Shale Gas Boom Causes Prices to Bottom Out

Ken Silverstein | Jan 10, 2012

Excellent Article by Ken Silverstein in EnergyBiz Insider regarding the reasons for current low natural gas prices

The boom in shale gas production is causing prices to bottom out. The irony here means that consumers are getting the cheapest natural gas in quite some time at the expense of those producers hoping to cash-in on the craze.

With the advent of new technologies to allow shale gas explorers to reach deep inside the earth’s surface to retrieve such fuel, the market place has felt the effect. Prices, in fact, have been trending down for a few years. And while that fundamental should persevere, the retail cost of that gas is expected to rise over time. That’s because an increasing number of utilities will come to rely on it.

“Natural gas used to generate power has half the carbon dioxide emissions of conventional coal power generation and near zero sulphur emissions,” says BP’s Energy Outlook. “Gas is expected to displace coal in power generation across the (developed world) due to rising carbon prices, permitting constraints for new plants and mandates.”

BP goes on to say that natural gas is the fastest growing fossil fuel and that its share of the electric generation market will continue to climb. Unconventional gas such as shale and coal bed methane will help drive up those ratios, it adds, noting that such forms will comprise 57 percent of all natural gas production by 2030.

That potential is the prevailing force even though it is causing short-term prices to drop — 30 percent to 40 percent in a year. In the dead of winter, the price of natural gas is now $3 per million BTUs, which is $10 less for the same unit in the summer of 2008. None of the investment banks that analyze natural gas are bullish on prices this year; most are forecast to be in the $3 range with some in the low $4s.

Despite the reduced price, producers can’t get enough of natural gas: The October 2011 monthly data presented by the U.S. Energy Information Administration shows gross production of 2,483 billion cubic feet, the highest month on record.

Beyond the new technologies that now allow access to abundant supplies, the developers are aided to a large extent by policy makers who are making it difficult on the competition: coal. Reports are suggesting that will it cost as much as $70 billion to comply with all of the pending federal rules. Utilities are finding that it is easier and cheaper to retire their older, smaller coal units.

Electric Power

According to the Brattle Group, it will cost $101 billion to $181 billion to retrofit the existing coal-fired generation portfolio. That is 5-7 percent of the total capacity but 16-21 percent of the total coal capacity. Altogether, it expects 50-66 gigawatts to be retired by 2020, and coal demand to fall by 15 percent by that time.

But many of the utilities that have used coal to fuel their electricity needs say that they are well positioned to deal with those changes. Not only do utilities such as Duke, Progress Energy and the Tennessee Valley Authority have diversified portfolios to cushion against such regulatory risks, they have also been moving into other types of generation, or they have installed scrubbers on their coal plants. In some cases, previous legal issues have forced the moves.

“To stay ahead of the EPA’s rule-making, utilities have announced they are retiring generally older or smaller coal units that are uneconomic,” says S&P credit analyst Gerrit Jepsen, in a report. “In addition, several utilities plan to build new gas-fired combined-cycle units to replace the retired capacity.”

While developers view the buying of natural gas fields an essential step to position themselves to meet future energy demands, they also have other reasons to sop up such land now: Natural gas is blessed with other base elements, namely ethane, propane, butane and natural gasoline.

Those “wet” gases are more closely correlated with the price of oil, which is more than $100 a barrel today. The relative high prices for such extracts are making producers happy, despite the current weak prices that they are getting for “dry” natural gas, whether that be shale gas or conventional gas. Dry gas, which used to move in unison with the price of oil, has now decoupled itself.

Under any set of circumstances, developers are committed to the production process. While vast natural gas supplies and a tepid economy are dampening their current fortunes, producers know that those factors will change as more utilities move from coal to gas.

EnergyBiz Insider is the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.

Weaning America off its imported oil addiction is generally considered to be high on the list of national energy goals. No one doubts the importance of pursuing this goal but there is substantial disagreement about how it can realistically be achieved.

One of the more popular ideas is to develop renewable energy technologies to substitute for oil. Solar, wind, biomass etc. are all admirable technologies but are generally more expensive to implement than traditional fossil fuels. The day for significant use of renewable energy will no doubt arrive eventually but it will take years of time and copious amounts of money.

Currently 60% of the oil we use in the United States is imported, most from countries that are unfriendly to the US. Transportation consumes 70% of the oil we use in America. Therefore the quickest way to reduce overall oil consumption is to find substitutes for the enormous amounts of imported oil that are dedicated to transportation.

The most immediate way to cut our oil dependence is to substitute the use of natural gas for vehicle fuel for petroleum. With the new technology of producing domestic natural gas from shale deposits, America now finds itself with greater stores of natural gas than Saudi Arabia has of oil. Natural gas as a vehicle fuel is plentiful, burns cleaner and is approximately one half the price of gasoline – so why are there not more Natural Gas Vehicles (NGV’s)?

