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Researcher: Bad Regulation Bigger Threat than Russian Gas

Limits on power generator greenhouse gas (GHG) emissions will be a boon to the natural gas industry while domestic productive capacity and access to global supply are poised to climb. Producers will need to remember that "price matters," and regulators should ensure that their initiatives do not contradict each other, a Rice University Baker Institute fellow warned.

Limiting emissions from power generators and fostering plug-in electric transportation will grow gas demand as gas-fired generation is the obvious choice for new capacity, Amy Myers Jaffe, Baker's Wallace S. Wilson fellow in energy studies, told NGI. "All that is going to benefit natural gas in a way that maybe we haven't calculated out entirely," she said. "I just think the potential in natural gas is very high, even though the supply could wind up being high. The potential for demand to grow astronomically is very high, and we need to consider that in the political context. If we're going to have policies that both restrict drilling for natural gas and promote demand for natural gas, that's not going to be successful."

Repeal of producer tax credits being weighed by Congress and the Obama administration must be considered carefully, Jaffe said. Incentives that are particularly beneficial to smaller producers should not be cast aside as the small independents are responsible for spearheading America's gas production growth, she said. For a small producer, the tax credit for intangible drilling costs (IDC) means a lot, and the loss of the credit could seriously impact such a producer's cash flow. The Obama administration has proposed the repeal of expensing of intangible drilling costs, which would add estimated revenue of $3.35 billion to the federal budget (see NGI, May 11).

IDCs are expenses that offer no salvage value regardless whether a well is ultimately declared to be dry. These costs include labor, drilling rig time and drilling fluids, and they can represent 60-80% of well costs.

"One of the lessons of the last five years is that smaller investors have made a tremendous contribution to energy security in the United States, and that is very different from whether the public feels it wants to tax a large oil company, because those smaller investors are really affected by small changes like the IDC credit," Jaffe said.

That said, producers large and small, domestic and foreign, would do well to remember that commodity prices matter. Today's relatively low natural gas prices are a response to the $10-plus gas of yesteryear. "Having the $10/MMBtu natural gas price went a long way to developing the play of shale gas," Jaffe said, "to the point -- and we've seen this before -- that it was no longer a $10 play. Maybe in the next couple of years it's going to become a $4 play and you're not even [going to] see that much shut in at even $3.50.

"Technology strengthens supply, and what we're seeing in North America is a fundamental paradigm shift. Instead of this becoming the premier market to dump LNG [liquefied natural gas], the LNG window is going to be closed, probably for a decade."

Still, that won't preclude all LNG imports, and these are nothing to fear, not even when they come from Russia, Jaffe said. Although the recent delivery of Russian LNG to Sempra Energy's Energia Costa Azul receiving terminal in North Baja California, Mexico (see NGI, April 13), had some domestic producers up in arms, Jaffe, as well as Murray Douglas, Wood Mackenzie global LNG analyst, said the domestic producers needn't worry.

"There's been a lot in the press about [Russia's] Gazprom getting this thing into Costa Azul," Douglas told NGI. "I don't think it's quite as big a deal as people were making out. I don't think it's going to change anything. If Gazprom can get a better price in Asia, they'll take it to Asia."

And there's no fear of a U.S. dependency on Russian LNG. "Who cares whether the Russian gas comes here or not?" Jaffe asked. "And we certainly don't have to worry about the Russians cutting off the United States. We're not the Ukraine...with no alternative supply.

"We're emerging toward a global market for gas. What we want is not to ban Russian supply. We want to have as diverse a supply as possible."

A summary of Jaffe's "Russia and the Caspian States in the Global Energy Balance," and "Scenarios for Russian Natural Gas Exports: The Role of Domestic Investment, the Caspian and LNG" by Rice professors Peter Hartley and Kenneth B. Medlock III are available at

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