Saturday, July 7, 2018

Our Natural Gas Curse (2)

From Encana Corp
Until very recently, the market for natural gas was pretty much the continent on which the gas was found. The market for crude oil is the whole world because the oil can be poured into tankers and shipped anywhere, but natural gas mostly travels by pipeline and so is much more restricted. Gas can be liquefied and shipped around the world but that becomes a whole different market.

The price for natural gas on continental North America is most often set at Henry, Louisiana - the Henry Hub. Many pipelines meet here, and many contracts for gas are settled here, either by taking delivery of the gas or rolling the contract over for another month. The price of gas has been settling lately between $2.50 and $3 per thousand cubic feet. Natural gas is considered fungible - one bit of gas is as good as another - so the gas that a producer puts into the pipeline system may not be the same molecules that the customer takes out at the other end. Of course, standards are maintained - the gas must be free of contaminants and must have a Btu content within a specified range.

Gas in North America is most often sold in quantities of 1,000 cu. ft. (Mcf), which contains approximately 1 million Btu's  (MMBtu's)     Another useful approximation is that 6,000 cu.ft. of gas has the same theoretical  energy  content as a barrel of crude oil. So, when natural gas is selling for $3 per Mcf it means that the gas is about equal to crude oil selling for $18. Crude oil has been selling in the $60 to $70 range this spring.

It happens that our Canadian energy unit - the gigajoule - is approximately equal to both 1,000 cu ft of natural gas, and 1 million Btu's; both of these are common energy units in other jurisdictions. On this continent, natural gas is most often priced (at wholesale) in units of 1,000 cu ft, which is very conveniently approximately equal to 1 gigajoule (which is the unit that Heritage Gas uses when it charges its Nova Scotia customers).

The retail price of gas - delivered to a home - is typically a little more than twice the wholesale price, so it is common for homeowners to pay $7 or $8 per gigajoule (GJ) of natural gas energy ( = 1,000 cubic feet (Mcf)). That GJ of natural gas has the same theoretical heat energy content as 26 litres of furnace oil (valued at $27 last February in Nova Scotia) or 39 litres of propane (valued at  $27 to $35). When natural gas is cheap, it represents great value. As we shall see, gas is not always that cheap.

So here's our situation on Nova Scotia:

  • The Maritimes and Northeast Pipeline was built in the late 1990's to carry our offshore natural gas to markets in New England. Gas was and is relatively cheap compared to liquid hydrocarbons so there was considerable demand for natural gas among industrial and residential users in Nova Scotia; as a consequence a great deal of expensive infrastructure was built to move gas around the region. Lateral pipelines were built to serve the pulp mills in Pictou County and at Point Tupper, and the Oxford Frozen Foods plant in northern Nova Scotia. Heritage Gas laid pipes throughout the streets of Halifax to serve residential and institutional customers. Just after all this infrastructure was completed the natural gas fields in our offshore began to fail, and the de-commissioning of the entire system will begin next year. As a result, the M&NE pipeline ran in reverse for 11 of the 12 months in 2017, bringing gas into Nova Scotia.

  • The M&NE pipeline was built in the first place to supply the Boston market; it is one of five pipelines that serve that area. Three pipelines come from the southern and western gas market area, including the  strong sources in the fracked fields of Pennsylvania. The other pipeline comes in from the north, carrying Western Canadian gas. Note that the M&NE pipeline was originally built to supply gas to Boston; now they use it to draw gas from that market.

    The Boston market is not well supplied with natural gas, despite there being so much supply adjacent to the region. There seems to be several reasons for this, including a fierce resistance by citizens and environmentalists to any pipeline expansion or new construction. There has also been a strong build-out of natural gas electrical generating plants, which are very economical to build and to operate but they increase demand for natural gas even further. (Most of the older generating plants use a steam turbine to drive the generators; the steam can come from a boiler powered by oil, gas, wood chips, pulverised coal or nuclear heat. Modern gas plants burn the natural gas in a turbine (the same technology in the engines on airliners) and the exhaust gases can fire a co-located  steam turbine, resulting in a an efficiency level that can exceed 50%, much higher than a coal plant.)

    A second problem lies with the nature of the electricity market in the New England states. The various utilities are regulated but they are not well integrated, and there is little incentive to build new gas pipelines into the region. Here in Nova Scotia the power company can apply to the Utilities Review Board  to undertake large capital projects which are underwritten by the ratepayers (all of its customers). This reduces the risk to the power company, which is fair. For whatever reason, the electrical utilities in New England cannot get their joint capital projects underwritten in a similar way, which leaves the individual utilities exposed to too much risk.

