by jboullion | Aug 15, 2012 | Uncategorized
August 10, 2012
A commentary by Michael Vickerman, RENEW Wisconsin
Wholesale natural gas prices are once again flirting with the $3.00/MMBtu mark after the Energy Information Agency (EIA) reported this week that working gas in storage increased by 24 billion cubic feet (bcf) over last week’s totals. Compared with the five-year average of 45 bcf for the first week in August, the volume injected is modest. The August 9th report marks the 15th week in a row where the weekly injection volumes trailed the five-year average by a minimum of 20 bcf.
On the trading front, the trend this summer has been a steady upward drift punctuated by sharp sell-offs whenever gas prices momentarily settle above $3.00. The last week in July was a case in point. Though the reported number for that week (28 bcf) was only half the five-year average for that date, the announcement triggered a pullback of nearly 10% down to $2.80 from $3.10. It turns out that EIA’s number came in 5 bcf higher than the traders’ own estimate, triggering a wave of serious unloading of positions by those who had bet long.
Everyone in the energy industry, including the traders themselves, knows that $3.00/MMBtu is well below the cost of producing natural gas, and cannot support exploration and extraction activity at the level we saw in 2008 through 2010. Producing shale gas, the so-called “game-changer” that industry flacks contended would loosen King Coal’s grip on the electricity sector, is an even more expensive proposition. High-profile exploration and production (E&P) companies like Chesapeake Energy tried to maintain a jaunty look while wholesale prices were scraping along the $2.00 floor, but they can no longer conceal their distress. Consider the following developments that occurred over the last fortnight.
- Chesapeake Energy announced plans to reduce domestic gas production in 2013 by 8%;
- BHP Billiton wrote down $2.84 billion on the value of Fayetteville shale gas assets it had acquired in 2011; and
- The most recent count of rigs drilling for natural gas in the United States is 498, nearly 70% off the levels seen in September 2008, when prices were above $10/MMBtu.
“Write down” is a fairly bloodless way to describe the loss of $3 billion; “carnage” is better at conveying the pain that now grips the natural gas sector. This begs the question: why do wholesale natural gas prices appear to be trapped for now at the $3.00/MMBtu level?
I believe that there are two reasons for this phenomenon. The first is that energy traders, like virtually everyone else in this country, are truly convinced that the U.S. is awash in shale gas. The industry-led campaign to persuade Congress, state legislatures, Wall Street, Big Media, utilities, and Joe Sixpack that the United States possesses a 100-year supply of natural gas has been a stunning success. Federal energy agencies like EIA have also bought into this view of the supply picture big-time, leaving little room for skeptics and agnostics to influence public perceptions.
This overaching belief has been unintentionally reinforced by local and regional controversies over the practice of hydraulic fracturing solid rock to obtain the shale gas trapped inside. Virtually unheard of four years ago, “fracking” has vaulted into the public consciousness, and in doing so, sustains the society-wide belief that natural gas can be accessed almost anywhere in the United States.
Ironically, the myth of abundance that E&P companies so carefully cultivated (and bankrolled) is now clearly working against their short-term interests.
The other factor that keeps prices so low is the traders’ fear of large demand swings. This is a more legitimate if somewhat overblown fear. The two main reference points for traders here is the demand destruction that occurred in 2008 from the one-two punch of double-digit gas prices and worldwide recession, and the abnormal bulge in storage volumes that occurred earlier this year.
Supply Overhang
As late as September 2011, natural gas inventories were tracking closely with the five-year average for storage volumes. Then came the phantom winter of 2011-2012, which brought us the usual dose of darkness but not the snowstorms and frigid air masses that make life in the Upper Midwest distinctly unpicniclike until April. In addition to disrupting seasonal cycles and ruining the maple syrup harvest, the extended stretches of anomalous warmth cut demand for heating fuel between 25% to 30%. Withdrawals of natural gas were substantially lower than the five-year averages during the heating season, creating a colossal bulge that briefly sent wholesale prices skidding below $2.00/MMBtu. By late April, the difference between 2012 storage volumes and the five-year average stood at 931bcf, about 60% larger than normal.
On May 1st, the pendulum started swinging the other way, whittling down the supply overhang to a more manageable 377 bcf compared with the five-year average for this week. Assuming present trends continue in future weekly storage reports, inventories should be in line with the five-year average by mid-December.
Traders attribute the ongoing reduction in inventories to a hotter than normal summer, prompting utilities to switch on more gas generators to meet system peaks. But weather isn’t the only thing that influences the storage picture; output does as well. But as long as traders and speculators subscribe to the myth of nearly limitless supply, they will discount the possibility that declining output is also responsible for lagging storage volumes. It is this mindset, coupled with the fear of weather-driven demand swings, that compels traders to focus on the supply overhang that remains, rather than gain a fuller appreciation of why it has shrunk so dramatically in only 15 weeks.
