- Fertilizer Prices Up 55%
- US Chemical Industry Suffering - Jobs at Risk
- Cities Facing Brownouts
- The Shape of Things to Come
Natural
Gas Crisis
by Dale
Allen Pfeiffer
© Copyright 2003, From The Wilderness Publications, www.copvcia.com.
All Rights Reserved. May be reprinted, distributed
or posted on an Internet web site for non-profit
purposes only.
June
23, 2003, 2000 PDT (FTW) --Forget about terrorists. Don't give another thought
to SARS. The single greatest threat to the U.S. right
now comes from a critical shortage of natural gas.
The impending crisis will affect all consumers directly
in the pocket book, and it may well mean that some
people won't survive next winter. The problem is not
with wells or pumps. The problem is that North America
is running out and there is no replacement supply.
Natural gas stocks are currently at 1,199 billion cubic
feet (Bcf), over 39% short of what they were last year
at this time (1,954 Bcf). The storage refill season
has so far proceeded at a very modest pace, though
buyers recently pushed up their purchases to record
levels.1 The peak storage refill period
runs from May through mid-July. By late July, summer
electricity demand usually limits the amount of natural
gas available for storage. Weekly storage levels tend
to taper off through the summer, rise again slightly
in September, and then drop to nothing as the winter
heating season starts up in October. There is very
little time left to replace the record withdrawals
that occurred this last winter, and the peak refill
season is nearly over. What is more, analysts are saying
that we need to do more than just replace what was
used last winter. In order to avoid a crisis next winter,
we must build our storage up to record levels.
Let's take a look at the Natural Gas (NG) situation
in an effort to understand what is happening. And then
let's lay in an extra load of firewood for that woodstove,
and see about double insulating the household before
next winter.
Review
Even though oil and gas are almost always found in
the same places and originate from the same organic
matter, let's remind ourselves that Natural Gas is
different from oil by nature. Being a gas as opposed
to a liquid, once a well is drilled it takes relatively
little effort to pump out the gas. There is little
tapering off in production, little need to expend more
energy driving the gas to the well hole. Natural Gas
production profiles generally have a rise, a plateau,
and then a steep cliff with little warning as the pressure
in the well drops and the play peters out. Likewise,
NG reserves are much more responsive to drilling than
are oil reserves. The more wells you sink into a gas
reserve, the more NG you will extract, and the quicker
you will deplete the reserve.
We must also bear in mind that, while the world as
a whole is nowhere near peaking in NG production, the
same is not true for North America. There may be massive
known reserves of NG still untapped around the globe
(especially in Russia), but that does us little good
here. This is because NG is not easily transported
overseas. First it must be chilled to liquid form in
special processing plants, loaded onto specially built
Liquid Natural Gas (LNG) tankers, shipped to specially
designed offloading ports, and then reverted back to
gaseous form.
All of this cuts into the net energy of LNG and adds
to the price. And the amount of LNG that can be shipped
in this manner is limited by the size and number of
tankers and the length of time for one full trip (from
the Middle East to the US and back, with loading and
unloading, up to half a year per tanker according to
some sources).
The US has few LNG tankers and still fewer offloading
ports, though there are plans to build more. It is
unlikely that we will ever meet a significant portion
of our NG demand through the use of LNG.
Over the past several years, US electricity producers
have looked increasingly to Natural Gas as the cleanest
way to produce electricity. Between electricity generation,
heating demand and industrial demand, our NG usage
has grown remarkably. And demand is continuing to grow.
The power sector alone will account for most of this
growth; it is expected to add another 2.5-3.0 Trillion
Cubic Feet (Tcf) to the national demand between now
and the end of the decade.2
The California gas crisis of 2000-2001 was a largely
manufactured crisis due to greed in the privatized
market. Energy sharks were able to magnify a slight
NG deficit into a full-blown crisis through manipulation
of the market and manipulation of regional NG supply.
This was the fruit of deregulation.
Unfortunately, the criminal activities of the California
energy sharks have tainted our view of the NG situation.
Now, whenever a shortage causes NG prices to rise,
people tend to think the situation is manufactured
and manipulated by the industry. And NG suppliers have
tried beyond reason to keep prices down and the supply
up, least they be tainted by the memory of the California
fiasco. Therefore, NG production in 2002 was allowed
to slide down to a paltry level, and NG storage was
unprepared for the drawdown that occurred last winter.
The Current Picture
Winter demand in 2002-2003 hit an all-time high, depleting
storage by a record 2550 Bcf. By early April, storage
had bottomed out at a dangerously low 623 Bcf, more
than 40% below normal storage for that time of year.
