Natural Gas Tsunami and the Dirty Dozen

"The significance of crises is the indication they provide that an occasion for retooling has arrived. "
- Thomas S. Kuhn, The Structure of Scientific Revolutions

"Nobody wants to talk about energy depletion: not enviros, not Al Gore, not W. Depletion is the crazy aunt in the closet, the emperor without clothes, the wolf at the door. "
- Randy Udall

Have you opened a natural gas bill lately? Profane stuff, eh? We take energy for granted. Fish don't worry about water, and we don't worry about energy ... until there's a major crisis.

Today's "perfect energy storm" qualifies. Oil and natural gas prices are both high. The national economy is creaking. Energy prices and California's flu are making that creaking louder. What to do? Are our energy problems going to get worse? Probably not right away. Could they have been any worse? Absolutely.

Warm weather in January and early February dropped wholesale natural gas prices by 40 percent. Compared to last year's price of $2.50 at this time, we're down to $6 from December's high of $10. Prediction: Xcel Energy will cut rates a little. But the long-term outlook for natural gas isn't rosy.

The following dirty dozen factors point toward sustained higher prices for natural gas (in the $4-$6 range) over the next few years. That's why several rural builders recently asked if ground-source heat pumps make better economic sense than they used to. While that's not clear, it is clear that the economics of energy efficiency in residential construction have changed, probably permanently. And don't think the code crowd hasn't noticed.

1. Betting the ranch

For the next four years, natural gas will fire 90 percent-plus of the nation's new electric generators. And because we're short on spare electric generating plants, we're building a lot more now than in recent times. New power plants will be the biggest new source of natural gas demand.

2. Everybody loves gas

Enviros hate coal and nukes but love gas, which is part of the driving force behind item No. 1. Homebuyers love gas. That's why close to 75 percent of new homes built last year are gas heated. In fact, about 54 percent of all homes nationwide are gas heated.

Industry uses half our gas. Farmers use fertilizer made from gas. Fertilizer grows the corn to feed the beef that McDonald's served for lunch today. ("Eat your gas, Johnny.")

So demand will continue to grow.

3. Gas is regional

While we can and do import close to 60 percent of the petroleum products we consume, 99 percent of the natural gas we use comes from North America. Only 1 percent is imported in the form of liquefied natural gas (LNG). By 2003, our LNG import capacity expands to 3 percent, but that's no bailout. For the most part, we're limited to what we produce and what Canada is willing to export (about half their production).

4. Pipes and caves

The several hundred-thousand miles of natural gas pipelines nationwide carry gas from the wellhead to your water heater. During the heating season, wells can't produce gas fast enough to meet the demand, so we draw gas from large underground storage caverns. Given increasing demands, both our pipeline and storage systems need to be expanded. A driver behind December's prices: hot weather last summer meant power plants consumed more gas to meet airconditioning loads, so gas couldn't be dumped into storage. Our storage last November 1 was at a historic low. This will become a bigger problem.

Down in New Mexico, the gas pipeline explosion that killed 10 people last August was the tip of a maintenance iceberg. Experts say we need to upgrade and expand the pipeline infrastructure. Can we do both at the same time`? It'll cost us.

5. Bigger tools, smaller pools

Thanks to better seismic technology, it's easier to locate gas than it used to be. But the pools we're finding are smaller. During 1999, discoveries per exploratory well dropped 16 percent nationwide. In the shallow waters of the Gulf of Mexico-the source of a quarter of our gasthe average amount of gas found per well since 1995 has dropped by 60 percent. Why smaller? It's simple: we found and tapped the big easy pools first.

6. Raging depletion

Because we're finding smaller pools, they're depleting faster. New on-shore wells in both the U.S. and Canada are decreasing by about 40 percent per year, compared to more typical 20 percent rates. So just to keep year-to-year gas supply even, we have to drill an increasing number of wells every year.

Bottom line: natural gas production in the U.S. hasn't changed much since 1994.

7. Drill, baby, drill

Drilling contractors are running full tilt. All 1,600 rigs in North America are on the job, and most of those are drilling for gas. Gas drilling is up more than 40 percent over last year. There aren't any spare rigs, so prices are up 30 percent over last year.

Even if we had more rigs, there aren't experienced crews to run them. On top of this, the industry is staring at a 40 percent retirement rate by its workforce during this decade.

8. Gas on ice

The largest and best-quality gas resources in North America are on the northern slope of Alaska and Canada, plus in the deepwater Gulf of Mexico. All of these resources will be expensive to develop. But don't expect north-slope gas to arrive in a hurry; think five years minimum.

9. The Canadian Card

Arguably, the best part of NAFTA is that our northern neighbors are now shipping us more of their energy resources. But this winter, natural gas prices in Alberta skyrocketed, much as they did here. Just before February elections, the politicians rebated nearly $1 billion back to businesses and homeowners to offset some of the natural gas price pain.

Commentators are asking how long that game can be played. Given the huge energy price gyrations of late, Canadians are starting the debate. Recently, Canada stopped shipping hydro-powered electricity down into New England. Bank on this: if the Canadians ever decide to level off their natural gas exports to us, we're in deep trouble.

10. Futures follies

Natural gas prices are set by trading markets such as the New York Mercantile Exchange (NYMEX). That's like the flea on the tail wagging a dog. If you want consistency in price signals for long-term supply and demand stability, don't look there. NYMEX pricing didn't give us more than a few months of warning that a natural gas price train wreck was about to hit us.

While Mark Twain once said that "everybody talks about the weather but nobody does anything about it," he didn't know any NYMEX natural gas traders. They follow the weather closer than Terrell Davis follows blockers. If the weather turns hot this summer, and gas-fired electric generators have to power a lot more air conditioning, that means natural gas traders will bid up prices, expecting an even smaller amount of gas in storage next November when we all crank up our furnaces.

11. Lack of systems thinking

There is a huge disconnect between what consumers hear from general information sources and what suppliers learn from the geology. So utilities keep planning to build natural gas power plants and consumers keep buying larger homes. Both need better information.

To project demand, your government's energy agencies seem to look in the rear-view mirror, check the trends, then predict where demand will go. Five years ago, they massively under-predicted demand for natural gas; last year we needed what they predicted we would need by 2005. Within two decades they say we'll need 39 trillion cubic feet per year to meet demand. The president of a large local natural gas production company wonders how we'll ever get to 30 tcf; 39 tcf is not an option.

12. National Energy Policy

There is never any consistency and little institutional memory. Consumers are insatiable during good times and fickle during bad, which contributes to wild price swings. Suppliers bob and weave, refining their tools on the one hand while trying to divine demand on the other. Suppliers shout for access to land that is currently off-limits to drilling, while not really leveling with consumers about the big energy picture. And the policy types seem fixated on keeping prices low, which is pandering, not policy.

Wrap

Based on early comments from D.C., you can expect the demand side of the equation, including homeowners and builders, will get at least a bone thrown their way. At the same time, tens if not hundreds of billions of dollars in tax breaks and incentives might be made available to energy suppliers. Here's hoping some of the above fundamental facts work their way into the discussion.

In the meantime, closer to home, why not put energy efficiency on your designing, building and marketing plate?

Steve Andrews consults with builders for E-Star Colorado and writes on energy issues (sbandrews@att.net). E-Star (www.e-star.com), is a nonprofit home energy rating system that works with both new and existing homes statewide.

2008 Built Green Colorado

Home Builders Association of Metro Denver, 9033 E. Easter Place, Suite 200, Centennial, CO 80112
(303) 778-1400 fax: (303) 733-9440  info@builtgreen.org

Last Updated: 10/05/2007