by jboullion | Jan 31, 2014 | Uncategorized
A commentary by Michael Vickerman
As this latest blast of arctic air slides away from the Upper Midwest, now is a good time to take stock of the conventional wisdom that grips natural gas markets today.
The Energy Information Administration (EIA) last week reported another large weekly withdrawal of natural gas–230 billion cubic feet (bcf)–from underground inventories. While this is a big number, it is well short of the record-setting 287 bcf withdrawal reported two weeks earlier. This week’s report may eclipse that number.
The heavy demand for natural gas this winter leaves inventories at their lowest levels for this time of year since 2004. Even if temperatures returned to normal this February and March, we could finish the heating season with only one-third the volume in storage back in early November.
Remember the extraordinary surplus that accumulated in the winter of 2011-2012? It’s ancient history now. Without a moment’s thought to what was happening, we managed to Hoover through every last cubic foot of ballooning inventories that in 2012 sent gas prices plunging down to levels not seen since 2002. One month into 2014, the pendulum has clearly swung over to the deficit side of the supply-demand equilibrium.
The problem is less a shortage of supply—domestic extraction volumes have risen nearly 50 percent in a mere eight years—than an accelerating “longage” of demand. Notwithstanding the sluggish economy, baseline consumption is rising, stoked by low commodity prices that discourage conservation efforts and a growing supply of residences and businesses to heat. Even though power companies scaled back their use of natural gas in 2013, overall gas consumption rose 2 percent from 2012 levels, according to EIA estimates.
Stir into that dynamic the coldest winter in the Upper Midwest this century and spice it with slowing production growth reported last year, and you have all but one of the ingredients needed for a dramatic upward re-pricing of this precious energy resource.
What is the missing ingredient here? A new narrative to combat the “shale gas miracle” myth that has been drummed into every adult American’s brain and belief system, courtesy of a well-financed and expertly orchestrated public relations campaign sponsored by the fossil energy industry.
Most Americans now believe that there is enough recoverable natural gas lurking under our feet to heat and power this country well into the next century. A fairy tale to be sure, but as long as it is one we believe to be true, we will have trouble recognizing the signals that tell us that the supply-demand picture is tightening.
Let’s focus on the supply picture for a moment. Did anyone notice that natural gas extraction volumes rose by only 1 percent in 2013? This was “the lowest annual growth since 2005,” the EIA wrote, noting also that “this production growth was essentially flat when compared to the 5 percent growth in 2012 and the 7 percent growth in 2011.” That modest bump failed to keep pace with EIA’s estimate for increased gas usage last year.
In spite of the recent record-setting withdrawals, the price of natural gas, now around $5.00 per MMBtu, is substantially below the $8.00 threshold that it sold for in January 2008, even though the amount of gas in storage then was 13 percent higher than today’s volumes.
One market analyst who clearly hasn’t noticed the changing picture told Bloomberg reporter Christine Buurma earlier this week that “the U.S. market remains awash in gas,” and dismissed the recent price rally as “transitory and not sustainable.” This analyst believes that prices could drop back to $4.00, a level widely thought several months ago to represent the price ceiling for this commodity.
Not to be outdone, another market analyst predicted a retreat to $3.00 prices by 2016. How this resurgence of supply can be accomplished when prices are dropping is not explained.
Here we see the power of the shale gas “game-changer” myth. Output growth is slackening and weather-related demand is spiking, yet energy analysts and market commentators still expect 2014’s prices to conform to the pattern set several years ago, when we were truly awash in gas.
While the rock bottom prices of 2012 proved very effective in working supplies back down to normal levels, they have also motivated energy companies to conserve cash, cut their exploration budgets, and squeeze as much product as possible from known reserves. Having operated in survival mode since the great gas bubble of 2012, these firms are too cash-strapped to ramp up exploration and extraction activity. What they would need to make that happen is, first and foremost, a return to 2008-level prices.