Spot prices skyrocketed to $10.00 per Million British
Thermal Units (MMbtu's). This led to NG prices of as
high as $30 per million cubic feet (Mcf).
The American Chemistry Council has calculated that
this is equivalent to paying $16 for a gallon of milk,
more than $9 for a gallon of gas, or nearly $13 for
a pound of beef.3
Prices dropped slightly following the end of the winter
heating season. However, in the last few weeks, prices
have begun to rebound due to increasing storage injection
demand---sending spot prices to over $6.00/MMbtu as
of June 4th.4 Prices are likely
to continue increasing, as the power industry desperately
seeks to rebuild its reserves through the summer. Competition
with summer electricity demand could send prices back
to their late winter highs.
Effects on Industry & Agriculture
One of the first effects of the soaring NG prices was
a drop in industrial use, along with fuel-switching,
wherever permits and technological capability allowed.
Most of those industrial facilities and generators
that did switch over to petroleum distillate have not
switched back, because NG at its lowest price this
spring was double the cost of distillate. This is likely
to lead to complications.5
The American Chemistry Council, along with other industry
lobbying groups, began to clamor immediately for the
US to increase domestic NG production as well as imports.
The US chemical industry uses 11% of all the natural
gas consumed in the United States as feedstock and
to run its plants. In May, Bayer Corporation led a
major effort to urge Congress and the White House to
lift restrictions on NG production in the Gulf of Mexico
and the Outer Continental Shelf. They also called for
increased imports from Canada.6 Partially
as a result of these efforts, Ambassador Paul Cellucci
has been pressuring Canada to streamline its regulations
and step up exports of both NG and oil to the US.7 To
do this, Canada would likely have to cut its own domestic
usage, because Canadian production of NG is declining.
Canadian analysts expect that net exports to the US
will be reduced by 5% this year.8
Rising NG prices have also led to an increase in Nitrogen
fertilizer costs, which use NG as a feedstock. Nitrogen
fertilizer is now selling for in excess of 55% more
than it sold for a year ago. Natural Gas accounts for
70 to 80% of the cost of such fertilizers. Southern
farmers also face higher irrigation expenses, as NG
is used to run irrigation pumps. Food processors do
not expect to pass these increased costs on to consumers;
in fact, they do not expect to absorb the extra costs
themselves. They expect farmers to eat the extra cost.9
Nitrogen fertilizer facilities are feeling the pinch.
Just recently, Unocal warned Agrium Inc. of possible
further cuts in NG supply to Agrium's Kenai, Alaska
nitrogen facility. Agrium is a leading global producer
of agricultural nutrients.10 This news indicates
that Alaskan NG production is declining. Elsewhere,
fertilizer plants have been shutting down. Most recently,
PCS Nitrogen announced it was shutting down its Millington
Tennessee plant indefinitely due to the price of NG.11
And then there is the effect on Canadian oil sands
mining, which is powered by NG. While none of the players
have actually said so, it is difficult to believe that
rising NG prices have not played a role in shelving
oil sands projects. Petro-Canada was the latest corporation
to announce a suspension of oil sands activity, placing
on hold its multi-billion dollar oil sands strategy.
Suncor, Shell and Syncrude are all trying to manage
multi-billion dollar overruns for their own tar sands
operations. Analysts for Rigzone warn that spiraling
oil sands construction costs are the biggest threat
to US energy security.12
Natural Gas is also the feedstock for hydrogen production.
As NG prices are expected to remain high for the next
several years, one cannot help but wonder what impact
this will have upon the hydrogen economy fantasy.
(As a side note, recently there was another incident
of a hydrogen tanker catching fire. The compressed
hydrogen gas inside the tanker shot a flame 60 feet
into the air until it burned itself out. It is believed
that the fire was caused by a failure in the mechanism
that controls the flow of gas out of the tank.13)
Government Response & the Example of Ladyfern
Energy Secretary Spencer Abraham has summoned energy
industry leaders to an emergency June summit to discuss
the NG situation.14 It is likely that this
summit will result in a call to roll back environmental
regulations on government-controlled lands and offshore
areas. It is also likely that the summit will result
in a bargain sale of NG drilling rights on public lands.
Beyond this handout, the Department of Energy (DOE)
believes that market forces will resolve the NG dilemma.
The agency believes that higher NG prices will result
in increased profits for operators, who will in turn
have more money to spend drilling NG wells.15 The
DOE does not realize that the industry is currently
running simply to stand still. US production history
shows that new wells are being depleted more quickly
all the time; the current decline rate is 28%. While
this is partially due to growing demand, it is also
due to the fact that the large plays of NG are all
aging and are in terminal decline. Newer plays tend
to be smaller and are produced (and depleted) quickly
in the effort to maintain overall production levels.
