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Wednesday, April 8, 2009

Info Post
Following the coffee break the meeting broke into two sessions, one that dealt with the future of transport demand, and one on the future of natural gas markets. I went to the one on natural gas markets, since this is the one that deals more with supply. The five main speakers sat around a table and chatted, under the guidance of EIA moderator, Steve Harvey. First they introduced themselves.

Rick Smead of the American Clean Skies Foundation spoke of the benefits of natural gas in keeping the air clean. He noted that the opportunities provided by the production from gas shale give a step change to the supply available and that it is just a case of going out and working out how to get it.

Jim Simpson of BENTEK who provide real time supply data and modeling, noted that it is only practical to model for two years ahead, conditions are changing that quickly. He polled the audience on where the gas price was going and the majority seemed to indicate slightly up. (Perhaps to $6), though he seemed to think that it is more likely that it will stay below or at $4.

Brian Jeffries of the Wyoming Pipeline Authority talked of the conditions (93% of Wyoming’s energy is exported) that led to the creation of the authority.

Christine Tezak had, until the recent debacle, been working for the Stanford Group and brought up some of the problems that might face the growth of the industry. How does the recent concern over the fluids used in fracing the horizontal wells and the Clean Water Act impact their future use, given that some of the water may pick up small amounts of contaminants, such as benzine, when it comes into contact with the rock formation. The question also is that while the Waxman- Markey bill gives a current Congressional position it is not clear which direction the Congress will swing from that base.

John Strom of Haddington Ventures talked a little on bulk energy storage and particularly wind energy with its need to even out the supply load. There is a need to separate the two parts to energy supply, that of the energy availability itself, and that of storage capacity to hold the energy against demand. He noted that there are “lots” of natural gas folk coming into the new Administration and that it is the “working girl” of the current energy supply.


(I won’t identify speakers in the following discussion). The change from 2005 when 2 hurricanes in the Gulf caused a rapid run up in price, to this past year, when 2 hurricanes and the price of natural gas dropped, indicates the advances that have been made in natural gas supply. This has been brought about with the coming of the natural gas from shale, and the vast reserves that this has now added. The Haynesville alone, now that the technical problems are resolved, has added a great quantity to national supply, and wells there are currently being throttled back to control feed into the network.

Those states in the North East that need the gas, and for whom supply is limited by the size of the pipes feeding it to them, now have the choice, with the Marcellus, of providing some of their own energy, but to do so will likely need to modify some of their regulations and simplify them. The Marcellus apparently runs under the Manhattan aquifer.

The conate water issue (the water found in the rock with the gas) as well as the need to dispose of the water used in the multiple frac jobs that make gas shale practical have not been fully addressed yet in PA and NY, though PA is somewhat more advanced in this regard. Exactly how the availability of LNG will play into this market is not clear, but the potential of oversupply, and the resulting long-term price that is closer to $4 than $6 will control where that NG goes. One supplier noted that a tanker, by the time it clears the Gibraltar passage will have passed 14 terminals where it could have dropped its cargo. Thus if the US price is too low, (considering the $4 transit fee) the tankers will simply divert to where the price is higher.

Alaskan natural gas was thought to be still 10 years away (and ask again in 10 years). With current lower 48 supplies being what they are, that gas is not needed, and may be more profitably be put in LNG tankers and sold to Asia.

It was noted that while drilling overall is down, numbers are still holding up for the Haynesville and some of the other shales. However it should be noted that at present natural gas is only used for about 25% of its potential in the generation of electricity. That percentage can easily be increased, and if it rises to 35%, then all bets on the amount that is available relative to supply will likely be off the table.

For while much of the argument at the moment is over the relative amount of Carbon Dioxide that coal generates relative to NG (about double) the other concerns over SO2 and NOX may also cause movement toward the cleaner gas.

As natural gas is used more and more as a partner with wind in providing the backup service it is needed, since the economics of running transmission lines based only on the 33% availability of wind is somewhat less favorable. The high variability in the wind energy supply from a farm is of some concern (and running a gas turbine only when the supply fails to ensure stable demand will guarantee an extremely short life for the turbine, due to the highly variable load).

There is a growing question as to the availability of transmission lines given future power generator location relative to the market, and with an adequate supply looking to the future (technology keeps solving the problems that face the industry) those issues should perhaps be addressed in more detail. And yet the models only go out two years, and the life of the gas wells in the shale is on the same order of magnitude (something I found folk were a lot cagier about discussing). However the size of the reserve is such that now the independent producers that have developed the product are now seeing the majors start to move into the market as its size has become more evident. They have the capital to stabilize the market and production from the fields. Certainly the size of the reserves that have been identified in the United States has weakened the ability of Russia, Iran and Qatar to form a cartel to control price and production.

Coming out of the meeting a couple of folk commented that if you did not know the business, following the discussion would have been a little difficult, and I think that this held true for most of the papers given at the meeting.

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