Recent Bargain Prices
Historically, natural gas prices have tracked oil prices at a fairly consistent ratio, with oil costing about 50 percent more than gas, per unit of energy. However, for the past couple of years, natural gas has been a bargain compared with oil. Since the beginning of 2009, there has been a radical decoupling of oil vs. natural gas prices, with oil costing 2X – 4X as much as gas. If you normalize their energy content to Btu’s, natural gas is selling in the vicinity of $4.50/MMBtu, whereas West Texas Crude is selling around $14.30/MMBtu – more than 3 times the price of gas (Figure 1).
Natural gas futures prices have also been declining, showing that traders expect continued downward pressure on price (Figure 2). The DOE’s U.S. Energy Information Administration publishes the Natural Gas Weekly Update, where you can see these comparisons and trends.
U.S. Recoverable Reserves of Natural Gas Growing, with the Help of New Discoveries and New Technology
One factor contributing to the decoupling of natural gas prices may be the discovery of new gas reserves in the continental U.S., such as the discovery in 2008 of the Marcellus Shale formation in the northeast United States. These huge recoverable reserves were made possible by new horizontal drilling techniques. With this technology and new discoveries, the assessment of the recoverable reserves within the U.S. grew 45 percent in just 2 years (end of 2006 to end of 2008). Because of gas shale discoveries, the world reserves could be 50-160 percent higher than previously thought. While U.S. Natural Gas Production peaked in 1974, it has held almost steady since then and is about the same level now as in 1976 (Figure 3). The same cannot be said for U.S. domestic oil production, which is at about only 40 percent of its peak in the early 70s.
Cleaner than Oil and Gas… but Not as Clean as Solar and Wind
Natural gas is moderately lower in green house gas emissions than oil or gas, producing about 30 percent less carbon dioxide than petroleum and 45 percent less than coal for the equivalent amount of heat, and it burns much cleaner, having far fewer of specific other pollutants such as Nitrogen Oxides, Sulfur Dioxide, Particulates, and Mercury (Figure 4).
While emerging sources of electric power generation such as wind, solar, geothermal, and tidal power are much lower than natural gas in CO2 emissions and other pollutants, natural gas is still the cleanest among the “big 3” fossil fuels (oil, gas, coal).
Exxon, Excel, and Pickens – Recent Examples of Enthusiasm for Gas
Exxon recently received antitrust clearance to buy U.S. natural-gas producer XTO Energy, Inc. This is the largest acquisition since Exxon merged with Mobil in 1999 and could portend more deals by major oil companies to buy U.S.-based natural gas producers.
Last Tuesday, March 16th, Colorado’s legislature introduced HB 1365 (the “Clean Air-Clean Jobs Act”) which proposes to reduce Xcel Energy Inc.’s coal-fired power generation along Colorado’s Front Range and replace it with natural gas-fired generation. The goal is to reduce nitrogen oxide emissions by 70 percent to 80 percent by the end of 2017. The state’s coal mining industry is understandably unhappy with this bill. It includes proposed long-term fixed-price contracts to reduce the effect of market price fluctuations.
The Pickens Plan
Although T. Boone Pickens grew up and flourished as an oil man, he has had a long affinity for trading in natural gas. He also has strong opinions about the need to secure the U.S. energy supply. In 2008, Mr. Pickens announced “The Pickens Plan,” an energy policy designed to reduce America’s dependence on foreign oil by investing about $1 trillion in new wind power generation, and shifting the natural gas currently used for electric power generation to be used instead to power trucks, buses, and other heavy vehicles. Pickens estimates this could reduce by 43 percent the amount the U.S. spends on foreign oil. Skeptics have pointed out that there is a lack of CNG fueling infrastructure and retrofits for cars that are expensive and hard to justify based on the cost savings. However, even critics acknowledge that for fuel-intensive vehicles, such as long-haul trucking, the savings may justify the investment.
Natural Gas Vehicles Popular in South America
South America has about 48 percent of the world’s total fleet of CNG (compressed natural gas) vehicles. Argentina has over 1.7 million NGVs (Natural Gas Vehicles), representing about 15 percent of their vehicles, and about 1800 refueling stations. In Brazil, about 5 percent of the total light vehicle fleet are NGVs. A network of CNG stations is being developed on the major highways of the Southern Cone (including Chile and Bolivia) to allow for long-haul transportation fueled by CNG.
The Future for Natural Gas
With its advantages in price, cleanliness, and domestic supply, there is no question that natural gas will continue to play a major and probably growing role in the energy future of the U.S. and much of the rest of the world. Its role in electricity generation and heating are long established. The future of natural gas as a mainstream transportation fuel is less certain, being dependent on the build-out of corridors of new fueling stations across the nation.
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