The "Air Pollution Management" Newsletter

June 2008
No. 362

Natural Gas Prices

A big potential for mercury control is at small coal plants which will need to install MACT. If natural gas prices were to fall below $4/MM/Btu, we would return to the situation of the 1990s where combined cycle plants would be the choice for new construction and smaller coal-fired plants would be retired. The odds of this occurring are now at least 1000 to l. At $3-4/MMBtu, gas is competitive with coal for electricity generation. At today’s prices the cost of gas-generated electricity is more than twice that from coal (even with all the latest air pollution control equipment). At $20/MMBtu the cost will be nearly four times that of coal. A family paying $2000/yr for electricity would be faced with paying $8000. This large difference in fuel prices would have a profound effect on energy decisions.

A front page article in The Wall Street Journal April 18, 2008 indicated that $20/MMBtu gas may be where the price is headed. Natural gas prices in the U.S. have risen 93 percent since August. On April 17 the price closed at $10.38/MMBtu. (On April 24 the price was $10.93). Gas heats 50 percent of U.S. residences and provides 20 percent of the power in the U.S.

Liquefied natural gas (LNG) arriving in Japan is priced at $20/MMBtu. Cheniere Energy Inc. just opened a new LNG terminal near the Texas-Louisiana border. However, the stock is down 70 percent from its high earlier this year because observers expect few tankers to deliver to the U.S. when they can achieve higher prices in Asia. Oil and gas generally trade at near equal values in $/MMBtu. It takes 6000 cubic feet to equal one barrel of oil. Gas is 1000 Btu/ft3. So at $10/MMBtu gas, is the equivalent now of $60/barrel. Oil is presently $114/barrel. So gas would rise to $19/MMBtu to keep its historic equality.

The article reports that some industry participants believe that gas will hold between $7/10/MMBtu based on a world increase of 30 percent in LNG. But anyone who has traveled to China recently can observe that the potential consumption in that country alone is enough to absorb much of the increase. The article points out that economists predicted that it would be a buyer’s market with purchasers holding down costs. The opposite has proved the case. Demand is high and producers can sell to the highest bidder.

The article also points out that when electricity demand is higher than supply, prices soar. Unlike other energy sources there is no storage. So we are very likely to have a repetition of the 2001 situation and a similar situation back in 1974. Within a few months utilities placed orders for 70,000 MW of coal-fired power plants. However, the shortage disappeared in a few years and many of the orders were canceled. But this time around it is not likely that there will be a sudden reversal.

As a last resort to meet demand, utilities could operate their single cycle peaking gas turbine plants. These units are only 60 percent as efficient as the combined cycle plants. This means that if they are buying gas at $20/MMBtu, it would be the equivalent impact of $33/MMBtu gas in a combined cycle plant. TXU had initiated the fast track construction of 11 coal-fired power plants in anticipation of this kind of problem. Most of those projects were canceled. Texas is heavily reliant on natural gas and is quite vulnerable along with California and others.

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