Old paradigms die hard. But in the not-very-distant future, the reality of reduced drilling activity and capital spending, along with rapid decline rates in shale gas plays, will bite deeply into the supply of natural gas and cause yet another overturning of expectations in this sector. Given the damage being inflicted on E&P companies as well as their renewable energy competitors, the intrusion of reality into this picture can’t happen soon enough.
Sources: Master Resource Report, Ravenna Capital Management http://www.ravennacapitalmanagement.com/mrr/
“Chesapeake to cut natural gas production,” NEWSOK, Adam Wilmoth, August 8, 2012. http://newsok.com/chesapeake-to-cut-natural-gas-production/article/3699062
“Billiton in $3.3 billion write-down as gas prices plunge,” BBC News. August 3, 2012. http://www.bbc.co.uk/news/business-19107135
Michael Vickerman is program and policy director of RENEW Wisconsin, a sustainable energy advocacy organization. For more information on the global and national petroleum and natural gas supply picture, visit “The End of Cheap Oil” section in RENEW Wisconsin’s web site: www.renewwisconsin.org. These commentaries also posted on RENEW’s blog: http://renewwisconsinblog.org and Madison Peak Oil Group’s blog: http://www.madisonpeakoil-blog.blogspot.com
by jboullion | Aug 15, 2012 | Uncategorized
August 10, 2012
A commentary by Michael Vickerman, RENEW Wisconsin
Wholesale natural gas prices are once again flirting with the $3.00/MMBtu mark after the Energy Information Agency (EIA) reported this week that working gas in storage increased by 24 billion cubic feet (bcf) over last week’s totals. Compared with the five-year average of 45 bcf for the first week in August, the volume injected is modest. The August 9th report marks the 15th week in a row where the weekly injection volumes trailed the five-year average by a minimum of 20 bcf.
On the trading front, the trend this summer has been a steady upward drift punctuated by sharp sell-offs whenever gas prices momentarily settle above $3.00. The last week in July was a case in point. Though the reported number for that week (28 bcf) was only half the five-year average for that date, the announcement triggered a pullback of nearly 10% down to $2.80 from $3.10. It turns out that EIA’s number came in 5 bcf higher than the traders’ own estimate, triggering a wave of serious unloading of positions by those who had bet long.
Everyone in the energy industry, including the traders themselves, knows that $3.00/MMBtu is well below the cost of producing natural gas, and cannot support exploration and extraction activity at the level we saw in 2008 through 2010. Producing shale gas, the so-called “game-changer” that industry flacks contended would loosen King Coal’s grip on the electricity sector, is an even more expensive proposition. High-profile exploration and production (E&P) companies like Chesapeake Energy tried to maintain a jaunty look while wholesale prices were scraping along the $2.00 floor, but they can no longer conceal their distress. Consider the following developments that occurred over the last fortnight.
- Chesapeake Energy announced plans to reduce domestic gas production in 2013 by 8%;
- BHP Billiton wrote down $2.84 billion on the value of Fayetteville shale gas assets it had acquired in 2011; and
- The most recent count of rigs drilling for natural gas in the United States is 498, nearly 70% off the levels seen in September 2008, when prices were above $10/MMBtu.
“Write down” is a fairly bloodless way to describe the loss of $3 billion; “carnage” is better at conveying the pain that now grips the natural gas sector. This begs the question: why do wholesale natural gas prices appear to be trapped for now at the $3.00/MMBtu level?
I believe that there are two reasons for this phenomenon. The first is that energy traders, like virtually everyone else in this country, are truly convinced that the U.S. is awash in shale gas. The industry-led campaign to persuade Congress, state legislatures, Wall Street, Big Media, utilities, and Joe Sixpack that the United States possesses a 100-year supply of natural gas has been a stunning success. Federal energy agencies like EIA have also bought into this view of the supply picture big-time, leaving little room for skeptics and agnostics to influence public perceptions.
This overaching belief has been unintentionally reinforced by local and regional controversies over the practice of hydraulic fracturing solid rock to obtain the shale gas trapped inside. Virtually unheard of four years ago, “fracking” has vaulted into the public consciousness, and in doing so, sustains the society-wide belief that natural gas can be accessed almost anywhere in the United States.
Ironically, the myth of abundance that E&P companies so carefully cultivated (and bankrolled) is now clearly working against their short-term interests.
The other factor that keeps prices so low is the traders’ fear of large demand swings. This is a more legitimate if somewhat overblown fear. The two main reference points for traders here is the demand destruction that occurred in 2008 from the one-two punch of double-digit gas prices and worldwide recession, and the abnormal bulge in storage volumes that occurred earlier this year.
