Look out – natural gas prices in North America will skyrocket by end of 2014

My friends and family recognize that I am an odd bird. I often wake up in the middle of the night as a result of thinking about things that few others worry about. Tonight was a great example; my eyes failed open at midnight as I thought really hard about how to spread the word about the dramatic increase in natural gas prices that will almost inevitably occur in the United States within the next two years.

In the publications that I regularly read, it is impossible to avoid noticing that there are some enormous bets being placed on the premise that natural gas prices in North America will remain at levels that are between 1/3 and 1/6th of the world price. Despite all words to the contrary, those prices are not the result of some kind of incredible technical innovation that has fundamentally reduced the cost of finding and extracting natural gas; they are the result of a temporary imbalance in the market that makes available supply slightly larger than available demand.

Several factors have combined to produce the pleasant effect – for gas buyers – of very low prices relative to history and relative to the prices paid almost everywhere else. Mild weather, slow economic conditions, associated production from wells drilled in search of far more lucrative oil, the high rate of initial production typical in frack jobs, leases that require drilling, the inherent inertia associated with drilling activities and, perhaps, a little purposeful push from people who understand how to use low prices to destroy competition have all combined to ensure that gas seems plentiful – in North America.

The rocks and shoals ahead are a result of a different combination of factors. Independent gas producers are having enormous difficulty attracting financing needed to continue drilling; major producers have cut their drilling programs as a natural result of getting numerous questions about low prices from analysts and stockholders; too many new customers are buying into the marketing pitch that hydraulic fracturing will lead to cheap gas forever; the housing market looks poised to begin a serious recovery led by low supply and pent up demand; and there is a serious push to try to eliminate the transportation bottlenecks that have kept natural gas prices from equalizing around the world.

The significantly higher prices that I predict will last at least as long as the pleasant times with low prices because the only effective response – other than another dramatic recession – has a long lead time. Yes, I purposely used the singular in the previous sentence because I can only see one alternative to a replay of the dramatic rise in gas prices that occurred here between 2000-2008.

The only reasonable answer to a price rise driven by having an overall energy supply that is lower than the demand is an increased supply. There are only two technologies with the capacity to make a difference – coal and nuclear energy. I may be totally off base, but I do not see a new round of coal plant building anyplace outside of Germany, the home of brown coal fans.

In my less than humble opinion, we need to build new nuclear plants. We should have started building in earnest at least a decade ago, but the second best time to start any long lead time effort that should have already started is NOW. Unfortunately, I think that almost everyone who has the ability to take action on this warning is either hypnotized, dozing, or celebrating the fact that they will be the wreckers who capture the spoils as the economy crashes against the rocky shore of high energy prices.

Being a lookout on a very large ship can be a lonely way to spend the midwatch.

Disclosure: I am a nuclear professional who knows a number of other nuclear professionals who have moved on, been reassigned or even laid off as a result of project delays or outright cancellations. The common refrain from the decision makers is that they cannot justify the expense of developing new nuclear capacity at a time of low gas prices. I want to burn this graph into their memory banks.

Natural gas wellhead price history (US)

Natural gas wellhead price history (US)

Instead, I think they are engaging in delusional thinking, purposely encouraged by publications of graphs like this one.

Official gas price projections

Official EIA gas price projection – Aug 2012

Note: In my years of analyzing the energy industry, I have found that the U. S. Energy Information Agency is a terrific source of historical data about energy prices and a really lousy source of accurate projections about the energy market. Here is a fun way to spend a few hours; read some old EIA projections and then compare them to what really transpired. You will see why I have made that statement.

Before signing off, I do want to point out that there are at least a few people in leadership roles in the energy industry who get it. Here is a short video of Steve Byrne of SCE&G explaining why it is a good time to be building new nuclear power plants.

One more disclosure: I own some stock in SCANA, the parent company of SCE&G. I tend to like to invest in companies led by people with some vision.

About Rod Adams

21 Responses to “Look out – natural gas prices in North America will skyrocket by end of 2014”

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  1. Joris van Dorp says:

    I spoke to an energy consultant at PWC yesterday and asked him whether he believed that natural gas prices (in europe!) would remain low and for how long, and whether he believed the Germans would really follow through with their ‘atomausstieg’.

    He said low natuarl gas prices would persist at least 5 to 10 years, and that the German *would* follow through. For what its worth.

    Joris

  2. Joel Riddle says:

    I am guessing that the Exelon decision to withdraw their ESP in Texas was a factor in motivating this point. Copying and pasting from an email I sent a friend just yesterday, “Depending on how cheap it might have been to maintain an ESP application, they could maybe start regretting this decision by 2015-2017, depending on NG prices.”

