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Where are Natural Gas prices headed?

Gas Pipe Inside a Power Plant

Having spent more than 25 years in the oil and gas industry I have seen my fair share of hydro-carbon price fluctuations. So it has not come as a complete surprise to me that the "shale gas" phenomenon has had such a dramatic impact on North American Natural Gas prices.

At the beginning of the 21st century Natural Gas prices were about $4.00/Million BTU and thereafter they rose rapidly to $8-$10/Million BTU in the years 2005-2007. The economic crisis that started in the fall of 2008 coincided with increasing production due to the success of shale gas development which translated into a very rapid decline in Natural Gas prices to just over $2.00/Million BTU in 2012. Since then prices have recovered somewhat to about $4/Million BTU.

The low prices since 2008 have resulted in a very predictable decline in the number of drilling rigs exploring for new natural gas reserves. The impact is displayed in the graph shown below.

There are a few very striking features of this graph.

First, the almost total elimination of vertical drilling rigs is interesting. In traditional gas fields widely spaced vertical wells are able to drain the reservoir efficiently because the gas flows quite freely through the rock. In technical terms this type of reservoir has relatively high permeability.

Reservoirs that consist of rocks with lower permeability cannot be produced very efficiently with vertical wells. It is much more efficient, although also much more expensive, to develop these reservoirs using horizontally drilled wells as shown below.

As horizontal drilling grew more common in the late 1990's it was possible to economically produce reservoirs that previously had been difficult or impossible to exploit. These so-called "tight gas" reservoirs became an ever more important source of Natural Gas in North America.

Because "tight gas" does not flow freely through the reservoir rock these wells produce a lot more gas in the first year of production than they do in subsequent years.  In the industry this is known as the production decline rate.

While a decline rate in a high quality traditional reservoir might be 1-2%  (allowing fields such as the Groningen in the Netherlands which came on-stream in 1963 to produce for an estimated 80+ years) tight gas can decline at 10-20% or more annually.

The "shale gas" phenomenon is a variation on "tight gas" which involves the injection of high pressure fluids and chemicals into a horizontally drilled well to break apart or "fracture" the reservoir rock near the well bore.  After years of research & development fracking techniques have become standard industry practice and reliably result in significant production from shale reservoirs.

The exploitation of "shale gas" has increased dramatically since 2005 resulting in a glut of Natural Gas in North American markets.  This in turn has driven down the price of Natural Gas to near historic lows in constant dollar terms.  The Energy Information Agency forecasts that Natural Gas production in the United States will continue to increase for the next two decades based upon ever-increasing production of "shale gas". They also forecast only modest increases in Natural Gas

prices to the range of $7-8/Million BTU by 2035.

I am not convinced that this scenario is at all realistic.

The steep decline in drilling activity over the past 5 years is going to catch up with us at some point in the near future.  It usually takes a few years to tie new gas wells into the distribution system and put production facilities in place.  Therefore there is a lag between drilling activity and production.

The other difficult obstacle to overcome is the impact of rapid decline rates on total shale gas production.

Assuming a constant amount of drilling activity and discovery success the total production flattens out after about 15-17 years with a 10% annual decline and after only 10 years with a 20% decline, as shown in the graphic below.   As the amount of shale gas in production increases the annual decline eventually is equal to the annual additions made through drilling for new reserves (Gary Swindell has analyzed production decline rates in great deal in a paper published in 1998 and extensively updated in 2005). 

As noted above drilling activity has not been constant over the past 5 years but has actually decreased pretty dramatically.  It follows that there will probably not be a large increase or in fact any significant increase in shale gas production over the next five years.

At the same time the older gas reservoirs will continue to decline at a slow rate as they have for decades.

Putting all these factors together it seems likely that Natural Gas supplies in North America will tighten up somewhat in the next few years.  This dynamic of gas "booms" and "busts" is one we have seen many times before and is primarily driven by commodity prices.

When prices reach lows such as they hit in 2012 drilling activity dries up, supplies tighten due to declines and prices go up.  Eventually prices go up enough for exploration companies to be willing to renew the search for new gas reserves.  That process takes a couple of years during which supplies tighten even more and prices go up further.  Eventually the balance swings in the opposite direction and supply meets or exceeds demand and prices soften.

The implications of this cycle are quite worrisome when put in the context of electricity generation.

The MACT regulations will force the closure of more than 40 GW of coal-fired generating capacity in the next few years.  This is firm and dispatchable generation that can be called upon at peak demand times.  No amount of solar and wind can replace that loss reliably without massive amounts of affordable energy storage which does not exist.

Utilities are struggling to come up with plans to replace the lost coal-fired generation capacity.  In many cases the current low prices are pushing utilities towards the construction of Natural Gas fired plants.

That cannot be considered to be a negative choice.  Natural Gas burns more cleanly than coal and produces about half of the CO2 per Watt of electricity generated.

