In recent years, U.S. natural gas production has soared while prices have fallen. According to the Energy Information Administration (EIA), production increased almost 36% from 2005 to 2013. EIA also reported that prices for natural gas used for electric power fell from $12.41 per 1000 cu ft (28 cu m) in June 2008 to $4.25 per 1000 cu ft in August 2014.
According to the EIA, the future for natural gas production looks bright, as well. In its “Annual Energy Outlook for 2014,” the EIA forecasted natural gas production to increase 56% from 2012 through 2040. Additionally, technically recoverable natural gas resources in the U.S. are currently estimated at 2431 trillion cu ft (69 trillion cu m), up 52% over previous 2005 estimates.
With low fuel costs, lower capital costs for natural gas plants and looming Environmental Protection Agency (EPA) carbon rules, electric utilities have been increasingly moving to gas. The EIA estimates that natural gas will surpass coal for electric generation by 2035. Recognizing that “natural gas is also the fuel most often used to replace older coal-fired generation as it is retired,” the EIA also estimates that natural gas consumption in the electric sector will grow by 33% when compared to 2012 numbers.
Everything’s good, right? Natural gas is the low-cost, low-carbon fuel that bolsters the sagging central plant utility business model and keeps dreaded distributed generation new comers at bay for years to come. Maybe so, maybe not. Even a cursory look at the historical prices for natural gas reveals a level of volatility with which most utilities would not be comfortable.
What are the concerns around today’s abundant supply of natural gas? The first concern deals with where most of the new gas is coming from. The recent growth in U.S. natural gas production (and domestic oil, as well) has come from the exploration of hydrocarbon-rich shale rock formations found in many areas across the country. Horizontal drilling combined with hydraulic fracturing (or fracking) techniques are used to extract oil and gas from these shale formations. While the technology has been around for decades, and the oil and gas industry insists that it is safe, fracking has many opponents who are concerned about environmental impacts. If environmental concerns were to restrict shale gas production, it could impact supply levels and increase the price paid for natural gas by electric generators. This, in turn, would drive up the price of electricity.
Even if fracking remains largely accepted, there are others vying for available natural gas supplies. With natural gas supplies being high and prices low, the U.S. industrial sector is getting into the act. The EIA forecasts natural gas consumption in the industrial sector to increase by 26% from 2012 to 2040. This increase is almost as high as the growth expected for the electric generation sector, and this sector will remain a serious competitor for natural gas supplies. The transportation sector is also projected to be a growing competitor, with natural gas being used in heavy-duty vehicles, trains and ships.
EIA estimates that transportation sector usage will grow from the 2012 level of 40 billion cu ft (1 billion cu ft) to 850 billion cu ft (24 billion cu m) in 2040. This competition for natural gas supplies will impact future prices.
Exports of liquefied natural gas could also compete for supplies. In 2012, the U.S. was a net importer of gas. In that year, the EIA reports that net imports represented 6% of the total U.S. supply. By 2040, the EIA estimates that the U.S. will be a net exporter of natural gas with exports reaching 18% of the total.
Clearly, there are a number of forces at work that can impact natural gas supplies and which, in turn, can drive natural gas prices. Not the least of these is the global price of oil. High oil prices can drive fuel switching, which can increase the demand for natural gas. Oil prices can be swayed significantly by international markets and geopolitical events. This international component adds yet more variability to the natural gas supply and price picture.
How can a utility defend itself from such volatility? Bloomberg reports that Duke Energy is making a move to acquire gas in the ground. According to Bloomberg, Duke Energy CFO Steve Young stated, “Gas prices have some volatility, and investments in gas reserves might make sense.”
By acquiring shale gas reserves in Oklahoma, Duke Energy is hoping to avoid some of the price swings experienced in the open market. Duke’s move represents a price hedge for its natural gas generation fleet that accounts for about one-third of its electricity production today. Such an investment tactic could become even more important as Duke Energy plans
to use more natural gas in the future in response to the EPA carbon rules.
As the share of electricity generated by natural gas grows over time, the exposure of electric prices to natural gas price run-ups grows, as well. With distributed generation competitors close at hand, utilities would be wise not to become too complacent with today’s natural gas surplus.