Pipeline transporting Russian natural gas. (image: visitbulgaria.info)

A new coalition of natural-gas-producing countries, called the Gas Exporting Countries Forum (GECF), had its first official meeting this week, the New York Times reported on Thursday. Members of the GECF convened in Doha, Qatar, where they elected Leonid V. Bokhanovsky as the coalition’s secretary general and discussed ways to fix the price of natural gas, which has been plummeting in recent months because of a glut in supply. Attending the meeting were energy ministers of the eleven member countries: Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Qatar, Nigeria, Russia, Trinidad and Tobago, and Venezuela.

The prenominate countries have been meeting informally since 2001, finally adopting a formal charter in Moscow a year ago. Some critics have labeled the group a “cartel,” applying the dubious informal title ‘Gas OPEC’ (presumably because ‘ONGEC’ is not all that catchy). Many analysts worry that the gas-rich GECF will have the power to drive up natural gas prices by constricting supplies, much in the same way that OPEC ostensibly spiked oil prices in the 1970s. Indeed, the eleven members of GEFC seem to have a tight grip on the market: Russia, the world’s biggest producer, alone supplies roughly 25 percent of Europe’s gas, while the three biggest gas-producers in the coalition control more than half of the world’s proven gas reserves.

Despite their clout, the members of the GECF are worried by the sinking price of gas. Over the last twelve months, oil prices have climbed about 40 percent while the price of natural gas has fallen by roughly the same percentage. The big reason for the price drop is a perceived overhang in supply—there’s just too much gas being produced and not enough demand for it. Most of the new gas has been coming from the United States, where new drilling technology—known as hydraulic fracturing (or ‘hydrofracking’)—has allowed gas to be extracted from geological formations previously considered impenetrable. This so-called ‘shale-bed gas’ poses a threat to Russia and other gas-producing nations, who have recently seen their market shares diminish.

Thus, the GECF’s first order of business was to figure out a way to maintain the link between natural gas and oil contracts; doing so would mean that the higher oil prices go, the higher gas prices go, too. And with oil hovering around $80 a barrel, this is an appealing arrangement for the members of GECF. If the group evolves into a cartel, it could prevent market forces from making relatively clean-burning gas less expensive than oil, said Ian Cronshaw of the International Energy Agency, which is opposed to the idea of strengthening links between oil and gas contracts. “Our position is that the market should set prices,” he said.

Be apprised: If GECF does begin driving up the price of natural gas, consumers who have the option of using either oil or gas to heat their homes and businesses will most likely begin using more heating oil. If this happens, the demand for oil will increase, thus driving up oil prices. In other words, nobody wins—except, of course, the oil and gas companies.

Not an alien probe—a wellhead for hydraulic fracturing, with injection pipes. (image: dpcusa.org)

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Fracking—if you’re a Battlestar Galactica fan, “fracking” is a coarse term for an intimate activity, as well as being an all-purpose, heavy-duty swear word.

However, if you’re in the oil or gas industry, or just read the news relating to upstate New York and eastern Pennsylvania, fracking—or fracing, as it’s also spelled—means something very different: hyrdofracking, or hydraulic fracturing. It’s a mining or drilling technique used to break up rock underground to create easier access to resources. It’s common in oil drilling; incredibly common in natural gas production; and is even used sometimes to revive flagging drinking water wells. It’s also used for some solid (as opposed to liquid or gas) mineral resources. For example, it’s used at a quarry in North Carolina to break granite blocks out from the surrounding bedrock.

Despite being in the news of late, it’s not a new technique. It was first commercially used in 1903, and was first used in the United States in the late 1940s. At present, thousands of wells use hydraulic fracturing. However, the “gas rush” in the Marcellus Shale formation in upstate New York and Pennsylvania has caused hydraulic fracturing to bubble to the surface of public consciousness: it may now come into widespread use in a densely populated region unaccustomed to fossil fuel resource extraction. Since the process—like most large-scale industrial processes—can have negative consequences, the near-certainty of its widespread adoption in this region has resulted in public controversy, as people weigh the benefits of economic gain against health and environmental risks.

