The Energy Information Administration (EIA) kicked off its annual two-day energy conference April 7 in Washington, DC.
The conference schedule took a two-part format, with a morning plenary session followed by a series of 90 minute concurrent sessions. Unfortunately, some of the most interesting concurrent sessions overlapped, so I was forced to make some tough choices as to which session to attend.
Here’s a rundown of some of my notes and thoughts from two the sessions.
This year’s plenary session was well attended and featured three speakers: US Secretary of Energy Dr. Stephen Chu, Yale University Professor of Economics William Nordhaus, and Exelon Corp (NYSE: EXC) CEO John Rowe.
The keynote address by Dr. Chu was clearly the most widely anticipated of the three addresses. A full analysis of the comments and points he made is enough to fill up several TEL issues, as he outlined the Obama administration’s basic energy policy. I'll focus on my general impressions in this issue and revisit the topic on At These Levels or in a future Energy Letter.
The most striking thing about Dr. Chu’s comments was just how little he mentioned oil, coal, natural gas and nuclear power. The secretary highlighted the fact that Americans are heavily dependant on oil imports, and how expensive those imports are. He also showed an interesting chart that highlighted the correlation between US recessions and spikes in the price of oil.
Finally, Dr. Chu, as expected, spent considerable time discussing climate change and the need to develop new low-carbon or carbon-free sources of generation.
However, after the first few slides he said very little about conventional energy sources and the future of nuclear power. In fact, he mentioned nuclear power on just one occasion, in response to one of the two questions he took at the end of his session. This is striking to me because these four sources of power account for nearly 93 percent of US primary energy consumption. And according to the EIA’s own estimates, these three sources of energy will still make up more than 90 percent of the total in 2030.
Generally speaking, Dr. Chu’s comments were aimed at highlighting some of the research and work being done by the Department of Energy (DoE) on renewable sources such as solar and wind. He also defended the stimulus package passed in February as a key aspect of US energy policy; the package included funding for key DoE projects.
And Dr. Chu also outlined the importance of energy efficiency. Improved energy efficiency is the low-hanging fruit of energy policy, the fastest and cheapest way to reduce consumption and emissions. The stimulus bill included several initiatives to improve US energy efficiency, including programs aimed at low-income families.
Dr. Chu also addressed concerns about the economic impact of proposed regulations to limit the emission of carbon dioxide and other greenhouse gases. Broadly, the secretary stated that economic growth doesn’t necessarily mean greater energy consumption, at least for developed countries, citing a chart that plotted the Human Development Index (HDI) against energy use for various countries around the world.
The chart showed that some developed countries with a high HDI--a measure that includes GDP, health care availability and other factors--consumed far less energy than others. He also noted that California's energy consumption has remained steady for years even as the economy has continued to grow. This is a compelling support for his argument, though I have major reservations about both examples, including the validity of HDI as a measure of prosperity and how California’s energy consumption is measured. These are topics for a future issue.
While I applaud the research being done on advanced solar and wind initiatives, if we fail to recognize the important roles oil, natural gas and coal will play--for decades to come--US energy policy will be meaningless. Dr. Chu also seemed to gloss over the major obstacles facing wind and solar power, particularly as these variable energy sources become a bigger part of the US energy mix.
In particular, I was disappointed that there was no discussion of the potential for greater use of clean-burning US-produced natural gas. I was also disheartened by the lukewarm endorsement of nuclear power.
Interestingly, Exelon CEO John Rowe addressed some of the key points made in Dr. Chu’s statements. Rowe supports a cap-and-trade system as a way of setting a price for carbon emissions.
He went on to note that trying to pick out which technologies or technology will emerge as the best solution to meeting energy needs and controlling emissions is futile. No one can really know for certain which technology will evolve to become the preferred solution. This has been one of my long-standing arguments in The Energy Strategist and a point I emphasized in my editorial for the G8 Summit last summer: There’s no silver bullet for the world’s energy problems; the solution is a combination of a large number of conventional, nuclear and renewable sources.
Mr. Rowe went on to note that once the price of carbon is set, the government should allow the market to come up with its own solutions. He also pointed out that there are real economic impacts of greenhouse gas emissions including, of course, higher electricity prices.
Natural Gas Panel
The natural gas panel took the form of a roundtable discussion among five participants. The focus of the panel quickly became the shale revolution in the US; rapid technological development over the past three to five years has allowed US producers to tap vast reserves of gas in major US shale basins.
Several participants noted how important this shift is. Just a few years ago most pundits assumed the US was exhausting its supplies of natural gas and would soon become a big importer of liquefied natural gas (LNG). Instead, the US has tapped such vast domestic supplies that it could easily become the world’s top producer if the demand were there for all that gas.
The consensus of most panelists was that US gas prices will average in the USD4 to USD6 per million British thermal units (MMBtu) range for years to come. Their rationale was fairly straightforward: Strong production growth from these vast deposits of US shale gas will be enough to keep the US in an oversupplied market for years to come. I’ve discussed this argument TEL, including in the previous issue, and on At These Levels.
The counterargument is that current low gas prices will continue to prompt producers to scale back their drilling activity sharply. One participant cited a survey of 114 producers that indicated that stable gas prices in the USD6 to USD7 per MMBtu range were needed to incentivize production from shale plays. While picking a break point price certainly isn’t an exact science, this would seem to be a logical level.
With prices well under that break point for months, the US gas-directed rig count has fallen precipitously--total rigs have fallen from 1,600 in late August to 808 as of last week. And horizontal rigs--an indicator of activity in major shale plays--have plummeted from highs around 650 in early November to barely 400 today. As I pointed here, this has begun to show up in EIA data; US gas production was falling rapidly in January, the latest month for which the EIA provides data.
While I agree that US natural gas prices will remain relatively low due to the overhang of shale production potential, I have a hard time believing that this rapid drop in US drilling activity and rig counts won’t push prices sharply higher from current depressed levels. This is an out-of-consensus view, but sometimes those are the most profitable investments of all.
A few additional points are worth noting from the Natural Gas Panel.
Natural Gas Infrastructure. The boom in shale gas production spells a need for significant new natural gas-related infrastructure such as pipelines and storage facilities. From a longer-term perspective this is one of my favorite investment themes in the energy industry.
Master limited partnerships (MLP) are some of the biggest builders of gas-related infrastructure in the US. MLPs offer a simple value proposition: high, tax-advantaged yields.
Carbon Dioxide Legislation and Renewable Portfolio Standards. These efforts will drive gas use. Renewable energy produces variable electricity output. Therefore, generators must use backup generation in the form of gas-fired turbines to fill in power needs when renewable output is low. When you see more wind turbines and solar farms built, your first thoughts should turn to gas.
Speed of Adjustment. Shale plays carry extremely low exploration risk, and the big producers have locked up considerable inventories of leases. Producing gas from these plays is more akin to a manufacturing operation than traditional oil and gas development. This means producers can quickly ramp up or shut down drilling activity in response to short-term changes in commodity prices. Producers can respond more quickly than in the past.