Cheap natural gas jumbles energy markets, stirs fears it could inhibit renewables

For the past three years, promoters of shale gas and environmentalists opposed to coal-fired power plants have hailed the sudden abundance of U.S. natural gas as a bridge to a renewable-energy future.

But natural gas has become so cheap that many energy experts and environmentalists now wonder whether it will turn into a long, bumpy detour.

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The ‘game-changing’ effect of shale gas.
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The ‘game-changing’ effect of shale gas.

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Jan. 31 (Bloomberg) -- Lucas Pipes, an analyst at Brean Murray Carret & Co., talks how the coal industry has been affected by natural gas prices.

Jan. 31 (Bloomberg) -- Lucas Pipes, an analyst at Brean Murray Carret & Co., talks how the coal industry has been affected by natural gas prices.

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U.S. natural gas prices, which hit more than $13 per thousand cubic feet in 2008, have tumbled to about $2.50 per thousand cubic feet. Rapidly rising production of shale gas and a warm winter have created a glut and pushed supplies in storage to 21 percent above the average of the past five years.

That has been good news for consumers, whose gas and electric bills have declined slightly. And it is a hopeful sign for the chemical industry, which uses gas as a raw material, and the makers of electric vehicles. President Obama is promoting the use of natural gas in trucks. And since burning natural gas emits half the greenhouse gases of burning coal, it could cut the quantity of climate-changing emissions.

Markets in turmoil

But cheap gas has also thrown energy markets into turmoil. It is impossible for almost any other source of electric power to compete, especially coal and nuclear. By trimming fuel bills, cheap gas has reduced incentives for energy conservation and efficiency. And it has left solar and wind, despite their own falling costs, heavily dependent on government mandates in California and roughly 30 other states, including Maryland.

“Shale gas has changed the game in the United States,” said Paul Browning, head of General Electric’s thermal-products division, which makes gas turbines. “It is putting pressure on other power generation technologies.”

The shale gas rush has raised myriad environmental issues over wastewater disposal, the toxicity of chemicals used to produce the gas, a possible link to earthquakes, and the amount of potent methane gas that escapes during drilling, possibly offsetting the climate benefits of gas over coal.

But the economic issue is disruptive, too. The rush to produce shale gas “is forcing all of us to seriously address what it means for us,” said Ralph Izzo, chief executive of Public Service Enterprise Group (PSEG), a New Jersey-based utility that relies on nuclear energy for half of its power supply. Izzo said it would mean “the delay of the nuclear renaissance for years to come.”

Coal use is fading. PSEG is increasing natural gas’s share of its power generation mix from 15 to 35 percent and shrinking coal’s share from 35 to 15 percent. In North Carolina, Duke Energy’s new Buck natural gas plant is producing power 30 percent cheaper than the company’s renovated Belews Creek plant, one of the most efficient coal plants in the country.

Even gas-producing companies are cutting back because of the glut. Chesapeake Energy, a leading shale gas company, said Jan. 23 that it will cut the number of rigs drilling for gas to 24, a third of its average in 2011. Chesapeake also said it would curtail its natural gas production by about 8 percent. Exxon Mobil said Tuesday that it has maintained its 70-rig U.S. fleet but doubled the percentage of rigs searching for oil instead of gas.

Undercutting renewables

Some supporters of wind and solar energy are worried that natural gas could undercut those technologies, too.

Last year, in a report titled “Are We Entering a Golden Age of Gas?,” then-International Energy Agency head Nobuo Tanaka warned that “while natural gas is the ‘cleanest’ fossil fuel, it is still a fossil fuel. Its increased use could muscle out low-carbon fuels, such as renewables and nuclear. . . . An expansion of gas use alone is no panacea for climate change.”

Rachel Cleetus, a senior climate economist at the Union of Concerned Scientists, said that “the problem is [natural gas] can take over the entire pie and crowd out renewables. Part of the reason this is happening is there’s a boom and there’s a sense that natural gas resources will be around forever.”

In his State of the Union address on Jan. 24, Obama echoed the conventional wisdom, saying that “we have a supply of natural gas that can last America nearly 100 years” and that “the development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy.”

But will natural gas continue undercutting other energy sources?

The day before the State of the Union address, the federal Energy Information Administration (EIA) underscored uncertainty about the outlook for gas supplies by slashing its estimates of how much gas is contained in the Marcellus Formation, the nation’s biggest shale gas prospect. The agency lowered its estimate of the “technically recoverable resource” by two-thirds, to 141 trillion cubic feet. That is still equal to six years of total U.S. gas consumption and well above the U.S. Geological Survey’s most recent Marcellus estimate, but it shows how much is still being learned about this new frontier.

John Staub, an EIA analyst, said proven reserves — the most certain category — in the Marcellus jumped 70 percent and that the rate of production decline in wells drilled has been slower than expected. But with new well data from Pennsylvania, Staub said, the EIA believes that less of the Marcellus can be tapped with existing technology than previously believed.

Overall, the United States has 273 trillion cubic feet of proven reserves, enough to last about 11 years. The EIA’s estimate of gas resources that can ultimately be recovered stands at 2,214 trillion cubic feet, or 92 years at present consumption levels. However, that includes gas offshore and in Alaska’s remote North Slope, where pipeline construction will be costly.

Chasing export deals

There is enough certainty about supply for several companies to start pursuing export deals. Cheniere Energy Partners, which had built an import terminal for liquefied natural gas in Louisiana years ago, has won federal approval to turn it into an export terminal and is signing up customers, including Korea Gas.

On Oct. 7, Dominion Power received permission from the Energy Department to turn its Cove Point facility, built in the 1970s to import liquefied natural gas from Algeria, into an export terminal. It can negotiate contracts for up to 25 years. Cove Point could export 1 billion cubic feet of natural gas a year, about 4 percent of current U.S. consumption.

The EIA predicts that the United States will become a net exporter of liquefied natural gas by 2016.

But exports and gas-fueled trucks are bad news for utilities and chemical companies that prefer to keep natural gas supplies in the United States — and to keep domestic gas prices low. Many believe they have seen this pattern before.

“We’re living through an era that we’d call the tyranny of natural gas,” said David Crane, chief executive of NRG, a major electric power company. “With all the enthusiasm for unconventional gas and low prices, the one group of people you don’t see rushing to embrace it . . . are the utility execs. We remember 1992, when everyone thought gas would be $2 forever.”

Boom, then bust

Back then, the United States built gas-fired power plants able to produce 200,000 megawatts, Crane said, equal to the entire power generation capacity in Japan. Then gas prices soared, defying economic models. Among utilities, Crane said, “everyone lost money.” Duke Energy chief executive James Rogers later called gas the “crack cocaine” of the electric power business.

Since then, half the states have passed clean-electricity standards that could protect renewable energy sources from natural gas competition. But renewable-energy developers also like to remind people about the volatility of gas prices over the past decade or two.

James McDermott, a managing director at US Renewables Group, said that when building a power plant, which requires borrowing money for 15 to 20 years, the cost of inputs has a “tremendous effect” on risk and thus the cost of borrowing. Since the wind and sun are free, there is “no price risk,” he said.

 
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