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Utility Chief Credits Shales for Price Stability

Even with an energy industry "sea change" to renewables, the Los Angeles Department of Water and Power (LADWP) remains reliant on natural gas and the industry's current shale boom, General Manager Ron Nichols told NGI's Shale Daily on Thursday.

Regarding the shale gas development, Nichols said LADWP is "tied at the hip to it. It has been one of the big reasons that gas prices have stayed steady for the last two years." With the recent exception of soaring oil prices, which may nudge gas prices up, there is a twofold reason for the stability, he said.

"First, the economy and the overall reduction of the demand curve for natural gas has kept prices low," Nichols said. "But as we look at more and more shale gas, those developments affect the [U.S.] supply and the thinking in the energy industry regarding how scarce gas really is. And quite frankly, the resource is nowhere near as scarce as we thought it was three years ago.

"That can change depending on what the real and/or perceived environmental risks are associated with the fracking process to extract that gas. That is an issue yet to play out. But shale absolutely affects us and affects the market."

He said that LADWP does not have to track closely the shale space, however, because its management sees the effects that it has on the forward prices for natural gas. "Long term, gas and oil are connected, although a little bit less right now than in the past in no small part because we recognize the potential volumes of shale gas we might have. The developments in the Middle East, however, have had some upward pressures on gas as well as oil."

As the owner of long-term natural gas reserves in Wyoming's Pinedale Basin (see Daily GPI, June 17, 2010), LADWP considered briefly last year selling its share in response to city budget woes, but Nichols said the current plans are to hang on to them. It holds roughly 74% of a $300 million reserves purchase made five years ago by a coalition of Southern California public-sector power providers.

"Irrespective of what we do [regarding adding renewables] we have to have baseload power and instantly dispatchable power resources here in the Los Angeles Basin, [and that means relying on its fleet of natural gas-fired generation plants, which are all being repowered]," said Nichols. He was chosen to head the utility late last year (see Power Market Today, Dec. 17, 2010).

"We have significant gas plants here, and we will continue to have significant plants here for some time. It is needed to enable wind and solar and other renewables to come into the mix to meet system reliability needs."

While Nichols said the large water/power utility has to continually "look at all" options, LADWP is hanging on to the gas reserves, looking at its costs and the near-term assets it has in hand. The assessment of ownership compared to contracting for supplies is an ongoing proposition for LADWP. "Do you hold them or sell them? Looking at those kinds of options is something we will probably do pretty regularly."

Would LADWP buy more gas reserves now?, he was asked.

"It is important to look at the difference between owning gas or just buying it," Nichols said. "Owning gives you the assurance of having it. The value of the reserve, though, goes up and down with the market. At the end of the day, how you price the gas you own ultimately needs to get tied to its market value."

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