But there are a couple of problems with a wholesale switch to Natural Gas.

For those truly fearful about climate change then the fact that Natural Gas produces CO2 will continue to be a problem.

Probably more important on a daily basis will be the potential impact on utility rates if Natural Gas prices escalate significantly.

There is a reason that more than half of the electricity generated in the United States up until the turn of the century came from the burning of coal.  Coal was and remains the least expensive energy source available.

Coal can also be stockpiled at a generating plant.  That may not seem important but congestion in pipelines can be a real problem when temperatures drop and both residential users and power plants are consuming Natural Gas at the maximum rate possible.  That was an issue in the NE part of the continent during the recent "Polar Vortex" storm.

My fear in all of this is that utilities will spend 10's of billions of dollars building Natural Gas plants which will help drive prices up - and those price increases will be passed on directly to electricity consumers.

My hope is that this rather bleak future of higher prices and continued CO2 emissions will cause utilities and governments to consider putting more time and money into developing affordable energy storage solutions.  If we could store energy on a very large scale we could time-shift solar and wind generation to match our demand patterns.  That is, in fact, a requirement before we can move completely away from the burning of hydro-carbons to generate electricity.  There are other measures that we can pursue - many of which are described in my Sustainable Energy Manifesto.

Discussions

Seems to me the issue points to a much more serious problem.

We have an administration that is hell-bent on running coal power plants out of business, yet is virtually unaccountable to the longer term damage to the economy they create. Utilities do not generally care, one way or the other, as the regulators allow them to make money in response to whatever dim-witted policy is contrived by the politicians.

Ordinarily, one would expect the ballot box and the protections of the rule-of-law to counter balance the rampant extremism of the current administration. However, the law is simply being circumvented and ignored while the alleged Justice Department aids-and-abets the entire enterprise. The Democratic Senate thwarts the peoples business at every turn. Further, gross distortions and outright lies are trotted out with the express purpose to deceive the electorate.

The loser in this Kafkaesque situation is the consumer who is the prime target of the war-on-the-middle-class being waged (quite successfully) by the left. Ultimately, balance will return, but the economic damage to our children's future is going to be quite severe.

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Great article, great. I have a 130 page compendium that I just started circulating. I mentioned you in it Michael as being somewhat to the right of Mr G Khan, although I cited something you said.

As for Davis Dwan't comment about the possible result of the steep decline in gas wells, that goes into my compendium today, and where people can see it.

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Davis, thanks for the time you spend putting your articles together. My wish is that someone would take an honest stab at outlining a national energy use policy - inclusive of all fuels - that takes into account the tangible and intangible positives and negatives of each fuel type. An effort to create mandatory research funding for clean coal technologies (there is actually enough coal in the ground to fuel our electricity needs for a few hundred years) to enable coal as a base-load fuel where it can be; an honest, really honest evaluation of fracking on the environment; oil reserves/depletion/refinery throughput; horizontal drilling, energy/fuel exports, technology advances by fuel type use, etc.

Your comment about the 40 GW of coal-generated loss sends shivers up my spine thinking about the ensuing economic chaos and the physical hardships by both residential and commercial users.

These are some of the same concerns and issues that the AGA and the NGI had when I worked with them in the mid 1980s.

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When viewed in terms of the net present value of revenue requirements over 30 years, the relative differences among a range of resource options is surprisingly small, which suggests an "all of the above" policy won't be much more costly than the optimal supply mix. It suggests strategies that focus on a single resource type don't save consumers much money but they do increase the risk of transient price spikes and supply disruptions

Mr. Keller seems to favor coal. I disagree, but my extreme dislike for coal has nothing to do with its carbon emissions. For all the public angst over nuclear power, coal is a far larger threat to public health. It's harmful emissions include SO2, particulates, mercury and other toxic metals, and the enormous amounts of ash and other by-products that are increasingly finding their way into drinking water supplies. Some may regard the EPA's stance on emissions controls as a war on coal. I regard them as common sense measures to ensure the nasty remains of coal combustion are dealt with responsibly.

Jack Ellis, Tahoe City, CA

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Seems to me equating zero risk to any form of power generation (coal, nuclear, wind, solar, etc) is wildly unrealistic and completely out of touch with economic common-sense. A one-sided focus on the health issues associated with using coal completely overlooks the fact that millions of lives owe their existence to the use of coal. This seems to be conveniently overlooked by zealot-like overreactions to the use of coal.

A reasonable and balanced approach should be applied, but that is essentially impossible when the EPA is run by extremists appointed by an Administration that just plain lacks integrity.

Technology improvements continue to reduce emissions from coal plants, but to expect no emissions is just silly, particularly when the impacts approach "angels-on-the-head-of-a-pin" proportions.

