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Will natural gas prices in North America skyrocket by the end of 2014?

My friends and family recognize that I am an odd bird. I often wake up in the middle of the night as a result of thinking about things that few others worry about. Tonight was a great example; my eyes failed open at midnight as I thought really hard about how to spread the word about the dramatic increase in natural gas prices that will almost inevitably occur in the United States within the next two years.

In the publications that I regularly read, it is impossible to avoid noticing that there are some enormous bets being placed on the premise that natural gas prices in North America will remain at levels that are between 1/3 and 1/6th of the world price. Despite all words to the contrary, those prices are not the result of some kind of incredible technical innovation that has fundamentally reduced the cost of finding and extracting natural gas; they are the result of a temporary imbalance in the market that makes available supply slightly larger than available demand.

Several factors have combined to produce the pleasant effect – for gas buyers – of very low prices relative to history and relative to the prices paid almost everywhere else. Mild weather, slow economic conditions, associated production from wells drilled in search of far more lucrative oil, the high rate of initial production typical in frack jobs, leases that require drilling, the inherent inertia associated with drilling activities and, perhaps, a little purposeful push from people who understand how to use low prices to destroy competition have all combined to ensure that gas seems plentiful – in North America.

The rocks and shoals ahead are a result of a different combination of factors. Independent gas producers are having enormous difficulty attracting financing needed to continue drilling; major producers have cut their drilling programs as a natural result of getting numerous questions about low prices from analysts and stockholders; too many new customers are buying into the marketing pitch that hydraulic fracturing will lead to cheap gas forever; the housing market looks poised to begin a serious recovery led by low supply and pent up demand; and there is a serious push to try to eliminate the transportation bottlenecks that have kept natural gas prices from equalizing around the world.

The significantly higher prices that I predict will last at least as long as the pleasant times with low prices because the only effective response – other than another dramatic recession – has a long lead time. Yes, I purposely used the singular in the previous sentence because I can only see one alternative to a replay of the dramatic rise in gas prices that occurred here between 2000-2008.

The only reasonable answer to a price rise driven by having an overall energy supply that is lower than the demand is an increased supply. There are only two technologies with the capacity to make a difference – coal and nuclear energy. I may be totally off base, but I do not see a new round of coal plant building anyplace outside of Germany, the home of brown coal fans.

In my less than humble opinion, we need to build new nuclear plants. We should have started building in earnest at least a decade ago, but the second best time to start any long lead time effort that should have already started is NOW. Unfortunately, I think that almost everyone who has the ability to take action on this warning is either hypnotized, dozing, or celebrating the fact that they will be the wreckers who capture the spoils as the economy crashes against the rocky shore of high energy prices.

Being a lookout on a very large ship can be a lonely way to spend the midwatch.

Disclosure: I am a nuclear professional who knows a number of other nuclear professionals who have moved on, been reassigned or even laid off as a result of project delays or outright cancellations. The common refrain from the decision makers is that they cannot justify the expense of developing new nuclear capacity at a time of low gas prices. I want to burn this graph into their memory banks.

Natural gas wellhead price history (US)

Natural gas wellhead price history (US)

Instead, I think they are engaging in delusional thinking, purposely encouraged by publications of graphs like this one.

Official gas price projections

Official EIA gas price projection – Aug 2012

Note: In my years of analyzing the energy industry, I have found that the U. S. Energy Information Agency is a terrific source of historical data about energy prices and a really lousy source of accurate projections about the energy market. Here is a fun way to spend a few hours; read some old EIA projections and then compare them to what really transpired. You will see why I have made that statement.

Before signing off, I do want to point out that there are at least a few people in leadership roles in the energy industry who get it. Here is a short video of Steve Byrne of SCE&G explaining why it is a good time to be building new nuclear power plants.

One more disclosure: I own some stock in SCANA, the parent company of SCE&G. I tend to like to invest in companies led by people with some vision.

The post Look out – natural gas prices in North America will skyrocket by end of 2014 appeared first on Atomic Insights.

