Wednesday, May 02, 2012

US Natural Gas: $10 a Barrel Oil Equivalence Price

Oil and natural gas used to be joined at the hip, and in the minds of many people they still are, even though the days when most US natural gas was a direct or indirect byproduct of oil production--either produced with oil or found by accident when a company was drilling for oil--are long past. The vast majority of our gas comes from dedicated gas wells in fields that were explored because of their gas potential, with shale gas and other so-called "tight gas" increasingly dominating output. The widely discussed shale gas revolution is the main reason natural gas is so cheap today, instead of costing over $10 per MMBTU as it would if shale gas hadn't happened and the industry's expectations about increasing LNG imports had materialized instead. _Geoffrey Styles
US natural gas production -- and thus gas prices relative to oil prices -- continue to be astoundingly low. $10 per barrel oil equivalent price compared to $110 a barrel for crude oil, puts natural gas at a large competitive advantage for those who are able to substitute natural gas for oil.

Already utilities in the US are making large investments to substitute natural gas electrical generating plants in place of coal power plants. Chemical companies are beginning to build expensive ethane to ethylene plants in multiple US locations, for the substitution of natural gas in place of oil in production of chemicals and polymers. Multiple oil and energy companies are making plans to build very expensive natural gas to liquid fuels (GTL) plants in Louisiana and Texas. And manufacturers who require cheap, high quality process heat, are locating in and expanding in parts of the US and Canada with plentiful, cheap natural gas. Low gas prices have serious consequences for multiple industries.

The only reason that additional demand from utilities, petrochemicals, transportation, and exports hasn't already sopped up the gas surplus and boosted prices is that all of these developments involve time lags of their own. It will take time to build the new ethylene crackers announced by Shell and Dow Chemical. Natural gas power plants have already ramped up output and seized market share from coal, but bigger shifts will require more gas turbines. Converting long-haul trucking to natural gas requires expensive modifications to trucks and new refueling infrastructure. Meanwhile the first liquefied natural gas export terminal just received the go-ahead from FERC. Yet while none of these things can happen overnight, and there isn't enough gas to push them all to their maximum potential in any case, they are all being propelled by the enormous driving force of natural gas at the oil equivalent of $12-20/bbl in a $100-per-barrel world. The developers of renewable energy technology must also figure out how to compete with that, if they're going to prosper without fiscally unsustainable subsidies.

As scaled-back drilling and new demand mop up the current gas glut, only one thing can happen to prices. The $64,000 question is how high they could rise and still keep the demand expansion going. A return to $10 natural gas would halt the shift from coal to gas and stop the penetration of gas in transportation in its tracks, but it would also unleash an even larger wave of new production. Mr. McClendon's latest guess for the medium-term price is between $3 and $5, and that sounds reasonable. Even at the latter the BTUs in gas would still cost just $29/bbl. We won't see oil at that price any time soon, so gas doesn't need to remain at $2 to create a world-beating energy advantage for the US. If natural gas can fulfill even a portion of the potential we see today, we will soon need to rethink most of our assumptions of energy scarcity embedded by four decades of recurring oil crises. That will be uncomfortable for some people. _Geoffrey Styles
Only the eco-fascists within Obama's administration could shut down this energy and economic boom. And they would certainly like to. But they will have to wait at least until after the next national elections, in November. And if congressional Democrats have any sense of self-preservation, Mr. Obama may begin to face a growing rebellion within his own party, if he attempts to apply his green dieoff.orgy dreams too forcefully, should he be re-elected.



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