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Discussion in 'Energy, Environment, and Policy' started by zack, Jan 19, 2012.
US natural gas prices fall to decade low - FT.com
Interesting point in the article -- the majors are still buying the fracking companies. The frackers are lying about their reserves (they're approximately doubling the numbers, according to the US Geological Service), so the production from the fracked wells will last about half as long as the frackers are saying.
The frackers' business model is to dig the well, announce large first-year production, then sell to the majors at inflated prices (thanks to doubling the claimed reserves). Apart from the inflated prices, this business model is actually documented in their annual reports.
Apparently the majors are still falling for the scam. It will be interesting to see when they figure the scam out. It should be about 10 years after production starts, on most of the fields.
Edit: Reading this article raises another question for me. The wholesale cost is $1 per million BTU, and the retail is $1 per BTU? That's a remarkable markup from wholesale to retail. Either that, or my utility company is being sloppy with their units.
I think you're misreading something. The "wholesale" cost that's relevant is the Henry Hub benchmark prompt future price (currently series NG12G), which closed at $2.33/MMBtu on Friday. I pay $5.3143/MMBtu from my gas utility, plus local distribution costs. While that ~100% markup looks remarkable, utilities almost always buy a lot of gas in advance of the year and put it into storage, as well as hedging gas prices through multi-year contracts. So while I'm sure that National Grid is making a profit on that spread, mostly it's some traders who are benefiting by falling gas prices. Those traders, though, stood to lose big if it had been a very cold winter and natural gas prices had shot up.
I think my utility is listing "BTU" where it means "MMBTU", sort of like the mess with "calories". Thanks.
EDIT: looking again, my prices are in therms ($1/therm inclusive of distribution costs). Indeed, the mentions of BTUs referred to MMBTU. So if a therm is a tenth of an MMBTU, I'm looking at the same prices as you are, more or less. Distribution costs are approximately equal to supply costs. And as you say, the supply costs appear to have a 100% markup over wholesale right now.
The most interesting thing about this is that I recently computed the breakeven point where electric heating is cheaper than natural gas heating. At current prices, electric heating costs about twice as much as gas heating. If gas prices inclusive of distribution double, electric heating will become more advantageous. This will happen sooner if electric prices drop, and I actually think they will, because they have recently (shockingly enough). Natural gas distribution costs are rising quickly here as New York requires utilities to stop subsidizing distribution system maintenance costs with supply costs; they'll be up to $7.5/MMBTU in a few years, if I remember the scheduled increases correctly. But the electric alternative, in some sense, caps the prices at $20/MMBTU retail, and dropping. If the majors need prices around $4.50 wholesale to make a profit on shale gas, that's already $12/MMBTU.
That's a fairly narrow window between profitability and demand destruction, and it will get smaller if electric prices drop, or if electric heat pumps improve. High fluctuations could easily see swings from "unprofitable" to "people removing their gas heat in favor of electric heat" and back.
Wholesale electricity and natural gas prices move almost in lock-step here in the northeast, so unless renewables radical reshape the power markets, I wouldn't count on a change in the natural-gas/electricity price ratio.
Is that electric resistance heating or electric heating using a heat-pump?
That's a heat pump. Albeit a 2006 model -- they may be better now.
It just DID change, that's what I'm telling you. I don't know what happened, but my electric rates are down from .11 to .08 (inclusive of delivery, and delivery went up). My gas rates, in contrast, are up from .80 to 1.00 per therm (inclusive of delivery).
I was not expecting that, but it happened.
EDIT: perhaps wholesale prices are moving in lockstep, but retail prices sure aren't. In NY's so-called deregulated electric market, I'm buying both the electric and gas through Energy Co-operative of America. Due to the co-op nature, I should be getting effectively wholesale rates apart from delivery.
Of course I am buying '100% renewable' electricity -- perhaps what's happened is that the price of THAT has dropped recently.
Yes, I was talking wholesale. Retail prices are a product of regulatory lag. Your utility undoubtedly has a book of contracts and owns stored natural gas, all of which are way above market prices today.
Remember, NY's market is "deregulated", and I'm buying from an ESCO. The lag isn't going to be very long.