How painful will the coming spike in natural gas prices be?

By Rod Adams

There is a good reason for American nuclear energy professionals to learn more about the dynamics of the natural gas market. We have been told numerous times that cheap natural gas is making our technology less and less viable in the competitive market place. Natural gas (also known as methane) is a terrific product, but it has been promoted as being capable of supplying a much larger portion of our overall energy demand. That promotional effort is putting us all at risk of a severe hangover when the low price bubble bursts.

I freely admit it; I am a contrarian who believes that the more the crowd pushes in one direction, the more beneficial it will be for me to move in the opposite direction. It is becoming more and more fashionable for casual observers of the North American energy market to make assertions about a long future of low natural gas prices that will benefit consumers and give energy intensive industries a competitive advantage in the world market.

In contrast, I am increasingly worried that there is going to be a painful spike in North American natural gas prices that will remind everyone that gas is a volatile commodity in both physical form and market price. Producers with supply that is not committed to long-term contracts will benefit enormously; consumers will suffer, independent power producers will suffer, and industrial customers will suffer, especially if they have recently made investments under an assumption that gas prices will remain low.

There are a number of factors in the multi-term differential equation that governs the balance between supply and demand in the gas market that are aligning to create an increasingly tight market.

  • Multinational companies like Sasol and Shell are planning or building gas-to-liquids (GTL) plants in the United States.
  • Drilling companies are scaling back drilling, especially in gas-rich areas.
  • The Department of Energy continues to approve export permits for liquified natural gas (LNG).
  • The Environmental Protection Agency has proposed CO2 emissions limits on new power plants that cannot be met with the best available coal burning technology.
  • Five existing nuclear power plant units, with a combined total capacity of more than 4,000 MWe, have either been permanently shut down or have announced an imminent closure.
  • Pipeline gas exports to Mexico have doubled in the past five years. There are projects underway that will result in another doubling in the rate of export to Mexico as our neighbor’s production capacity falls.
  • Canada is planning several west coast LNG export facilities.

Though increasing natural gas prices might seem to be a potential boon for nuclear energy development, there will be negative economic effects whose overall impact is unpredictable. History shows that a dramatically higher energy price reduces or eliminates energy demand growth, leads to inflationary pressures, and contributes to the risk of increased interest rates. Each of those effects puts new nuclear power plant projects at risk. The high prices may not last long; those effects tend to work to eventually bring markets back into balance.

United States citizens are often surprisingly unaware of events and market trends in other portions of the world. Even within my circle of colleagues that are working in the energy business, few realize that cheap natural gas is an almost purely North American phenomenon. European prices are approximately 2.5-3 times higher than current US prices, while Asian LNG buyers are often paying 4 or 5 times as much per unit energy as consumers in the United States.

That helps to explain why so many other countries are still planning a significant increase in their nuclear electricity production capacity. Outside of the United States, the nuclear renaissance is still moving forward, but that is not necessarily helping the nuclear professionals that like living and working inside the United States. (I am one of those people; with three young grandchildren, I am not interested in living overseas.)

All the above data points tell me that nuclear power plant owners should be much more reluctant to shut down their operating reactors, especially if they are making that decision based on an assumption that natural gas prices are going to remain low for many more years into the future. While it can sometimes require more patience than is common in corporate board rooms, a permanent decision to destroy a generating asset that meets all possible emission standards and does not burn natural gas seems to be a very short term decision. Observing those kinds of decisions makes my brain replay a refrain from a Jimmy Buffett song—”It’s a permanent reminder of a temporary feeling.”

The data also tell me that Southern Company and SCANA are going to be pleased that they made the long-term choice to expand their nuclear energy generating capability at just the right time to take advantage of low interest rates, low energy prices, low wage inflation, and new, passively safe nuclear power plant designs. Even though it seems to be a remote possibility today, someday in the near future their customers are going to be happy that they are served by utilities that did not follow the crowd down the seemingly easy path of increased natural gas dependence.

gas plant 290x201

_______________________

Adams

Adams

Rod Adams is a nuclear advocate with extensive small nuclear plant operating experience. Adams is a former engineer officer, USS Von Steuben. He is the host and producer of The Atomic Show Podcast. Adams has been an ANS member since 2005. He writes about nuclear technology at his own blog, Atomic Insights.

11 Responses to How painful will the coming spike in natural gas prices be?

  1. There is no “by line” on this piece. But looking at what is said, the style, and the personal references, I assume that it is by Rod Adams.

  2. Key word: “inelastic.”

  3. Hi,
    In your whole analysis, so seem to have missed on the REAL boom in RE which will severely challenge growth of nuclear. A number of large solar and wind projects have been built and are being built.
    My honest opinion is that the biggest challenge to nukes is not the low or high price of gas. It is the ridiculously high capital costs and the time needed (often with huge financial over runs) that makes RE more sensible.
    Gas after all, is just gas – here today, gone tomorrow….
    Cheers :)

  4. Bill Rodgers

    @Anuj,

    Not sure where you get the idea that approximately 3-5% of intermittent wind and solar are going to affect boardroom decisions regarding nuclear.

    And now with the subsidies slowly dying – as they should- the economics of large scale solar and wind are slowly sinking despite the state mandated RPS and the ISO’s forcing negative pricing into the marketplace.

    Gas is the current driver for pricing comparisons of large scale power generation systems not wind or solar

  5. SpreadingSolar

    I agree that Natural Gas is likely to increase in price and perhaps in a dramatic fashion. The best treatment of this was the report “Drill Baby Drill” from the post-carbon institute (http://www.postcarbon.org/drill-baby-drill/). You’re also right that cheap natural gas AND the enormous build-out of CCGT in the first half of last decade has put pressure on aging nuke plants. However, Anuj is also right to point out that renewable generation (>16 GW of which was added in 2012) is a longer term threat. These assets will generate power regardless of market pricing and they are getting cheaper every day.

