Thursday, June 16, 2011

What If Natural Gas Cost $10 Per thousand Cubic Feet?

As recently as July 2008, natural gas was priced at $13 for a thousand cubic feet so asking what if it cost $10 is not asking what if the impossible happened.

Here are 7 Big Changes that would happen if gas cost $10 for a thousand cubic feet:

1. Coal plants that are now retiring would not retire.  Why?  The wholesale price of electric generation would nearly double or be about $100 per megawatt-hour or 10 cents per kilowatt-hour.  Owners of coal plants would keep them operating and make the investments required to do so, because the plants would earn at least twice the revenues they do now when gas is at $4.50;

2. Building new natural gas plants to make electricity or switching coal plants to natural gas would grind to a complete stop.  Natural gas at $10 would make natural gas plants uncompetitive and uneconomic.

3. Natural gas at $10 would boost sharply the price of electricity, forcing more energy conservation through the pain of high prices.

4. Natural gas at $10 would make wind energy more economic than building a new natural gas plant.  The cost of a wind farm is now in the range of about $55 to $70 per megawatt-hour and $10 gas means about $100 per megawatt-hour wholesale electricity generation prices.

5. Natural gas at $10 would cut the payback period for solar systems significantly as the price of grid electricity would be much higher.

6. Natural gas at $10 would mean a customer using natural gas to heat (90 mcf/year) would pay about $500 more per year in gas heating bills.

7. Natural gas at $10 would mean electricity bills that would increase by about 5 cents per kilowatt-hour or $500 per year for a customer using 10,000 kilowatt-hours per year.


  1. Interesting reflection... what would it mean for the natural gas companies invested in shale?

  2. What would it mean for royalty-collecting landowners, including the Commonwealth?

  3. What would the path to $10 gas look like?

    Either reduce supply, or increase demand, or both. I wonder how responsive supply is to declines in drilling. Is this a possibility?

    Could industry slow down drilling enough to affect the overall supply picture provided that some acreage must be drilled to maintain leases? Can they get enough backing on the hill for significantly stimulating demand via policy in the face of environmental and oil/coal/tea party headwinds?

    Although the supply glut is helping consumers and encouraging fuel switching, are such low prices sustainable?

  4. $10 gas should benefit royalty owners assuming a reasonable royalty agreement.

    $10 gas would lead to substantial profits for all gas producers and especially Marcellus gas producers since Marcellus is the lowest cost to produce shale gas.

    Stimulating gas demand is the only way to increase gas prices. The EPA proposed Air Toxic Rule would increase gas demand by more than 1 trillion cubic feet. Yet most (not quite all) within the gas industry have done nothing to support that rule. Not surprisingly many of the owners of the old coal plants and others in the coal industry have strongly attacked the proposed Air Toxic Rule.

    Increasing natural gas vehicles will not appreciably increase gas demand for the next 5 years. It should be pursued. Urgently pursued. But the lead time is substantial.

  5. John,

    It looked to me as though HB was driving at this:

    Why not form a North American OPEC of natgas among the bigger producing states and provinces?

    Why not ration the stuff through sliding-scale taxation?

    Why not -- on environmental, conservationist, and economic grounds?

  6. Any organized effort by companies to raise prices would almost certainly violate the anti-trust laws. And that is a good thing. The weakening of anti-trust laws by judicial ideological activists (Judge Bork and Justice Scalia at the forefront) who don't like them is one reason this nation has gotten into the mess of "Too Big To Fail." That is a side note.

    America must act to use the incredible gas supplies that we now have. I favor using them to reduce substantially the pollution coming from the making of electricity. I also favor using the gas as part of a national plan to cut the amount of oil used in transportation from about 90% to 30% by 2030. Gas vehicles, electric cars, biodiesel, advanced ethanol are a matter of national security, economic security (we cannot afford $100 plus oil), and reducing pollution that shortens lives and sickens people.

  7. Anon,

    Actually, I was driving at the opposite (this is the USA, after all, and we all know how poorly gov't intervention in oil and gas markets has worked in the past).

    What I was driving at:
    Natural gas has often been treated as more of a nuisance for liquid producers than a commodity; on a global scale, there is lots of gas.

    This mentality has changed recently because the price of natural gas was significantly higher than in the past (drilling multi-million dollar wells and major oil companies involvement as evidence of a new economic picture).

    I have to wonder how much has really changed to make multimillion dollar gas wells part of an sustainable business model now that prices have been down in the dirt for some time.

    How much does this gas really cost to produce? It varies significantly across single plays, and between plays. It also depends on your business model. The high IPs may pay for drilling, but what do the decline curves look like? Does the business model require continued, constant drilling? If so, how does that affect the price?

    I'm just curious to see how the economics of these plays will unfold; that's the only thing I was driving at.

  8. Good message. Interesting points. You are right that costs vary between shale plays or even within them. Production varies too.

    Speaking generally, the Marcellus wells seem to be meeting or exceeding expectations for production.

    Marcellus has a number of cost advantages that make it a premium reserve in many ways.