And the debate has been loud, as would be expected when enough natural gas to satisfy US demand for at least a decade is set against possible harm to the water supply for almost 10 million people in one of the world capitals of media, finance, and law. It’s not natural gas per se that’s sparked a firestorm of controversy, it’s the technique—hydraulic fracturing—used to extract it.

So what exactly is hydraulic fracturing?

IEA Chief Fatih Birol addressed the Council on Foreign Relations earlier this week. (image: wikipedia.org and cfr.org)

Monday night at the Council on Foreign Relations in New York, Fatih Birol, Chief Economist at the International Energy Agency (IEA) presented the highlights of the recently released 2009 World Energy Outlook, which was recently completed. Yours truly was in attendance, and got the scoop just for you dear readers.

Mr. Birol knows his stuff- he worked for OPEC for six years, has written lots of articles about energy and energy policy, has won lots of awards for his work and is steeped every day in the numbers and analysis of global energy consumption and production. He’s known for being pretty plainspoken. So when he has something to say, we should listen.

And what he has to say isn’t pretty. Some samples:

• To keep up with global oil demand, the world will need to discover an additional four (yes, he said four) Saudi Arabia’s worth of crude production before 2030

• To keep up with global gas demand the world will need to discover an additional four Russia’s worth of natural gas reserves by 2030.

• Because of the financial crisis, global investment in oil production fell by $90B in 2009, or 19 percent- the first time this has happened in a decade.

• Existing oil fields will lose two-thirds of their productive capacity by 2030

• Between 2008 and 2030, the percentage of GDP spent on energy in the US will double, and in countries like China and India could increase three to six-fold.

• Oil prices were ‘not innocent’ in precipitating the financial crisis of 2008 and will remain a threat to global growth.

Whoa…Fatih…I’m trying to catch my breath here. What are we going to do?

Mr. Birol emphasized that the way to address these threats is to address climate change. In the IEA’s projections they use two scenarios, one they call the ‘Reference’ scenario (no change in our behavior) and the ‘450’ scenario (we keep carbon parts per million in the atmosphere under the critical 450 and thus will save the world- or so Al Gore tells me).

The changes he calls for to reach the 450 scenario are EXPENSIVE. They would cost many trillions—with a capital T. Renewables, electric cars, carbon capture, wind, solar, cap and trade, the works. But, he emphasizes, the cost of waiting will be even more expensive.

During the Q&A session that followed his presentation, someone asked him what his recommendations would be if climate change turned out to be an elaborate hoax (I paraphrase). He said he would still recommend 90% of the changes outlined in the review. Huh?

Birol explained that many people, especially in the developing world, view energy security as a bigger issue than climate change. Countries like China and India may not be very interested in spending money on climate change, but they may be extremely willing to spend on energy security. The same argument could be made to climate change skeptics. In his view, the changes we would make to reduce emissions are the same moves we would make to improve our energy security.

Interesting. Is it possible climate change zealots and national security hawks can fall in love on this? Who’s going to call Al Gore and Dick Cheney for the handshake photo-op? And is this really a way we can convince China it is in their best interest not to turn the planet into the air quality equivalent of my Grandpa’s apartment (Marlboro reds, two packs daily)? Sounds revolutionary to me.

Birol did have some other very interesting comments that we will touch on in future articles, among them:

• Hydrofracking in the US represents a silent energy revolution that no one is paying attention to, but will provide us with oodles of natgas for the next 20 years.
• Oil and coal usage in OECD (developed) countries peaked in 2009
• A natural gas glut is forming globally and will reach its apex in 2015

So put that in your pipe and smoke it. Be back in touch soon.

Excess natural gas being flared, or burned off. (image: www.robertamsterdam.com)

As Time Magazine reported today, oil prices have been increasing and natural gas prices have been falling in recent weeks and months.  Since December 2008, crude oil prices have increased from around $30 per barrel to over $70 per barrel; at the same time, natural gas prices have decreased from $6 per million BTU to less than $3 per million BTU. One has more than doubled, while the other has more than halved.

