Saturday, April 6, 2013

Natural Gas:

A Flash in the Pan?

Several articles have been published in the past few days all addressing various aspects of the sudden rise in the prospects for natural gas, and the potential longer-term consequences of following policies that rely too much on what might be a short term availability.

The articles take somewhat different approaches to the problem.  Some of the authors, or the analysts cited, have their own biases as far as the alternatives to natural gas.  However, all have some common themes with respect to the long-term prospects for natural gas and the detrimental consequences they can wreak on other alternatives while the costs are low and everything looks rosy.

Two of the articles sum up the key issues:

Is Natural Gas the Next Bubble?  Has Fracking Promised More Than It Can Deliver?

The provocative title is a summary in itself.  The subtitle to the article succinctly states the conclusion:  New research shows that putting too much of our eggs into this energy basket could be detrimental to our future economic health.

The article goes on to provide several examples, for both coal and nuclear plants, where the cost competition from currently cheap natural gas is driving utilities to close the existing plants.  Although I take issue with their characterization of nuclear power as having "glaring environmental, safety and health issues," the authors are objective enough to recognize that substituting natural gas for nuclear power production has serious detrimental effects on carbon emissions.

Based on my own reading, I think their conclusions about the potential short-term nature of the natural gas boom are valid.  They provide a fairly detailed discussion of studies that verify the concerns, and speculate that, in the not-so-distant future, we may find ourselves facing exactly the same scenario that we face today with crude oil--"much more dependent and at a higher price."

Rise of Natural Gas May Mean Fall of Alternative Energy

This article reiterates the theme that the low cost of natural gas may be temporary.  The article also outlines various other concerns about natural gas, including the environmental effects of gas production.

The author outlines some of the paths that the current push for natural gas might lead us down.  He observes that, "Today the shift to natural gas in electricity generation is out-of-control, and consumers are going to suffer as a result. If you want to see the price of natural gas rise significantly, replace all coal and nuclear plants with natural gas over the next 30 years. We would wind up with a single fuel for electricity production just as we have one fuel for transportation. Consumers would regret it."

Although "alternative energy" for many people seems to be a code-word for "not nuclear," this article takes a broader view.  The author notes that:  "Advances in nuclear power and renewable energy sources would help maintain energy diversity. Small modular reactors built in a factory for a fraction of the cost of large nuclear plants could make a real difference in this country and globally. As we expand the use of intermittent renewable sources of electricity - especially solar and wind - base-load nuclear power will be needed to "firm" renewable sources when they are not available."

Other Articles

Still other recent items look at the same problem from other angles.  One, for example, notes that many wind farms have long-term power purchase agreements (PPAs).  These could keep costs low
and exert a downward pressure on rising gas prices.  While the article is focused only on wind, the same should, of course, be true of PPAs for other energy sources.  I am not sure what the terms are for PPAs, so wonder if these could possibly hold prices down for the longer term, but it may be one way we can buy time as the full dimensions of the gas bubble begin to take shape. 


1 comment:

  1. @Gail

    As I tried to imply here quite some time ago in response to your review of "Why We Hate Oil Companies", I see a purposeful marketing strategy behind what has been painted as a spontaneous, technology-enabled shift in the supply picture for natural gas. In my analysis, one of the factors behind the natural gas bubble is a purposeful effort to derail the nuclear revival.

    The oil companies - which are also the natural gas companies - have taken some pages right out of Rockefeller's dusty old Standard Oil book. They have invested heavily into the infrastructure required to extract and deliver gas, driven down the price and are capturing market share.

    As gas producers drive out their competition - primarily new nuclear power plants that do not burn ANY natural gas to supply electricity, which is their most lucrative market - they will act surprised as demand for their product increases faster than their ability to increase production. That process will inevitably lead to an imbalance between the rate at which customers want their product and the rate at which they can deliver.

    Prices and profits will rise. Since gas infrastructure is notoriously difficult to build because of the nature of the commodity - it is a low energy density gas at STP - the price increase will be rapid and sustained.

    People that extract and sell gas understand its price history. They have very fond memories of the "good old days" from 2001-2008 when their wells were incredible cash cows because they were extracting with essentially zero marginal cost, but selling for $6, $8, $10, $14 or even $25 per MMBTU.

    There was a brief period last winter in New England when natural gas prices exceeded $30 per MMBTU. That should have been a clear warning, but it does not seem to have been heeded.

    Unfortunately, many of the most powerful influencers in the nuclear industry also remember the last gas price mountain with fondness. When you are operating nuclear plants with a marginal cost of 2 cents per kilowatt-hour in a competitive market where the "last-in" supplier sets the price, skyrocketing natural gas leads to high priced electricity.

    Every commodity supplier likes high prices for their commodity, especially when they already know that their production costs are far lower than the market price in a supply-constrained environment.

    Rod Adams