Natural Gas – Got Glut?

In general the drilling of new Natural Gas (NG) wells has dropped significantly in the past year or more. Where there were over 100 active drilling rigs last year, today there are less than 30 in the Marcellus shale.

Why the down turn?

It’s a basic economic principle – too much supply, not enough demand decreases prices and profits along with it.

The drillers drilled too many wells too fast and over produced creating a glut.  A supply glut will drive down market prices which the cost of drilling remains the same.   This reduces profits and stresses the drilling corporations ability to make profit.

After a couple of years betting that drilling more and more wells was the answer, the industry finally realized more is not necessarily better.

What to do with all that gas?  It has to go somewhere, right?  The industry’s solution is to build more  and bigger pipelines.

Corporations are busy rolling out the spin sprinkled with dire predictions of shortages and Polar Vortexes. Recently there have been headlines from NG corporations how low their prices are for US consumers but fail to mention the prices are low because there’s a glut, and the glut is there because there is no corresponding demand.

According to DOE Energy Secretary Ernest:

High-volume transmission pipelines, which carry gas from wells to refineries and storage facilities, remain “underutilized” and still have room to spare, but smaller distribution lines – which carry gas to customers – are aging and at capacity, harming the environment and putting consumers at risk of explosions.

So what are the new pipelines for? According to one op-ed headline “Cove Point terminal on schedule to help relieve gas glut”.

HUH? WTF?

If the demand is not there, how will pipelines relieve the glut?

They won’t.

New pipelines will essentially STORE the gas coming from gas well pads and only relieve the glut at the well heads, but the hype predicts:

“Demand is only going up,” Tony Cox, director of midstream business development for UGI Energy Services, said during Penn State University’s fifth annual Natural Gas Utilization Conference in Southpointe.

The only part of the glut that will be relieved is at the wellhead.  Once all these new pipelines are built and there is no significant increase in demand, what will be the solution?  Probably more pipelines.

Consumers pays More
About those aging and at capacity smaller distribution lines, consumers may see a surcharge on their bills to cover the cost of upgrading/repairing existing pipelines.

Columbia Gas of Pennsylvania tacked on such a surcharge in 2013.

Philadelphia Gas Works (PGW) says it can cut in half the time it takes to replace its leaky pipes if it raises the customer infrastructure surcharge by 2.5% according to a September 2015 article by StateImpact Pennsylvania.

PGW has been replacing its older cast iron and bare steel pipe with the more state-of-the-art plastic pipe, but the cost is high and the pace has been slow. It takes an estimated $1 million to fix each mile of pipe. Current plans have PGW replacing all those lines within the next 88 years. But with the increase in a surcharge, known as the Distribution System Improvement Charge (DISC), the utility says it can replace those pipes within 45 years.

The same is happening in many other localities and across the nation.   Consumers are going to pay to repair/upgrade the pipelines that the industry has neglected.

Meanwhile, The Federal Energy Regulatory Commission (FERC) approved a Policy Statement in April 2015, allowing interstate natural gas pipelines to seek to recover through a surcharge mechanism certain capital expenditures made to modernize pipeline system infrastructure in a manner that enhances system reliability, safety and regulatory compliance.

For the consumers at the end of the pipelines, any “savings” they may see from lower prices would be offset by surcharges.

What About Exports?

That’s another fly in the ointment.

The rush to build pipelines and export terminals began when the anticipated export price were reported as high as $15/Mcf.

The Natural Gas industry had been pumping out plans for more export terminals based on the assumption the Liquid Natural Gas (LNG) prices in Asia and Europe would remain high.   However, LNG prices are tied to crude oil prices and crude oil have been dropping since last year.

Per Brooking Institute 2015 report:

Currently, Henry Hub prices have remained low at around $3/Mcf. Meanwhile, spot prices in Asia (roughly $6-7/mmBtu for 2015-2016)21 and Europe have tumbled over the course of 2014 (because they have been tied to world oil prices, which declined precipitously, because of a slowdown in economic growth, and because natural gas faces stiff competition from other fuel sources, negatively impacting demand) to levels where it would be increasingly difficult for North American LNG to be considered profitable.

And Moody’s Investor Services, back in April 2015 stated:

…low LNG prices will result in the cancellation of the vast majority of the nearly 30 liquefaction projects currently proposed in the US, 18 in western Canada, and four in eastern Canada.