    A third problem is the uncertainty caused by Mr Trump's promise to restore the coal industry to its former glory, and to put all the Appalachian miners back to work. The American administration wants utilities to keep their relatively inefficient coal plants going,and to even build new ones. But American presidential policy can turn on a dime (depending upon what the man sees on Fox News every morning, apparently). No utility boards of directors want to make long-term investment decisions in an uncertain regulatory climate.

    The New England natural gas market is highly constrained, which means that instead of the M&NE pipeline being a honking great hose from a natural gas ocean, it is in fact a straw sucking from a natural gas puddle.
  • Both the Maritimes and Northeast Pipeline and the Heritage Gas distribution system operate as public utilities, which means that they charge for the service of delivering gas, but the cost of the gas is very nearly what they pay for the gas in Massachusetts. The price of natural gas can spike very rapidly in very cold weather in New England, so the retail price of gas can easily reach $19 per GJ as it did last February. Homeowners get a big surprise when they open their gas bills!

    This is why Heritage Gas, through its parent company, proposes to build a natural gas storage facility in Alton, near Stewiacke. They can buy gas relatively cheaply in the summer when demand is lower and store it in their salt caverns, and then withdraw that gas in winter when the demand is highest. It's common practice among other gas utilities.
  • Some very large gas customers purchase their supply directly from upstream gas companies, and pay the pipeline company to transport the gas to Nova Scotia. NS Power does this, and so also do the pulp companies. Last winter, when residential and institutional gas prices were so high, the pulp companies shut down production and sold their gas ration into the residential market for a tidy profit. Production at the Point Tupper plant was down for several weeks last winter (without layoffs) because the company could sell their gas ration and still make money. The NS Power plant at Tufts Cove in Dartmouth routinely switches fuels and sells its gas consignment when prices warrant.

Here's a measure of just how constrained the Boston natural gas market is. There was so little spare gas available in Massachusetts last winter that they actually imported liquefied natural gas (LNG) into the market. Irving Oil in Saint John brought in three LNG cargoes, some of which they used themselves, and some of  which they fed into the pipeline. Other players brought two cargoes of Russian LNG into New England!  This at a time when President Trump is imposing sanctions on Russia and attempting to bully Europe into not buying Russian gas, and here is Boston buying Russian gas! Twice!  The price for LNG cargoes usually starts at $12 - $14 per GJ, as opposed to about $3 for Louisiana gas in the pipeline. No wonder that Halifax homeowners were paying $19 /GJ!

And our M&NE straw sucks from that tiny market. Our Nova Scotian natural gas future is linked to a market so restricted that they have to import Russian natural gas to get through the winter.

One of the greatest economic curses that Nova Scotia endures is elsewhere called the "psychology of previous investment"; having invested all of that money in some project we feel that we cannot abandon the investment. Building that Point Tupper biomass plant for many millions of dollars was a huge mistake, but now that it can be run, it must be run.  So we chip old growth forests to power home entertainment centres in households across the province, and to ship power to Newfoundland so they can save $50,000 per day by not burning oil in their own plants.

Having built the infrastructure for the delivery of natural gas we cannot or will not abandon it, so we import foreign gas at great expense and at considerable inconvenience.

So, what to do? It appears that our biggest natural gas problem in Nova Scotia is the difficulty in sourcing reasonably priced gas in the New England market, and that' not something that we can fix on our own. When (and if) the New Englanders build more pipelines into their region, we will benefit. When (or if) Heritage Gas gets its storage caverns operational in Alton we will see much less volatility in pricing as they will have gas on hand when the heating season starts.

Some larger customers are already switching from natural gas to propane. It's not terribly hard to do, although one has to build an on-site tank to hold the propane, and there are small modifications required in the furnace as the propane has to be diluted with air as it enters the combustion chamber because propane is much more energy-dense than natural gas.

Propane comes from a number of sources, including from oil and gas wells as a by-product of extraction, and as a by-product from the refining of crude oil. It can be delivered to our region by truck or by railcar, and the price only spikes occasionally.

Ultimately, we will have to explore the possibility of building a liquefied natural gas receiving station in Halifax, and bring in our own cargoes of Russian  or Qatari LNG.

Until we resolve this natural gas problem we will continue to clearcut and chip our forests as the predatory capitalists who own our pulp mills search for the cheapest sources of energy. And with the Province giving away our forests, and in some cases paying the companies to take the forest we will end up with no natural gas and fiercely degraded woodlands.

That's Premier MacNeil's gift to our grandchildren!

No comments:

Post a Comment