The Exchange

Are We Drunk on Natural Gas?

The Exchange

By Jigar Shah

Politicians and pundits on both sides of the aisle are drunk on the idea that exporting America's cheap natural gas will boost our economy and fix our trade deficit. However, those close to the industry know that they're using three-year-old data and that exporting natural gas is not a panacea for American manufacturing.

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On the right, Nick Loris, a policy analyst The Heritage Foundation just wrote in “Keystone XL and Natural Gas Provide Energy Trade Opportunities” that we have a glut of natural gas and low gas prices in the United States that could be exported and “would provide a huge boon to the U.S. economy.”

On the left, it is reported that President Obama is reviewing applications for 20 liquefied natural gas export terminals. In the U.S. natural gas is decarbonizing our energy supply. Exporting can be a way for us to help our neighbors meet their climate change and energy needs while reducing our trade deficit.

So, are we thinking straight, or are we drunk on natural gas?

A political issue

The answer is that politicians, or pundits, are much more exuberant, or drunk, about natural gas as an economic driver, deficit reduction savior, and job creator than the natural gas industry is.

The good folks in the natural gas business are dealing with the absolute realities of supply and demand. Many are just happy that market supply and demand are finally in balance. Natural gas remains an inexpensive fuel alternative, which is good for manufacturing and creates a possible market for natural gas exports from the U.S. However, the United States remains a natural gas island. Right now, we are not exporting significant amounts of liquefied natural gas.

Pricing swings

As the natural gas industry knows, in 2010/2011, we “over drilled.” It was a typical commodity cycle putting too much gas into the market where supply outstripped demand.

That also coincided with a mild winter during which the electricity and heating sector used less than normal amounts of natural gas causing further downward pricing pressure. It is why we saw crazy low prices in 2012. For example, in April 2012, natural gas prices dipped below $2.

As of June 4, 2013, the price of natural gas was at $4. At this level the natural gas industry is no longer frothy, and supply and demand are in balance. At this price, coal plants pushed out of the market in 2012 are back to work – producing power more cheaply than the much-heralded natural gas.

Higher prices led to a dramatic drop in the number of people drilling for gas. For example, by June of 2012, the number of drilling rigs for the Marcellus Shale region was down 29 percent according to Baker Hughes, which tracks the industry. By August 2012, it was reported that the natural gas rig count dropped to a ten-year low. According to Baker Hughes, the rig count as of June 2013 is 354.

So if you look at the gas rig count, it has dropped from of peak in 2011 of around 900-plus rigs to a very low 350 – so a two-thirds drop.

That means that speculative drilling has sputtered to nothing. There is no reason to speculate when there is plenty of oil drilling that produces natural gas as a by-product. These oil rigs that also produce natural gas are called “wet plays.”

According to the chart below from Bloomberg New Energy Finance, there are several “wet plays” producing natural gas for zero incremental cost (note: this chart does not include land costs). These plays derive their value from the oil they produce - the gas is icing on the cake.

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There are many additional plays stalled waiting to turn on if prices rise.

How do we raise natural gas prices? Increasing demand is tough, but exporting could double gas prices to the global price of above $7. As it turns out creating a robust U.S. export business will be a slow burn.

Export pricing

The capital cost of a natural gas export plant is around $10 billion. And, in May 2013, the U.S. Department of Energy approved the conversion of a terminal on the Texas Gulf Coast’s Quintana Island to liquefy natural gas for shipment.

Manufacturing and industrial facilities are enjoying a renaissance in the U.S. partly due to low natural gas prices. Exporting gas will likely drive up the price, increasing the cost of manufacturing across industry.

So, while many politicians think natural gas will be the great savior of our trade deficit through exports, it conversely might raise the cost to other industries and slow manufacturing growth here at home. It is unclear if exporting natural gas would cost or create jobs overall.

The energy savior du jour?

I have often said that there is no green energy or brown energy, just useful energy. We ought to just measure energy and its cost. Natural gas in the US is a cheap fuel that is not clean – but better than coal. Solar and wind are clean sources that we need to deploy because they eliminate volatile energy prices and make economic sense.

Solar has already created more than 100,000 jobs since 2007 in the U.S. while driving down the cost of energy.

Right now we have so many energy choices, yet we have an “all of the above” energy statement with no energy plan. Politicians “hook” onto what might appear to be the savior du jour.

I am here to confirm that there is no one savior, but we need a plan from the government to serve as the guide to assure we meet our energy needs without defeating our planet and ourselves. So, rather than getting drunk on any one energy source, the government could provide a sobering plan.

Jigar Shah is an entrepreneur and visionary committed to leveraging the next economy by solving the challenging issues of our time. Shah is the author of the book, "Creating Climate Wealth," to be published in Summer 2013.

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