Folks,

This week I prepared a detailed report on the natural gas situation in the U.S. (and elsewhere), for Energy and Capital.
The full report (with lots of charts) is available as a PDF file here: Indigestion Over Gas. Or you can just read the short version below.

The implications are clear to me: We’re going to be seeing significantly higher prices for grid electricity and gas-fired heat.

–C

Unpleasant Surprises for Natural Gas

2007-05-11

By Chris Nelder

Last week was just full of unpleasant surprises for natural gas supply.

I’ve been researching the issues and it looks like we have some serious supply issues on our hands, starting now and growing worse over the next 20 years or more.

I have prepared a detailed free report on it, which you can find here . But here’s the short version.

First, the International Energy Agency (IEA) issued a warning that it’s very concerned about an impending supply gap for natural gas.

This is important because about one quarter of our electricity in the U.S. is generated from natural gas, a share that is expected to increase along with demand.

But I don’t believe that share can be increased. And that spells “higher grid electricity” prices for this country, and an even better outlook for solar and wind generation.

Apparently, receding horizons, massive cost increases, and lack of construction materials and skilled labor have all contributed to delays and cancellations in new power plant construction. It’s just not a friendly environment for investing in new plants.

The IEA emphasized that governments must reduce the risk for potential power plant investors, because the time frames are so long, the price tags are so high, and uncertainty about combating global warming is adding to the investment risk.

As if to reinforce the idea, ExxonMobil, BP and ConocoPhillips told Alaskan lawmakers last week that they didn’t want to help build a proposed natural gas pipeline from Alaska’s North Slope because there are too many demands and not enough return in it.

And an energy broker at Man Financial indicated that British Gas and Powergen were taking a wait-and-see approach to further investment, waiting for clarity on the government’s future energy policy.

Ironically, it seems that uncertainty about the fuel alternatives of the future is causing investment to lag in the fuels of the present.

Futures Rally Under Way

The second surprise of last week was that the June New York natural gas contract revisited the $8/MMbtu level, in a rally apparently driven by hedge fund activity.

Natural gas prices have been sort of off the radar in the last few months, since most of the U.S. experienced an unusually warm winter this year. No sustained cold temperatures until early February made natural gas consumption lower than normal, inventories rose, and prices dropped.

But as you can see from the below chart, it looks like they’re beginning their upward march once again, and could be on their way to $10.

 

But a lack of investment in gas fields, and high spot prices, are really the least of our troubles.

The big concern is that we’re past Peak Gas in North America, and there is little hope for increasing imports. Here’s why.

A Yawning Gap

Gas production in North America topped out in 2002, and has been declining ever since, at the rate of about 1.7% annually in the U.S.

And this depletion has been relentless, despite a tripling of producing gas wells since 1971. We’re drilling more than ever, production is still declining…and now gas drilling rigs have been making an exodus from Canada.

Current supply and demand forecasts indicate that a serious shortfall in natural gas supply is looming.

Like, to the tune of 11 trillion cubic feet (Tcf) per year by 2025, or about half of our current usage of 22 Tcf/year.

Demand for natural gas is rising steadily along with demand for electricity, but drilling can’t make up for depletion, let alone additional demand.

That makes imports our last resort, right?

Wrong.

Natural gas production is mostly a landlocked business. We only import 19% of the natural gas we use, and 86% of that comes by pipeline from Canada and Mexico…both of which are both past their peaks.

Overseas suppliers provide the remaining imports as liquefied natural gas, or “LNG.” But those imports are inherently limited by a number of factors, including supply, tanker availability, and the lack of liquefaction and regasification terminals, and none of those issues look like they will be resolved any time soon. I explain the manifold reasons for this in the full report.

In short, every year we’re needing more imports, but getting about the same amounts, and paying more for them.

The bottom line: When it comes to natural gas, we’re on our own.

And even though new drilling in the Gulf (and eventually in Alaska) will produce some additional gas, it won’t be nearly enough to change the basic production picture.

That leaves one remaining option: Switching fuels.

Given the constraints on building new coal and nuclear plants, I am convinced that the most likely candidates for filling the electricity supply gap are renewable sources like wind and solar.

“A window of opportunity now exists to push for a cleaner and more efficient generation portfolio that will have significant impact on the energy sector and the environment for the next 40-50 years”, Mr. Mandil said.

A window that is yawning wider every year, as we reach the end of the line for natural gas fired power plants.

A window that opens up on a huge new vista of spinning wind turbines, shining solar panels and even more renewable energy profits–like those we continuously load up on at Green Chip Stocks .

Until next time,

–Chris