There But for Shale Gas . . .
August 29, 2022 § 2 Comments
Electricity prices in Europe are going through the proverbial roof, as reported in a NY Times piece. There but for fortune go you and I, is the song line*. Substitute “shale gas” for “fortune” and you have the United States today. Were it not for shale gas, we would be facing a dismal future in electricity pricing and carbon mitigation.
European electricity prices are being driven by high prices for natural gas. A scant two years ago, the price ranged from USD 5 to 8 per MMBTU (which is roughly equivalent to a thousand cubic feet). At the time US prices would have been between USD 2 and 3. In the last ten months, European prices have fluctuated between USD 25 and 60, with a peak of USD 70 following the Russian invasion of Ukraine. These are unprecedented numbers. At the peak, natural gas was at a calorific equivalent of oil at USD 420 per barrel.
Even discounting the war related peak as unusual, even the pre-war price of USD 25 to 35 was extraordinarily high and appears to have been driven by LNG supply and demand imbalance. Reminding folks, Liquefied Natural Gas (LNG) chills the gas to -161 C, in so doing compresses the gas 600 times, and is the only realistic means for transoceanic transport of natural gas. The overall delivered cost per thousand cubic feet goes up between USD 3 and 4, depending on the distance of the destination.
When the crisis struck, Europe was getting a natural gas mix of domestic, Russian and LNG. LNG became the last cubic foot and therefore the determinant of price. Climate change related droughts in Asia led to shortfalls in hydroelectricity, thus raising LNG demand, which outstripped supply. Diverting supplies from these other destinations to Europe escalated the cost.
In the US, the norm since 2010 has been natural gas at a fraction of the oil price, except when oil took unusual dips, making gas both cleaner and more affordable. The significance of the year 2010 is that shale gas production hit its stride in 2009, causing natural gas prices to remain low, mostly under USD 5. But, prior to that the US was a net importer of gas and much of it was expected to arrive in the form of LNG, with 41 regasification terminals under consideration. In fact, Cheniere Energy’s Sabine Pass plant, with a regassification capacity of 4 billion cubic feet per day (bcfd) was commissioned in 2008 but by 2010 the decision was made to convert it to a liquefaction facility. Expensive facilities such as high draft vessel berthing and gas storage translated to the new mission. This bold move, betting on shale gas potential, gave them a lead and the model has been emulated by others.
With exports averaging 11.2 bcfd this year, the US went from being an important importer of LNG in 2006 to the largest exporter in 2022. It currently supplies nearly half of Europe’s LNG. Ironically, France, which banned hydraulic fracturing, was the largest recipient of shale gas derived LNG from the US in June.
Gas driven decline in coal power Courtesy US Energy Information Administration
Were it not for shale gas, the US certainly would not have been in a position to ameliorate the pain in Europe today. On the contrary, it would have been a major importer of LNG and there is every reason to believe that it would have been facing the same electricity pricing crisis being endured by Europe today. Furthermore, coal-based electricity would have seen a resurgence. Evidence for this is that in 2021, when natural gas prices nearly doubled, coal-based plant capacity factors increased by nearly 25% (see figure). This elasticity means that if the US had seen anything like the 5- and 6-fold natural gas price increases that Europe experienced pre-war, substantial shifts to coal would have been likely, with new capacity additions. This last would be because the shale gas-based decline in coal plants would not have occurred in the first place. Dismal, indeed, from an environmental standpoint.
There but for shale gas . . . .
August 29, 2022
*There but for Fortune, Joan Baez (1964), written by Phil Ochs