    On the EIA projections being lousy, that is because their projections assume that things will basically stay the same (particularly in regards to regulations). When does that ever happen?

    I don’t know that NG in America will “skyrocket” by the end of 2014, but I do know that the present price is not high enough to sustain production from difficult means such as fracking. The new supply that has been coming online in recent years cannot sustain itself at these low prices, and in many cases (particularly XOM’s purchase of XTO) has been subsidized via the profits of petroleum.

  3. meredith Angwin says:

    Joel is right. The cost of production is more than the present price of gas. That means that new drilling will cease until the price rises. How long will that take? I don’t think it will take 10 years. Shale wells have comparatively bad profiles in terms of length of production.

    An earlier gas “bubble” happened when the federal government took the price controls off “deep gas”. At that point, there was a fair amount of fraud in the gas industry reporting. Penn Square Bank was a participant and a victim of all this.

    http://en.wikipedia.org/wiki/Penn_Square_Bank

    At Forbes, Richard Finger wrote that we are headed to $8 natural gas, due to the economics of the wells
    http://www.forbes.com/sites/richardfinger/2012/07/22/were-headed-to-8-00-natural-gas/

    Also at Forbes, this about the cost of production at the Haynesville field (among other topics). Not worth drilling if the price of gas is below $6.

    http://www.forbes.com/sites/christopherhelman/2012/08/06/low-gas-prices-wipe-out-giant-chunk-of-chesapeake-reserves/

    My feeling is that it will take time to literally “burn off” the gas they found to date. I would say…3 years. (I am acting as a pundit here!) But after that, starting in 2015, prices will rise quite quickly to $6. Then drilling will start again. I don’t think we will really go to $8 for a while. But even at $6 gas, the electricity price on the gird will mean that existing nuclear plants (and hydro, and coal) will be very profitable, and new nuclear plants will be looking mighty good.

    • Aaron Rizzio says:

      Meredith,

      “. . . even at $6 gas, the electricity price on the gird will mean that existing nuclear plants (and hydro, and coal) will be very profitable, and new nuclear plants will be looking mighty good.”

      The heat rate of new combined cycle natural gas units is better than 7,000 BTU per kWh, so you are saying NEW nuclear (along with their capital amortization costs) can be profitable (or “look good” to financiers) under a regime of marginal competitive~4-5 cents per kWh fuel costs (as I recall fuel constitutes about 80% of the cost of a gas fired kWh)?

      You know the nuclear industry better than I do, I simply ask to gauge your professional opinion.

      • Meredith Angwin says:

        Aaron, I perhaps did not think that through enough. I was going on a couple of things…$8 natural gas was part of the motivation for the Nuclear Renaissance of a couple of years ago, and also I heard Jeffrey Immelt speak at Dartmouth and say that GE was not selling very many combined cycle plants in this country, though they were selling a lot of them abroad. I suspect that with our (relatively cheap) gas, there may not be that many combined cycle plants, which are pretty expensive. Not like a nuclear plant, but still. With $6 gas, a gas turbine plant is still one of the more expensive things on the grid, which is why they are mostly load-following and peaking.

        I would now amend my comments to say paid-off nuclear plants will make a lot of money with $6 gas, but maybe new ones won’t be competitive unless there is $8 gas. I don’t think there will be $8 gas very soon. See Neutron Economy post. But nuclear plants could be competitive at $6 gas, if it’s open cycle.

        I am not an energy economist, I am just saying things I have been trying to put together in my own mind. Open cycle is not very efficient of gas. Combined cycle is still comparatively rare. Gas prices at $6 are efficient for combined cycle…if they build them for gas so “cheap.” Etc

        Here’s the Neutron Economy post
        http://neutroneconomy.blogspot.com/2012/09/does-declining-gas-exploration-indicate.html

    • Daniel says:

      And linked nuclear to energy independence ….

    • Rod Adams says:

      BFD – even in a less than one minute clip extracted and published on the Nuclear Energy Institute YouTube channel, Romney spent more time talking about using more natural gas than he did about enabling nuclear energy to flourish.

      • Brian Mays says:

        Oh Rod, you can be such a hypocrite at times. You gushed praise when Obama mentioned nuclear power just once in his State of the Union address two years ago.

        Now, such mentions of nuclear power from a politician result in “BFD.” What gives?

        I guess you didn’t watch this year’s State of the Union address. Don’t worry, I have an excerpt for you (emphasis mine):

        This country needs an all-out, all-of-the-above strategy that develops every available source of American energy a strategy that’s cleaner, cheaper, and full of new jobs. We have a supply of natural gas that can last America nearly 100 years. And my administration will take every possible action to safely develop this energy.

        The only time that Obama mentioned the word “nuclear” was in reference to Iran’s weapons program.

