Dieter Helm – Coal Critic, Atomic Agnostic, Natural Gas Enthusiast
Dieter Helm’s The Carbon Crunch: How We’re Getting Climate Change Wrong–and How to Fix It has the potential to be an influential energy policy book, not just for the UK…
I’ve been involved in a reasoned discussion with an oil field accountant / attorney about US natural gas prices and total resource base. I thought that it would be worth preserving and sharing that discussion here so that it would not get buried. If you read closely between the lines, you will see why I have put this post into the ‘smoking gun’ category.
The discussion is associated with a Wall Street Journal article titled Nuclear Power’s New Hope: Small Reactors. I’ve rearranged the comments so that they flow in order; the blog software that the Journal uses limits how deep a reply thread can go.
Aside: I have removed some of my “signatures” and disclosures in the interest of getting rid of extraneous repetition. I retained the disclosure in my first comment. I’ve also taken the liberty of correcting some of the grammar / proofreading errors that can creep into internet comment threads when they cannot be edited. End Aside.
Kenneth llindsey Wrote: (in response to someone else’s comment):
Good points, just another example of government robbing the taxpayer. Nat Gas is so abundant that it nearly had to be given away this spring and summer when the storage almost reached capacity; and Washington wants to waste billions on nuclear, which is usually the most expensive energy. No wonder they can’t balance the budget. After sixty plus years, nuclear plants are still not economically viable on their own, its time to stop subsidizing losers. Maybe there should be a box on the tax form to allow people to pay more taxes if the want wind, solar and nuclear, otherwise let the free markets pick the winners.
Rodney Adams Replied:
Nuclear plants are economical; they produce some of the lowest cost power on the grid. Here are the numbers for 2011 in cents per kilowatt hour:
Coal – 3.23
Gas – 4.51
Nuclear – 2.19
Petroleum – 21.56 (Mainly Hawaii, Alaska, Long Island and Puerto Rico)
Source: NEI Resources and stats page on US electricity production costs
The primary assistance that the $452 million spread over 5 years – with at least a one for one match from the company – will provide will be to defray the up-front fees charged by the US government to review license applications. The current cost of that regulatory service to an applicant is $274 per professional staff hour. The applicant has no ability to control the amount of time that the regulator decides to spend on the application and no ability to speed the process along by volunteering to pay for overtime or extra regulators to put reviews in parallel.
I will not argue with your assertion that nuclear plants are expensive, but at least part of the blame rests on the shoulders of the US government. It has tied down the industry with a number of special rules that have been purposely designed by people who do not like nuclear energy. Unfortunately, many of the people with the most logical reasons for disliking nuclear energy are wealthy and politically powerful – they sell natural gas, coal and oil in competition with nuclear energy and would like to do everything they can to hamstring their competitor.
Publisher, Atomic Insights
Disclosure: B&W is my day job employer, but my thoughts about energy policy are my own. I do not speak for the company.
Kenneth llindsey Replied:
Your data cost of Nat Gas is incorrect in that it was based on cost of $12 per MCF not the current price of $3.50 per MCF (plus or minus 10%), which is why Coal and Nuclear Projects around the county are shutting down.
Rodney Adams Replied:
No. My data for US electricity production costs was based on 2011 numbers. The price of natural gas fell from $12 per million BTU in June of 2008 to something close to its current level of $3.50 IN NORTH AMERICA. The world price for natural gas is more like $12-16 per million BTU. Do you honestly believe that the price differential between the North American market and the world market will remain in place for too much longer? Are you unaware of all of the projects that have been proposed to export gas from the US to that international market so that the extracting companies can obtain something closer to world prices for their product.
Kenneth llindsey Replied:
In 2011 the Nat Gas price was between $4.50 and $5.50; for the 1st 6 months of 2012 the price averaged $2.20. Most people outside of the energy industry do not know that we have about a six hundred year supply. Also, in North Dakota more Natural Gas is being flared off than is being used in the rest off the country as there is no storage or pipeline for the Nat Gas that is the byproduct of Oil Shale drilling. If you will read some of Yergin’s books you will see that, on balance, the oil and gas industry suffers more from oversupply than undersupply. Also, the jump to $3.50 from $2.50 was caused in part by the CME futures changing the contract this fall from End of Month to End of Next Month. Don’t worry, it will still take years to decommission the current 102 nuclear plants, but the bondholders may need to take a haircut. Also, numerous studies have shown that the price increase from exporting will be no greater than 10%, which is really not material as at $ 3.85 per MCF it is still the most inexpensive energy.