Once again, economists fail to recognize that throwing
more money into production will not solve the problem
if a non-renewable resource base is depleted.
Another myth supported by the DOE as well as many industry
insiders is that the price of NG cannot rise above
the equivalent price of oil for any sustained period
of time---the logic being that users will switch from
NG to petroleum distillate until NG prices settle back
down. This may have been true in the past, but it does
not hold true for today's market. In the current market,
most opportunities for fuel- switching have already
been taken, as mentioned above. NG is currently priced
over twice as high as distillate per MMbtu.16 In
such a market, no one in their right mind would continue
to burn NG if they had the capacity to switch.
Analysts claim that between industry and the energy-generating
sector there is at least 6.5 Bcf/day of remaining potential
for fuel switching. These claims are simply based on
a count of facilities that are dual-fuel permitted.
Many of these dual-permitted plants are now no longer
capable of burning oil, though they retain the dual-fuel
permit. Others cannot burn oil during the ozone season.
Many other combined-cycle units are dual-permitted
while still lacking the burners required to burn fuel
oil. There are a number of reasons why a count of dual-fuel
permits is not an accurate assessment of fuel switching
potential. It is likely that the remaining fuel switching
potential is half of the amount analysts claim.17
Moreover, inventories of oil products in the US are
at low levels right now. Inventories of distillate
are particularly low because, in recent months, refineries
have been converting substantial amounts of distillate
into gasoline. Due to increased demand, these inventories
are not expected to be replenished any time soon. As
a result, we simply don't have the physical supply
of distillate to allow for large scale switching.
There are many additional factors limiting the amount
of fuel switching that may occur. At prices below $10.00/MMbtu,
it is unlikely that remaining fuel switching will exceed
1.0-1.5 Bcf/day. This would only free up an additional
175-250 Bcf of NG for injection into storage between
now and late October.
Should NG price hikes result in a drilling frenzy,
the result would probably resemble what happened to
the Ladyfern deposit in Northern British Columbia.
Discovered in 1999, Ladyfern was considered the largest
NG discovery in North America. At one time, Ladyfern
was thought to contain over one trillion cubic feet
of NG, but experience has cut that number to less than
half. Ladyfern was also expected to make up fully one
quarter of Canada's NG production for some time to
come.
What happened? From a withdrawal rate of 785 Mcf/day
the play has now dwindled to 300 Mcf, and will quickly
be reduced to a trickle. Only a year ago, this area
of British Columbia resembled a gold rush, as NG riggers,
helicopters, service crews, and road and pipeline construction
crews stampeded the muskeg. Roads that carried 1,000
service vehicles per day one year ago are now lucky
to see two dozen trucks.18
What happened to Ladyfern was a result of unbridled,
unregulated greed. Government mismanagement allowed
competing corporations to overproduce the play, and
draw it dry in a fraction of the time that it should
have taken. As a result, there are numerous wells dotting
the muskeg of British Columbia that are sucking water,
and the people of British Columbia are being cheated
out of much-needed revenue. Companies that would have
made 200% on their investment if properly managed have
had to settle for a 20% return. And the overproduction
and speedy depletion of Ladyfern has contributed to
Canada's falling NG production and the rising NG prices
of these past several months.19
Will the DOE learn from Ladyfern as it seeks to roll
back regulations in an effort to spur NG production?
Will the NG industry remember the lesson of Ladyfern
as they are drawn by the lure of skyrocketing NG prices?
As NG production continues to diminish in North America,
rising NG prices and rising NG demand could result
in the overproduction of other plays.
The Current Storage Refill Season
The NG storage injection season normally runs from
April to late October. But the majority of the refill
occurs between late April and the middle of July---the
period after the end of the winter heating season,
but before the summer cooling season increases electricity
demand. This means there are only a few weeks remaining
in the peak refill season. And as time goes by, it
becomes increasingly difficult to make up for deficits
from previous weeks. Until the week ending May 30th,
weekly injection rates remained low. Part of the reason
for this was the need for local distribution companies
to obtain permits to allow them to change their purchasing
habits. These permits have now been obtained and the
local distribution companies are beginning to boost
their purchasing orders.