As to the screw-ups that occasionally occur, hold those responsible accountable and subject to penalties, as establish by laws. That same principal should also be applied to government.

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Mr. Keller, I think we agree on the idea that no energy conversion technology is risk- or consequence-free, and I think we might also agree that mitigating those consequences is important. My preference would be for utility managements to take the lead in proposing and adopting measures that protect people's health and the environment. They should take the initiative because it's the right thing to do, it's good for business, it backs up the notion that utilities provide a public service by their deeds and not just their words, and it keeps the bureaucrats at bay. Since utility managements apparently aren't smart enough to do this, regulators feel compelled to act instead. Officials in West Virginia realized pretty quickly that the public was no longer perfectly willing to accept a lax regulatory regime when a consequence was contaminated drinking water.

Since Duke Energy is clearly responsible for the recent spill that has contaminated the Dan River with toxic waste, what remedy would you propose for this screw-up, which is becoming less and less of an occasional thing and more and more common? If I were the decision-maker, I'd be considering charges for criminal negligence.

By THE ASSOCIATED PRESS The state Department of Environment and Natural Resources said wastewater containing unsafe levels of arsenic from a Duke Energy coal ash dump is flowing into the Dan River, already contaminated from a Feb. 2 spill. The state ordered Duke on Tuesday to stop the wastewater coming from a pipe running under a coal ash dump at its Eden power plant. A nearby pipe at the dump collapsed without warning Feb. 2, coating the bottom of the Dan River with toxic ash as far as 70 miles downstream. State regulators expressed concern that the second pipe could fail, setting off a second spill. Water coming from the pipe contains arsenic at levels 14 times that considered safe for human contact. Duke had played down concerns that water in the pipe is contaminated. The United States Fish and Wildlife Service advised that a pile of coal ash about 75 feet long and as much as 5 feet deep has been detected on the bottom of the Dan River near the site of the Feb. 2 spill. The coal ash is burying aquatic animals and their food.

Jack Ellis, Tahoe City, CA

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Retiring coal plants Might Increase Demand for Natural Gas

Per Black and Veatch US expected to retire up to 60 GW of coal-fired capacity by 2030.A portion of these retirement will reflect conversion to natural gas. Recently Lakeland Electric switched from natural gas to coal when natural gas [Henry Hub spot price] exceeded $6/MMBTU. On the other hand ANGA expects natural gas prices to remain between $4-$6 per Mcf due to improved drilling and recovery technology.

Conversion from Coal to Natural Gas based-loaded power plants will continue until cost of Natural Gas exceeds $6/MMBTU. This scenario may not be seen for the next few years.- Natural Gas remaining fuel of choice for power plants. See reference to my article

Goodwin, R.W.; “Natural Gas Power Plants’ Fuel of Choice”; Energy Pulse Weekly; July 26, 2011

Richard W. Goodwin West Palm Beach FL 2/19/14

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Coal isn't alone. Uranium mining is equally hazardous and uranium mining companies apparently act no more responsibly than Duke Energy did: http://www.nytimes.com/2014/02/20/us/nestled-amid-toxic-waste-a-navajo-v...

Jack Ellis, Tahoe City, CA 96145

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Jack, I do not think problems at coal plants are becoming more common, rather the screw-ups are more visible due to regulations and much more widespread media visibility. I can remember some truly hair-raising situations back in the "old days" whose existence never made it past the plant gates. This same observation applies to all manner of industrial facility as well.

As to Duke, the plant exceeded the permit limitations and will have to pay any subsequent fines that may be imposed. Not sure what the actual damage to the environment is, but some remediation may be required if an even-handed assessment concludes it is significant. However, not sure the currently constructed EPA is capable of being "even-handed".

I am quite certain that the actual impacts on the environment of using coal are much less than in the old days. The real issue: what is "good-enough" from an environmental and economic standpoint, recognizing "zero" impacts is absurd? That same concept applies to gathering and using natural gas.

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The switch from gas to coal that Richard Goodwin mentions is Worth thinking about, followed by the good news that the price of gas is expected by experts to range between four and six dollars. Is that with or without the exports of natural gas that dumb Moniz and his henchmen feel is appropriate?

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A good article Davis,

The problem with renewables is not solved by energy storage alone and I will illiustrate with an example.

A nuclear power plant rated at 1000 MW will produce 1000 MW for 24 hours in any given day day and can supply a load of 1000 MW all day for each one of the 24 hours that it operates. It requires no storage facility. I assume a 100% capacity factor although realistically this is about 92-98% and lower for some plants but the average is probably 90% or better.

Lets us say that we now replace that nuclear generation with a 1000 MW solar farm of photo-voltaic cells and combine it with 1000 MW of storage capacity. That by the way is an enormous consumption of land and a very very large storage facility with technology we do not have yet. Those problems aside let me continue.