“The drop in international oil prices relative to US natural gas prices has wiped out the price advantage US LNG projects, reversing the wide differentials of the past four years that led Asian buyers to demand more Henry Hub-linked contracts for their LNG portfolios,” says Moody’s Senior Vice President Mihoko Manabe

Lower oil prices will result in the deferral or cancellation of most other projects, especially this year. While some companies like Exxon Mobil Corp. can afford to be patient and wait several years until markets are more favorable, most other LNG sponsors have far less financial wherewithal, and some may be more eager to capitalize on the billions of dollars of upfront investments they have made already, sooner rather than later.

Today it’s around $6-7/Mcf, about the same as it costs to turn natural gas into a liquid and ship it to foreign markets. Essentially, exporting LNG would be at a loss, and consequently a number of proposed export terminals are off the table for now.

Unlike America, many European and Asian countries are investing in solar and wind to meet their energy needs.  Even Middle East countries are investing billions into solar energy projects.

The Mohammed bin Rashid Al Maktoum Solar Park, launched in 2013 with 13 megawatts of capacity, is expected over the next 15 years to expand to 3,000 MW, providing the Dubai Electricity and Water Authority (DEWA) enough power to meet 15 percent of UAE’s demand.

The Ouarzazate solar complex, to be developed in three phases, will account for roughly a quarter of the new electricity generation called for under Morocco’s 2,000 MW solar development program launched in 2009. It is also the kingdom’s answer to expensive fossil fuel imports and climate change.

These two massive energy projects, along with other solar developments in Egypt, Jordan, Saudi Arabia and elsewhere, are demonstrating that the oil-rich region known in policy circles as MENA — Middle East and North Africa — is beginning to challenge long-standing assumptions about its energy resources.

Why are oil rich counties in the Middle East building solar?  So they can sell more of their fossil fuel to countries, like America, which remain stubbornly stuck on fossil fuels.

PA Budget and Severance Tax

The natural gas industry managed to beat back a severance tax. It’s off the table, and currently being debated is an increase in sales tax for Pennsylvanian’s.   If the increase in sales tax goes through it will make Pennsylvania the 2^nd highest in the nation behind California.

PA’s sales tax is currently at 6%, the hike would bring it up to 7.25%.

In Allegheny County and Philadelphia, where additional local sales taxes are imposed, the total rates would be 8.25 percent and 9.25 percent, respectively. Only Chicago, among the country’s 10 most populous cities, would have a higher rate than Philadelphia.

In the Pennsylvania Republican controlled legislature argues that a severance tax would drive the industry out of Pennsylvania.

This argument couldn’t be more ridiculous

Firstly, the bulk of the Marcellus Shale is in Pennsylvania.   There is no technology in existence which would allow the natural gas industry to pack up the shale formation and take it with them.

And secondly, if they leave, where will they go? To other states which have severance or extraction taxes much higher than the one originally proposed in Pennsylvania?

In a related argument, legislators opine about the loss of jobs if the industry leaves.   Under former Governor Tom Corbett, the number of jobs “created” by the industry was touted at 250,000.  This included ancillary jobs, or spin offs such as jobs at McDonalds or Walmart.

In June 2015, the labor department changed how it counts the jobs and now only looks at direct industry jobs in 6  “core” industries:

•     Crude petroleum and natural gas extraction
•     Natural gas liquid extraction
•     Drilling oil and gas wells
•     Support activities for oil and gas operations
•     Oil and gas pipeline and related structures
•     Pipeline transportation of natural gas

The June 2015 PA Department of Labor report now attributes 89,314 jobs to the gas industry.   This is approximately 0.01% of the entire Pennsylvania workforce.

In 2012, there were a total of 137,650 permanent coal-related jobs nationwide, and 806,831 oil and gas jobs as of 2011. By contrast, there were 3,401,279 green jobs in 2011.  The Department of Energy predicts using conservative estimates that by 2030 there will be over half a million wind jobs alone.

The green economy already supports more jobs than the fossil fuel economy, and has for years, even though renewable energy accounts for only 11.98% of domestically produced energy.

The writing is on the wall: the key to creating American jobs now and in the future is not investment in fossil fuels, it is investment in the green economy.

However, Pennsylvania legislators won’t read the writing on the wall.   Pennsylvania was #5 in renewable energy in 2012 and  dropped to #11 by 2014 with only about 2,900 employed with the expiration of renewable energy tax credits for homeowners and pressure from the fossil fuel industry to squash such green energy initiatives.   Ironically, the natural gas industry continues to promote itself as a bridge fuel while at the same time it spends millions to make sure that bridge is never built.

As a side note, about those pipelines – they are not taxed in Pennsylvania. Pipelines are considered equipment and are tax exempt.  There are a couple of bills floating around Harrisburg which would tax pipelines, but with legislators snugly tucked into the industry’s pockets there is little to no chance of these seeing the light of day.

© 2015 Dory Hippauf