In a memo to Governor Kulongoski the chairman of the Oregon Public Utility Commission (PUC), Lee Beyer, expressed concern about the future price of natural gas due to a combination of increased demand, lack of supply, increased production costs for Canadian and domestic resources, and a move away from coal-fired generation.
The memo, dated May 30th, states “The Commission’s statutory responsibility is to represent utility ratepayers in obtaining reliable utility service at a reasonable price. Naturally, we are very rate-sensitive with concerns about rate stability as well as consistency of service. To a large extent, our sensitivity was heightened by our experience with the 2001 energy crisis. From this perspective, we tend to take a “belt & suspenders” approach to energy hoping to avoid the ““what if we we’re wrong” result down the line.
Beyer concedes that “any one analyst’s assumptions or conclusions may be right or wrong, sometimes widely so,” with this in mind Beyer goes onto say, “the following is the Commission’s observations of the Oregon Department of Energy’s (ODE) Report.” Beyer then proceeds to give specific references in the ODE Report where PUC has additional or different information and/or data.
According to the memo the ODE report referred to the US Energy Agency in projecting that domestic natural gas usage will rise 0.3% per year through 2030. However, PUC counters, that percentage is based on the assumption that 145 new nuclear plants will be built and a number of new coal plants with carbon capture and sequestration technology. Most industry analysts question this forecast. They believe the forecast for gas demand is low based on a belief that new commercial coal technologies will not be available until after 2025 or 2030 and that the projected number of nuclear plants is unrealistically high. PUC reports that Northwest Natural Gas projects that the demand will grow by 1.9% through 2012 and that the NW Natural Gas projection is “generally consistent” with the experience of Oregon’s three natural gas utilities.
The memo goes on to state that the Wall Street Journal recently reported: “The global appetite for natural gas has profound implications for a U.S. economy already tipping toward recession and struggling against inflation pressures.” According to a March 2008 NRRI Report, between 1999 and 2003 200,OOOMW of natural gas generating capacity was built in the US. During this building cycle, gas prices were around $2.00/MMBTU promoting that “Dash for Gas.“ The current energy environment appears to be on the cusp of a second “Dash for Gas.“ The ODE report notes that 40% of current Oregon electricity comes from coal generation and notes that financial conditions (and policy uncertainty) will encourage the switch from coal to natural gas. “As renewable energy becomes a larger part of the Oregon energy portfolio, more gas-fired generation will likely be built to fill in the gaps and act as backup. This could increase demand for natural gas in Oregon.”
Breyer states, ‘In sum, it is fair to say that Oregon’s demand for natural gas will continue to grow over the next 20 years.”
One of the complaints of local opponents of the Bradwood Landing project has been that Oregon won’t see any of the natural gas being imported, that Oregon is being used as a conduit for a pipeline to carry the fuel to California. The PUC memo states that Oregon is served primarily by Canadian natural gas that is shipped via pipelines through Washington. Oregon also receives natural gas from the Rocky Mountain states via the Northwest Pipeline that accesses the Opal Hub in Wyoming.” About 70% of Northwest natural gas comes from Canada. The Northwest pipeline from Wyoming is currently operating at or near capacity.
The memo points out that while the ODE report shows Canadian exports are expected to decrease by more than 20% during the next 20 years industry analysts believe those numbers to be very conservative. Canadian government sources state that the natural well count in Alberta is decreasing and the productive life of each well is also decreasing at the same time that Canadian domestic demands are increasing.
The ODE report states that even if the Canadian supply diminishes there is a “sufficient” LNG capacity in the US to meet the demand because of LNG terminals on the East coast and in the Gulf of Mexico.
However, the PUC memo counters, “this optimism may be misplaced in view of limited pipeline capacity and energy economics.” More pipelines must be constructed in order for the ODE report to be accurate. Presently, the Mexican Costa Azul LNG terminal in Baja is unable to even reach Northern California because of a lack of pipelines. As Clatsop County citizens are currently aware, pipeline construction is being fought by many groups. Most recently a referendum to ban pipelines from being allowed to cross open spaces, parks and recreation lands has been proposed in Clatsop County. The referendum is expected to be voted on in September.
The ODE report contends that the global price of LNG compared to North American gas is keeping it out of the US market at close to $20 per million BTUs, roughly double the price of the U.S. benchmark. PUC counters that FERC Market Monitoring Snapshot reported that Japanese contract gas prices are pegged at $14 MMBTU, only about $1.50 above the current domestic spot price. The memo states, “It is worth noting that the reported actual cost of delivering LNG to U.S. facilities is approximately $4.50/MMBTU leaving lots of room for market economics to work.” The other point that PUC makes is that long-term contract LNG prices are cheaper than the spot market prices and that it is unlikely that a LNG developer could get financing without having long-term contracts for both supply and consumption.
ODE’s report notes drilling for natural gas in the Rockies and new pipelines to the Northwest (barring any organized efforts from local populations determined to keep the pipelines out of their backyards). However, the PUC memo counters, the exploration for new sources of natural gas is from what is referred to as “unconventional” resources. They tend to be located in areas more difficult to get to and work in. “It is likely however, that the cost of mining these nonconventional resources will approach the world market price for LNG,” Breyer writes.
PUC discounts the ODE’s assertion that domestic needs can be met by Alaskan gas and a new pipeline. Even the ODE report acknowledges that it is unlikely to happen before 2018 and most experts state that politics would never allow the pipeline to be built.
Disruptions commonly effect the gas supply in the United States, according to the ODE report, with hurricanes in the Gulf Coast at the source of much of the US domestic supply and problems with major pipelines like the failure of the El Paso Southwest line during 2001 energy crisis. PUC notes that both FERC and electricity regulators have raised concerns about the insufficient supply of natural gas during severe weather periods as the US becomes more reliant on gas fueled electricity generation.
The PUC memo draws attention to the fact that, “… a regional (supply) problem that left the Northwest isolated from supply could put significant stress on the state’s energy resources,” as stated by the ODE report. The memo quotes the report in emphasizing: “… the storage offered by an LNG plant in Oregon could benefit the state due to cost savings during high demand periods and provide resiliency in an emergency.” The memo concludes, before summarizing, “Other regions of the country are all looking to secure access to additional gas supply sources, such an LNG and nonconventional gas, to replace supplies from quickly diminishing domestic and pipeline import sources. The Northwest should do the same.”
Notes:
Report from the Oregon Dept. of Energy to the Governor can be read here.
The Oregon PUC “ensures consumers receive utility service at fair and reasonable rates, while allowing regulated companies the opportunity to earn an adequate return on their investment.”
The full PUC Report can be read here.
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