Pardon Me, Can You Spare Some Gas?

 | Jan 25, 2013 | 10:52 AM EST
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Ever wonder what would happen if the United States were to run out of natural gas? In some parts of the country, we just did. In New England, the price of natural gas is approaching $35. That's not a typo. Natural gas is now almost twice as expensive as fuel oil, and that's wholesale, not retail pricing.

As a nation, we have plenty of natural gas. The problem is that it's located in areas where it's not needed.

The nation lacks adequate infrastructure. Energy is abundant, but it cannot get to market. In the case of natural gas, the infrastructure is so weak that during peak periods of demand there is no supply left at the end of the pipe.

New England has three separate interstate pipelines terminating in the Boston area. But most of the natural gas in those pipelines is gone well before it reaches the city.

Kinder Morgan's (KMI) (KMP) Tennessee Gas Pipeline system originates in South Texas and Louisiana. It traverses through Arkansas, Kentucky, Tennessee, Ohio and Pennsylvania. It delivers natural gas in West Virginia, New Jersey, New York and New England. The pipeline is constrained before reaching New England. As of Friday, Tennessee Gas Pipeline had no spare capacity to deliver additional natural gas for New England's consumers.

Spectra Energy's (SE) Algonquin Gas Transmission system originates in New Jersey, where it is supplied by Spectra's Texas Eastern Transmission System, which is also connected to the gas supplies in South Texas and Louisiana. As of Friday, Algonquin had no spare capacity.

Maritimes & Northeast Pipelin is jointly owned by Spectra Energy, Emera (Canadian) and ExxonMobil (XOM). Maritimes originates in near Sable Island on the edge of the Nova Scotian continental shelf in eastern Canada. The pipeline extends from Nova Scotia into New Brunswick, Maine, New Hampshire, and Massachusetts, where it connects with Algonquin. As of Friday, Maritimes may have had capacity, but it had no spare natural gas.

Natural gas production at Sable Offshore Energy Project is in decline as long-term maintenance is underway. Development of new gas fields has been delayed.

As the winter cold settles in, there appear to be no pipeline options to supply New Englanders with additional volumes of natural gas. Shipping liquefied natural gas (LNG) to the region and dumping non-essential customers are the only remaining options. Both options are being pursued.

New England's options to access new supplies of LNG are also limited. While New England and Canada have more than enough facilities to handle shipments, global LNG supplies are tight. Most of New England's supplies originate from Trinidad and Tobago and it has been supplemented with supplies from Yemen.

According to the Energy Information Administration (EIA), shipments from Yemen were down in 2012 because attacks on Yemeni pipeline infrastructure affected operations at the Balhaf liquefaction terminal on the Gulf of Aden.

In addition, high LNG prices in the United Kingdom is diverting long-term supplies and shipping capacity. The only additional LNG available is uncommitted supplies, which is minimal.

Reducing demand for natural gas by dumping non-essential customers is the last step. The region's largest huge gas guzzlers are New England's gas turbines, which produce much of the region's electric power.

Nobody has to call power producers like Exelon (EXC) and tell them to shut down. Exelon inherited a fleet of gas turbines in the Northeast when it merged with Constellation Energy Group. It is smart. It can see that delivered natural gas is currently at about $40, the breakeven for efficient gas turbines is approximately $300 per megawatt-hour (300 cents per kilowatt-hour), or about eight times normal market prices. If the market-clearing prices for wholesale power remain below $300, Exelon is upside down.

Friday morning, the market-clearing prices for bulk power in New England climbed to more than $200 per megawatt-hour. It is well below the breakeven point for all gas turbines, no matter how efficient they may be. All gas turbines, including Exelon's, must secure a special deal, shut down or take on substantial financial losses.

Exelon's loss is Entergy's (ETR), NextEra Energy's (NEE) and Dominion Resources' (D) gain. Entergy operates three nuclear stations in Vermont, Massachusetts and New York. NextEra operates a nuclear station in New Hampshire. Dominion operates one in Connecticut. They are largely unaffected by dwindling natural gas supplies and they continue operating unimpeded.

Better, these nuclear stations have production costs of approximately $25 per megawatt-hour. The difference between the market-clearing price of $200 and $25 is their gross margin for the day.

From an energy security point of view, nuclear power has become a lifeline for New Englanders. New York is on the edge and they could be facing growing challenges if demand increases.

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