VIEWPOINTS OF A COMMODITY TRADER

“It’s déjà vu all over again,” said Yogi Berra. The baseball Hall of Famer could easily have been predicting the coming resurgence of new natural gas–fired power plants. A couple of nuclear plants may actually break ground, but don’t hold your breath. Many more wind turbines will dot the landscape as renewable portfolio standards dictate resource planning, but their peak generation contribution will continue be small (and disappointing). The most interesting story for 2010 is that the dash for gas in the U.S. has begun–again.” – Kennedy Maize and Dr. Robert Peltier, Power Magazine

Everyone hates natural gas right now and rightfully so. It has been in an extended down move for a long time. On the other hand, it has fallen below the critical $4.00, which has triggered buying on previous occasions, lending an underlying support to further declines. We are approaching (or have arrived) at the “It’s déjà vu all over again,” buy zone. Let’s explore why that may be.

Theoretically, based on an energy equivalent basis, crude oil and natural gas prices should have a 6 to 1 ratio. However, outside the classroom in the “Real World”, a ratio of more like 10 to 12 times Natural gas is considered “Normal”.  Since Oil has moved higher and Natural Gas lower, the current ratio has risen to the 21-22 area. The historical high was 29 in 2009.

Competition for natural gas such as solar, wind, nuclear and coal are great soldiers in the battle for energy efficiency, yet unrealistic sole solutions. Solar and wind face “real world” difficulties in that they have great difficulty interfacing with the existing electrical grid. They require what is called a Smart Grid to measure the variability in supply and they also need different kinds of back-up capacity.

I read where in Germany for example, every time they build a 900-megawatt wind plant they need to build a 900-megawatt gas plant to make up for the variability.  According to the Personal Finance newsletter,” Natural gas emits 60% less CO2 than coal to create the same amount of electricity. Gas also emits far less of other pollutants such as sulfur dioxide and mercury.  America has an abundant supply of natural gas and it works with the existing electrical grid. This makes it the fuel of choice for electricity generators looking to build new capacity amid uncertainty over carbon and environmental regulation.  The boom in natural gas will require more pipelines, processing, and storage facilities which will be supported by government loan guarantees.”

Apparently ExxonMobil agrees. They invested in a $41 billion acquisition of XTO Energy at the end of last year. This kind of commitment is a major bet on the future of natural gas and could set the stage for a raft of future acquisitions by energy majors in the next few years. When Exxon bought Mobil, other major energy companies followed suit to stay competitive in the long term. Exxon projects that natural gas demand will grow 1.8% per year through 2030, which is twice their projection of oil demand. 

Kennedy Maize and Dr. Robert Peltier of Power Magazine summed it up by saying “Coal perks along, with new plants under construction and some likely to come online. New nukes are ephemeral. Renewables can nicely fill generating niches but won’t dent the big generating market. They will make money but won’t change the U.S. generating mix. Only gas looks likes a game-changer, given the emphasis on drilling in shale in the U.S. and elsewhere.”

In 1970, we imported 24% of our oil. Today, it’s more than 65% and growing. We consume 25% of the world’s oil with 4% of the world’s population and if that’s not bad enough we depend on countries that hate us for two thirds of it. We send between $400 to $500 billion dollars a year to foreign nations, that we are in desperate need of right here.

On the other hand we are in the top three or so natural gas producers in the world, behind only Russia and Canada.

The U.S. Potential Gas Committee (PGC) issued a report in June of 2009 that estimated total U.S. natural gas reserves at over 1,800 trillion cubic feet, the highest in the committee’s 44-year history. John Curtis of the Colorado School of Mines, head of the PGC, said that the estimate “reaffirms the committee’s conviction that abundant, recoverable natural gas resources exist within our borders, both onshore and offshore, in all types of reservoirs.”

So why are we not putting these reserves to work? Politics I presume, because there is little reason otherwise.

When we finally wake up to the potential for natural gas, the new production technologies combined with the new gas reserves in shale will totally change how the world looks at energy and electric generation. Also, at some point we will realize we have to begin using America’s abundant natural gas reserves to replace imported oil as a transportation fuel in addition to its other uses in power generation and chemicals.

Hopefully that time is near.

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Filed under: Food For Thought by Charles Maley
Tags: «crude oil - natural gas - Robert Peltier »