Aside EIA page shows that natural gas price to electricity producers ranged from $4.18-$5.66 for 2011 and from $2.79-$3.81 for first 9 months of 2012. End Aside.
Rodney Adams Replied:
The Potential Gas Committee produces a biannual report on the amount of natural gas in reservoirs in the US. they put it into four categories: proven, probable, possible and speculative. The people on the committee are directly from industry and have many reasons to provide optimistic numbers.
In the widely touted report published in April 2011, which totals the resource base as of the end of 2010, the report said that there was a total future supply of 2170 trillion cubic feet of natural gas in the US.
There were celebrations and loud proclamations about a 100 year supply right under our feet.
However, I have a questioning attitude and the ability to do arithmetic. I checked the Energy Information Agency, which is really good for providing historical information, even if their projections have some flaws. For 2011, the US consumed 24.3 trillion cubic feet of natural gas.
The arithmetic is simple 2170 TCF / 24.3 TCF/YR = 89.3 years – as long as we do not increase the rate at which we are burning the resource. The flared gas that you mentioned in North Dakota counts as part of the resource base total, but the flaring (waste) of that gas is not counted in the EIA consumption numbers. In other words, the clock is actually ticking faster than my simple estimate shows.
I’ve read most of Yergin’s work. He was a less conflicted source of information when he wrote The Prize: The Epic Quest for Oil, Money and Power in 1991, before he had established a lucrative consulting business called Cambridge Energy Research Associates and established a close relationship with the oil and gas industry.
Kenneth llindsey Replied:
Unless of course, the people in the industry or their clients would have to write down the balance sheet asset value of reserves in which case they have an economic motive to underestimate the total reserves. Historically, that reserve estimate you cited has been incorrect. On the other hand, I have worked in the Haynesville Shale, the Eagleford Shale and currently in the Marcellus Shale and discuss production levels with drillers and pipeliners etc. on an almost daily basis, and basically in this year, 2012, there have been little on no gas only wells drilled other than to fulfill preexisting lease or contract requirements, yet production continues to rise, so I stand by the earlier stated industry insider estimate of a six hundred year supply.
Rodney Adams Replied:
Now you are attempting to baffle with baloney.
Companies whose asset values are based on the value and size of their resource base do not have an incentive to underestimate the size of their resources. In fact, the incentives are quite the opposite.
I listened to the most recent ExxonMobil (currently one of the largest gas producers in the US after their purchase of XTO) analyst call. They were asked pointedly when they planned to write down the value of their resources since a substantial portion of their base cannot be economically produced at today’s low prices. The spokesperson on the call explained that SEC regulation allow them to use their own internal pricing models to estimate the selling price, so they had no plans to do any write downs. According to their internal projections, the price of gas will be high enough in the near future to make their resources economical to produce again.
In the meantime, they are reducing their drilling, contributing to the 50% fall in gas drilling that you noted. They did not believe that action would lead to continued increases in supply, however. Again, quite the opposite. By slowing drilling, they fully expect supply to fall and prices to rise – simple economics 101 concept there.
By the way, perhaps it is time for you to clearly acknowledge that you have a personal stake in this discussion, just as I do.
Kenneth llindsey Replied:
I have BBA in accounting, (plus additional completed majors in finance and political science) and worked as an External Auditor in the energy industry before becoming an attorney.
Further explanation of motives in the National Reserve Estimate: For an individual company; Companies generally write their inventories to near market value. Thus if the total national reserve estimate is understated, the per unit value of their specific inventory will be greater, as less supply means higher value. A number of companies such as BHP Billiton which took a $450 million charge against its $2.84 billion Fayetteville gas holding bought from Chesapeake, but I did not yet find the report of their writedown of the $12.4 billion Petrohawk Eagleford properties. Many companies such as Chesapeake, Devon, Petrohawk etc have sold their nat gas to majors & foreign based upon artificially higher market valuations due to the underestimated national estimates.
When Rex Tillerson stated he was losing his shirt on Nat Gas, he was referring to potential writedowns of Exxon’s reserves to market value, not to any real loss since the per unit MCF production cost for a frac well can range from $0.05 to $0.45, and the production cost for a straight bore hole well generally recognized at $2.50. Additionally, since Exxon is the largest chemical company in the U.S., the inventory loss was made up by the increased savings of nat gas as a feedstock. It is probably unrealistic to expect nat gas to trade outside of $3.50 plus or minus ten percent on a monthly average, although it may trade higher in the wintertime and lower in the spring and fall. The danger is that we may be giving away nat gas, (which almost happened earlier in the year when storage and pipelines reached capacity), thus causing a price crash to a $1 of less, but most of the producers have seen this pitfall and tried to cut production.
