can fit on a flatbed trailer.
  • And last but not least, be highly efficient – north of 40 percent, which, by the way, would make carbon capture easier and less expensive.  By comparison, our current fleet is at around 30 percent efficiency.  Plants in Asia are at 42–43 percent.  Our goal here is 47–50 percent.

 

We began rolling out the Coal FIRST initiative in earnest last year.  In December, we issued an RFP for conceptual designs for coal-based power plants of the future, with an option to conduct preliminary front-end engineering design studies.  And, later this year, we’re going to issue a couple of funding opportunity announcements that will be informed by our review of those proposals.

 

By the way, this initiative is a major part of our Advanced Energy Systems program, and our FY20 budget request for this program is $220 million – a 40 percent increase over what we got from Congress last year. 

 

So, we’re committed to putting the necessary resources into this initiative – and we’re excited about the potential of these plants to strengthen coal’s place in the grid, and transform the way we use that vast resource for power generation.

 

Speaking of using coal in new ways, I want to talk for a moment about what we’re doing to create new value streams for coal – and new opportunities for states like West Virginia. 

 

We’re doing some fantastic work here on things like using coal to develop valuable commercial products like pitches, fibers, nanocarbon catalysts, and other materials.  Today, though, I want to talk about the potential to extract rare earth elements from coal. 

 

Rare earth elements are found in aerospace parts, high-efficiency lights, luminous paint, magnets, and many other products that touch our everyday lives – even our smart phones.  These elements are integral to the way we live – and to economic growth and our national security.  The problem, of course, is that we depend on imports for supplies of rare earth elements.  So, it’s critical to explore potential domestic sources of rare earth elements – and coal is a promising source.

 

For example, there may be about 5 million metric tons of REEs available among coal deposits in Pennsylvania, West Virginia, Kentucky, and Virginia.

 

The issue, of course, is that these critical elements are extremely difficult to retrieve.  And new technologies are needed to help us take advantage of this tremendous potential.  That’s where our Rare Earth Element Program comes in.  To date, we’ve invested $75 million to move this effort forward.

 

We’ve developed new processes to concentrate and extract REEs from coal-based materials, and then separate them into salable products.  At the same time, new technologies developed by industry are being tested at small scale to determine their usefulness in producing REEs from coal by-products. 

 

We’ve also found rare earth concentrations greater than 300 parts per million in coal samples taken from several basins – concentrations that are critical to the commercial viability of extracting the elements from coal and coal by-products.  And, last summer, we commissioned a facility at West Virginia University to extract rare earths from acid mine drainage.

 

We want to build on these successes, and the work we’re doing here will move us closer to developing domestic rare earth element resources from coal.  And by developing a valuable domestic source of REEs right here in West Virginia, we not only could meet our demand for rare earths, we could also add new value streams to coal.  And potentially bring new industries –and new jobs – to West Virginia and other parts of coal country.

 

So, we’re doing a lot work in the oil and gas, and coal spaces that will have impacts nationally – and even globally.  But there will also be local impacts – in Appalachia and here in West Virginia.  And we welcome your input, and the opportunity to work with you on these efforts.

 

Thank you.