Price of Natural Gas Has Thrown Energy Markets Into Turmoil

Updates

March 2, 2014: the long rambling note below discusses the very survivability of the nuclear energy program in the United States. Today, there is a report that Exelon might have to close three of the six nuclear reactors because of cheap natural gas.
 

Original Post

Link to a Washington Post article, brought to my attention by CarpeDiem.com.

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.

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.”

Some random thoughts while reading the article:

1. Re-writing history.  Consider this item in the story:

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.

Yes, there have been some high profile talking heads (T. Boone Pickens comes to mind) that have promoted natural gas as the bridge to a renewable-energy future. But can anyone really name any environmentalist that has been promoting natural gas? No, the environmentalists have been promoting renewable energy, i.e., solar and wind.

Initially they ignored natural gas; but in past couple of years they have been scaring folks about fracking.

State legislatures across America have been mandating renewable energy; I am unaware of any environmentalist petitioning a state legislature to give some breaks to the natural gas industry. So, that's the first point: we have a story suggesting that environmentalists were advocating natural gas all along. No, they ignored it initially, and now they are trying to kill it by killing fracking.

2.  Now people are actually suggesting coal may be better than natural gas when it comes to the environment. Consider this item in the story:

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. I did not think I would see the day when we would be back to arguing coal was better for the environment.

3. All of a sudden, folks are worried about the coal industry and the nuclear industry.  This item:

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.

Wasn't it the president himself who wanted to see the demise of the coal industry? He should have been euphoric at the state of the union address just a few days ago, claiming that the demise of the coal industry was in his sights, with this revolution in natural gas.

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.

4. And continued stretching of the truth:

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.

Have the costs for solar and wind decreased? I would like to see the data. I used to track solar energy costs and those costs had pretty much leveled off when I stopped tracking. At best, costs have come down slightly, but not enough to imply that costs for wind/solar have significantly decreased.

5. Natural gas may or may not be the demise of other forms of energy, but it certainly has derailed the nuclear industry. First, we have natural gas. Then, see point #1 above, we have coal, and now the environmentalists are suggesting coal is better than natural gas for the environment. President Obama says we have enough natural gas to last 100 years; coal reserves are known to last much longer. That to me spells the demise of the nuclear industry if things don't change.

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.”

Renaissance? I would argue that we are looking at the very "survivability" of the nuclear industry if things don't change. The debacle in Japan did not help matters.

6.  There is a reference to Chesapeake in the story, but it's pretty much a passing reference:

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. 

Two things. First, the article did not mention that CHK has a market cap of $14 billion and has debt of $12 billion. Repeat: CHK has $12 billion in debt and its market cap is $14 billion. All things being equal suggest market cap could decrease, and debt could increase. I am not aware of another well-known fossil energy company with a similar balance sheet. Second point: is cutting production of natural gas by 8 percent really going to make any difference for CHK?

Idle rambling.

If one's livelihood is nuclear, would you feel threatened? If your livelihood is renewable energy (wind/solar), would you feel threatened? Sure, the president advocated the demise of the coal industry but everyone knows that disruption of the coal industry has its own perils. But, coal has little to worry about: excess US coal will be shipped to Asia. Companies like CHK are too big to fail, but one has to wonder. Could CHK be in trouble? CHK probably not, but other natural gas companies could be. Non-natural gas companies have already failed, e.g., Solyndra.

XOM has said it has no plans to cut natural gas production.

Conclusion: wow, I would like to say what I'm thinking but everyone would laugh. The rambling started with no point in mind; I was just in a rambling mood and commenting randomly on the article, and then it struck me: the non-natural gas energy industry is saying, "Houston, we have a problem." And the non-natural gas industry has a solution.