What is not sustainable for much longer is $4.00 natural gas, especially in light of certain physical and economic realities, such as:
- Steep decline rates in the output from wells tapping into shale gas released by hydraulic fracturing (“fracking”);
- Continuing expansion of gas-fired generating capacity substituting for coal and nuclear power plants now being retired; and
- Accelerating investments in infrastructure to liquefy domestically produced natural gas for export to Europe and Asia, which would bring to bear global pricing pressures on a commodity currently enjoying a substantial discount relative to overseas markets.
On the last point, for a taste of what global pricing pressure can do to a formerly low-cost energy source, observe the supply-demand-pricing dynamic that is now sending Midwest propane markets into gyrations. True, a number of unforeseeable events, some of them weather-related, converged to elevate propane use over the last six months, but in a globalized market, the people who can pay the most for a valuable commodity are often not the ones who need it the most.
Anyone who has ever watched a football game in January knows that subzero temperatures can be a game-changer, too. Perhaps this remarkable stretch of winter weather will be just the thing to pierce through the veil of wishful thinking and comforting fairy tales that undermine our collective ability to face our uncertain energy future, and to make all necessary preparations.
|
Heating Season
|
Start Volume
|
Remaining volume after 4th week of year
|
Difference
|
|
2013-2014
|
3834
|
2193
|
1641
|
|
2012-2013
|
3929
|
2996
|
933
|
|
2011-2012
|
3805
|
3098
|
717
|
|
2010-2011
|
3833
|
2542
|
1291
|
|
2009-2010
|
3837
|
2521
|
1316
|
|
2008-2009
|
3488
|
2374
|
1114
|
|
2007-2008
|
3545
|
2536
|
1009
|
|
2006-2007
|
3461
|
2757
|
704
|
|
2005-2006
|
3282
|
2494
|
788
|
|
2004-2005
|
3327
|
2270
|
1057
|
|
2003-2004
|
3167
|
2063
|
1104
|
Source: AmericanOilman.com
Michael Vickerman is program and policy director of RENEW Wisconsin, an independent, 501(c)(3) nonprofit that leads and represents businesses, organizations and individuals who seek more clean, renewable energy in Wisconsin. More information on RENEW’s Web site at www.renewwisconsin.org.
by jboullion | Jan 30, 2014 | Uncategorized
A recent propane shortage in the Midwest has led to a fivefold increase in prices. The Midwest has the nation’s highest share of propane users, many of which are in rural areas. Responding to this volatile situation, the governors of Illinois, Minnesota, Ohio, and Wisconsin have declared state of emergencies.
One explanation being offered for the shortage is exportation. While domestic propane production has actually increased over the past five years, the amount of barrels exported has grown significantly.
Click here for a further analysis of the Midwest’s propane shortage.
by RENEW Wisconsin | Apr 26, 2013 | Uncategorized
from Michael Vickerman
In addition to unwanted snow showers, April 2013 has brought us a flurry of clean energy news stories. Taken together, these recent developments offer a revealing picture of the unique challenges we face in Wisconsin in advancing an energy future that is less reliant on fossil fuels.
On the face of it, the announcement on Earth Day that several Wisconsin utilitie will retire a minimum of 260 MW of older coal-fired plants and spend $1.2 billion on pollution control upgrades should qualify as good news. The settlement with U.S. EPA also obligates Wisconsin Power & Light (Alliant Energy) and Madison Gas & Electric to offer up to $5.5 million to support solar PV installation in their territories.
However, if one does the math, the solar component adds up to only one-half of one percent of the total amount the utilities will spend under this settlement. The price tag of the pollution control work even exceeds the nearly $1 billion it will cost to decommission the soon-to-be-retired Kewaunee Nuclear Power Plant. That 39-year-old plant will cease operating in May.
With a combined price tag exceeding $2 billion, these will very likely be the two most expensive electricity-related projects initiated this decade. Ratepayers will absorb the full cost of the pollution control measures undertaken by the owners of the Columbia and Edgewater power plants.
If Kewaunee’s retirement and the planned shutdowns of Alliant’s Nelson Dewey and Edgewater 3 plants had been announced five years ago, Wisconsin would be swarming with wind and bioenergy developers right now. But utility interest in renewable energy development has diminished markedly, owing to the unfavorable political climate here for windpower development and the belief that natural gas will stay cheap for years to come. Furthermore, electricity providers have largely fulfilled their requirements under Wisconsin’s modest Renewable Electricity Standard, and there is no successor policy in sight.
