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Natural gas: The other scenario

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In a widely distributed article from Reuters reporters Sarah McBride and Nichola Groom last week that detailed John Doerr’s commitment to cleantech investing and how it has tarnished the VC firm he heads, there were many familiar narratives that I’ve been seeing over the past couple years about cleantech investing.

There was the now mainstream meme which boils down to irrational exuberance from well meaning investors in ’05-’07 ended in bankruptcy, aided by the financial crisis, subsidy cuts, failure of cap and trade and Solyndra, the nail in the coffin of investor sentiment. But the more interesting story line for me is the relatively newer narrative, involving natural gas, which the article trots out:

“The explosion in natural gas development made possible by “fracking” undermined the economics of many renewable energy projects.”

I myself have expressed real concern about natural gas pricing, and do believe that at this point in the market evolution of renewable energy it’s the biggest competitive concern for solar and wind power, and a longer term potential problem for biofuels. But there’s another scenario here for natural gas, one that deserves consideration and one folks writing about cleantech investing should consider before they assume that natural gas is a surefire renewable energy killer.

The true cost of hydraulic fracking

The price in the spot market for natural gas right now is $3.43 per million Btu, up from a decade low last April of under 2 bucks. Natural gas is cheap right now, making it very attractive to utilities building natural gas power plants.

But it can’t stay that low for the simple reason that hydraulic fracturing is expensive. Pumping millions of gallons of water into the ground and extending wells in horizontal directions is a newer and more expensive strategy. A 2011 study from the University of Pittsburgh pegs the well costs at $7.6 million, a 50 percent premium over the typical $4 million to $5 million well. And a 2008 Credit Suisse study put the production cost of fracking at $8 per MMBtu.

The other scenario for natural gas

So prices have to go up or the continued exploration of natural gas will collapse. The solution here is actually very simple—start exporting natural gas on the global market. Professor Bruce McKenzie Everett at the Fletcher School at Tufts noted in an interview in December:

“The price of natural gas has now gotten so low that some are saying they can’t produce it economically—but this is a good thing for all of us, because it will force them to explore new markets and uses. There are several directions that natural gas production, both fracking and conventional, can take. One is that people just stop producing it at the current rates, and the price returns to a more stable level and just stays there, likely at the $10-to-$12-dollar level of a decade ago. We could also start exporting. The world price for natural gas is $15 to $16 per thousand cubic feet.”

And this very issue of whether to export natural gas will be a major focus in 2013, creating some very strange alliances. For example, both the Sierra Club and the U.S. manufacturing sector don’t want natural gas exported. The Sierra Club doesn’t want carbon emitting natural gas on the world stage. Companies like Dow Chemical want all that cheap natural gas to stay here to power their factories.

On the other side of the debate are strange bedfellows. Natural gas drillers like Chesapeake Energy need global natural gas prices to justify fracking and solar power producers like First Solar would love to see higher natural gas prices so that solar is more competitive.

Strange bedfellows aside, exportation seems inevitable to me as does the fact that natural gas prices will have to head north because either natural gas will be exported or the drilling industry will collapse under low pricing, creating subsequent supply constraints.

If natural gas prices go north

If the domestic price of natural gas goes to the global price of $15-16 per MMBtu, four times its current price, we’ll be looking at a different competitive environment for energy pricing. For starters, coal starts to look dirt cheap again, something obvious when you look at the Energy Information Agency’s (EIA) equivalent data comparing cost per megawatt hour between coal and natural gas.

At $15 per MMBtu, natural gas is four times as expensive as coal. Combined cycle natural gas powered electricity, usually comes at a levelized cost of electricity (LCOE) of around 6-7 cents per kilowatt hour, 3 cents cheaper than wind and coal, and half of the cost of solar PV. If the price utilities pay for natural gas triples to $10-12 per MBtu, the LCOE will start to creep north, as the prices of renewables continues their gradual descent in price.

The economics of renewable power generation remain a tough sell in an unsubsidized economic environment. But to say that cheap natural gas will completely undermine the industry ignores the reality that natural gas power generation will almost certainly get more expensive.