June 2009 Archives

There has been a lot of controversy lately surrounding the United States Natural Gas Fund and how it might or might not be affecting natural gas prices. As covered in-depth by Platts reporter Cheryl Buchta, the exchange-traded fund last month held around 25% of open interest in the spot-month contract on NYMEX, 33% of NYMEX Henry Hub swaps and an unknown percentage of the Henry Hub look-alike swap on IntercontinentalExchange.

To be sure, this is potentially unsettling to the market. After all, this passive investment vehicle is holding a nice chunk of natural gas positions on NYMEX (ICE does not provide its open interest in natural gas swaps). ETFs, by their nature, do not need the physical commodity and serve more as a means of portfolio diversification and investor profit.

In 1969, when the US Atomic Energy Commission, the predecessor of DOE, detonated a 40-kiloton nuclear device (read: atomic bomb) 8,426 feet below the surface of a western Colorado mountainside in an attempt to release commercially marketable quantities of gas, little did they suspect that the site would still be the scene of controversy 40 years later.

Project Rulison was the second natural gas reservoir-stimulation experiment in the Plowshare Program, which was designed to develop peaceful uses for nuclear energy. The blast vaporized the surrounding rock and formed a cavity about 150 feet in diameter. Although a re-entry well drilled at the site produced 455,000 Mcf of gas, the gas was too radioactive to be used commercially and in 1971 the re-entry well was shut in; it was abandoned in 1976.

Contrary to what passes for common knowledge, the drilling technique known as hydraulic fracturing has never been regulated by the federal government, asserts Chris Tucker, a spokesman for a pro-industry group.

Tucker works for for Energy In Depth, an educational campaign made up of about 20 independent oil and gas producers. Before he joined that outfit, he was the communications director for former US Representative John Peterson, the Pennsylvania Republican who made increasing offshore drilling a national issue.

Tucker's target is the Fracking Responsibility and Awareness of Chemicals Act of 2009, aka the FRAC Act. The bill's two primary co-sponsors, Democratic US Representatives Diana DeGette of Colorado and Maurice Hinchey of New York, say the bill woud repeal a portion of the Energy Policy Act of 2005 that exempted hydraulic fracturing, or "fracking," from regulation under the federal Safe Drinking Water Act.

A commenter over on The Barrel, a Platts companion blog on the oil industry, linked one of the more interesting and informative articles I've read on speculation in recent days. The catch -- this article is far from recent. In fact, it was published in 1963, addressing the repercussions of industry's push to halt speculation and control price swings in the onion futures markets over 50 years ago.

This article, published by Stanford University, delves into what the author believed were erroneous assumptions that led up to clampdown on onion futures (As noted by Barrel contributor John Kingston, onions are the only commodity expressly prohibited from having a futures market.).

Some excerpts may sound familiar to those watching the current debate on speculation.

It must be only coincidence, but at the very time Democratic leaders are rounding up votes, leaning on undecideds and seeing if they can amend Waxman-Markey a tiny bit to accommodate some key voters' concerns, some Wall Street folks are practically pleading for it.

Not in so many words, perhaps, at least not in public. But big investor-types are throwing around the mantra that regulated utilities have invoked for years: regulatory certainty. If you want renewable energy development, they say, you have to define the playing field.

Certainly the financial community has held this view for a long time; it just seems to be reaching fever pitch right now, as the climate change/energy bill goes to a crucial stage tomorrow. It's hard to know how closely Wall Street lobbyists are working the issue, but one might assume they are making themselves felt.

Even as Southeastern utility executives and political figures declare their region's inability to attain renewable electricity standards that would be required by bills in Congress, Louisiana lawmakers are agreeing on a measure to let municipalities in the state emulate a Berkeley, California, renewables and efficiency program.

Correspondent Housley Carr reports that the state's Senate and House have unanimously approved a bill allowing the creation of "sustainable energy financing districts" by any municipality that collects property taxes and issues bonds.

The Waxman-Markey bill is on the House Rules Committee's radar screen, setting up the possibility of a floor vote on it Friday. So the heat is on. Democratic leaders on the energy and climate change issue are negotiating final trouble spots so they can get that floor vote before Congress leaves for the Fourth of July recess. But the campaign against the bill is also ratcheting up outside of Washington.

In fact, MidAmerican Energy just won the Campaign Media Analysis Group's Ad of the Week notice for its TV spot urging customers to tell their members of Congress to oppose Waxman-Markey.

You fund your own think tank (American Clean Skies Foundation) to promote natural gas use (increase demand) and that begets a Web TV channel (CleanSkies.tv) complete with everything but today's lottery number and weather.