If the Sun is providing the 1000 MW of energy input the solar farm will produce 1000 MW for each hour that the Sun shines. The Solar farm can either feed that energy to the storage facility for use later OR it can supply 1000 MW of load while the Sun provides the energy (assuming no clouds or other reductions in output occur) So lets say we have located our plant exactly on the equator and we receive 12 hours of sunlight and 12 hours with no sunlight. For the 12 hours of sunlight our solar farm can feed energy to 1000 MW of load or feed energy to 1000 MW of storage. When the Sun goes down it cannot do either since it is producing no Megawatts at all.

If we had chosen to store the 1000 MW during the 12 hours then we would have 1000 MW for use at night but we would NOT have been able to supply the 1000 MW load during the day. If we had chosen to supply the 1000 MW load during the day and not stored it we would not have been able to supply the 1000 MW load at night.

Therefore it follows that in order to supply both the 1000 MW load during the day AND the 1000 MW during the night we would need TWO solar farms each of 1000 MW capacity. In other words for every megawatt of load you will need two megawatts of solar panels AND one megawatt of storage. That is because the solar panel has a 50% capacity factor.

Capital and land is then required to build twice the installed capacity necessary as well as the storage capacity and is the reason why solar is not economic irrespective of the price of solar panels. In other words to do the same job as a single nuclear power plant rated at 1000 MW you will need two 1000 MW solar farms and 1 x 1000 MW storage facility.

Similar arguments apply to wind farms except the situation there if far worse. With a capacity factor of at best 33% you will need three times as many 1000MW wind farms on average to supply the 1000 MW load.

Ignoring capacity factor and fuel availability in calculating renewables cost is sheer folly that borders on stupidity.The ONLY reason that solar and wind exist is because coal, nuclear and gas also exist. Take the conventional grid away and you will create an enormous reliability and cost problem and essentially destroy the grid system itself. Germany is well down that path and if were not for French Nuclear power plants would be in serious trouble already. They will soon see that a solar and wind future is the correct path to economic ruin.

If there is no coal and natural gas prices are too high to operate natural gas plants and all the nuclear plants are not operating where is the power going to come from?? As in Japan right now the result is manifesting itself in gigantic trade deficits, increased coal fired pollution and an abandonment of any hope of achieving CO2 emissions reductions.

Welcome to the real world.

Malcolm

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Fifty percent CF is great for Florida or the Central African Republic, Malcolm, but what about Germany. Brush up on your German if you want to hear some opinions about the foolishness that Angela Merkel has sponsored. Unless I am mistaken, she ignores those opinions the same way she would ignore squirrels or butterflies, but I wonder what the flunkies around her Think,

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I could not agree with you more Fred. When I look at solar installations in Canada covered in feet of snow and ice and producing zero for days on end I wonder what fairy tales the people who installed them have been told. It does not matter much to me whether the likes of Ms Merkel think solar power is viable in the northern hemisphere the arithmetic and the physics clearly point to this being a monumentally stupid idea. And should the nincompoop currently in power in France choose to close all the French nuclear plants then the lights will indeed go out in Germany as well as France. I recently invested in Lyondell-Basell a large Eurpooean chemical producer that is shutting down all of its European operations and moving them to North America simply because of high energy costs - gas mostly but also electricity. It will not be long before you see VW and BMW follow suit since corporations vote with their feet and their dollars. When the inevitable exodus of industry from Germany starts Ms. Merkel will realize her colossal mistake.

She will wear it well.

Malcolm

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Malcolm, the price of electricity to households is steadily Rising in Germany. Funny, but I NEVER thought that a crazy idea like the one she put forward would go anywhere in Germany, but history tells us that Germany is the Place where nuthouse thinking would Catch on. Try Reading Hitler's speech when he declared war on the US.

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I cannot say that surprises me in the least Fred.I am not an economist but as I note above you need to install 2000MW solar for every 1000MW of nuclear. And that presupposes the sun shines at 100% for a full 12 hours......which during my visits to that country...clearly is not the case. I estimate that for countries in the Northern hemisphere you would need to install 3 to 4000MW for every 1000MW of nuclear. THat is an awful lot of solar panels and does not take account of the storage capcity alsop needed to make that scenario work. For a modern industrial economy solar panels are the dumbest idea yet. Even if the price of installed solar per MW was exactly the same as nuclear it would still require at least four times the capital for the same net result of 1000MW continuously for 24 hours. It does not matter how efficient the panels are the capital cost of replacing nuclear with solar (or wind - an even worse case) will send German industry scurrying for the exit doors. This trend is already happening. With Merkel sticking to her nutbar plans the worst is yet to come.

I don't like to be proved right but I will in this case take great delight in the spectacle.

Ms Merkel as smart as she is appears not to understand the economic implications of the proven fact that the sun does not and never will shine at night.

Malcolm

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