Supply Overhang
As late as September 2011, natural gas inventories were tracking closely with the five-year average for storage volumes. Then came the phantom winter of 2011-2012, which brought us the usual dose of darkness but not the snowstorms and frigid air masses that make life in the Upper Midwest distinctly unpicniclike until April. In addition to disrupting seasonal cycles and ruining the maple syrup harvest, the extended stretches of anomalous warmth cut demand for heating fuel between 25% to 30%. Withdrawals of natural gas were substantially lower than the five-year averages during the heating season, creating a colossal bulge that briefly sent wholesale prices skidding below $2.00/MMBtu. By late April, the difference between 2012 storage volumes and the five-year average stood at 931bcf, about 60% larger than normal.
On May 1st, the pendulum started swinging the other way, whittling down the supply overhang to a more manageable 377 bcf compared with the five-year average for this week. Assuming present trends continue in future weekly storage reports, inventories should be in line with the five-year average by mid-December.
Traders attribute the ongoing reduction in inventories to a hotter than normal summer, prompting utilities to switch on more gas generators to meet system peaks. But weather isn’t the only thing that influences the storage picture; output does as well. But as long as traders and speculators subscribe to the myth of nearly limitless supply, they will discount the possibility that declining output is also responsible for lagging storage volumes. It is this mindset, coupled with the fear of weather-driven demand swings, that compels traders to focus on the supply overhang that remains, rather than gain a fuller appreciation of why it has shrunk so dramatically in only 15 weeks.
Old paradigms die hard. But in the not-very-distant future, the reality of reduced drilling activity and capital spending, along with rapid decline rates in shale gas plays, will bite deeply into the supply of natural gas and cause yet another overturning of expectations in this sector. Given the damage being inflicted on E&P companies as well as their renewable energy competitors, the intrusion of reality into this picture can’t happen soon enough.
Sources: Master Resource Report, Ravenna Capital Management http://www.ravennacapitalmanagement.com/mrr/
“Chesapeake to cut natural gas production,” NEWSOK, Adam Wilmoth, August 8, 2012. http://newsok.com/chesapeake-to-cut-natural-gas-production/article/3699062
“Billiton in $3.3 billion write-down as gas prices plunge,” BBC News. August 3, 2012. http://www.bbc.co.uk/news/business-19107135
Michael Vickerman is program and policy director of RENEW Wisconsin, a sustainable energy advocacy organization. For more information on the global and national petroleum and natural gas supply picture, visit “The End of Cheap Oil” section in RENEW Wisconsin’s web site: www.renewwisconsin.org. These commentaries also posted on RENEW’s blog: http://renewwisconsinblog.org and Madison Peak Oil Group’s blog: http://www.madisonpeakoil-blog.blogspot.com
by Ed Blume | Aug 13, 2012 | Uncategorized
August 10, 2012
A commentary by Michael Vickerman, RENEW Wisconsin, Director, Policy and Programs:
After skidding below $2.00/MMBtu this winter,
wholesale natural gas prices are now creeping toward the $3.00 mark.
This upward movement is the result of below-normal volumes of natural
gas going into storage for the winter heating season. The latest report,
released August 16th, marks the 16th straight week where injection
volumes lagged significantly behind the five-year average.
Notwithstanding this mild rebound, everyone in the
energy industry, including the traders themselves, knows that
$3.00/MMBtu is well below the cost of producing natural gas, and cannot
deliver a return that can support future drilling efforts. This is
particularly true with shale gas, the so-called “game-changer” that
industry flacks contended would topple King Coal’s reign over the
electricity sector.
High-profile shale gas producers like Chesapeake
Energy are now running out of ways of concealing their financial
distress. Consider the following developments that occurred over the
last fortnight.
- Chesapeake Energy announced plans to reduce domestic gas production in 2013 by 8%;
- BHP Billiton wrote down $2.84 billion on the value of Fayetteville shale gas assets it had acquired in 2011; and
- The most recent count of rigs drilling for natural gas in the United
States is 495, down 70% from the record-setting levels seen in
September 2008.
“Write down” is a fairly bloodless way to describe
the loss of $3 billion; “carnage” is better at conveying the pain that
now grips the natural gas sector. This begs the question: why are
wholesale natural gas prices still under the $3.00/MMBtu level?
I believe that there are two reasons for this
phenomenon. The first is that energy traders, like virtually everyone
else in this country, are truly convinced that the United States is
awash in shale gas, thanks to a brilliant industry-led public relations
campaign. Lower prices help reinforce the popular belief that cheap gas
will be with us for another century. Unfortunately, federal energy
agencies and universities have also bought into this view of the supply
picture big-time, leaving little room for skeptics and agnostics to
influence public perceptions.
