Wednesday, April 11, 2012

Is Cheap Gas the Solution?

Prior to the current shale gas boom taking hold, the price of natural gas climbed dramatically.  It peaked, in 2008, at around $13 per mcf.

An mcf is 1,000 cubic feet of natural gas with a heat value of 1 million Btu.  That's a lot of gas.  You can cook a lot of steaks with 1,000 cubic feet of natural gas!

You know what an mcf of natural gas fetches today on the marker?  Right around $2.30 a unit.  That is cheap.  Really cheap.  I grew up in West Texas in the 1970s were natural gas, which was a by product of oil production, was flared off at the well head.  You could drive for miles and miles and see flares burning all over the landscape. You know why?  Natural gas was only worth a few pennies an mcf and it was cheaper to flare it off than to bring it to market.  Why was that?  There were almost no pipelines available.  You know what's different now?  We have lots and lots of pipelines.  In the US we have a pipeline system that is the envy of the world.  It is literally the best and most comprehensive pipeline system on the planet.  Which means we can transport natural gas just about anywhere we need it.  Easily and cheaply.

As energy companies hone extraction techniques natural gas will get cheaper still.  Below is an excerpt from an article comparing and contrasting coal and nuclear power plants with gas fired power plants.  The differences are shocking.

But there are also extra bonus points.  "Combined-cycle" gas power plants can reach efficiencies of 60% or more, compared to heat efficiencies of nuclear power plants of 35% or coal plants of 40%.  
It gets even better than that.  Gas-fired electricity generation is essentially non-polluting and user-friendly, and it can be placed in close proximity to wherever power is needed, making distributed generation economically feasible.  For example, a large apartment building of 1,000 units could use its own 10-megawatt power plant.  But once installed, it becomes possible to consider co-generation, with the waste heat used for space heating, air-conditioning, hot water, laundry, and other process-heat applications -- and even desalination.  One can imagine energy efficiencies of as much as 80%, more than double what is achieved today.  It would also simplify the problem of waste-heat disposal. 
Cheap gas will encourage the petrochemical industry to invest $30 billion in new U.S. plants over the next five years, according to Chevron-Phillips Chemical Co.  Plastics producers will get a double-boost -- from cheaper feedstock gas, the raw material for their product, and lower electricity costs.  When natural gas becomes really cheap -- say, less than $2 per mcf -- it will become more like nuclear energy, where the main cost is not fuel, but the capital cost of the power plant. 

Read more:

Here in Ohio the Utica shale formation contains enormous untapped reserves of natural gas.  I sometimes wonder if prices drop low enough whether there will be enough incentive to develop those resources.  Then I'm reminded that the natural gas is often mixed with oil and natural gas liquids (NGL) which continue to have significant value in the market.

As I wrote last summer the shale gas boom has completely re-aligned the geopolitical chess board.  Things are going to be very interesting over the next 50 years!

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James L. Salmon, Esq.
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Adam Abraham said...

This is the cheapest (and funnest) way to travel. The only catch is that you never quite know where you are going or how far you are going.
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