Since they’re both fossil fuels, shouldn’t their prices be moving more in lockstep? And if natural gas prices are lower, why isn’t everyone switching from oil to gas? According to Ari Officer, a director at a Chicago-based trading firm, it’s because (1) natural gas and oil may both be fossil fuels, but they’re not interchangeable; and (2) the currently low gas prices will not last.

Natural gas is not as easy to store or transport as oil. It cannot be effectively trucked or ship by water, the same way that oil can—it requires a network of pipes to distribute it. It also cannot be stored as easily—it is most effectively stored at fairly high pressures in underground reservoirs. These two characteristics mean that the market for natural gas is domestic, not international; excess natural gas is not exported abroad. And it is not as readily stored against future need or for future sale.

Also, since natural gas cannot readily be substituted for other fuels, like oil, a low natural gas price will not increase demand for gas, as usually happens when price for a commodity falls. You can’t turn natural gas into home heating oil, diesel, gasoline, or asphalt; you can’t burn it to heat your home instead of oil unless natural gas pipes exist in your neighborhood and you spend several thousand dollars on converting your system; all you can really do is expand use of natural gas for generating electricity. But since most electricity in this country is generated by coal, you’re now competing with the United States’ most readily abundant fossil fuel.

Instead, when production exceeds consumption, natural gas producers can give away free gas, vent gas into the atmosphere, or “flare it”—burn it off. These options allow them to keep the wells running, which avoids the costs of safely shutting down and capping a well—as well as the costs of having to reopen the well, should demand pick up. If these options are undesirable for one reason or another, then the other choice is to cap the well. (Note that flaring gas is bad for the environment—world-wide, 400 million tons of CO2 are released into the atmosphere by flaring.
However, even using the above techniques to get rid of some of the excess, when the supply of natural gas is large compared to demand, it’s going to depress the price of natural gas. And that’s exactly what’s been happening. Decreased industrial demand for power owing to the recession, combined with a cool summer which reduced demand for electricity for air conditioning, has pushed the price of natural gas far down.

But what goes down must come up. When prices drop as low as they are now, it becomes unprofitable to drill new wells. Over the past year, the Energy Information Administration estimates that half of U.S. natural gas drilling rigs have shut down. However, since the output of even the most productive wells decreases over time, to keep production constant, new wells must continually be added. The idling of drilling rigs will decrease the natural gas supply in the future. This will lead to supply tightness, which if coupled with an increase in demand from more industrial activity when the economy revives, will lead to higher prices.

In addition, the price of natural gas is being artificially depressed yet further by the functioning of the natural gas futures market, which is dominated by a single huge fund, the United States Natural Gas Fund. This fund has been following a strategy that pushes down prices. If and when this fund changes its strategy, natural gas prices will rebound in a big way.
Finally, there is a great deal of uncertainty about exactly what is the United State’s gas storage capacity—remember, natural gas storage is not as straightforward as oil storage, which contributes to price uncertainty. Putting all these factors together, there’s good reason to think that natural gas prices will more than double next year—a prediction supported by the evidence of the past year. After all, if prices could drop by half in a year, they could surge by 100% or more, too.

What does this mean for home heating oil prices? Not much at all. Remember, many of the physical and market characteristics of oil and natural gas differ profoundly. Counterintuitive as it seems, the supply or price of one does not seem to have much in the way of an effect on the other—hence the enormous disconnect between their prices that has developed.

However, what it means for home heating oil users is this: despite the recent increases in home heating oil prices, especially in New England, it’s not worth switching. A proper conversion to gas could easily cost you upwards of $3,000—potentially much more if you are required to seal or remove a now-disused oil tank, as a number of towns require.  Investing that much for a fuel which could easily double or more in price over the next year simply doesn’t makes sense. As the president of one utility said, given the cost of the conversion, for it to make sense, it has to be a 25-year commitment. That is not a commitment that should be made lightly, or owing to the pricing of the moment in a volatile market.