POWER September 2011 - 50

THE FUTURE OF NATURAL GAS
a national market price. Price differences by
region reflect only transportation costs, not
the underlying gas. " In the past, gas prices
varied regionally, complicating the economics
of gas a generating fuel. It also fluctuated
seasonally, spiking in the winter in response
to home heating needs.
According to FERC's staff analysis, in some
areas-particularly the Southeast-gas has become
the baseload generating fuel of choice;
gas-fired plants are now being dispatched ahead
of coal units. Ellsworth noted, " In 2010, we
saw natural gas supply and demand meet new
records, while natural gas prices remained moderate
throughout most of the year. "
According to FERC's State of the Markets
2010, " Though 2010 natural gas prices were
up about 12 percent on average over 2009,
they remained well below the levels of previous
years. Natural gas demand increased
in 2010 and was only partially offset by increased
natural gas supply.
" Natural gas storage levels were high for
much of the year and reached record levels in
November. Outside of early winter 2010 and a
few days in June, spot prices at the Henry Hub
remained between $3/MMBtu and $5/MMBtu.
By the end of the year, prices remained low
despite a cold start to the winter. "
One widely used metric for commodity
prices is the Goldman Sachs Commodity Index
(GSCI). Over the two years between 2008
and 2010, the GSCI doubled. But U.S. natural
gas prices were flat. According to FERC,
this was because the U.S. gas market is almost
entirely self-sufficient, insulated from forces
that drive other commodity prices, such as the
price of crude oil. Also, noted FERC, " Strong
domestic production growth, combined with
added pipeline and storage infrastructure,
have increased domestic supply and reduced
geographic and season price differences. "
Liquid Side Benefits
One little-understood aspect of the arrival of
shale gas, which drives its economics, is that
the gas is often found in conjunction with
crude oil or natural gas liquids (NGLs). NGLs
are hydrocarbon components of gas that, according
to a standard industry definition, " are
liquid at surface in field facilities or in gasprocessing
plants. " They include propane,
butane, pentane, hexane, and heptane. Technically,
this does not include ethane, which must
be refrigerated to become a liquid, but which
has great value as a petrochemical feedstock
and is generally included in economic discussions
of NGLs (Figure 3).
The Bakken formation in North Dakota's
Williston Basin produces copious amounts of
crude oil; the same is true of the Eagle Ford
formation in Texas. Thanks to the drilling
boom in the Bakken, North Dakota has avoidSeptember
2011 | POWER
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ed the recession that has plagued the rest of
the U.S. over the past four years. According
to the EIA, oil production from shale formations
has risen from negligible five years ago
to 300,000 barrels per day in 2010. The giant
Marcellus shale formation under much of
New York, Pennsylvania, and West Virginia
contains large reserves of NGLs along with
the gas. The Eagle Ford and Barnett shales
in Texas produce significant NGL volumes
along with oil and gas.
Because the oil and the NGLs are worth
much more on the market than natural gas,
the gas is essentially free. FERC's Ellsworth
made this point in his presentation to the
commission earlier this year. Oil and NGLs,
he told FERC, have such value of their own
that " the breakeven cost for natural gas has
fallen to zero. " Both Shell and Dow Chemical
in recent months have announced plans to
spend hundreds of millions of dollars to build
ethylene processing plants to exploit the nonmethane
shale resources.
Many Policy Implications
The implications for the power generating
business of a large, predictable, and economic
supply of natural gas are revolutionary.
Much of the long and often fruitless discussion
over the past 15 years over the roles of
coal, uranium, wind, water, and sun is rendered
largely irrelevant by copious domestic
gas. The endless haggling over how to reduce
carbon dioxide emissions in electric generation
begins to look feckless.
A recent study by a team from the Massachusetts
Institute of Technology (MIT), the
fourth in a series by the MIT Energy Initiative
examining energy issues, highlights the
role that abundant new supplies of gas can
play in transforming U.S. energy systems.
Says MIT's Anthony Meggs, a coauthor of
the study, " Shale gas is transformative for the
economy of the United States, and potentially
on a global scale " because it has so dramatically
increased the amount of gas that can be
produced economically in the U.S.
Abundant, low-cost natural gas has a number
of policy implications that may reprioritize
capital investment and redirect legislative
priorities in the coming years, such as those
that follow.
Requires Fewer New Transmission
Lines. The need to spend enormous sums to
build new long-distance transmission lines
to move power from generating sites favorable
for wind and sun to load centers may
diminish with readily available low-cost
gas. (If gas substitutes for new renewables,
many gas-fired units built during the 1980s
and 1990s, now sitting idle or not operating
at peak efficiencies, could march up the
dispatch order.) Decades of planning about
moving large quantities of gas from Alaska
across Canada to the U.S. could wither because
of cost versus lower-48 gas.
Locating generation closer to load could also
improve reliability and offer greater grid protection
against cyber attacks or solar storms.
Eliminates the Need for Carbon Reduction
Legislation. One of the most obvious
impacts of gas is on emissions of carbon dioxide
(CO2
) from power generating plants. Using
sidelined and under-used gas-fired plants
to supplant coal generation makes a quick,
low-cost dent in emissions of not only CO2
but also conventional pollutants such as sulfur
dioxide, oxides of nitrogen, particulates, and
3. More than just gas. Unconventional drilling techniques allow drilling horizontally at
depths of over a mile beneath the surface to follow shale deposits. The wells often deliver liquid
petroleum products as well as natural gas, an unexpected economic bonus. Source: EIA and
U.S. Geological Survey
Land surface
Conventional
non-associated
gas
Coalbed methane
Conventional
associated gas
Seal
Sandstone
Tight sand
gas
Gas-rich shale
Oil
49

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POWER September 2011

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