March/April 2013

MAC Economic Commentary

Untapped potential: mining and natural gas

By Brendan Marshall

Natural gas prices have remained stable, while diesel prices have increased | Source: CGA, Kent Group, Statistics Canada 326-0009

In 2010, energy inputs (fuel and electricity) cost Canadian miners $2.2 billion – the third most expensive production cost after materials and wages. Frequent dependency on diesel due to limited or non-existent energy infrastructure in remote locations contributed significantly to this cost.

This dependency on diesel leaves miners with little flexibility to reduce greenhouse gas (GHG) emissions. Amid these concerns, recent developments in natural gas have caught the attention of miners. Technological advances in gas extraction have boosted supply through new finds and have increased access to known deposits. Due to market developments in North America, gas prices remain low on average. And the fuel has a smaller GHG footprint than diesel. This positions natural gas well to assist miners in reducing both their energy costs and carbon emissions.

With anticipated emissions reduction regulations from the federal government, along with several provincial emissions programs and, most recently, the advent of the Western Climate Initiative, incentives to reduce carbon emissions are increasing. Diesel releases roughly 0.9 tonnes of carbon dioxide (CO2) per megawatt hour (MwH) of electricity generated, whereas in producing the same amount of electricity, natural gas emits 0.6 tonnes on a single cycle unit and 0.4 tonnes on a combined cycle generator. Depending on the market value of a trading permit, or the price per tonne of a carbon tax, the potential to decrease emissions and to increase compliance-related cost savings is significant.

In the North American market, the price of natural gas closed at around $4 per million British thermal units (MMBtu) in 2012 – the same rate it opened at in 2000. The fuel had an average 2012 price of US$2.75 per MMBtu based on Henry Hub, the pricing point for natural gas futures traded on the New York Mercantile Exchange. The price of diesel, on the other hand, more than doubled from $16 to $34 per MMBtu over the same period and had an average 2012 price of $34.88 per MMBtu. To appreciate this price increase, consider that one MAC member consumes an average of 2.2 million litres of diesel each month at a single operation. On a strict price comparison, given some 36,500 Btu per litre of diesel, the energy cost savings for this one operation switching to natural gas would exceed $2.5 million a month (more than $30 million annually) at 2012 average prices. Given that natural gas prices are subject to volatility – such as the 2013 winter price spikes in the northeastern U.S. – questions over the viability of switching need further detailed analysis.

Currently, miners face similar challenges in accessing natural gas as they do with other diesel-replacing alternatives. In remote areas, particularly in the North, no direct transmission or distribution pipeline network exists, and building one would be a capital-intensive investment. Maritime transportation of natural gas is also expensive as it requires ships, and unloading and storage facilities. It is a compounded challenge since very little port infrastructure currently exists and all-weather road systems are scarce. This leaves many mining operations isolated, with sunk costs in diesel generation and storage facilities.

Natural gas technologies, however, continue to improve, incrementally enhancing the fuel’s usability for miners. Some natural gas generation technologies have been designed to retrofit existing diesel systems, making a fuel switch less capital-intensive. From an end-use perspective, progress has been made towards the development of liquid natural gas engines for heavy vehicles. In June 2012, Westport Innovations Inc., a global leader in natural gas engines, signed agreements with Caterpillar Inc. to co-develop natural gas technology for off-road equipment, including mining trucks (see Efficient injection). Cat 793, 795 and 797 trucks, equipped to run on natural gas, are expected to roll off the assembly line in 2017. Efficiency gains in combined cycle technology have improved significantly over the last decade, rendering greater generation output per volume of fuel input.

Increasing interest in tapping into the potential of natural gas is likely to continue fuelling innovation, the developments from which will help miners overcome existing hurdles. Although uptake has been limited to date, opportunities where miners can harness these advantages are being explored and implemented where possible. To aid in this process, MAC is currently engaged in an exploratory dialogue with the Canadian Gas Association.

Progress already made in the area of heavy mining vehicles demonstrates a trend that is likely to continue as market demand for natural gas solutions grows. While no home-run scenario exists now, miners are keeping their eyes on the ball.

Brendan Marshall is director of economic affairs at MAC. He works to advance the mining industry’s interests and understanding of key economic issues such as taxation, international trade and investment, transportation, energy and climate change, and innovation.

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