The primary impediment to the use of NGV’s is the absence of a refueling infrastructure and the cost of converting vehicles to burn natural gas. Both of these issues will be overcome with time, but the benefits of NGV’s can be achieved much more quickly with strategic economic incentives. There is currently pending in Congress a bill that will accomplish just that. It is S. 1863 and is entitled the NAT GAS ACT. This bill will facilitate the establishment of a CNG refueling infrastructure and will be financed with a special surcharge added to natural gas when used as a vehicle fuel. This bill will NOT ADD A PENNY to the deficit.

NGV advocates—including energy expert T. Boone Pickens—are hopeful that this bill will be passed by the Senate and, ultimately, become law, therefore accelerating the demand for NGVs throughout the United States.

“This is a great opportunity to end four decades of unfulfilled promises by our elected leaders to end America’s dependence on foreign oil,” Pickens said in a statement applauding the sponsoring group’s bipartisan efforts.

“America’s energy future is the key to our economic viability and creating jobs now. These should not be partisan issues, which is why I expect this Senate Bill will experience such broad support from both sides of the aisle.

“Nothing in America has such a thoroughly transformative economic potential as domestic natural gas. Simply by increasing the use of domestic natural gas in vehicles, we can get on our own resources, immediately create 400,000 good jobs, redirect billions of dollars of foreign oil money back into the hands of American businesses, and cut our dependence on OPEC by half.”

EnergyBidder encourages everyone to support S. 1863.

If you are a small business consumer of natural gas in Georgia you have several challenges to overcome. Unlike large commercial or industrial users of natural gas, you probably don’t have multiple marketers vying for your business. The reason is obvious. You use a small quantity of gas and the potential profit for the marketer less.

Although natural gas expense is significant to you, your usage is not large enough to get the attention of natural gas marketers. You may find that you have to work quite hard to find “cheap” natural gas. The good news is that low rates are available to consumers who shop. To appreciate the potential savings it helps to consider the way in which marketers set commercial rates. There are basically three rates available from marketers.

1. The “standard” rate that marketers post on their website and quote to new customers that call and apply for service.
2. The “default” rate that marketers apply to customers whose contract has lapsed and have not renewed at competitive rates.
3. The “competitive” rate that marketers will bid when faced with competition for an account.

Clearly it’s to the benefit of small commercial businesses to seek out the competitive natural gas rate when applying for gas service. How do they do that? The best way is to issue a formal request for proposal (RFP) to multiple Georgia natural gas marketers. This is a service provided by EnergyBidder through its website www.energybidder.com.

You might say, “Why can’t I get competitive natural gas quotes myself”? Well, you can but I submit you can get better pricing by using an established service like EnergyBidder. First, it takes experience and knowledge to identify the qualified marketers and to make sure that the quotes are “apples to apples.” Marketers have multiple ways of computing gas rates and it’s important to make sure rate structures, pipeline charges, service charges and contract terms are consistent. Secondly only a service like EnergyBidder can provide you with the power of aggregation. When multiple accounts can be aggregated (or bundled) together, marketers will provide lower pricing for all.

For more information about smart shopping for your natural gas needs visit us at www.energybidder.com.

Welcome to the EnergyBidder Blog. We’ll be commenting on all sorts of topics relating to the deregulated natural gas and electricity markets around the country. Please feel free to comment on any of the topics presented. Deregulation of the energy markets has elicited mixed reviews but one thing is for sure – deals can be had for savvy shoppers that know how to compare offers. For some helpful basic information about the deregulated energy markets let me suggest you go to our website at www.energybidder.com and click on the “Energy Markets” tab.

EnergyBidder will eventually be covering all the major state gas and electric markets but we’re beginning with the natural gas market in Georgia. The Georgia gas market is perhaps the most vibrant and competitive gas market in the Country. The Georgia model is unique in that the gas utility, Atlanta Gas Light, is totally out of the merchant function. AGL now only provides the gas transportation function and multiple marketers are actively soliciting business. Georgia natural gas marketing efforts are at a fever pitch right now since we’re in the “light up season” when everyone is thinking about saving money on winter heating bills.

How does a consumer make a decision about selection of a gas provider? Well, they can go to each of the websites for the ten marketers currently qualified to provide gas service in Georgia. Or they can go to the Georgia Public Service Commission website which lists prices for the different marketers. Doing either of these is time consuming and requires some basic knowledge of the market to make sense of the offers. Even if you do all this you will still probably not get the lowest price for natural gas in Georgia because Georgia gas companies DO NOT POST THEIR LOWEST PRICES ON THEIR WEBSITE OR THE PSC WEBSITE!!! The lowest prices are obtained by consumers that SHOP for the best energy deal. Shopping requires quite a bit of knowledge and time. This fact is the force which drives EnergyBidder. Consumers looking for the best gas deal in Georgia have only to go to www.energybidder.com to find the best offer from a Georgia gas company.

How large can the savings be by using the EnergyBidder service? Residential consumers typically save 10% – 15%. Commercial businesses can often save much more. EnergyBidder has achieved savings in excess of 40% for a number of businesses which had previously been been paying their marketers’ “standard” rate.

In the future we will be sharing more information about the deregulated energy markets and how you can use them to reduce your energy costs. In the meantime we hope you use www.energybidder.com as one of your primary resources for energy information.