Dash for Gas, 21st Century Style!    

Seth  Blumsack    

John  and  Willie  Leone  Family  Department  of  Energy  and  Mineral  Engineering,  Pennsylvania  State  University  

 Vermont  Law  School,  4  June  2013  

 

   

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An Old Joke

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An  oil  execuKve  walks  into  a  bar  and  sees  a  wildcaMer  staring  at  his  drink.    “What’s  the  maMer?”  says  the  execuKve,  “Another  dry  hole?    “Worse  than  that,”  the  wildcaMer  says…  

               …we  found  gas.”  

Joke  courtesy  of  Fereidun  Fesharaki  

A New Joke?

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An  oil  execuKve  walks  into  a  bar  and  sees  a  wind  execuKve  staring  at  his  drink.    “What’s  the  maMer?”  says  the  execuKve,  “Was  the  PTC  not  renewed?”    “Worse  than  that,”  the  wind  execuKve  says…  

             …they  found  more  gas.”  

Today,  there  appear  to  be  many  more  opportuniKes  in  gas,  which  causes  some  headaches  for  renewables.  Living  in  the  land  of  plenty,  however,  does  not  necessarily  mean  a  smooth  ride.  

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Dash for Gas: Jolly Old(e) Style

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•  Rapid  shiZ  towards  gas-‐fired  power  generaKon  in  the  UK  following  electricity  privaKzaKon  

•  Kept  power  prices  low…unKl  it  didn’t!  

•  Lessons:  1.  There  is  always  

compeKKon!    (Coal  demand  dropped,  so  coal  got  cheaper)  

2.  Don’t  bet  the  farm!    (Unclear  whether  New  England  has  learned  from  Olde  England)  

Dash for Gas: 20th Century Style

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Dash for Gas: 20th Century Style

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Renewables Dis-integration?

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Average  electricity  price  in  PJM:  $70  

Renewables Dis-integration?

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Average  electricity  price  in  PJM:  $70  

Average  electricity  price  in  PJM:  $35  

Land of Plenty!

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•  At  this  point  nearly  1/3  of  all  gas  produced  in  the  U.S.  is  from  shales  (even  more  if  you  add  in  Kght  sands  which  require  fracking).  

•  Even  with  rising  extracKon  costs,  current  economics  of  natural  gas  are  compelling.  Growth  will  probably  be  driven  by  electricity  and  industry.  

Not Dead Yet?

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Path Dependency? It Depends

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•  LNG  terminal  build-‐out  in  anKcipaKon  of  increased  imports  of  natural  gas,  which  never  materialized.  

•  They  were  built  but  the  gas  never  came!  (Because  we  found  it  in  Texas  and  Pennsylvania).  

•  Owners,  seeing  money  flushed  away,  are  now  keen  to  retrofit  terminals  to  export  natural  gas.  

Westward, Ho!

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•  Despite  some  reports,  the  market  recognizes  that  it  is  very  far  out  of  equilibrium.  

•  Drillers  are  “spudding”  wells  to  maintain  lease  holdings  and  then  scrambling  to  the  Bakken  oil  patch  or  the  wet  gas  areas.  

Westward, Ho!

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“Dry  gas”  in  Northeastern  PA,  Southern  New  York  

“Wet  gas”  in  Southwestern  PA  

Spoils for the Victors?

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•  State  governments,  wanKng  to  maintain  jobs  and  tax  revenue,  do  not  like  disequilibrium.  

•  Old  ideas  (natural  gas  vehicles)  and  new  ideas  (ethane  crackers  in  wet  gas  areas)  are  awash  in  subsidy  and  incenKve  dollars.  

Images  courtesy  ANGA  

Hub Pricing for Natural Gas

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The  benchmark  natural  gas  price  for  all  of  North  America  is  the  price   of   the   “Henry  Hub”  natural   gas   futures   contract   traded  on  the  New  York  MercanKle  Exchange  (NYMEX).    Henry  Hub  is  a  physical  pipeline  in  Louisiana  that  connects  to  several  major  pipeline  systems.  

Henry  Hub  

Hub Pricing for Natural Gas

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North  America   is  unique   in  having   this   type  of  pricing  system  for  natural  gas.  Most  of   the  rest  of   the  world   indexes  natural  gas  contracts  to  oil  prices.  

Henry  Hub  

Gas/Oil Pricing Disconnect

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Getting Oilier…

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•  LNG  supply  chain  costs  are  immense  ($50b  or  more  for  greenfield  project),  leaving  both  buyers  and  sellers  exposed.  

•  Spot  LNG  volumes  are  growing  but  will  have  to  conKnue  to  be  dominated  by  long-‐term  contracts.  

•  Indexed  to  what?  Henry  Hub  or  the  world  oil  price?  

Image  courtesy  of  Fereidun  Fesharaki  

…And Oilier Still…

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•  Major  North  American  gas  exports  would  serve  to  link  global  gas  markets  that  are  currently  separated  (basically  Asia  and  Europe)  

•  This  would  likely  break  the  “gas-‐to-‐oil”  indexing  paradigm  but  introduce  other  risks  as  “gas-‐to-‐gas”  indexing  predominates.  

Image  courtesy  of  Fereidun  Fesharaki  

Global Supply

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Whither Wind?

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•  Unlike  previous  dashes  for  gas,  the  current  rush  is  driven  by  poliKcal  desires  to  engineer  large-‐scale  markets  for  newly-‐discovered  mineral  wealth.  

•  Currently,  the  implicaKons  for  other  forms  of  power  generaKon  are  bleak…but  there  are  more  binding  constraints  affecKng  renewable  energy  projects  now  (like  transmission).  

•  Renewables  and  gas  are  in  some  ways  symbioKc  –  renewables  need  backup  power  and  gas  needs  the  emissions  offsets.  Energy  efficiency  may  be  under  a  bigger  threat.  

•  But  the  gas  market  is  getng  oilier…  

Thank You!  

Seth  Blumsack  blumsack@psu.edu  

 

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