Rodney Adams Replied:
Are you trying to convince me that Chesapeake, Devon and Petrohawk were all able to sell overvalued properties to the majors? Do you expect people to believe that major petroleum producers like ExxonMobil, Shell, and Chevron are gullible investors that do not do their due diligence?
I have far more respect for their decades of experience and armies of accountants. I also have a little more cynical view of their histories of profitable influence on the energy market and their proven use of “price wars” to destroy potential competitors. Those price wars have nearly inevitably been followed by very profitable periods of rising prices as supply fell short of demand.
I am pretty sure that the main target of the current North American natural gas price war was something called the “nuclear renaissance” but coal has also been targeted. My analysis indicates that the majors are accepting low margins on their gas business in an effort to drive out some of those pesky independents who would not play along with their artificial market constraints.
Please do not get me wrong; I like low energy prices. I just do not believe that the natural gas suppliers like them anywhere near as much as consumers do. I believe they are perfectly capable of recognizing that the best way to drive up the price is to encourage more demand while they are slowing production capacity development.
Kenneth llindsey Replied:
It is not a question of gullible, nor would due diligence typically go beyond verifying the existence of the assets; it is merely that there is far more natural gas nationally available than anyone conceived was possible, and that information was not widely known beyond the field level. For example, Exxon bought XTO when the price was around $6.50 per MCF and then it dropped to $2.50 per MCF. Other purchasers of assets from the independents have seen similar drops. Of course, a major may have a 30 year timeline, while an indie may only have a 3 to 5 year timeline, thus a major can survive the lag till we are able to export our excess capacity; but at the moment gas only drilling has come to a virtual standstill.
Rodney Adams Replied:
The missing link in your argument is the fact that total US methane production is about 10% higher than it was in 1970; the real culprit that has allowed gas prices to remain low has been the demand destruction caused by the Great Recession of 2008 and its lingering effects. The mild winter of 2011-2012 helped.
Sure, storage systems are full, but total natural gas storage capacity in the US amounts to less than 1/6th of annual consumption (4 TCF storage versus 24.3 TCF/YR).
Because natural gas is so explosive, it has to be transported away from extraction wells or flared off. Because gas nearly always gets produced – in varying proportions – anytime someone drills for oil, there are usually some extractors who will take almost any spot market price in order to get rid of what is essentially a waste product of their oil extraction efforts.
That explosive, difficult to store, and difficult to transport (without an installed pipe) nature of methane also leads to large price variability based on small swings in the balance between supply and demand. Price changes far more rapidly than most observers admit publicly, but the graphs are available on the Energy Information Agency web site. Here is a link to a post where I included one of those gas price history graphs:
Why do nuclear energy developers ask for predictable market prices
I have a public bet with one of my readers that natural gas being sold to US electricity generating customers will be trading for more than $10 per MMBTU for at least one month before the end of 2014. Would you like to make a similar wager?
You are right that the majors have much longer time horizons than the independents. They are playing a hand that requires some staying power. They have income statements that can support artificially low gas prices to drive out competition because they are selling oil at prices that are 5 times as high today as they were just 11 years ago. Their costs for established reservoirs have not increased by much more than the rate of inflation.
High oil prices are what enables ExxonMobil to “lose their shirt” on gas, yet routinely report quarterly, after-tax profits in the 11 digits.
Their long game is to convince as many electrical power producing customers as possible to build infrastructure that can only burn gas or distillate fuel oil (combined cycle gas turbines), convince Congress to fund infrastructure for CNG vehicles, allow LNG export, and then bank enormous profits as natural gas prices rise like they did from the period from 2000-2008. I can hear the spokesmen now, claiming that they are price takers, not price makers and that they are only selling their product for whatever price that the market is willing to pay.
We’ve watched this plot unfold at least once already. Are you old enough to remember the mid 1990s, when gas producers and their purchased pundits repeatedly told everyone that there was plenty of “cheap natural gas” to allow prices to remain bounded by normal inflation for at least 20 years? Do you remember what happened to the Independent Power Producers that believed the sales pitch?
I am old enough. IPPs went bankrupt. They could not afford to install and run their machines once gas hit about $8 per MMBTU. It kept on climbing to $14 before the sudden crash in the summer of 2008.
