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The Gas Revolution

Amazingly, an era of energy abundance is upon us, unless politicians and environmentalists get their way.

Apr 18, 2011, Vol. 16, No. 30 • By STEVEN F. HAYWARD
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The second issue is what to do with this unexpected bounty. The suddenly low cost of gas, combined with high-efficiency gas power plant designs, now make new gas-fired power plants cheaper than coal-fired power plants according to the Department of Energy’s latest analysis. Natural gas has been the largest growth sector in American power generation over the last two decades, though because of its price volatility much of the new gas capacity was employed in “peaker” power plants that were turned on and off during periods of high demand such as the summer months. Now it appears gas could be used more for baseload generation, replacing aging coal plants that are under pressure from costly new EPA clean air regulations and the environmentalist crusade to do to coal-fired electricity what it did to nuclear power 30 years ago.

For the time being natural gas producers and utilities are joining with environmentalists to tilt the playing field in favor of forcing gas as a replacement for coal, by offering incentives and subsidies for fuel switching. Colorado enacted sweetheart legislation last year to prod its utilities to convert from coal to gas, and Texas​—​which uses the most coal-fired electricity of any state by a large margin​—​is considering the same market-bending mischief. This coalition won’t long endure, however, because the other edge of the cheap gas sword is coming into play already: Cheap gas makes expensive wind and solar power even less cost competitive than they already are.

Environmentalists used to love natural gas​—​so long as it was expensive and used in part as a backstop for intermittent wind and solar power. Now that it is suddenly cheap and practical for baseload generation, environmentalists are changing their minds. Politico’s Bob King noted this about-face in a mid-February story, “Greens Sour on Natural Gas.” The Environmental Defense Fund, ProPublica, and the Sierra Club are suddenly voicing opposition to the expansion of natural gas use. King quoted Sierra Club chairman Carl Pope calling for phasing out natural gas use in the United States entirely by the year 2050, and Sierra’s deputy executive director Bruce Hamilton said, “We want people to know that natural gas is not a clean fuel.” As recently as a December appearance with me on CNBC, Hamilton endorsed using “clean” natural gas “for a very long time.” You might call this the theorem of environmental duplicity: namely, there is no form of “clean” or “alternative” energy that environmentalists won’t decide to oppose if it becomes practical and affordable on a large scale.

From the standpoint of the increasingly desperate and forlorn climate campaign, environmentalists have a point. Natural gas has long been regarded as the cleanest of the fossil fuels because it is much lower in conventional air pollutants (that is, the emissions that cause ozone, particulates, and carbon monoxide) than coal or oil. But it is still a prodigious producer of carbon dioxide; climate change orthodoxy calls for reducing CO2 emissions to almost 1 billion tons by the year 2050, yet carbon dioxide emissions from current levels of natural gas use are 1.2 billion tons a year. There is no way to reach the targets of climate orthodoxy if we expand our use of natural gas.

Still, it may be a mistake to adopt a dirigiste policy of pushing natural gas use in the electric power sector, because coal remains abundant and cheap, and neither climate hysteria nor conventional air pollution concerns are compelling enough reasons to suppress coal power deliberately. (Conventional air pollutants and mercury emissions from coal plants are falling steadily, and will continue to do so even without a new suite of EPA regulations.) Substituting natural gas for coal power plants would not reduce our imports of foreign oil by a single barrel. But adopting natural gas as a transportation fuel in our car and truck fleet would, if done on a large scale, and this is the most tantalizing prospect. 

T. Boone Pickens has been pushing this idea for the last two years, arguing that we should start with the trucking fleet. But the conversion costs are high. It costs about $50,000 or more to convert a diesel truck to run on compressed natural gas, and natural gas-powered autos would be considerably more expensive than gasoline-powered autos. The one commercial natural gas car currently available, a Honda Civic, costs about $10,000 more than a gasoline engine Civic. Natural gas vehicles would require a large compressed gas infrastructure that does not currently exist. Pickens and other natural gas transportation enthusiasts are lobbying for tax credits for truck fleet conversions and filling station gas compression upgrades​—​another subsidy the federal budget doesn’t need right now. But federal subsidies may not be necessary. If diesel reaches $5 a gallon, the unsubsidized payback period for converting a high-mileage long-haul truck would be two years or less at current natural gas prices. That’s why UPS is starting to expand its fleet of natural gas trucks. For comparatively low-mileage passenger cars, the price of gasoline would have to be much higher than it is today for gas conversion to look attractive, somewhere in the neighborhood of $8 or $9 a gallon.

With all of the emphasis​—​and confusion​—​in the automotive industry about whether to develop hybrid-electric cars or other power sources, policymakers ought to tread carefully before piling on a new market-distorting tax credit or subsidy. Furthermore, natural gas can be converted to liquid fuels, especially methanol, that can be used in current gasoline-powered cars for a minimal extra conversion cost. At current natural gas prices, methanol can be produced at a cost of about $1.30 a gallon, though methanol has a lower energy content than gasoline, so the equivalent gasoline price would be closer to about $1.60 a gallon​—​attractive at current oil prices, but not if oil drops again to 2009 levels.

Finally, it is not a slam dunk that newly abundant natural gas supplies should be used primarily for new energy production. Current low prices are inducing the chemical industry to begin looking to our shores again for expansion. Two weeks ago CP Chem, a joint venture of Chevron and ConocoPhillips, announced that it is considering a major expansion at a Gulf Coast facility that would utilize shale gas, a development Chemical Week called “the most significant yet related to the improved cost position of U.S. petro-chemicals.” The chief fear of the chemical industry is that the price volatility that drove them overseas in the last decade might not be over. The chemical industry, like electric utilities, has been bit before by confident assurances that cheap gas was here to stay.

There is good reason for that concern. The urge for politicians and collaborating interest groups to meddle in the natural gas success story is irresistible, but all options for gas share one key assumption that should not go unchallenged: that the shale gas revolution will continue uninterrupted, thereby guaranteeing stable low prices. Although this appears probable at the moment, two aspects of shale gas production have escaped notice in the recent lavish media attention. First, its production costs​—​the “hurdle rate” as it is called in the trade​—​can be highly variable and site specific. Although hurdle rates are proprietary information from site to site and company to company, some shale gas plays such as the Haynesville-Bossier that straddles the Texas-Louisiana border are said to have production costs as high as $4 per thousand cubic feet, which is only slightly above the current market price. Hence in recent months, many drilling rigs have been pulling out of the Haynesville-Bossier and moving back to straight oil exploration in other parts of Texas. By contrast, the hurdle rate for Marcellus gas wells is said to be as low as 60 cents per thousand cubic feet in some cases, making the Marcellus play very profitable even if prices fall substantially below current levels.

The second factor is that shale gas wells have a much faster production decline curve than conventional gas wells; in other words, shale wells run out of gas sooner, requiring new wells to be drilled on a constant basis. New regulations that slow or make more expensive the replenishment of depleting wells, or a gas glut that collapses prices and idles drilling capacity, could set off a fresh round of price volatility and scramble everyone’s calculations. It would be best if politicians left well enough alone and allowed the marketplace to compete over the uses of natural gas, but politics and energy have always mixed like gin-ethanol and tonic, so don’t count on it.

Steven F. Hayward is the F. K. Weyerhaeuser fellow at the American Enterprise Institute and the author of the Almanac of Environmental Trends, to be released on Earth Day (April 22).

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