        (Aside: I’ve noticed over the years that Obama really loves the qualifiers safe and safely. I can’t figure out whether that’s the lawyer or the politician in him.)

        If mentioning nuclear power is a virtue and promoting natural gas is a sin, then shouldn’t we be a little less biased — or at least a little more consistent — when deciding when to praise the virtuous and chastise the sinful?

        • Rod Adams says:

          Brian – your standard to qualify as “gushing” is about as high as the ad supported media’s standard for “spewing” when applied to nuclear power plant radiation discharges.

          Here is the ENTIRE text of the post that you described as “gushed praise”.

          “During the State of the Union address on January 27, 2010, President Barack Obama stressed the importance of energy innovation investments in his discussion about leading an economic recovery through infrastructure construction. Here is what he said at the very top of his list:”

          • Brian Mays says:

            Well, Rod, I was really referring more to what you said in the comments than in the article, but the fact that you decided to post an article because of the mere mention of nuclear power by Obama says something.

            Speaking of those comments, looking back, I think that the pessimism I expressed in my comments is now well justified. In fact, it appears that I might have underestimated just how bad things could get. If someone had told me two and a half years ago that we would find ourselves in a situation in which review of all new license applications and even all new license extensions by the NRC had been indefinitely suspended, I doubt I would have believed him. Yet, this is where we are today. That’s definitely a Change, but not one that I was not hoping for. ;-)

            Weren’t you the one who emphasized that President Obama’s support for nuclear energy was qualified by the word “safely” yet when he uses exactly the same word to qualify his support for natural gas you imply that he is a fan of the fuel?

            Sure, read my aside above. I just made mention of it.

            Obama was trained as a lawyer, and lawyers are trained to carefully parse and craft their words. Subtle differences mean something — in fact, they mean everything.

            Let’s take a look at those words, shall we? Here is the excerpt from Obama’s SOTU that concerned natural gas:

            … my administration will take every possible action to safely develop this energy.

            Meanwhile, here are his words following last year’s tsunami/earthquake in Japan:

            … those of us who are concerned about climate change, we’ve got to recognize that nuclear power, if it’s safe, can make a significant contribution to the climate-change question. And I’m determined to ensure that it’s safe.

            When has Obama ever used the words “if it’s safe” to describe natural gas? But when it comes to nuclear, he’s also determined to “ensure that it’s safe”? Oh really? Well, the actions and attitude of the guy he put in charge of the NRC clearly indicate that Obama’s chairman thought that the only “safe” nuclear plant is one that is not operating. Why should I believe that Obama feels differently, or even cares one way or the other?

            When it comes to nuclear power, Obama has never bothered to mention any concrete goals, unlike his opponents McCain and Romney have done. It’s always just empty rhetoric that doesn’t cost him much if anything at all.

            In any case, Obama’s actions speak louder than his words. Has he managed to suspend the licensing of new fracking operations in the US just as he has manged to suspend the licensing of new nuclear plants?

            I just happen to like his opponent even less.

            Yes, that is clear, but it is also obvious that it is for reasons other than their rhetoric on nuclear/gas electricity generation.

          • Rod Adams says:

            @Brian – while you are correct that things are far worse now that either of hoped they would be, I still do not agree that the rhetoric of the Repuplicans will make any more real difference now than it ever did. As I have pointed out several times before, we did not build any new nuclear plants during 8 years of Regan, 4 years of Bush 1 or 8 years of Bush 2 despite many positive WORDS. I am fully aware of the fact that 4 years of Carter, 8 years of Clinton and 3.5 years of Obama were no better, and by other measures were worse.

            I have also pointed to what I believe the real issue is – The Establishment, as represented in leaders of BOTH major parties in the US “two party system”, is severely threatened by the development of nuclear energy. It will shift our economy in ways that take part of their wealth away, giving it to eggheads and hard-working people like you and me.

            My favorite candidate in this year’s race was Ron Paul. He spoke a lot of excellent words about energy and about our dangerous, expensive, immoral foreign policy, which is driven by our thirst for hydrocarbon wealth and control. The reason I still favor Obama over Romney is that Obama is far less connected to The Establishment. I like community organizers more than I like vulture capitalists who were born as rich elitists and got richer by leveraged buyouts that were made more lucrative by laying off productive workers.

          • Brian Mays says:

            The reason I still favor Obama over Romney is that Obama is far less connected to The Establishment.

            Rod – You’ve got to be kidding me! Obama has come out of the Chicago political machine. This is an organization that was powerful enough to defeat the Clinton political Juggernaut four years ago in a bitter struggle for the presidential nomination. It is a region that is so corrupt that the governor of the state is now going to jail for trying to sell Obama’s old Senate seat. These people are a huge, corrupt part of what makes up “The Establishment.”

