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Gas Producers Wake Up and Smell the CO2

Without the addition of an odorant, natural gas has almost no scent. Until recently gas producers had almost no voice on Capitol Hill. However, repeated success at unlocking gas from unconventional plays has them speaking up for policies that would make markets for their invisible and heretofore largely ignored fuel.

Any casual reader of these pages is no stranger to the fact that America is in the middle of a gas renaissance following the unlocking of unconventional resource plays. But not everyone else is aware. "It was very disturbing to us when the president and [Energy] Secretary [Steven] Chu were talking about energy legislation and climate change legislation...and natural gas just wasn't mentioned. It was left out of the early debate," America's Natural Gas Alliance (ANGA) Chairman David A. Trice told NGI.

Trice, who also is a retired CEO from Newfield Exploration Co., said the first goal of ANGA, which was formed in June, is to spread the word about the abundance of U.S. gas. "Once you understand abundance you recognize that gas will be there and will be reliable, and because there's going to be a lot of it there will be competition in the marketplace and prices will be reasonable," he said. "I would say abundance is a major issue that policymakers and our customers need to understand.

"We've got a hell of a lot of gas, and that's different than the situation we had three or four years ago."

But more convincing will be needed. U.S. Environmental Protection Agency Administrator Lisa Jackson last Thursday said on National Public Radio that expanding natural gas use is "probably not a long-term strategy" as it would be a threat to feedstock supplies to the chemicals and other industries.

Coal producers have long been at work to brand America as "the Saudi Arabia" of coal, while their gas counterparts have relied on the virtue of cleanliness to garner favor for their fuel. But that hasn't carried the day. "One might have expected that cap-and-trade would be the kiss of death for coal," observed analysts at Barclays Capital recently. "Instead, the natural gas industry was simply out-matched by the sophisticated, experienced coal lobby."

So the abundance argument is a welcome addition to the gas story, which producers now realize they must tell more frequently and with greater zeal.

"It was really that revelation that caused the formation of this new ANGA group where we've all come together to focus on natural gas demand creation, and focusing on natural gas demand creation we've gotten heavily involved in the politics of greenhouse gas (GHG) regulation," said Charles B. Stanley, chair of ANGA's technology committee and Questar Corp. COO.

Abundance is also something of a burden right now for the industry, which finds itself with a surfeit of product in the midst of a weak economy that is offering slow to no demand growth. The residential and industrial sectors are nonstarters when it comes to bolstering gas demand. "The significant needle-movers for future gas demand are power and transportation," Stanley said. "And power has the most, the biggest possibility of significantly changing future gas demand. I think it's safe to say that the natural gas producers were relatively uninformed of the huge amount of underutilized gas generating capacity that exists in this country."

Power Generation

Chesapeake Energy CEO Aubrey K. McClendon, whose company is a founding member of ANGA, would like to see the government launch a "gas for clunkers" program that would target for retirement the nation's oldest, least-efficient and dirtiest coal-fired power plants. The roughly 75,000 MW of lost generating capacity would, of course, be replaced by gas-fired capacity -- from plants already on the ground.

"Right now we have about 400,000 MW of installed [gas-fired] generating capacity," McClendon told NGI. "But through any given year we typically don't use more than 20-25% of that capacity, leaving about 300,000 MW of unused capacity, which would more than make up for removing the dirtiest 75,000 MW from the coal generation stack.

"You just do what you did for people who had old cars. You pay them more than what they're worth in the marketplace and give them a financial incentive to shut down these coal plants. Some utilities are going to object because perhaps they don't own the natural gas generation plants that would run harder, but we think that could be worked out as well."

Environmentalists also are talking about incentivizing the retirement of old coal plants, McClendon said. They and others "are taking a look at the Waxman-Markey bill and saying, 'gosh, can't we do better than this? Is there another way to start to reduce CO2 [carbon dioxide] emissions much more quickly?'"

Such a program would make inroads for natural gas in the power generation stack. Gas-fired power is almost always on the margin, meaning it is the last to get dispatched as demand rises. Many in the power and gas industries thought that the wider rollout of renewable power -- wind and solar -- would increase the demand for gas-fired power as renewables would need a quick-responding backup due to their intermittent nature.

"The early experience we've seen in states with substantial renewables buildout has not followed the intuitive logic, which is troubling, obviously," Stanley said. He noted hearing some observe that coal-fired generators have been operating almost like peakers to follow the peaks and valleys of wind generation output.

In Texas, the state with the most installed wind generating capacity, wind power is pressuring gas-fired generation, more so in some scenarios than others but generally not as much as it impacts coal and nuclear, analysts at Tudor, Pickering, Holt & Co. Securities Inc. found recently.

"...[G]as-fired [power] output is not likely to grow at the same pace as earlier this decade, principally because the electricity demand growth rate is expected to be smaller and a significant amount of wind capacity is heading to market," Barclays said.