Discussions

Geoffrey Styles's picture
Geoffrey Styles on Aug 31, 2012 5:26 pm GMT

Rod,

This might surprise you, but I agree with much of your diagnosis and prescription. Natural gas prices are depressed for a variety of reasons, including some you identified, and I don't expect them to remain this low indefinitely.  The futures market--not a forecast, but a current market consensus--reflects gas rising back above $4 by 2015. Gas drilling has fallen off, not least because it's more lucrative to drill into liquids-rich (oil and natural gas liquids) portions of the shale, because the gas is worth the energy equivalent of $18/bbl while the oil is currently worth $70-90 per barrel, depending on which side of the current pipeline bottlenecks your wells are.

However, I think your analysis missed a few important factors affecting the magnitude and duration of a future natural gas price recovery.  First, I think you're overestimating how long it would take to bring a lot more gas online.  Shale technology has altered gas industry dynamics by essentially eliminating exploration risk for an enormous category of resources.  It's an oversimplification, but shale drillers now don't have to find the resource first, as they did in the past, involving several lengthy steps.  Instead, at least for the big, identified shales they simply need to sign up the mineral rights owners and then line up the rigs and supplies.  We also don't yet know the long-run marginal cost of producing the various shales.  This is still a relatively new application, and companies are rapidly moving down their cost curves as they gain experience and as the services industry continues to innovate.  If those costs look like $4-7/MCF today, could they end up at $3-4 in a few years?  Someone who specializes in this highly technical field could venture a better guess than I.

Having said that, I agree with you that we urgently need to start building new nuclear reactors, even if a gas price spike such as you suggest might not be as sudden, high, or lasting as you imply.  As enthusiastic as I have been about shale gas, it can't supply all of our energy needs, even if they stopped growing because we become more efficient.  Fuel and technology diversity are crucial for many reasons, and the existing nuclear fleet appears to face serious relicensing uncertainties, at least in some locations.  It would also be a terrible irony if the emissions-reduction potential of gas-fired power generation were squandered displacing the largest low-emission generation source we have, precluding the possibility of using some of this gas to displace imported oil in other segments like trucking, bus transit, and possibly rail, as we've discussed in the past. 

Edward Kerr's picture
Edward Kerr on Aug 31, 2012 10:43 pm GMT

Rod,

Great analysis. I was trying to make those same arguments to a friend who heats with NG just a few days ago but he just poo pooed me.

Personally I suspect that some NG is an ongoing process ( bacteria eating rock and excreting methane-as many bacteria do) but even if that were true it could not sustain our use of NG.

I cannot agree with your assertion that Nuclear Energy is any type of an answer. The exigent negatives far outweigh it's one redeeming factor-low CO2 emissions.

To my way of thinking solar energy offers the only sane long term solution to our electrical generation needs. Unfortunately, due to it's main downside (variability) we will need to build in a large redundancy. However were we to cover the same area that fossil fuel extraction has already, and will in the future, destroy environmentally, we could easily power the planet.

Regards,

Edward Kerr

Leo Klisch's picture
Leo Klisch on Sep 4, 2012 12:08 am GMT

I understand the value of NG for other purposes such as transportation and should not be squandered. I think one could say that using NG for water or space heating is squandering since for this purpose only a  very low temperature source is needed. So as NG prices rise maybe CHP, solar thermal (where storage is much cheaper than electrical storage) will play a big role in keeping our NG consumption under control.

 

Plus I'm not so sure that nuclear can compete against something like the HVDC 3500MW Rock Island Clean Line from NW Iowa to near Chicago even with NG backup. If a 3500mw or less nuclear plant was built in nw Iowa it would have to run flat out 24/7/365 to make it worthwhile and would reduce the amount of wind into that line by that much I think? Just like transportation wind backup could be one of the most appropriate ways to use our precious NG resources if we can get it down to say 10 to 20% of for example the total yearly output of the Clean Line.

 

 

 

Maila Konery's picture
Maila Konery on Oct 2, 2012 6:51 am GMT

Consumers in New York are already fuming over crazy surcharges for spending money on gas with a charge card. Gas stations all over the nation have been observed doing it, largely to be able to break even on gas sales. Article source: Gas station credit card fees irking motorists

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