This overarching belief has been unintentionally
reinforced by local and regional controversies over the practice of
hydraulic fracturing solid rock to obtain the shale gas trapped inside.
Virtually unheard of four years ago, “fracking” has vaulted into the
public consciousness, and in doing so, sustains the society-wide belief
that natural gas can be accessed almost anywhere in the United States.
Ironically, the myth of abundance that E&P
companies so carefully cultivated–and bankrolled–is now clearly
working against their short-term interests.
The other factor that keeps prices so low is the
traders’ fear of large demand swings. For example, the phantom winter
of 2011-2012, which cut demand for heating fuel by more than 25%,
creating a colossal oversupply that sent wholesale prices crashing. The
supply pendulum is now swinging the other way, and more than half of
the bulge has melted away. Assuming a continuation of smaller-than
normal injections, natural gas inventories should be in line with the
five-year average by mid-December.
Traders attribute the ongoing reduction in inventories
to a hotter than normal summer, prompting utilities to switch on more
gas generators to meet system peaks. But weather isn’t the only thing
that influences the storage picture; output does as well. But as long as
traders and speculators subscribe to the myth of nearly limitless
supply, they will discount the possibility that declining output is also
responsible for lagging storage volumes.
The paradigm shift ushered in by the fracking
phenomenon won’t go away easily. But in the not-very-distant future, the
reality of reduced drilling activity and capital spending, along with
rapid decline rates in shale gas plays, will bite deeply into natural
gas supplies and cause yet another overturning of expectations in this
sector. For electric utilities as well as end-users, the results will
not be pretty.
Michael Vickerman is program and policy director of RENEW Wisconsin, a
sustainable energy advocacy organization. For more information on the
global and national petroleum and natural gas supply picture, visit “The
End of Cheap Oil” section in RENEW Wisconsin’s web site:
www.renewwisconsin.org. These commentaries also posted on RENEW’s blog:
http://renewwisconsinblog.org and Madison Peak Oil Group’s blog:
http://www.madisonpeakoil-blog.blogspot.com
by jboullion | Aug 13, 2012 | Uncategorized
From a story by Justin Guay, Sierra Club International Program:
Of course they still have to face the problems they have inherited from trying to copy/paste a centralized grid from the West. So what can they do to solve peak problems with the grid they already have in place? Deploy lots and lots of distributed solar and efficiency.
That’s because, unlike coal, solar for the most part is available when you need it – during peak hours. Which is why it’s great to see States like Gujarat taking the lead in roof top solar programs with the support of the IFC. And efficiency makes the peaks smaller so you need less power in the first place.
The irony here of course is that distributed generation has always been ignored as trivial compared to the real need for a large scale ‘modern grid.’ That’s because policymakers and commentators lack the imagination to understand the fact that when aggregated, small can be very, very big.
Take the hidden truth behind India’s modern grid (as my colleague Jigar Shah points out): it is actually already a distributed system that is largely powered by filthy, costly diesel gen sets. That’s because power outages are so frequent that businesses and wealthy individuals have been forced to pay for this backup generation to ensure power. This is a tremendous opportunity for companies seeking targeted diesel replacement strategies to save people and companies tremendous amounts of money, while providing reliable power.
by jboullion | Aug 13, 2012 | Uncategorized
From a story by Justin Guay, Sierra Club International Program:
Of course they still have to face the problems they have inherited from trying to copy/paste a centralized grid from the West. So what can they do to solve peak problems with the grid they already have in place? Deploy lots and lots of distributed solar and efficiency.
That’s because, unlike coal, solar for the most part is available when you need it – during peak hours. Which is why it’s great to see States like Gujarat taking the lead in roof top solar programs with the support of the IFC. And efficiency makes the peaks smaller so you need less power in the first place.
The irony here of course is that distributed generation has always been ignored as trivial compared to the real need for a large scale ‘modern grid.’ That’s because policymakers and commentators lack the imagination to understand the fact that when aggregated, small can be very, very big.
Take the hidden truth behind India’s modern grid (as my colleague Jigar Shah points out): it is actually already a distributed system that is largely powered by filthy, costly diesel gen sets. That’s because power outages are so frequent that businesses and wealthy individuals have been forced to pay for this backup generation to ensure power. This is a tremendous opportunity for companies seeking targeted diesel replacement strategies to save people and companies tremendous amounts of money, while providing reliable power.
by jboullion | Aug 10, 2012 | Uncategorized
Chippewa Valley Alternative Energy is a small, family-owned business in west-central Wisconsin. It has been involved in the alternative energy field in for over 25 years, and have been heavily involved in many aspects of thermal, pyrolation and gasification energy technologies; and, Jeff Peterson, a RENEW member, are sponsoring RENEW’s membership/public meeting at the Polk County Energy Fair, August 18, at 1:00 pm in St. Croix Falls.