Don’t get me wrong. We are elated that up to $5.5 million will be set aside for new solar electric generating capacity. But that sum is insufficient to remedy the massive imbalance in Wisconsin’s electricity resource mix. Even when being shuttered for good, Wisconsin’s legacy coal and nuclear plants seem destined to cast a long shadow over our energy future and draw resources away from building a less fossil-fuel-intensive energy economy.
Contrast these stories with two recent developments in Iowa. First, Facebook announced that it will locate a brand-new data center near Des Moines. There were many ingredients that led to the selection of Iowa as a data center host, not least of which is a substantial in-state wind energy portfolio that help keep Iowa electricity rates well below the national average.
The other milestone was a recent Circuit Court decision that moves Iowa tantalizingly close to the day when electricity customers can freely contract with third parties to provide them with renewable energy produced on their premises. If this becomes an explicit policy in Iowa, the solar energy market should mushroom there, as it has in states like New Jersey, California and Colorado.
Natural gas prices are just as low in Iowa as they are here, but you won’t find the utilities there using that as an argument against investing in renewables. In the case of Facebook, ongoing renewable investments helped seal the deal. The social media giant is hungry for wind generation, and Mid-American, which has ample supplies of windpower, is hungry for new customers with large energy appetites.
A similar dynamic could evolve in Wisconsin, but the state’s utilities need to understand how valuable clean energy is to attracting companies and industries to set up shop here.
by jboullion | Mar 29, 2013 | Uncategorized
This article from Media Matters breaks down the overstated safety risks of wind power (released in a recent Forbes article). This type of misinformation is embarrassing, and we applaud Shauna Theel for this article, breaking down and analyzing the numbers. Find the original posting of this article here.
In a column for Forbes, the head of the Institute for Energy Research exaggerated the safety risks associated with wind power by including suicides, murders, and several other fatalities that have little to do with wind industry safety in order to misleadingly claim that the oil and gas is “one of the safest” industries.
Robert Bradley Jr., the CEO of the fossil fuel
industry-funded Institute for Energy Research,
claimed that wind turbines “present significant safety risks for humans,” adding: “Since the 1970s, 133 fatalities have occurred on turbines — that’s a high figure considering the relatively small size of the wind sector.” That figure comes from an
anti-wind group whose
list includes a wind plant construction worker
shot during a protest against the plant, a wind turbine operator found hanging in an apparent
suicide, a man who committed
suicide after opposition to wind turbines on his land, a man that died while climbing a turbine for a
class, a
snowmobile hitting the fence around a wind farm construction site, and a
“shirtless and shoeless” man electrocuted inside of a windmill.
More credible statistics show that in 2012 there were
12 wind industry deaths worldwide — eight of which were in China where workplace safety standards are lax. In the U.S., the American Wind Energy Association has
allied with the Occupational Safety and Health Administration to train workers on fall, electrical, and crane hazards. By comparison,
1,384 people died in coal mine accidents in China last year, and sulfur pollution alone contributes to about
400,000 premature deaths in China annually.
Estimates of the number of deaths per terawatt hour based on data from the World Health Organization and occupational safety statistics have also found that fossil fuels contribute to far more deaths than wind energy:
by jboullion | Nov 9, 2012 | Uncategorized
A commentary by Michael Vickerman, Director, Policy and Programs at RENEW Wisconsin:
Shock waves reverberated across the Upper Midwest when Dominion Resources announced in late October that it would permanently shut down its Kewaunee nuclear generating station in early 2013. Operational since 1974, the Kewaunee station, located along Lake Michigan 30 miles east of Green Bay, currently generates about 5% of the electricity that originates in Wisconsin.
Virginia-based Dominion, which bought the 560-megawatt Kewaunee plant in 2005 from two Wisconsin utilities, attributed its decision to its inability to secure long-term power purchase agreements to keep the plant going. Without securing purchasing commitments from utilities, Dominion would have to sell Kewaunee’s output into the regional wholesale market at prices well below the plant’s cost of production.
