Energy Law Wisconsin Blog

Natural Gas: Why You Should Take an Interest in Recent Developments

In recent months, natural gas has received more media attention than any time I can remember.  Based upon my own research and my recent participation in the first Wisconsin Natural Gas for Transportation Roundtable, held in Madison, Wisconsin on April 25, 2012, I believe this increased attention  is not only well-deserved, it may actually be insufficient.

Technology innovations have led to a fundamental change in the economics of the production of natural gas from shale deposits.  This change in natural gas economics, in turn is fueling (pardon the pun) accelerating economic, regulatory and infrastructure developments whose effects will be widespread.

Some of the areas that are undergoing drastic change in the evolving world of natural gas production include:
– Natural Gas Pricing

– Renewable Energy Development

– Environmental Quality

– Energy Regulations

– Natural Gas Transport Infrastructure

These very significant changes are too much to cover in a single blog post. I will attempt, through a series of upcoming posts, to address, in bite-sized pieces, some of the critical issues. Today, I will begin with the apparently fundamental change in the in the available supply and price of natural gas in the United States.

 

Natural Gas Production – Then & Now

If you were to turn the clock back to 2005 and look at the headlines about natural gas production, you would find articles lamenting the natural gas crisis. The prevailing wisdom was that natural gas production in the United States had peaked and was on the decline, leaving the country facing a supply shortage that many claimed to not be going away anytime soon. For example, the Alliance to Save Energy urged Congress to adopt energy efficiency measures to deal with the crisis (See here).

The cry went out to find new sources of natural gas, with potential solutions including increasing offshore drilling in places likely to produce natural gas and importing liquefied natural gas (LNG) from overseas. The importation process would require natural gas from other parts of the world to be cooled to a liquid state, brought to the United States, warmed up and put in domestic natural gas pipelines.

If you turn the clock forward to 2012, however, the headlines broadcast a crisis of another variety – a crisis of oversupply.   For example, a CNBC interview with a commodities expert who ran a hedge fund that specializes in energy-related investments was titled “Who Will Survive the Natural Gas Oversupply?”  The story claimed, in language that echoes the language of 2005, that the current natural gas oversupply conditions in the United States will not go away anytime soon.

Low Cost, High Supply Affects Global Economy

Headlines are one thing, but prices and actual projects under development are another.  Based on the latter, it cannot be denied that the U.S. natural gas supply picture has changed radically in less than ten years. Natural gas futures contracts which reached an historic high at
$15.35/MMBTU in late 2005 are now priced at approximately $2/MMBTU.  As far as projects go, the industry has gone from developing terminals designed to receive imports of LNG to seeking permits for terminals established for the purpose of exporting LNG.

Many people are convinced that the low cost, high supply scenario for natural gas is here to stay at least for many years.  Their optimism is based not only on today’s numbers, but also their confidence that the U.S. is only tapping the tip of the iceberg when it comes to shale gas supply.  Others, including some who have been in the utility industry for decades and have seen ups and downs in the natural gas supply, aren’t so sure. Still others believe one or more of the following factors may throw a monkey wrench into the high supply, low cost natural gas scenario:

– Environmental and liability concerns, including the environmental impact from fracking, climate change impact of higher natural gas use, and even earthquakes claimed to be caused by shale gas exploration.

– High increased demand will drive up price due to wholesale electric generation industry switching away from coal, nuclear and renewables to natural gas.

– Increased demand from China, India and the developing world will drive up the price.

– Infrastructure and transport limitations.

At this point, you may be thinking, “This is all very interesting, but I do not live on the coasts where the LNG terminals will be located, so what does any of this have to do with me?” After attending the Wisconsin Natural Gas for Transport Roundtable, I am convinced that Wisconsin will have a birds’ eye view of watching the birth of a new natural gas infrastructure, particularly for transport, and will have all the opportunities and growing pains associated with such an industry.

I’ll talk more about this and some of the impacts and risks associated with this developing industry in future posts.

Written on April 27, 2012 at 2:07 pm, by Michael Allen