            In any case, after four years you can no longer call Obama an outsider — an incompetent amateur, of course (how else does one explain an unemployment rate that remains above 8% ;-) ), but not an outsider.

            You think that Obama is his own man? For almost four years, he has let Reid and Pelosi dictate and run his agenda — particularly Reid when it came to anything nuclear. You can’t get more “Establishment” than that.

            I like community organizers more than I like vulture capitalists …

            I didn’t realize that you were a Michael Douglas fan, but it appears that you have watched Wall Street one too many times. Please step away from the popcorn. Believe it or not, that movie was fiction, and Gordon Gekko is no more real than Douglas’s other character, Richard Adams, from a popular 1979 movie that also was fictional. You might remember the one.

            Personally, I like people who have held real jobs. Those who have spent their entire lives delivering pretty, but empty, speeches consisting of carefully parsed words don’t interest me. If I wanted a diet of empty fluff and pretentious nonsense, I would have stayed in academia.

            I guess we can agree to disagree.

          • Rod Adams says:

            @Brian

            There is no need to resort to insults by implying that I get my ideas by watching movies.

            The idea of calling Romney a “vulture capitalist” actually came to me based on reading some of the coverage of the TV reality show called the Republican primary debates

            http://www.washingtonpost.com/blogs/election-2012/post/rick-perry-doubles-down-on-vulture-capitalist-criticism-of-mitt-romney/2012/01/11/gIQAziWqqP_blog.html

            It was a phrase that seems to have been repeated by his rivals on numerous occasions, though I cannot testify to that based on personal experience; I watch reality shows even less frequently than I watch movies.

            For a man who spent a substantial portion of your youth earning a PhD, you sure have an anti-intellectual position regarding higher educational institutions. I have spent a few years teaching at a college level; I consider that to be a “real job” involving real work. I had some colleagues during other portions of my career who looked down on my professor experience until I asked them how they would feel about preparing and delivering three to four hours worth of original presentation material to three or four questioning audiences each week. When put in that context, they understood that the job was not as easy as it looked.

            The region that you dismiss as corrupt based on having some admitted issues with politicians who break the rules has a slightly better record on corruption than New York or New England. I never said that Obama was an outsider or that he had NO connection to The Establishment; he did, after all, succeed in building a powerful enough base of support to be elected to the highest political office in the land. What I said was that he was LESS connected to The Establishment that worries me – the one that keeps starting and fighting wars over hydrocarbons. Illinois may have some corruption problems, but it produces 50% of its electricity with nuclear reactors and most of the rest from coal. It has fewer ties to the multinational petroleum pushers and is more receptive to the disruptive technology that threatens the axis of Northeast-politicians/Texas-California-producers.

            I have no love or even respect for Harry Reid, but the R’s blew their chance to eliminate him from the picture two years ago when they chose to run an easily caricatured clown for his seat.

        • Rod Adams says:

          On more thing, Brian. Weren’t you the one who emphasized that President Obama’s support for nuclear energy was qualified by the word “safely” yet when he uses exactly the same word to qualify his support for natural gas you imply that he is a fan of the fuel?

          Please understand, I am not a huge fan of the performance of the President over the past four years. I just happen to like his opponent even less.

  4. John Tucker says:

    Rod considering scientifically hydrocarbon gas is in itself a basically unlimited resource achievable from so many resources and industrial procedures I don’t even understand why pricing issues even mater.

    Environmentally, as is it is a poison. On a planetary scale. That should be the end of it.

    I don’t understand the thinking here.

    • Rod Adams says:

      @John Tucker – believe it or not, most people in business make decisions based on cost and price.

      After all, the reason for business is to make money. It has little or nothing to do with science.

      • John Tucker says:

        Or a viable future it seems.

        Indeed that is probably the long term argument for reasonable regulation.

  5. jmdesp says:

    “Germany, the home of brown coal fans”

    That’s a low blow. A well deserved one. Thinking about printing myself a Boxberg teeshirt with the legend : “Here’s how energy in Germany really looks like”. Or “It’s not Mordor, it’s Boxberg”

  6. Roger Blomquist says:

    It might be worse than this article suggests because there is a growing world market for LNG. If the US or the rest of North America exports, this will apply increasing pressure on US gas prices.

  7. John ONeill says:

    Interesting that Russia, like the US, has domestic gas prices below world levels but for different reasons – to keep the peasants from rioting.
    http://www.euractiv.com/energy/russias-natural-gas-dilemma-analysis-512092
    The eleven RBMK reactors still operating produce considerably more energy than German wind and solar power, freeing up Gazprom to export more gas west for when those unreliables aren’t working.