That drop did not happen because of a magical discovery of hydraulic fracturing matched up with horizontal drilling; it happened because our economy cannot survive with such a large portion of its output being poured into the pockets of multinational petroleum companies.
Well, that was interesting, wasn’t it? Stay tuned, I suppose.
I think it’s well worth the investigation toward 1 aspect of what Rod noted above in the exchange. Unlike other commodities: frozen orange juice, oil, diesel, soy beans, gas is simply is only a globally trade commodity, like the above ones, outside the U.S. Given the huge limitations in LNG production facilities in in the U.S. and Canada, it’s geographic isolation by way of pipeline from the rest of the world, and the lack the LNG *import* facilities in the U.S., the market for gas can reflect the true supply and demand originating and limited to this continent.
Rod noted that there is/will be a rush to build LNG export facilities in the U.S. They fought as hard as people fight against nuclear, I might add. But the natural gas suppliers…the Big Gas companies (not to mention the smaller, middle-level players) are pushing big time for this to happen so they can “play” in the world market, something they are physically unable to do so…for now.
The only way, IMveryHO, that Rod’s 2014 price-per-mmbtu can get to $10 is if this occurs…or seriously starts to occur. So what I’d like to suggest Rod do is to point his investigative “gasdar” (gas radar) toward current legislation and regulatory changes that could lessen the restrictions on LNG facilities and to let us know what is being proposed.
You mean like this promotional piece in today’s Bloomberg News?
Or do you mean analysis of the arbitrage opportunity as appeared in this Christian Science Monitor piece last week?
The gasdar is up and running.
Excellent! Exactly. So we have to pay attention to this. It’s a lobby effort no doubt that has been flying under the radar…gasdar…for some time though it is hiding in plain site.
Look at the rise in diesel prices. Historically they were below gasoline prices by 1 to 10%. Now it’s reversed. Guess why? The US exports about half of all diesel produced in U.S. oil refineries to Europe, where most vehicles run on it, and where diesel refining plant is maxed out.
The vast export of diesel (often listed in lists as “petroleum exports from the U.S.”) industry servers two purposes. It makes billions in profits for the big players and…by devoting so much oil refining capacity toward diesel from gasoline, it artificially keeps gasoline prices higher than they would be.
Gotta love commodity capitalism.
I’ve been told that historically, the refining process was pretty simple distillation, and first the gasoline came out and then the diesel. So diesel was the ‘leftovers.’ But nowadays, the Chem E’s have figured out how to turn the crude into whatever hydrocarbons you want – so they decide how much of the barrel goes to make gasoline and how much goes to make diesel. Since diesel has a higher energy content, it is worth more, and sells for a higher price.
Don’t know if that’s true, but that’s how I heard it from a petroleum engineer.
Rod: When he said this: ‘six hundred year supply’ it was time to stop wasting time with him. The short answer to the question at the top? Speculation. Also, I don’t think NG will ever be exported significantly. The price will rise to the cost of production, and all the new NG plants (taking the place of coal) will be taking the gas we can produce. There are a lot of interesting discussions by some knowledgeable folks on ‘The Oil Drum’. It’s not a bad scenario. The gas plants are killing coal. When gas goes up in price, nuclear will look very attractive (assuming Vogtle and Summer get built on time and on budget). We can keep the gas plants for peaking.
Some other odd claims:
Kenneth ll: “Also, in North Dakota more Natural Gas is being flared off than is being used in the rest off the country …”
“About 5 trillion cubic feet (b.c.f.) of natural gas were flared or vented without burning worldwide last year. That huge amount of wasted energy is roughly equal to a quarter of all natural gas consumed in the US annually, the World Bank reports.” http://www.csmonitor.com/Environment/2012/0713/Thanks-to-North-Dakota-US-waste-of-natural-gas-grows-rapidly
“The good news for gas production in North Dakota is that it is increasing rapidly, reaching an all-time high 21.3 Bcf, or almost 688,000 Mcf/d, in May.
The bad news is that more than 30% of the gas produced in the state is being flared, …” http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/6533725
Kenneth ll: “… the per unit MCF production cost for a frac well can range from $0.05 to $0.45, and the production cost for a straight bore hole well generally recognized at $2.50.”
My understanding is that fracked gas costs about $6 to produce, which is why nobody who doesn’t have to is still drilling gas wells (as opposed to oil wells that also produce gas).
