In Part 1 of yesterday’s post, I discussed the energy market fundamentals of retail gas and Crude Oil.  Now, here’s my honest assessment of Natural Gas.   Natural Gas has been battered in this market.   Due to the Shale Gas revolution along with mild weather…NYMEX Natural Gas prompt month is trading near $2.53, up from it’s 10 year low of $2.21 this past “Winter”.   It’s hard to believe, but during the Hurricane Katrina days, Natural Gas prices were near $13.

With Natural Gas prices so low, it actually puts a strain on a lot of other markets.  For example, power (electricity) prices are a function of Natural Gas…and therefore many power markets around the country are depressed.   With power markets depressed and power prices so low…nobody “wants” to write PPA’s  (Power Purchase Agreements) at these levels.   And yet having a executed PPA in hand is crucial for any renewable energy developer/marketer.

For example, those who own renewable energy facilities want to be able to sell their power for an “optimum” price…and the power prices today have just been battered with Natural Gas prices…especially here in California.    So there isn’t a “real” demand for renewable energy when Natural gas is so cheap.

Natural Gas, especially combined cycle Natural Gas plants, are a clean and efficient form of “conventional” energy that does not require how much “sunshine” or “snow melt” or “wind” is produced to determine output.  It makes sense for a lot of utilities to use conventional forms of output given how cheap and reliable they are (ie Natural Gas).

The only reason that many renewable energy facilities (wind, solar farms, etc) are being developed in this market environment is for the Federal Tax Credit (and to satisfy California’s 33% RPS mandate).   Otherwise, most companies would not want to build or sell renewable energy in this environment because it’s not economical and/or favorable.  The Federal Tax Credit is spurring a glut of renewable supply, yet there is no focus on demand.

Trust me, I’m all in favor of building a renewable portfolio in conjunction with having stable and cleaner form of conventional energy output.  But when you have a multitude of projects (adding to supply), and no focus on the demand element…you can essentially set up a recipe for disaster.   On top of that, grid integration costs are high from the Utilities and that puts a large dent into the economics of building a renewable energy facility in today’s market conditions.  And perhaps this poses another problem…are we building enough transmission to handle all the incoming renewable projects?  Or are we going to face massive amounts of congestion in the near future?

With the mild weather we’ve had this winter, Natural Gas storage is also a major concern.  We’re about 41% above last year, and 40% about the 5 year average.  Current inventories are near 2.6tcf….record highs for this time of year.

In my opinion, we’ll probably need to have Summer heat waves last 4 weeks and about 3 Cat 4-5 hurricanes slam into Gas facilities in the GOM to make a sustained dent in Natural Gas prices.   If we have a mild Summer and no major Hurricane hitting the GOM…storage facilities may have to start paying companies to take their gas out of storage.  Yes, it could be that bad.

We need to start using our Natural Gas (and reduce production)…or prices are going to be depressed for quite some time. I’d like to see Natural Gas prices in the $4-$5 dollar range.  And with the current supply glut of Natural Gas….here’s how I think we should do it:

1) Reduce drilling of Shale Gas:  I’d like to see a temporary reduction on drilling…perhaps during maintenance season is the best time.  Some producers have said and already have begun reducing their output which has led to a temporary “dead cat” bounce of Nat Gas prices.  But we need more.

I know it’s painful for producers, and many are required to drill based on their lease agreements.   I understand that some producers are focusing on liquid rich plays (Propane, Ethane, Butane)…but that also produces a lot of gas.   The only other thing that may stop ya’ll from drilling are “freeze-off’s”…but with the “winter” we are having…forget about it!

2) Start using our Natural Gas domestically:  It would make sense to me if our trucks, buses, delivery vehicles, shuttles, taxis all ran on CNG.  I think we should continue to push to use Natural Gas for transportation.   It’s cleaner with near zero emissions and (I think) the most effective and practical solution for large vehicles on our roads.   I believe in the Pickens Plan for Natural Gas

3) Export our Natural Gas:  Since we have a huge supply glut of Natural Gas, we should continue to explore ways to increase our exports of Natural Gas.   I understand Cheniere is converting it’s Sabine Pass facility to do exactly this, but from what I understand it has some credit issue to overcome.

Some folks in the government are talking about a “Natural Gas export ban.”  I think it is wrong. Natural Gas should be looked at as a global commodity which should be allowed to be sold to any country (both FTA and non FTA countries) requiring it.   Sure, there should be some regulation on how much US Nat Gas is leaving the country…but there shouldn’t be a ban.

Bottom line, I am hoping Natural Gas producers can continue to curtail some production (more than the approx 1Bcf/day that is happening now) and we start exporting/utilizing our own domestic Natural Gas here at home.    Otherwise, we’re going to keep seeing depressed prices for a while! (Photo credit: Propurchaser Blog)