Shale Gas Affecting Industry's Pricing
Pittsburgh Post-Gazette
14 January 2011
By Elwin Green
The recent onslaught of severe winter weather has caused the wholesale
price of natural gas to edge upward since mid-December, but it still
remains lower than it has been for most of the past decade.
Thursday, the closing price was $4.407 per million British Thermal
Units, according to Eugene, Ore.-based Moore Research Center, Inc. A
year ago, it was closer to $6.
The trend of natural gas prices has been credited to the growth in the
extraction of natural gas from shale formations, including the
Marcellus Shale.
Now, the U.S. Department of Energy says that the available supply of
such gas is more than twice as large as it thought just a year ago. In
a December update to its annual energy outlook, the agency said that
the nation's supply of shale gas is 827 trillion cubic feet, 480
million cubic feet larger than last year's estimate.
As a result, the Energy Department says the price of natural gas at the
wellhead, before transportation and other costs are added, will remain
less than $5 per thousand cubic feet through 2022. (A thousand cubic
feet is roughly equivalent to a million BTUs.) Going further out, to
the year 2035, it has lowered its estimate to $6.53, from an $8.19
estimate a year ago.
Those projections carry a bonus: a reduction in the price of
electricity. The agency says that by 2016, the average price for
electricity will fall as low as 8.9 cents per kilowatt hour, down from
9.8 cents in 2009.
That's because natural gas fuels 23 percent of U.S. generation, and is
expected to fuel more in the future. Of 448 new power plants planned
for the years 2011-2014, more than 40 percent, or 184, will be fueled
by natural gas, adding 29,141 megawatts of generation capacity to the
grid. Only 22 new coal plants are planned, with a total generation
capacity of 9,993 megawatts.
As natural gas increases its share of electricity generation, shale gas
will account for a larger portion of the natural gas in use, said Jack
W. Plunkett in his newly published book, "The Next Boom."
In an interview, Mr. Plunkett recalled another time when natural gas
was abundant.
"In the '70s and '80s, we went through a period of very stable,
extremely low gas prices," he said. "My friends in the industry were
dreaming of getting gas up to $2 and keeping it there."
By the end of 2000, natural gas reached $10 per mmBTUs.
In the early 2000s, Mr. Plunkett said, supplies seemed so scarce that
the nation was preparing to rely on imported liquid natural gas. "We'd
have a line of LNG ships as far as you could see on the Gulf Coast," he
said.
"The shift in the gas industry is nothing less than a complete turning
it upside down.
"The potential supply is so great that even with all of the demand for
electric utilities ... I can't see where we've got any sign of a spike
in gas for a long, long time."
Bill Bathe, CEO of U.S. Energy Services, a Minneapolis, Minn.-based
energy management company, said that the only cause that he could see
causing a spike in natural gas prices would be problems in moving the
gas to market.
"You may see a blowout in the price of transportation" due to the cost
of constructing and maintaining pipelines, he said. Otherwise, "I've
got to go out sometime in 2015 before I see a price above $6.
"If you add any kind of inflation at all, that's a very good price."
But there could be a downside to low prices, he said -- a loss of
incentive on the part of producers. When prices are low, there is
little motivation on the part of producers to get gas out of the ground
since their payoff is smaller.
"When we saw natural gas at $8, $9, $10 ... it was very frustrating,
very difficult," he said, "but there was a lot of excitement behind the
scenes.
"There is a silver lining to high prices, and kind of a negative to low
prices."
Elwin Green: egreen@post-gazette.com or 412-263-1969.