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Natural Gas Demand Momentum

May 2nd, 2014

OMAHA (Capstone Energy Services) – This week, the U.S. Supreme court ruled that the EPA could reinstate regulations limiting power plant emissions that cross state lines – the Cross-State Air Pollution Rule. It is estimated that this EPA rule will affect as many as 1,000 power plants in the eastern U.S. requiring additional pollution control equipment, or in some (or many) cases leading to more plant retirement and replacements. Currently, the Energy Information Administration (EIA) estimates that more than 40 gigawatts of coal fired generation will be retired before 2016 (See chart below). The primary fuel for these replacements will be natural gas which could lead to 4-8 Bcf per day or a 5-10% increase in natural gas demand depending on operational efficiency of the units. This ruling will only add momentum to the transition.

Industry officials are expressing concerns to State and Federal Agencies including the Department of Energy that generation fuel diversity should be a cornerstone in the long term generation portfolio strategy. Nevertheless, political, regulatory and economic pressures continue to push toward the use of natural gas. While several nuclear facilities are being built in the Southeast, additional nuclear plants will be slow in coming, if at all, because of the expense, regulatory requirements and the widespread public and environmental opposition. Wind and solar facilities are expanding at a record rate. These facilities are less than 10% of total generation and still require standby conventional generation because of the production variability and the lack of economic storage technology. A separate EPA regulation requires new coal plants to recapture and dispose of all carbon, an unproven, expensive technology that effectively prohibits new coal plants in the short term. Hydro, oil and biofuel generation all face environmental opposition. That leaves natural gas as the most logical, inexpensive and relatively clean alternative.

The move toward natural gas for electric generation is well underway and was a contributing factor to the natural gas supply problems and price volatility that occurred this last winter in the Northeastern U.S. While the primary factor was weather, the additional peak electric demand exacerbated the situation. The Federal Energy Regulatory Commission (FERC) and the North American Energy Standards Board (NAESB) are working to solve many of the operational problems that exist in the interrelationship of the two industries, which should result in some proposed major structural changes to both industries this next fall; however, a real risk remains that similar price volatility will occur next winter during peak demand periods even without record cold temperatures.

The momentum toward increased natural gas use is not limited to generation. Barclays projected this week that industrial demand will increase faster than expected in the coming years and FERC is proceeding with processing applications for natural gas export facilities. Use of natural gas for road and off road vehicles is also expanding. While significant increases in demand appear inevitable, the availability of supply does not. The expectation is that increased shale gas production will meet the increased demand. In theory, it probably can, at some yet to be determined market price. Will the current $4.75 per MMbtu NYMEX price be enough to create needed incremental supply without a shortfall? That is unclear. Compounding the supply difficulty is the lagging pipeline infrastructure. A new study issued this week by the White and Case Law Firm asserts that lack of pipelines is hindering the U.S. Shale revolution. This is a problem that needs to be addressed, and quickly — new demand is on the way and will not wait for new supply and delivery infrastructure to be available. The offset will be the potential for much higher prices and the associated detrimental effect on consumers, end users and the economy in general.

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By Ed Freeman

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Energy Facts

Energy Facts

Natural gas can be used as a raw material in a variety of products, including paint, fertilizer, plastics and medicines.

Natural gas produces fewer emissions than other fossil fuels, with less nitrogen, sulfur, carbon and fine particulates.

Texas produces the largest amount of natural gas in the USA.

The biggest consumer of coal in the US is the electric power sector.

There are 17,658 electric utility generators in the USA.
 

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