Regal Edicts or a Canute Moment?

Glancing throught the WP this morning I came upon the following quote

Environmental groups yesterday were working on a letter to senators, arguing that the risk of default on the loans for nuclear and coal projects -- and thus the potential cost to taxpayers -- was much higher than that.

"The credit risk to the taxpayer is very significant," said Josh Dorner, a spokesman for the Sierra Club.

At the moment coal-fired power plants provide about half the nation's electricity, nuclear about 20%, natural gas about 21% and hydro-electric about 6%. It would seem that the environmental groups are suggesting that, with the change in Administration these ratios will change and that there will be a major change in supply sources.

Now I know that Dr. James Hansen is wandering around decrying coal extraction and use, both with his letter today demanding that the mine at Coal River Mountain not be allowed to proceed, and making a successful input to the KingsNorth protest trial , but there is a point where reality has to be brought into the debate.

As an illustration, back in the days when the Kings of England had real power (as in “off with his head” type power) Edward I (Longshanks – the one that had (Mel Gibson -er no) , (Braveheart er no), William Wallace (yes) cut in bits while alive), decided that he didn’t like the smell of coal burning and banned its use from London.

Early on, no one had the scientific tools to correlate smog with adverse health effects, but complaints about the smoky air as an annoyance date back to at least 1272, when King Edward I, on the urging of important noblemen and clerics, banned the burning of sea-coal. Anyone caught burning or selling the stuff was to be tortured or executed. The first offender caught was summarily put to death. This deterred nobody. Of necessity, citizens continued to burn sea-coal in violation of the law, which required the burning of wood few could afford.

So it is today. Even if the information that Dr Hansen was providing about global warming was correct (see my Saturday posts among many others that point to evidence that he is not) one must first find and provide a satisfactory alternative. Solar panels do not do one any good if they are under a foot of snow and wind turbines don’t work well if festooned in ice. Thus one is left to look at natural gas as being the potential alternative to coal and nuclear power.

The EIA projection for sources of power for projected new stations shows that of the roughly 93,000 Megawatts (MW) of new power anticipated to come on line between 2008 and 2012, roughly half (48,460 MW) is anticipated to be powered by natural gas, and 15,000 MW roughly by wind , while coal has 23,347 MW and nuclear only appears in 2012 wih 1,270 MW . (Solar is at 2,395 MW). Now the further out years are probably a little low for solar and wind, since these cost somewhat less to install in terms of time and money, although permitting of wind is becoming an issue in California. Yet I suspect that they may be a little high, by that time for natural gas.

When one looks at the current projection for natural gas supply in the country then one gets a quite significantly mixed message. On the one hand there are growing reports of new wells being sunk into the various gas shales around the country and the success that they are having. The Oil and Gas Journal, for example, wrote last week of developments in the Marcellus shale, speaking of Range Resources Crop.

The Marcellus, a hindrance to overall capital efficiency the past few years, will be "highly accretive to our capital efficiency in 2009," the company said.

Seven of the 10 wells had initial rates of 3.5 MMcfd or gas equivalent or more, and three flowed 9 MMcfd of gas equivalent or more. The best well made 24.5 MMcfd of gas equivalent.

The company is producing 35 MMcfd of gas equivalent from the Marcellus and is constrained by processing capacity. Eight of the wells have been on line for more than 30 days, and their 30-day average rate is 4.3 MMcfd of gas equivalent. The highest volume well averaged 9.6 MMcfd of gas equivalent. . . . . Range, which has cut more than 20 days and $800,000 from its drilling costs in recent wells, believes horizontal well costs will average $3-4 million in 2009.

I had earlier mentioned that the long slick-water fracked horizontal wells were being estimated as costing about $5 million apiece, and those numbers suggest the ballpark that drillers are now playing in. There are similar tales of success for the Barnett, Fayetteville, Woodford and other gas shales around the country.

Haynesville production is also looking promising.

The company's budget is $690 million for Haynesville drilling in 2009, when it expects to average 12 rigs and complete 75-80 gross wells.

Petrohawk is targeting laterals of 4,300-4,600 ft with as many as 15 frac stages spaced 325 ft apart to improve drainage and minimize the number of wells.

While laterals at its first four completions averaged 3,339 ft with 10 frac stages, the last 12 completions averaged 3,958 ft and 12 stages except one well that had mechanical problems and only six frac stages.

In an article in the OGJ authors from Booz & Co quote an EIA projection that unconventional natural gas will represent almost 50% of total US production by 2012.

It is this increasing reliance on the unconventional gas reserve that leads me to first be a bit cautious about seeing the assurance of future supply, and then in being comfortable with the ability to continue to supply the growing power station demand for gas, let alone increases in other demands.

It should be remembered that gas wells in shale have a relatively short life, and with some 60% of production lost after their first year of operation long-term stability of supply (a vital necessity for power station viability) can only be assured by a continuous program of well drilling. And since one tends to drill the more promising leads first, this also implies that to meet demand the number of operational rigs will have to increase, rather than the current opposite. For that to occur the price of natural gas will have to rise back up again.

And here we come to catch 22 (and back to old King Edward) – at this point natural gas supply and demand will reach a balance point (that likely reduces each year) as the increase in price limits the demand for a switch in comparison to coal. That has already happened at our local power station that has blanked off the gas feed lines, and does not anticipate unsealing them again. As companies seek to find the cheapest alternative that will allow them to continue to operate (these not being the best of financial times) then the market for coal, and probably nuclear, will grow, rather than decline and the investors in those power plants will probably have a better financially assured future than those investing in other alternatives.

By the way, speaking as one groundhog in defense of another, why are they picking on Punxsutawney Phil?