While the pricing environment for all bulk power generators is nothing short of brutal these days, Kewaunee carries the additional burden of being an independently owned power plant, since the entities most likely to buy electricity from that generator—utilities–have power plants of their own that compete for the same set of customers. And a growing number of these utility-owned generators burn natural gas, which is currently the least expensive generation source in most areas of the country.
Dominion’s decision comes down to simple economics. Wisconsin utilities believe that over the foreseeable future natural gas will remain cheap and supplies will remain abundant. That would explain their unwillingness to enter into long-term commitments with Dominion, even though Kewaunee recently acquired a 20-year extension to its operating license and does not need expansive retrofits to comply with environmental standards, unlike a host of utility-owned coal plants in Wisconsin.
But even if Dominion’s managers were convinced that natural gas prices have nowhere to go but up in 2013 and beyond, the company, lacking a retail customer base in the Midwest, could not risk producing power below cost while waiting for the turnaround.
Wisconsin utilities have placed heavy bets on natural gas in the expectation that it will remain the price-setting fuel for years to come. Over the last 12 months, they have bought several combined-cycle generators from independent power producers. Buying power plants enables them to pass through their acquisition and operating costs directly to their customers while generating returns to their shareholders. I suspect these utilities are anything but broken up over the impending demise of a nonutility competitor that could have supplied electricity to Wisconsin customers for 20 more years.
But there is another side to this story; the low-price energy future that Wisconsin utilities are embracing can only materialize if natural gas extraction companies continue to sell their output below production costs. This expectation is unrealistic, given the massive pain being inflicted on these companies in the form of operating losses, write-downs, and credit rating downgrades.
Don’t just take my word for it, ask Exxon Mobil ceo Rex Tillerson, whose company spent $41 billion during the shale gas boom to acquire XTO, a large gas producer that is now yielding more red ink than methane. As reported in a recent New York Times article, Tillerson minced no words in assessing the impact of its recent misadventures on the company’s bottom line. “We’re all losing our shirts today,” Tillerson said. “We’re making no money. It’s all in the red.”
Much of the industry’s woes are self-inflicted. The lease agreements that drillers eagerly signed during the height of the shale gas boom obligate them to extract the resource by a certain deadline, regardless of whether such activity is profitable. That these companies cannot disengage quickly from existing leases is greatly diminishing their appetite for exploring new natural gas prospects. Until a pricing turnaround occurs, they will refrain from spending money on exploring new resource provinces like Ohio and Michigan.
Sooner or later, this slowdown in exploration activity will tip the supply-demand equation in the opposite direction, resulting in lower-than-average gas storage volumes. Barring a repeat of last winter’s unusually mild weather, the crossover point should occur around January 1st . But with so many balance sheets in tatters from this highly unprofitable market environment, nothing short of a strong and sustained price increase will be required to persuade drillers to start taking risks again.
When this corrective price increase begins rippling through the electricity markets, it will be interesting to observe how the customers will respond. Right now Wisconsin utility managers are convinced that they are making the right call on natural gas. So completely have they swallowed the shale gas “game-changing” mystique that they were willing to let a 560 MW nuclear plant fall out of the supply picture for good. In this brave new world of theirs, gas is the new coal, and resource diversity is passé.
In the aftermath of Dominion’s announcement, a few commentators have defended the impending closure as a textbook example of how markets work. But this view ignores the delusional thinking that sent shale gas extraction into overdrive, causing prices to plunge below the cost of production. The real game-changer, as it turns out, here was not the emergence of “fracking” technology but the industry-generated public relations campaign that implanted the narrative of a nation awash in cheap natural gas into virtually every American cranium. But as we now see, this narrative has boomeranged on the natural gas industry, and they are paying for their current woes in ways that guarantee a pronounced pendulum swing in the direction of higher prices.
The question going forward is: will this narrative also boomerang on Wisconsin electricity users, after the last employee leaving Kewaunee turns out the lights?
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 previous posts Madison Peak Oil Group’s blog: http://www.madisonpeakoil-blog.blogspot.com. This commentary is also listed on RENEW Wisconsin’s blog: http://www.renewwisconsin-blog.org/