I wish it were possible for Dominion to put Kewaunee in some sort of a cold layup condition, to be brought back on-line when the economics of running the plant are more favorable. But they would need to keep the highly trained staff on site, which would be expensive if they didn’t know how long it will be before power prices are high enough to make Kewaunee profitable again. It is a shame no other power companies are stepping up to buy the plant.
It would be possible except Dominion would also have to pay the NRC to write new rules for having a reactor in an extended layup condition until business conditions warranted bringing it back on-line. At the going rate of $274 per hour for NRC review time it just isn’t the plant staff that would have to be paid. It is also the NRC itself that would need to be paid for as long as the reactor would remain offline.
So once again we are presented with a situation where the solution is relatively simple but the bureaucracy will not permit it.
In other words trying to keep a reactor in cold layup is a high impact risk event for a publically traded company due to a unquantifiable cost factor. Which is not good for the ratepayers in Wisconsin and elsewhere.
Good Morning Rod,
Lindsey’s comments about the abundance of natural gas have some merit.
I’ve been in the nuclear industry since 1979.
But several things did bother me about the comments.
#1 Storage Capacity was almost reached in 2011.
#2 Prices did drop to less than 1/4 of the world spot price for LNG
#3 Cheniere is the only company with a permit to export
#4 Cheniere will have their export port ready by 2015
#5 World prices are still 3 to 4 times US prices
#6 Cut backs in LNG production have maintained the $3.50
Major producers shut down wells to maintain price demands.
The Texas oil patch stopped, and Texans clearly said, “No more oil until the price reaches above $60/barrel.”
Now, not only oil, but natural gas wells are being cut back. Why?
There are 9 more export permits sitting on someone’s desk, and have been sitting there for several years, waiting to be signed. Why?
When you’re able to own the product, and control the distribution, you can set the demand price.
Coal is being thrown under the bus, and to some extent oil as well, for electric production.
Remember the arguments the Russians used to convince the Germans after Fukashima?
“Nuclear is bad. Shut them down. We have natural gas for your turbines. We’ll supply your gas needs at a reasonable price.”
The plan seems very simple. Shutdown the coal, oil, and nukes. Generate using natural gas as the primary baseload.
I believe (even by your calculations of 89 years) we have the natural gas reserves. I also believe the price is being maintained for a reason. Greed!
Here’s an article you will find interesting, Rod,
Note the sensitivity of gas prices to nuclear output, and the fact that $8 gas was just seen in New England.
Of all Llindsey’s arguments, I found the stuff about gas produced from oil wells to be most (potentially) compelling.
In a recent post at the ANS Nuclear Cafe, I listed four reasons why current low gas prices won’t last. They are 1) the fact that oil costs ~6 times what gas does on an energy equivalent basis, 2) the fact that gas sells for ~3-4 times the US price in most of the rest of the world, 3) the high sensitivity of gas prices to the supply/demand balance, resulting in a large price increase when the economy (finally) grows, and 4) the fact that fracked gas costs far more to produce than the current price.
If Llindsey’s right about there being little gas-only drilling, and it were true that by product gas (from oil drilling) by itself were enough to maintain glut conditions, then it would take out my 4th argument, at least, and it may be possible for low gas prices to persist. I’m not sure if those premises are true, however.
Another argument that has some merit is that it will probably take a long time for the US to build significant gas export capacity (LNG terminals, etc…).
Thanks for the discourse on Wall Street. I think the price for natural gas will go up and hit $10/MMBtu even sooner, depending on weather conditions or any other potential disruptions, eg pipeline failure in one region. Prices drove the production of new wells to lows. I’m having some trouble finding the graph I’m looking for. It used to be an EIA publication, monthly new gas wells. Seems information about how gas is produced needs to be shrouded in secrecy due to “budget cuts”.
I saw a presentation at Coal Gen where they showed the number of new wells along with the gas price. More wells are closing than are opening. And have been for some time, the only new gas wells are this that produce liquids. Here is a historic graph from EIA that ends in 2010 of the number of wells:
Here is a Reuters article putting natural gas rig counts at a 13 year low. http://www.reuters.com/article/2012/10/19/us-energy-natgas-rigs-idUSBRE89I13Q20121019
Using some second order modeling, predator prey type relationships, the price signals to expand rigs need to occur before we get more rigs. If hub gas price needs to be $6/MMBtu then no new wells will come until hat market price is cleared. Because it takes finite time to drill new wells the price will overshoot, by a non trivial amount as stored gas is depleted and not replaced. I’m just waiting for when that price shock will hit.
There is a good article on Methane in the December issue of “National Geographic”.
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