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.