Regardless whether old coal plants are prodded into retirement, the key issue for gas producers when it comes to climate change legislation is establishing a price for carbon. A mandate for renewables without cap-and-trade or some other means of pricing CO2 emissions is a worst-case scenario. Estimates of what that price would need to be to level the playing field for gas versus coal vary wildly depending on how the modeling is done.

Stanley told NGI a carbon price of $30-35/ton would be neutral for gas, something a bit higher would be "meaningful." However, McClendon said he thinks $10-12/ton would level the playing field for gas. "Wow, that's a much lower price than the models I've seen," Stanley said when told of McClendon's number.

Foreign offsets are another problem when CO2 emitters can purchase credits that allow them to continue to pollute rather than shift from coal to natural gas, Stanley said. "The foreign offset is a political hot potato but is one of the things that's suppressing CO2 prices and impacting natural gas demand in the models that we're running."

While gas producers once thought gas would "be the winner in every CO2 race," they no longer take that for granted, Stanley said. "If you think about current natural gas [power generation] burn, it's about 16 Bcf/d on an annualized average basis. Just an increase in the utilization of the existing facilities could significantly move the needle on natural gas demand...

"I think a lot of us thought, 'gee, that will happen on its own without the industry becoming fully involved.' But as we watched the Waxman-Markey bill take shape, it was clear that we weren't at the table and we were late in the House process, but I think that we're now fully engaged on the Senate side, and we're having meaningful discussions with senators who are contemplating taking this bill up later this fall."

The Waxman-Markey bill (HR 2454) cleared the House by a slim margin late in June -- 219 to 212 (see NGI, June 29). It needed at least 218 to pass. "It's going to be an uphill battle" in the Senate, Martin Edwards, vice president of legislative affairs for the Interstate Natural Gas Association of America, said at the time. "It has a chance. It's going to be very challenging in the Senate...but it's not impossible" (see NGI, July 6). A decision to push back the introduction of climate change legislation until later this month, combined with the Senate's intent to focus on health care legislation when its returns this week, is raising some doubts about the fate of a climate change bill this year (see related story).

Transportation

On the other natural gas battleground -- the transportation sector -- there is farther to go and less to gain, but natural gas vehicles (NGV) are growing nearer and dearer to the hearts of gas producers, many of whom are converting company trucks in the field to burn gas and putting up their own refueling stations. McClendon has been an early proponent of NGVs. "It's more of an incremental, one-at-a-time kind of a gain unless we can get the government to do a big program," he said.

ANGA is pushing House and Senate legislation known as the New Alternative to Give Americans Solutions Act of 2009, known as the Nat Gas Act (HB 1835, S 1408) (see NGI, Aug. 31). The legislation would modify tax incentives to encourage the purchase of NGVs and construction of refueling infrastructure, encourage federal agencies to use alternative-fueled vehicles and provide grants to light and heavy-duty engine manufacturers for research and development of better natural gas engines.

Compressed natural gas (CNG) would fuel cars and light trucks while liquefied natural gas (LNG) would power the long-haul trucking industry, although trade group American Trucking Associations has found much to criticize about the latter (see NGI, Feb. 23).

By McClendon's estimate, about 20% of America's fueling stations, which dispense 80-85% of transportation fuel, could be retrofitted to supply natural gas for $20-25 billion, "which used to be a lot of money; today, maybe not so much." And a 1% conversion of the country's transportation fleet to natural gas would yield a 1% increase in natural gas demand.

"We've said in 2008 it looks like natural gas supply went up by 8%, so in that one year alone we could have converted 8% of our transportation fuel demand in our country," McClendon said. "I don't see that there's any chance that we could convert the transportation network over to natural gas at a rate that would strain the supplies of natural gas. I think that's really an important point to make. We're talking about incremental steps here.

"The industry, through ANGA, is doing all it can to support this legislation, and we hope it sees the light of day. The biggest problem is getting attention behind health care and cap-and-trade and all that."

At least coal producers aren't gunning for the transportation market.

LNG (the new non-market for U.S. gas)

It wasn't that many years ago that then-Federal Reserve Chairman Alan Greenspan called for the construction of LNG terminals and regasification infrastructure to supply the nation's new gas-fired power plants (see NGI, June 16, 2003). More recently McClendon was an advocate of exporting LNG derived from shale gas to Asian and other markets (see NGI, Aug. 4, 2008). Now, not so much.

"We worked on that. I don't think it makes sense from the Lower 48," he told NGI. "All the exportation facilities would probably be on the Gulf Coast, and the Atlantic Basin for LNG is reasonably crowded. Where it makes sense is on the West Coast. I don't think it will happen on the West Coast of the U.S. I think it will happen on the West Coast of Canada with the Kitimat [LNG Inc.] facility [see NGI, Aug. 17]. It's certainly important for Canada to have more highly valued markets for natural gas" (see related story).

Upon further consideration following this story's publication, Aubrey McClendon suggested that $35-40/ton of carbon dioxide is a more appropriate cost to consider for economic parity of natural gas- and coal-fired power generation.

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