So what's a small Oklahoma City gas producer got to do to further promote America's clean burning fuel for the 21st century?

Get that tattooed guy from upstate New York, the one guy with 1890s handlebar mustache, the muscle shirt and biceps and triceps to match, to build you a chopper; a muscle bike, a hog that howls manly-man but with half the carbon footprint of a Vespa.

This is certainly different. But what shouldn't be different, in this unusually challenging time? At the Federal Energy Regulatory Commission, the new head of external affairs is Julia Bovey, late of the Natural Resources Defense Council. Previously she was at the Conservation Law Foundation.

There's no reason a FERC external affairs chief should not come from the environmental community; external affairs is external affairs, and handling constituent groups and the media is a transferable skill. It just probably hasn't happened before at FERC, and it must reflect new Chairman Jon Wellinghoff's long-evident interest in seeing the energy industry transform itself by efficiency and renewables.

The Potential Gas Committee has announced a total resource base of 1,836 Tcf of natural gas, the highest evaluation yet, but Michael Decker, executive vice president and chief operating officer of Gasco Energy, said the numbers may get even better.

His own company is drilling down to the Mancos Shale in the Uinta Basin in Utah, about 13,000 to 15,000 feet below the surface. "Our most recent well, which has tight sands potential, could produce 4 Bcf of gas," he said. "It cost us $4.3 million to develop it." To break even, he said, they need about $2.75/Mcf.

I missed the Tweetup last night at the Sequoia, down on the Potomac riverfront. It's too bad, because it would have been my first Tweetup, and I could maybe have expensed a libation -- only kidding -- given that it was for "Happy Global Wind Day!"

I hadn't known it was Global Wind Day until yesterday, and I just hadn't planned for it. At the Tweetup, I could have met some of the actual people with whom I might have been tweeting, if I had been. Given that there was a Happy Global Wind Day Tweetup in Manhattan last night, too, being at the one in DC would have provided a nice sense of the global. Or what might pass for global in the New York-Washington corridor.

Global Wind Day really was pretty global, though.

Sell me light-hours, cooling hours and water-heating hours. But don't sell me kilowatt-hours. If I took Peter Fox-Penner's advice, that's what I would tell my electric company.

And if utilities took his advice, that's what they would do. Roger Sant, who founded AES, proposed the idea in 1980, Fox-Penner, of the Brattle Group, recalls in a paper, and Thomas Edison's business started out that way: as an energy services company. Only later did it switch to selling only the kilowatt-hours, and leaving the electric appliances to others.

In 1980, the time was not right. But Fox-Penner sees its moment coming.

Bart Chilton, arguably the most outspoken member of the Commodity Futures Trading Commission, has once again come up with one of his infamous analogies relating pop culture to commodity markets -- this time equating the need to meld business operations and environmental stewardship with an episode of the popular 1990s US sitcom Seinfeld.

In the debate over how shale gas drilling should be regulated, Albert Appleton, an infrastructure and environmental consultant, says one aspect of the issue is being overlooked: Who will pay the environmental costs?

"Over the next 10 years, it will become ever more apparent that the existing hydrocarbon-based energy industry will be playing a game of last-man-standing in which the prize will go to the industry or the components of particular industries that are more efficient and more sustainable," he said in testimony offered on June 4 to the House Energy and Mineral Resources Subcommittee.

One of the web's most prominent climate change action activists is on the shale gas bandwagon, it looks like. Joseph Romm is urging attention to what he calls possibly "the single biggest game changer for climate action in the next two decades -- U.S. natural gas supply." Having just attended an event focused on gas supply, he advises in his Climate Progress blog:

The bottom line is staggering. As one of the presenters put it, "If the current trend continues" for production of unconventional gas, then by 2020 "natural gas could displace half of the coal burning power plants." If that is true, and the projections by the other experts were comparable, then natural gas alone could essentially meet the entire Waxman-Markey CO2 target for 2020 -- without requiring gobs of new power plants to be sited and built or thousands of miles of new transmission lines.

Here's something good: somebody with a bank saying "governments are not doing enough." The EU carbon market is not working to cut emissions, and governments have to step in and force development of clean energy, says Seb Walhain, head of energy and carbon markets at Fortis Bank.

As the US builds a carbon market program of its own, with free emission allowances for a long time and measures to keep allowance prices down, these remarks and others give pause. Maybe the approach Congress is taking -- forcing both a carbon market and a renewable energy requirement -- would address Walhain's issue, even though critics say the renewables targets are far lower than they should be.