By the second week in July, NG storage injection will
be in competition with the summer cooling season. This
year, electricity demand will rely increasingly on
NG. Much of this reliance on NG will be due to new
limits on NOx (Nitrous oxide) emissions taking effect
this year. From May 1st to Sept. 30th,
Northeastern utilities will be required to cut NOx
emissions (NOx is a precursor to urban smog) by 1/3
from the level of NOx emissions of the same time period
last year. To meet this cap, coal-burning utilities
will find it necessary to cut back on coal use and
substitute cleaner burning gas-fired generator units.20
To complicate matters, extended summer shutdowns at
nuclear power plants will further increase the electricity
generating demand on Natural Gas. Degraded reactor
vessel heads threaten to sideline many Nuclear reactors
during the summer. Nuclear reactors currently generate
about 10% of the nation's electricity.21
Add a hot summer onto this, and in short order, we
could see NG prices return to the $8.00-$10.00 range
experienced last winter.
Supply, Demand & the Ideal Storage Goal
This winter saw a record 2,549 Bcf withdrawal from
storage. Most analysts claim this was due to the cold
winter. But even before the winter heating season had
started, storage had fallen by more than 500 Bcf relative
to the five year average.22 So we began
the winter season in a very precarious position.
While the Eastern United States did experience a long
and bitter cold spell in January and February, the
winter was actually slightly milder than usual for
the winter heating season as a whole. As measured in
gas-weighted Heating Degree Days, the weather was 3%
milder than historical norms. While severe cold weather
in January and February did contribute to the NG withdrawal
rates, in the coldest week of the winter the increase
in NG consumption attributable to weather was less
than 30 Bcf. Even after normalizing the data for weather,
withdrawal from storage for the winter season was 843
Bcf greater than expected.23 Why this enormous
withdrawal?
The answer is that demand for NG has been increasing
over the past several years beyond the Energy Information
Administration's assessments for necessary storage.
Meanwhile, NG production in the United States and Canada
has fallen off the cliff. The only reason why this
cliff has not become readily apparent is that the NG
industry has been bringing new fields online in a frantic
effort to keep production levels from dropping too
rapidly. Unfortunately, very few of the new plays have
high production levels, and most of them play out very
quickly. In effect, NG production is running faster
and faster in an effort simply to stay in place, while
demand is leaving it far behind.
Analysts estimate that we need a minimum storage level
of 3,450 Bcf by the beginning of winter to ensure the
public safety. Even at this level, price spikes are
likely to occur. An ideal working reserve to insure
public safety and a healthy economy would be in the
range of 3,550 to 3,850 Bcf. The United States has
a total storage capacity of 3,450 Bcf, right at the
minimum storage level needed. The ideal working level
is 100 to 400 Bcf above capacity.24
Last year storage peaked at 3,172 Bcf on October 10th.
By April 11th, storage was down to a record
low of 623 Bcf.25 Current storage is at
1,199 Bcf---less than 38% of last year's peak.26 Simply
to reach a minimum storage level of 3,450 Bcf will
require injections levels of 130 Bcf per week for the
next 10 weeks.27 The May 30th injection
rate was a record 114 Bcf, still a far cry from 130
Bcf.28
The year 2001 saw a record injection season, with injection
rates over 100 Bcf for 8 out of 10 weeks between May
2nd and mid-July. Beginning from our low
of 623 Bcf, if we match the 2001 injection season,
we will face winter with a storage total of 2,919 Bcf-250
Bcf below last year's end of season storage level.
Analysts say it may be impossible to reach a safe storage
level at this point in the season.29
The Natural Gas Crisis
It is almost a certainty that there will be a Natural
Gas crisis this year, and you will not have to wait
until winter to see it begin. Prices are already beginning
to move upward. By the end of August NG prices will
probably be back in the $8.00-$10.00/MMbtu range, and
possibly higher. Such prices for summer are unheard
of, and there is no telling how it will affect the
market, or our electric bills.
This will be the beginning of the crisis. But it will
grow worse as we go into winter. How bad it becomes
depends on how much NG has been injected into storage
by the beginning of winter. If storage injections over
the next several weeks continue at the same pace as
this past week (114 Bcf) but remain 15 to 20 Bcf below
the 130 Bcf/week needed to reach minimum levels of
storage, then we will likely see a repeat of last winter,
with NG prices soaring in the second half of the season.
If storage injections over the next several weeks fall
back below the 102.1 Bcf injection levels of 2001,
then this coming winter will likely be worse than last
year. At this rate, we will enter the winter heating
season at dangerously low levels. Public safety could
be endangered.
If storage injections over the next several weeks drop
back down to the 77.7 Bcf/week level achieved last
year, then we will see a crisis of overwhelming magnitude.
