Energy - between a rock and a hard place

Coal Displacing Nat Gas...Already

Resilience,

31 October, 2013

In January, 2012, the price of nat gas plunged to below $2/mcf due to overproduction by shale operators. Such low prices did, indeed, prompt utilities to switch from coal fired generation to natural gas fired generation if they had the capacity. Industry crowed that this was the shape of things to come with electricity costs plummeting for consumers and heralding the end of “King Coal”.

Unfortunately, as with most aspects of unconventional shale production, this proved short lived and oversold. Glaring numbers show another picture altogether.

Electricity generation from natural gas began to fade only months after it had gained ground in much the same way that shale gas wells fade only months after initial production. As gas prices moved up to trade between $3.50-4/mcf, utilities promptly began switching back to using coal for generation.

According to EIA (Energy Information Administration):

“During the first half of 2013…the price of natural gas delivered to electric generators averaged $4.46 per MMBtu, 44 percent higher than the same period last year.”

EIA continued with:

“Electric generators have been running their existing coal capacity at higher rates so far this year in response to the increasing cost of natural gas relative to coal.”

This is of note for several reasons.

Firstly, industry and its proponents including such entities as the Wall Street Journal, have made fantastical comments about nat gas providing “benefits to the poor” which will be long lived particularly with respect to lower electricity costs for the consumer. Such benefits are already evaporating. We do not live in Camelot regardless of industry and media hype.

Secondly, but most importantly, we can now safely assume that nat gas is priced out of the market for electricity generation somewhere between $3.50-4/mcf. That produces an enormous difficulty for natural gas producers in that the break-even costs of unconventional shale wells is considerably higher with the average probably falling around $6/mcf. Exportation of shale gas will drive these prices higher still creating an unfavorable climate for natural gas as a primary source of electricity generation. That means all those purported “benefits to the poor” are non-existent over the long term. It also means that producers cannot keep this game going forever without incurring significant and further losses which are already quite considerable. Or exporting enough to make up the difference in domestic use. But this of course means that the U.S. will be exporting a natural resource rather than converting those resources into finished product to be exported which historically would provide greater economic benefit. In other words, everything about this picture is essentially based on knee jerk corporate and governmental policy decisions. Always a bad plan.

             

Utility use of nat gas ramped up in 2012 but as quickly as March, 2013, Reuters reported:  

“U.S. utilities will use more coal and less natural gas to generate power as coal becomes cheaper and gas more expensive, electricity traders said on Friday.”

A few months later in June 2013, a further statement by World Resources Institute confirmed this:

“Electricity markets are very dynamic, and while there’s been a lot of press about the success story of the benefits of natural gas, it’s important to realize that that’s temporary and it depends on gas prices staying really low, and we’re starting to see there are these thresholds where utilities will switch back to higher-carbon fuel, like coal.”

Interestingly, however, industry continued to tell a different story. In September 2013, Lynn Lachenmyer, a senior vice president at Exxon Mobil, told attendees in her keynote address at the Petrochemical Maritime Outlook conference:

“[Natural gas] is penetrating into the power sector, which has been predominantly coal in the past. We see it making tremendous inroads there.”

All present tense but in direct contrast with the actual use figures which had swung back toward coal. In other words, increased nat gas use was already past tense. Further, Ms. Lachenmeyer stated:

[By 2040] wind will make up just 7 percent of the world’s stockpile of energy… and solar will make up just 2 percent. Meanwhile, oil and natural gas will make up 60 percent of the world’s energy supply in 30 years, up from 55 percent today.”

Visions of Camelot once again.

And yet only one month prior to Ms. Lachenmeyer’s comments, the IEA (International Energy Agency) stated in its second annual Medium-Term Renewable Energy Market Report:

“Power generation from hydro, wind, solar and other renewable sources worldwide will exceed that from gas and be twice that from nuclear by 2016.”

This is an enormous discrepancy with ExxonMobil’s prognostications. In fact, someone’s prognostications are hinting at delusions. Given that IEA’s figures state that renewables will overtake gas in a mere three years and thus are much closer in terms of the future, it stands to reason that the IEA figures are probably more valid than ExxonMobil forecasts for 2040.

