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Tuesday, February 15, 2011 5:37 PM ET
Shale revolution enabling regulators to fight gas price volatility
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Anadarko Petroleum Corp.The Woodlands, Texas
National Grid USAWaltham, Massachusetts

State regulators can "rejoice" in the "good news story" of domestic shale gas, as steady supply and abundant reserves should limit price volatility for years to come, industry observers said Feb. 15.

By unleashing the country's unconventional resources, the natural gas industry has dealt state utility commissions additional tools to limit consumer impacts from commodity price swings, concluded a panel presenting at the National Association of Regulatory Utility Commissioners meeting in Washington, D.C. The panel discussion previewed a report on volatility completed by a task force formed by the Bipartisan Policy Center and the American Clean Skies Foundation that is due out in March.

Task force member Ralph Cavanagh, co-director of the Natural Resources Defense Council's energy program, said the report is neither an invitation to complacency because of abundant supplies, nor a push for burning more natural gas. Rather, the report is a reassessment on the state of the domestic natural gas supply, and it outlines strategies available for managing natural gas price volatility.

"It doesn't pretend that natural gas price volatility is gone, and any who were around during the 1990s should be extremely skeptical of anyone who stands up before you and tells you that abundant supply and low prices is going to be available forever," he said. "What you are going to hear … is a convincing case for the proposition that the tools available for managing that volatility, for protecting customers from its worse effects, and going forward having real confidence that natural gas can become an increasingly important part of the nation's energy supply."

Cavanagh said the report does not dwell on just using more natural gas, but instead explores how to use natural gas more efficiently to "squeeze every BTU" out of a finite supply of the fuel. "It is extremely comforting … to know about the extra decades of consumption at current levels," he said. "But the term 'at current levels' is always an important qualifier. Exponential growth will eat up any finite supply and strain any distribution and transmission system."

While finite, shale supply estimates continue to grow with each reassessment.

Bruce Henning, vice president of energy regulatory and market analysis with ICF International, said ICF has more than doubled its estimate of shale resources. "When we look at the overall, we conclude that there is over 1,500 Tcf available at prices below $8. That $8 is over time and including some inflation," he said. "We think that shale gas can more than double between now and 2015."

To reach its full potential, Henning noted that there remains a lot of work to be done in the shale gas space. "It's going to involve the appropriate environmental considerations; it's going to involve the infrastructure associated with the treatment of the NGLs from this; it's going to involve the building of facilities and investments within the industry," he said.

Still, the shale gas revolution represents a fundamental shift from what had occurred in the industry before. "Once again, technology progress winds up providing an opportunity to bring energy to consumers, if it's dealt with appropriately, at competitive prices," he said.

Does the supply mean there will no longer be price spikes? Of course not, says Henning. But it does mean there should be significant natural gas resources available to supply the markets for decades to come, he said.

Long-term gas contracts

With the "fundamentally different" backdrop presented by Henning, the task force re-evaluated all the tools available for a supply portfolio, including long-term gas contracts.

From the producer perspective, Scott Moore, vice president of marketing for Anadarko Petroleum Corp., advocated for long-term contracts and said they have a particularly useful role in power generation. He said long-term contracts help utilities create a more balanced and stable commodity portfolio. The contracts can also add certainty to capital investments, he said.

After a competitive bidding process in Colorado, Anadarko was awarded a 10-year agreement that begins in 2012 to supply Xcel Energy Inc. with natural gas to fuel power generation facilities. The delivery quantity outlined in the agreement ramps up to 50,000 MMBtu/d. The agreement was backed by the Colorado Public Utilities Commission.

Richard Rapp, senior vice president of energy portfolio management at National Grid USA, was lukewarm on long-term contracts, however. Rapp supported long-term contracts to an extent, but he emphasized the need for balance. "As it relates to long-term contracting, I agree it should be a tool in the toolbox for creating one's portfolio," he said. "But our view is the more you diversify the portfolio … the greater stability you have overall."

After presenting, Rapp told SNL that he viewed financial derivative hedging as superior to long-term contracts for a few reasons. First, by entering into a contract with specific physical supply, Rapp said, a company's hands are tied to which basin it acquires its gas from. "You lose some of the flexibility from the physical management of the portfolio," he said.

Secondly, there is more credit risk. "Your financial derivatives are typically with the big financial houses," he said. "If the price of the product is out of the market, you see yourself having less credit risk with a large financial player than you do with a producer that may just say 'why am I sticking with this $4 price when I can get $7 in another place in the market' and potentially default on the contract. It's both a combination of physical flexibility in your procurement and credit risk."

Economically and environmentally, good news

From a broad perspective, Cavanagh said shale supplies offer a great opportunity for many different groups. While he wanted to avoid "boosterism" of burning more gas, he gushed over the prospects for the resource.

"I personally, and this is perhaps significant from the constituent that I represent, am both convinced by the case for more abundant domestic supply than previously thought … and I am convinced that this, fundamentally from both economic and environmental perspectives, is good news," he said. "By any reasonable measure, the availability of more domestic natural gas supply at, from a long-term perspective, lower costs than accustomed to recently is something that environmental advocates, state utility regulators and a whole host of other constituencies can rejoice in."

But for the rosy picture of shale gas supply to turn into a reality of low, stable prices coupled with environmental benefits associated with natural gas usage instead other fossil fuels, Cavanagh underscored the need for environmental performance.

On the sidelines of the conference, Cavanagh said the extraordinarily bullish projections for natural gas assume full access to the resource. However, the public will not tolerate full access to the resource without a strong environmental track record, according to Cavanagh.

"I think the industry largely [understands], but we're going to have to see," he said. "I think this is a good news story, and I am not afraid of it. But it means there are going to be some significant state and federal regulatory challenges because we are talking about a level of activity we've never seen."

He said he hoped the industry would cooperate fully with the efforts of the EPA and others working to ensure there are adequate safeguards to protect the public and the environment. He was optimistic that the industry would be receptive to regulation but said there may be some companies that drag down the rest.

"They are at some risk of the poorest performers dragging them down. There's going to have to be an industrywide safety and environmental culture, which is important to every industry of this scale," he said. "I think they can get there, and I think that the choice between natural gas and coal, in particular in terms of environmental impact, is unambiguously in favor of natural gas."

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