By Terrence Thorn
If the last decade of the 20th century saw a â€œdash to gas,â€ then the first decade of this century is seeing the U.S. gas industry â€œpower walkâ€ in the same direction. Fueled by cheap prices, lower investment costs, and the fuelâ€™s lower emissions, the late 1990s saw a surge in the construction of natural gas fired power plants. Almost 90 percent of the U.S. power generation capacity that has been added since 1998 is natural gasfired. Already, some areas use natural gas to generate a large portion of their electricity â€“ nearly 50 percent of the power in California and Texas, and 40 percent in Florida. Natural gas also is becoming a much larger part of U.S. electricity generation, rising 34 percent between 2002 and 2007. Today, a second natural gas renaissance is being predicted. And unlike the 90s, this expansion will occur in an era of sustained high natural gas prices.
High Prices Despite Record Production
The price of natural gas in the U.S. has roughly doubled in less than a year. A hot summer that increases demand for air conditioning and draws down storage levels, or an active hurricane season, will lead to further spikes in natural gas prices.
Even with normal summer conditions, during a normal winter some analysts expect the delivered price of natural gas to spike to $15 per thousand cubic feet â€“ over a 50 percent increase over last year. Distracted by $100 fillups and high oil prices, American consumers are largely unaware of the gas price shock awaiting them when they fire up their furnaces this winter. Consumers should brace themselves for some of the largest natural gas rate increases in memory.
These price increases have occurred despite the fact that U.S. natural gas production increased 6 percent from the first half of 2007 to the first half of 2008. Almost all of the increase came from shalegas plays in the Arkoma, Anadarko, Fort Worth, and Permian basins of the MidContinent Area. Yet despite the supply success, the U.S. natural gas balance is tightening. Demand for natural gas in North America is increasing at about 3 percent per year. U.S. industrial gas demand is up as manufacturers become more competitive due to a weak dollar. Robust fertilizer production and the surge in ethanol production have also contributed to increased demand. Also supporting the high price environment is the fact that North America is receiving fewer shipments of liquefied natural gas as supplies head toward markets like Spain and Japan, where they can attract a much better price. LNG imports were a key factor in building U.S. gas inventories to alltime highs before last winter, but imports have languished so far this year.
Why Gas Is the Only Game in Town
Roadblocks to building new coal and nuclear plants in the U.S. are fueling expectations for a natural gas boom. Dozens of proposals for new coal and nuclear plants have been shelved, cancelled, or delayed because of rocketing construction costs, financing risk, regulatory uncertainty, and public concern over global warming and toxic pollution.
Opposition is also rising to new coalfired power plants built without the capacity to capture greenhouse gas emissions. Citigroup Inc., JP Morgan Chase & Co., and Morgan Stanley have said they are uncomfortable financing new coalfired electricity plant construction because of the growing concern over emissions and potential carbon controls. Nuclear power projects are also losing steam, despite generous new federal incentives. By the end of 2009 the U.S. Nuclear Regulatory Commission expects to receive 21 applications to build 32 new reactors. So far it has received only four applications to build seven reactors. As states reject coal and nuclear plants, the power market will increasingly turn to natural gas. Ironically, the expansion of wind energy has provided a boost for natural gasfired generation as a backup resource when the wind fails.
The final push towards gas will come from programs to regulate carbon emissions. The U.S. Natural Gas Council predicts that a carboncapping system, such as the one Congress considered this year, could lead to a 20 percent increase in gas consumption over the next decade â€“ an increase of almost 3 trillion cubic feet per year.
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