Even more damning are the IEA forecasts which extrapolated from the impressive growth rate seen in 2012 within the renewable sector. For instance, global renewable generating capacity grew more than 8% in spite of extreme lobbying by the fossil fuel industry in countries like the U.S. which caused a challenging investment and policy climate for the renewable industry to say the least.

Nevertheless, according to Fuel Fix:

“In absolute terms, global renewable generation in 2012 – at 4 860 TWh – exceeded the total estimated electricity consumption of China.”

That is an astonishing growth pattern.

But perhaps the answer to Exxon’s discrepancy lies in the comments of IEA Executive Director Maria van der Hoeven as she presented at the Renewable Energy Finance Forum in New York. Ms. van der Hoeven stated:

“As [renewable] costs continue to fall, renewable power sources are increasingly standing on their own merits versus new fossil-fuel generation.”

There is no doubt that gets the attention of executive management teams in the fossil fuel industry. Ms. van der Hoeven went on to state:

“Many renewables no longer require high economic incentives. But they do still need long-term policies that provide a predictable and reliable market and regulatory framework compatible with societal goals. And worldwide subsidies for fossil fuels remain six times higher than economic incentives for renewables.”

Renewables are, therefore, standing on their own globally in spite of an extreme bias toward fossil fuel use. Imagine a world where those subsidy monies were transferred to renewable generation and research and development. That, no doubt, would be a policy exercise to be fought tooth and nail by the fossil fuel industry.

In fact, such incredible growth in the renewable sector probably has much to do with the extreme hyperbole, overestimation of reserves, underestimation of costs, etc. surrounding unconventional fuels. The fossil fuel industry does, indeed, need to convince us that business as usual can be a maintained. After all, they are losing market share in spite of their glowing reports.

But, but....

Peak Coal Passed in 2008 as Mining Costs Rise, Group Says

Bloomberg,

31 October, 2013

Coal reserves in the U.S. are lower than government and industry estimates because the shallow deposits that are cheaper to access have been largely mined out, according to a study by a group urging the country to pursue renewable energy.

Clean Energy Action in Boulder, Colorado, said in a report today that the U.S. passed its peak coal production in 2008, and that production will become increasingly difficult and expensive across the country. Only one of the top 16 coal-producing states, Indiana, is likely to see record production in the future. 

Traditional producers such as Pennsylvania and West Virginia hit their peak decades ago, it said.

“Independent of arguments about climate change and clean coal, coal’s days are very likely numbered due to questions of economic supply,” Zane Selvans, the assistant director of research at Clean Energy Action, said in a statement. “We are rapidly approaching the end of accessible U.S. coal deposits that can be mined profitably.”

The group’s conclusions are at odds with forecasts from the U.S. Energy Information Administration and the National Mining Association. Coal production and use in the U.S. has bounced back this year, after production fell to a two-decade low in 2012, and coal use in power plants for power production was displaced by cheap natural gas.

This year, coal use rose more than 8 percent over the first six months of 2013 compared to the same period in 2012, according to the EIA.

Mining Association

Hal Quinn, the president of the National Mining Association, said Oct. 21 in a meeting with Bloomberg editors and reporters that coal use is projected to be up 7.5 percent this year compared to 2012, and its use will continue largely unabated through 2020, even in the face of a boost in production of natural gas and a 2015 deadline for new regulations from the U.S. Environmental Protection Agency.

Quinn’s group, which represents companies such as Arch Coal Inc. (ACI) and Peabody Energy Corp. (BTU), held a rally with coal miners on Capitol Hill yesterday at which supporters said the U.S. has a 200-year supply of coal, and that if the EPA backs off more regulation, the fuel represents the cheapest way to produce electricity. 

The environmental group’s report today said the cost of delivering coal rose 7.72 percent a year from 2004 to 2012, and expenses are likely to continue to rise. 

Meanwhile, the EIA data used to estimate a 200-year supply of coal is faulty, because it doesn’t fully capture the economic viability of mining that coal, it said.

“Rising coal costs reflect the rising costs of production for coal as it becomes increasingly difficult to access the remaining coal,” the report said.