  6. So everyone loves gas now, right? So what’s climate change? Chopped liver?

  7. Natural Gas is one part CH4 (methane) and one part ABN (Anything But Nuclear).

  8. @Anuj

    I did not miss any real boom in “RE”. Without massive subsidies, there is no incentive for anyone to invest in wind, solar, biomass or geothermal power systems. Subsidies are only affordable on a small scale. If there is enough growth in the technology to make any substantial difference in the balance of energy sources, the cost of the continuous subsidies becomes large enough so that people start to notice, complain and fight back.

    The “cheap” PV panels from China are going to disappear from the market because Chinese decision makers will get tired of making them without making any money. The ones that have already been installed will deteriorate far faster than predicted. I’ve dealt with enough Chinese manufactured products to have some idea of their quality control standards.

    When it comes to energy, selling “renewable” is a great way to increase the market share of natural gas. Why do you think so many petroleum companies spend so much of their marketing budgets touting wind, solar and biomass energy? It is a great strategy for increasing sales of their established product lines.

  9. Rod – there’s a couple of factors that may lead to the price of gas staying lower longer than you might expect.

    On the demand side, unquestionably the low prices we enjoy here are attracting much global interest. On an energy equivalent basis, gas would have to trade north of $15 to equal the price of oil. So there is plenty of room for gas prices to rise.

    And on the supply side, the number of rigs drilling for gas has plummeted, it’s half what it was two years ago and only a fourth of the 2008 peak. Also, the shale gas wells do tend to have very high depletion rates.

    However, gas production has continued to climb and probably will continue to do so for at least two reasons. First is that the boom in drilling for oil is also leading to a plethora of what is called associated gas. Because the epicenter of the boom has moved from North Dakota to Texas, this gas is easy to connect to transmission lines and the market. But connections to the currently flared North Dakota gas are coming soon if only for environmental and not economic reasons. The oil drilling boom is likely to only intensify. If the reforms to Mexico’s constitution pass, then Eagle Ford drilling south of the border will also ramp up.

    The other factor is the thousands of drilled but uncompleted wells in Pennsylvania. Surely these are not the best prospects, but they still represent a vast, fairly low cost source of additional supply should prices rise only slightly.

    I just don’t see North American gas prices sustaining much above $5 before 2020. Maybe I’m wrong, that’s why there’s a market, but I figured you should think about these other factors.

  10. SpreadingSolar

    Rod,

    You need to go back an look at current solar markets. Operating margins for solar manufacturers are again in the black and volumes continue to rise. In the U.S. we’re now installing more GW of PV annually than we’re retiring of nuke generating capacity. Current PPAs for utility scale PV is in the $0.06-$0.08/kWh range and this equates to $0.04-$0.06/kWh in year 30 of these PPA ($2012). Know what happens in year 31? The PV plant continues to pump our power at a rate that much closer to “too cheap to meter” than anything the nuke industry achieved.

    Additionally, distributed PV is already below retail rates. This trend will accelerate as installation markets mature, hardware prices continue to fall, panel efficiency increases, and retail rates continue to outpace inflation. In some locations new nukes make sense but increasingly we’ll see a virtuous cycle between renewables, natural gas, distributed storage, and grid intelligence significant reduce the need for significant baseload power.

  11. Mauro Missaglia

    This debate concerns again – as can be expected – around the same issues: climate change, economics, renewable energies and nuclear. All of these factors being of course related to one specific subject, which is the one that concerns nuclear: the long-term generation of baseload electricity.

    Climate change:
    The Inter-Governmental Panel on Climate Change just released the new edition of the scientific bases supporting the evidence of anthropogenic climate change. This document notably raises the probability that the observed and undeniable climate change is man-made to 95%, compared to 90% in the previous edition.

    Faced with this evidence, the very notion that much of the baseload electricity generation should be based on natural gas – whatever its origins and its costs – let alone on coal, is just insane. It is also a remainder of the short-sightedness and utter lack of courage of policy makers, unable to speak up in front of the short-term / mid-term interests of big oil and gas corporations.

    Economics:
    Taking into account the above factor, should any discussion about the best way of producing baseload electricity be based on economics? Absolutely not! Or, best said, absolutely not as far as gas and coal are concerned (apart possibly for the very short term transition), since they are purely and simply to be ruled out, period.

    Let’s leave oil and gas to any other application (e.g. transportation), and let the specialists concentrate on how to use less and less of them for the same “amount” of a given application. But please, let’s stop wasting time (and money) discussing merits and drawbacks of baseload electricity generation by gas and coal in the mid and long term, since there simply is no merit, there are only terrible drawbacks!

    Renewable Energies (notably, solar and wind)
    Here the debate about their economics versus that of nuclear is a very good one. Also, the debate about their technical feasibility and implementation on a very large scale is a very good one.

    I will not add anything very specific to the excellent answer by Rod to Anuj.

    I will simply add a perspective that I very recently had from an experienced R&D engineer (holding a PhD from one of the very best French engineering schools) working here in France for the multinational glass maker Saint Gobain, which is of course very much involved and interested in developments concerning solar energy. He told me exactly what Ron points out about PV, notably about its economical nonsense, were it not heavily subsidized. He was also quite skeptical about the future possible technical improvements of the technology, namely about technological breakthroughs that could represent real game changers.

    Nuclear:
    So, where does nuclear stand in all of the above?

    Well, it should stand in a very good position. And, it would stand in a very bright spot for the long term, were it not – again – for an economic and political system sadly dominated by short-termism and greed for the immediate profit, instead of by long-term considerations about the well being of humanity and the planet that we and our descendants all share.