Generation Dispatch -- June 24, 2016

Updates

Later, 2:25 p.m. Central Time: see first comment. I brought it up here so that it is browser searchable:

A few observations to add ...

There are continuing improvements in LTO (shale oil or light tight oil) extractive processes that are not so readily apparent due to overall low levels of activity.

The Permian will continue to surprise to the upside as the VERY large number of operators there are becoming more skillful at drilling/ completing wells in that extraordinarily hydrocarbon rich area.

The Canadian oil sector may loom larger in future significance as their SAGD (steam-assisted gravity drainage) procedures continue to become more cost effective in both the extractive activities as well as the infrastructure, ie., mini, modular facilities that are erected when/where needed.

Finally, I've been looking at numerous production profiles from Cabot's Susquehanna county wells in Pennsylvania.

One word ... Wow!

They have increased output on seemingly dozens of wells from 1 MMcfd last year to 3MMcfd now.

Only reasonable way that could happen is if they choked back a bunch last year.

Incredibly productive area. Natgas for generations to come for certain. 

Pennsylvania now reports natural gas production monthly.

Cabot's production in April is here.

Original Post

 

Meandering thoughts on the oil and gas sector. This post is not ready for prime time but it gets the conversation going.

If I had just one 30-second sound bite, one elevator speech for crude oil and one 30-second sound bite, one elevator speech for natural gas, these would be:

• for crude oil: we are now reaching a steady state, supply/demand for crude oil; that balance is fairly well understood; and Saudi Arabia has probably reached its production/export limitations
• for natural gas: in the US, with the announced closure of the last two nuclear power plants in California, it's all about dispatchable energy.

There are so many huge stories going on in the world of energy, it's hard to know where to start. There are so many changes occurring. There are so many new concepts to learn. I focus on crude oil and natural gas.

Crude oil

• the tea leaves suggest that Saudi Arabia has reached its limits of production
• we now have a better idea of how important the different types of crude oil are, e.g. heavy vs light
• we've been in a relative period of "calm" with regard to global production; we seemed to hae reach a steady-state of supply-demand; it seems unlikely to see any huge production / supply increase; it is unlikely to see a huge decrease, but an unplanned decrease in crude oil production seems much more probably than an unplanned increase in crude oil production over the next decade
• the only producers that really count now are Saudi Arabia, Russia, and the US; from here on out, it only becomes more painful for most of the other oil producing/oil exporting nations
• US gasoline demand is setting new records; at some point RBN Energy will like have a post on how much of this is due to gasoline exports
• many analysts still misunderstand / do not understand the "Bakken"
• in the US, the oil and gas industry keeps making progress; in Russia and Saudi Arabia, not so much
• outside of the US, Russia, and Saudi Arabia, the oil industry seems to take a foot forward, and then two steps back -- case studies: Nigeria, Libya, Venezuela, Iraq, Kurdistan 
• the Panama Canal expansion could have huge implications
• the infrastructure in the US to move that crude oil around is in great shape; there seems to be a fairly good match between upstream (E&P) and midstream (refining) capacity; there are huge opportunities to add more petrochemical plants along the Gulf Coast, the East Coast, and inland (North Dakota)

Natural gas

• without question, this is the big story regarding natural gas: the announced, planned closure of the last two nuclear plants in California; solar/wind as replacement only means increased natural gas requirements
• with oil, the "aha" was understanding the importance "heavy" vs "light"
• with natural gas, the "aha" is dispatchable energy; we've talked about it rarely, but today RBN Energy points out the importance -- more on that below
• the US pretty much as a limitless supply of readily accessible natural gas for the next sixty years; generally speaking, 20 years = one generation of humans, so we are talking about three generations of Americans having a limitless supply of readily accessible natural gas

Dispatchable energy: from today's RBN Energy post. The writers try to explain the "abrupt shift in power burn" this summer:

Theme: There are several factors that likely contributed to this abrupt upshift in power burn in June. 

Higher absolute power burn levels this spring: Sure, temperatures in June have been much higher than in May, which is considered a “shoulder” (or off-peak) month for demand typically marked by mild weather. With higher temperatures, June demand for air conditioning is higher as well. That explains the higher absolute power burn levels. 

Economic dispatch:But what about the jump in temperature-adjusted demand? That can be better explained with fuel economics. Power generation plants are brought on line in order of the variable cost of operating the plant (although there are other factors – notably reliability - that are taken into account). Least expensive units are brought on first and most expensive units last – a process known as economic dispatch. 

Even with the "war on coal" natural gas was less expensive: A major (but not only) factor in generation dispatch is plant fuel cost, and the closest competitor to natural gas-fired generation is still coal. As our regular blog readers know, for some time now low gas prices as well as a regulatory and related structural shift in the industry — gas plant additions combined with coal plant retirements — have favored increased utilization of gas-fired plants. So fuel switching economics was a major factor driving more temperature-adjusted demand.  In February, the Energy Information Administration (EIA) reported that U.S. gas-fired power plants generated more electricity than their coal-fired counterparts through much of 2015. Since last October, natural gas prices have beat out even the most accessible (and therefore cheapest) coal — Powder River Basin (PRB) coal — by an average 22 cents/MMBtu. That’s including the cost of transportation for delivering the coal, which has come down drastically in recent months. Last month, when market participants were out scheduling their physical natural gas nominations for June delivery, the June gas contract was still averaging about 13 cents under the corresponding PRB coal contract, and more than $1.00 under the most expensive coal in the country — Central Appalachian (CAPP) coal. In other words, the economics still favored gas at that point, and with temperatures expected to rise in June, power generators likely expected to utilize their gas plant capacity at exceptionally high rates, providing a welcome boost to natural gas demand. 

Pricing has changed: The natural gas market, after all, has been waiting on strong, even record power burn to help sponge up all the excess gas in storage. But with the record power demand (and hot weather forecasts) has come significantly higher natural gas prices. And, in turn, with the recent price gains, the coal-gas price relationship has now flipped.

I'm not particularly interested in the natural gas vs coal story.

That's economic dispatch.

What fascinates me is energy dispatch unrelated to cost.

Wind and solar energy is NOT dispatchable. Say that three times: wind and solar energy are not dispatchable. 

For that matter, as we learned this week (or the previous week), nuclear energy for all intents and purposes is not dispatchable. To some extent it might be, but even if one argues that nuclear energy is dispatchable, nuclear energy is not economically dispatchable. Nuclear energy plants were designed to run for one to three years at a constant, 24/7 rate.

Unfortunately, state-mandated renewable energy laws upset the nuclear energy business model, and nuclear plants are not feasible in an era/area where wind and solar are being mandated. Mandate wind and solar, and eventually the nuclear plants have to close.

But because wind and solar energy is not dispatchable, every time a new wind farm or solar farm comes on line, a natural gas plant has to provide backup. Germany has gone that route (turning to coal, rather than natural gas) and the utilities are paying a huge price for that inefficiency. US utilities have seen this and are taking steps to protect themselves; whether they can is yet to be seen.

Enough for now.