In such a case, it would be wise for the Bush administration
to develop an emergency program to build storage during
the remainder of the injection season, and to nationally
ration NG for both electrical use and for home heating.30
And now let's talk about the weather. A mild summer
and a mild winter would be a blessing. Mild weather
for the entire year would not necessarily prevent price
runups or the depletion of storage, but it would ease
the sense of emergency. On the other hand, a hot summer
and/or a cold winter would worsen the crisis. A hot
summer would increase electricity demand for cooling,
making it more difficult to meet storage injection
goals. A severe winter could create a national energy
emergency such as we have never seen before. With storage
below minimum and a severe winter, it is not impossible
that we could completely deplete storage.
In the worst case, there would be many stories of people
freezing in their homes. Prices would skyrocket. The
chemical and fertilizer industry would be sent reeling.
Overall, industry would slow down drastically and the
economy would suffer. Come the summer of 2004, farmers
would go out of business and the price of food would
likely begin to climb. And the task of refilling storage
in 2004 would be even more daunting than it is this
year.
For now, we can hope for mild weather, watch the weekly
injection rates, and consider adding in an extra supply
of wood for the fireplace or double insulating our
homes. It may be time to look at investing in passive
solar heating for the home.
--------
1 Natural
Gas Weekly Update. EIA, 6/5/2003. <http://tonto.eia.doe.gov/oog/info/ngw/ngupdate.asp>
2 Days
of Shock and Awe About to Hit the Natural Gas and
Power Markets Part 1, Andrew Weissman. Energy
Pulse, 5/9/2003. <http://www.energypulse.net/centers/article/article_print.cfm?a_id=324>
3 Bayer
Calls For Reliable Supply Of Natural Gas In North
America. CNN Matthews, 5/1/2003.
<http://hsweb01.screamingmedia.com/PMA/pma_newsarticle1_national.htm?
SMDOCID=comtex_2003_05_01_cc_0000-2200-KEYWORD.Missing&SMContentSet=0>
4 Op.
Cit. See note 2.
5 Ibid.
6 Op.
Cit. See note 3.
7 U.S.
Ambassador pushes for easier access to Canadian energy
reserves. CP, 5/9/2003. <http://cnews.canoe.ca/BizTicker/CANOE-wire.Cellucci-Canadian-Energy.html>
8 Canada
Natural Gas Production Deteriorating, Dina O'Meara.
Dow Jones Wire. <http://www.dowjones.com>
9 Higher
natural gas price increases cost of nitrogen fertilizers,
Repps Hudson. 4/28/2003.
<http://www.stltoday.com/stltoday/business/stories.nsf/Business/A5955B471FDAFD8486256D170017A302?
OpenDocument&Headline=Higher+natural+gas+price+increases+cost+of+nitrogen+fertilizers>+
10 Natural
Gas Supply In Alaska Could Be Reduced. Stockhouse,
6/2/2003. <http://www.stockhouse.ca/news/news.asp?tick=AGU&newsid=1717250>
11 Fertilizer
plant closes, high gas prices blamed, Richard
Thompson. 6/7/2003. <http://www.gomemphis.com/mca/business/article/0,1426,MCA_440_2017989,00.html>
12 Petro-Canada
Reviewing Oilsands Strategy. Rigzone, 5/2/2003. <http://www.rigzone.com/news/article.asp?a_id=6493>
13 H2
Tanker Ignites in California. EVWorld, 5/21/2003. <http://www.evworld.com/databases/shownews.cfm?pageid=news210503-02>
14 Abraham
calls summer natural gas summit. UPI National
Desk, 5/16/2003.
15 Natural
Gas Debate: Is It Chicken Little or Alfred E Neuman,
Richard Mason. Rigzone, 6/4/2003. <http://www.rigzone.com/news/article.asp?a_id=6870>
16 Days
of Shock and Awe About to Hit the Natural Gas and
Power Markets Part 2, Andrew Weissman. Energy
Pulse, 5/9/2003.
<
http://www.energypulse.net/centers/article/article_display.cfm?a_id=325>
17 Ibid.
18 Northern
Greed, Andrew Nikiforuk. Canadian Business. <http://www.canadianbusiness.com/features/article.jsp?content=20030512_53695_53695>
19 Ibid.
20 Op.
Cit. See note 2.
21 US
nuclear power snags may drain oil/natgas supply.
Planet Ark, 5/7/2003. <http://www.planetark.org/dailynewsstory.cfm/newsid/20699/story.htm>
22 Op.
Cit. See note 2.
23 Ibid.
24 Ibid.
25 Ibid.
26 Op.
Cit. See note 1.
27 Op.
Cit. See note 16.
28 Op.
Cit. See note 1.
29 Op.
Cit. See note 16.
30 Ibid.
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