Tuesday, March 13, 2012

Energy Exports and the Sierra Club

Shale gas continues to cause waves in the energy market beyond our immediate shores.  As everyone knows, the price of natural gas has been plummeting from already low levels in recent months because of oversupply from shale and anemic demand.  Thermal coal, the kind used to make electricity, is feeling the heat as well.  As low gas prices cause utilities to burn more gas, coal is less in demand.  The US DOE reports that coal's share of electricity production in December 2011 fell below 40% for the first time since 1978.  So what are producers facing oversupply and weak prices to do?  Export, of course!

All of this should sound familiar to gas fans.  Now coal prices are dropping internationally as unexpected U.S. exports are causing oversupply in the seaborne coal market.  It's funny how coal and natural gas are singing the same song.

I'm waiting for the Sierra Club to raise a ruckus about coal exports the way they are gearing up to fight LNG exports.  But what's interesting about the Sierra Club's battle against natural gas (still halfhearted at this point) is that the organization wants to push alternative energy in the next breath.  I'm all for new forms of renewable and low pollution-emitting energy, and I believe in the "portfolio approach" to energy security, but alternative energy can't succeed in the marketplace with low natural gas prices.

In many utility markets, energy prices are set by natural gas prices.  That used to make some sense when natural gas prices tended to be high, but now that gas prices look to be cheap (and stable) for quite a while, it is hard for alternative energy sources to sneak under the price cap and compete as a market-based alternative.   By coming out against LNG export (ostensibly because it validates widespread hydraulic fracturing), the Sierra Club is shooting itself in the foot by harming market acceptance of alternative energy.

The Sierra Club needs to rank its environmental activism priorities.  I'll take a crack at it:  1) get rid of coal power plants; 2) advance renewable energy, 3) make natural gas drilling safe.  Fine.  There are those (many) in the group that want to abolish hydraulic fracturing, but that genie has been out of the bottle for 60 years, so they need to move on.  Fracking has been identified as an enemy now that it is being done in close proximity to populated areas.  But the combination of fracking and horizontal drilling has unlocked a natural resource bounty in the U.S. that creates welcome and previously unexpected economic, environmental and political gains for the U.S.  The genie is out of the bottle.  The best thing is to work with it.

The Sierra Club doesn't want cheap gas, but one of the only ways to drive natural gas prices higher in the mid-term is to allow domestic producers to export LNG. I'm not suggesting political collusion, but the organization needs to drop the paranoia that LNG export is some kind of sinister plot (a belief proffered by many individuals).  I guarantee you that building multi-billion dollar terminals to load liquefied gas on ships is much harder and riskier than loading it in a pipeline to ship it to New York or Chicago.

There are more constructive ways to work towards the goal of making drilling safer while simultaneously advancing alternative fuels and reducing coal consumption.  The Sierra Club needs to figure out what they are so they can join the conversation instead of just picketing outside.


ha85 said...

Good stuff, keep it coming!

Anonymous said...

As always, your blog is excellent. Regarding LNG exports, do you find the prospect of importing $19/MMBtu energy and exporting $2.50/MMBtu energy rather silly?

Robert Hutchinson said...

Let's hope you get a better price than $2.50/MMBtu on the foreign market for your troubles!

Logistics mean as much as price in many cases. This, for instance, partially explains why we have high gasoline prices when we are sitting on a glut of unrefined oil in Cushing, OK. I find the argument that we need to rush the importation of more Canadian oil to Cushing before clearing the blockage to be rather silly. I'm glad to see talk of new pipelines to Houston. If we really want lower gas prices, we need to get US oil to US refiners so they don't have to import the expensive stuff from overseas (which is logistically easier at this point).

It will also be interesting to see what becomes of the Sasoil gas to liquids plant proposed around Lake Charles.

Anonymous said...

I was using $2.50 as the replacement price for our use. I understand there are better bids offshore, ergo the fact that LNG still has an equity valuation.

It seems to me we should be spending our time finding ways to endogenously clear our energy supply with gas that is currently available at $3.90, on average, over the next 60 months on CME vs reinventing uses for some stranded capex on the gulf coast.

Point is, were going to be importing far more expensive energy than we export.