Havoc and Opportunity in Natural Gas
Wolf Richter www.testosteronepit.com
The Electric Power Monthly April 2012 by US Energy Information Administration (EIA) is a showcase of the monumental consequences of the price of natural gas that has dropped to levels not seen in a decade. The fourth warmest winter on record, which curtailed the use of gas for heating, coincided with record production in the US. And now there are concerns that storage facilities, which are filled to record levels for this time of the year, may soon reach capacity, forcing the industry to flare excess gas. This, doom-and-gloom theorists go, will force the price of gas to near zero in the US.
In the international markets, natural gas is a pricy commodity. Japan, for example. It will soon take the last of its 50 still functional nuclear reactors off line for scheduled maintenance (four reactors were destroyed at Fukushima Number One). But due to local opposition, none of the reactors have been brought back up yet. Faced with Third-World-like power shortages, the country is looking at every alternative available, including the reactivation of gas-fired power plants, no matter how old they are. To feed their appetite, Japan has to import liquefied natural gas (LNG) from countries that have invested heavily in liquefaction plants that convert gas into a liquid state before loading it on tankers.
But the US, the largest producer of natural gas in the world, doesn’t yet have liquefaction plants and cannot export natural gas, though it has import terminals for LNG—now used for storage. Hence, even in our globalized economy, this one-way isolation of a major resource in the US has produced a mind-boggling price difference: natural gas for the Japanese markets recently traded at $16.50 per MMBTU, while at the Henry Hub it traded at $2.28 per MMBTU.
But the low price of natural gas in the US has begun to shift the energy portfolio of the electric power industry in dramatic ways. The Electric Power Monthly April 2012, which compares February 2012 to February last year, isn't as current as the EIA’s weekly update, but it contains a plethora of detail that document the monumental shift to natural gas, among them:
- Coal-fired generation dropped 17.7% to 113,831 GWh, for a 36.7% share of all electric power generated, down from last year’s 44.1%. The old saw that 50% of the electricity generated in the US comes from coal no longer holds true, for now.
- Gas-fired generation jumped a phenomenal 38.6% to 91,260 GWh, increasing its share to 29.4% from last year’s 21%.
This massive switch from coal to natural gas will continue as long as the price of gas remains low—along the way accomplishing what environmentalists have long sought but failed to accomplish: reducing the US’s reliance on coal for power generation.
At the same time, the low price is wreaking havoc among energy companies, and those that can are switching from drilling for gas to drilling for oil and natural gas liquids (priced similar to oil). At the 2008 peak of the gas drilling bubble, over 1,600 rigs were drilling for natural gas in the US. Then the rig count plunged. Last summer, it stabilized at around 900, but since then, it has been in free fall. By last week it had dropped to 613 (Baker Hughes). A clear sign that the current price of natural gas is not sustainable.
However, due to the significant delay between dropping rig count and dropping production, production volumes will continue to be strong, and the pressures exerted on the industry—while power generators are laughing all the way to the bank—may not yet have reached the level of maximum pain.
This is the force of creative destruction. The invention of fracking and the constant improvement of the technologies involved gave the oil and gas industry access to an immense natural resource in the US. Enthusiasm for it created a drilling bubble and production levels that, as far as natural gas is concerned, exceeded demand. The victims, if we can call them that, have now become visible: energy companies focused on natural gas, coal companies, the solar industry, companies that build wind turbines.... the list is long. None of them can thrive with natural gas at current prices.
Even President Obama has made dirt-cheap natural gas a cornerstone of his energy policy. But investors are bloodied, and drilling activity is falling off a cliff. Production will taper off, just as demand from power companies and industrial users is skyrocketing—and the ensuing spike in the price of natural gas will throw a monkey wrench in President Obama’s plans. Read.... The Natural Gas Massacre.
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