Natural Gas Prices to $8

Brian Hicks

Written By Brian Hicks

Posted May 8, 2013

There is fear that the U.S. Northeast will face a five-year seasonal high this summer in natural gas prices.

Some predict that prices could reach as high as $8, maybe more, as demand pushes power plants to max capacity. The worry that pipelines can’t handle the load is definitely creeping in as it starts to heat up.

super frackChris Kostas, an analyst from Energy Security Analysis Inc., told Bloomberg regional costs could average out to about $5 to $5.50 per million British thermal units (BTU), but in some areas like Boston, New York City, and others along the Northeast, that amount could hit $7 or $8.

In 2008, there was a similar crisis that pushed gas from Algonquin City Gates, who serves Boston, to more than $10 during summer deliveries. That price has since been below $5 in each summer following, but signs this year already indicate that it could happen again.

Infrastructure Bottlenecks

It really all falls back on infrastructure. With the low number of pipelines in place right now, the Northeast is dangerously close to facing blackouts that would leave electricity customers high and dry.

The problem is taking place during peak demand—in the winter with freezing temperatures, and then again in the summer months when customers use air conditioners.

New England almost faced that very problem last year. In both June and in February, with a limited gas supply and periods of equipment failures, customers neared the point of blackout. Luckily, there was just barely enough in the tank.

Still, worry resonates that it will happen again soon.

Companies who run the region’s main pipelines—Kinder Morgan Energy Partners LP (NYSE: KMP), Spectra Energy Corp. (NYSE: SE) and Williams Cos. (NYSE: WMB)—all say their systems are at or near capacity, Bloomberg reports.

Boston and New York City have already seen prices this year reach a five year high. From January through April, customers in those locations were already paying on average $78.50 a megawatt-hour and $75.13, respectively.

With limited access to natural gas and an increasing reliance on electricity from gas, suppliers can’t meet demand if the supply is unattainable.

And it really started in 2008—that’s when drilling technology took off. Fracking and horizontal drilling were being used to extract natural gas that was always beyond reach beforehand. From there, natural gas became an economical and even more environmentally friendly alternative to the use of coal.

But as the switch took off, there still wasn’t the infrastructure in place to feed the demand. Now, older units once fueled by coal have been shut down due to environmental regulations and bottlenecks, but the infrastructure to transport natural gas still hasn’t emerged.

That’s why prices reached $10 in 2008 and that’s why they will likely soar again this summer.

The Marcellus Shale in Pennsylvania, Ohio, and West Virginia is where much of the natural gas would come from, especially more recently, as last year it saw production jump 69 percent in 2012 from the previous year to average 6.1 billion cubic feet per day.

Pipeline is needed to secure that supply. And while added pipeline capacity has come online in the past few years, a real connection to regional pipelines in places like Boston and New York City isn’t there.

Spectra from All Sides

Spectra Energy, the Houston-based gas company, is set to change all that. It is currently building a 20-mile long natural gas pipeline that will run from Staten Island all the way to Manhattan’s West Village and cross through New Jersey along the way. It is set to be completed by November of this year.

While proponents of the Spectra pipeline point to job creation, reduced energy costs, and a reduction in greenhouses gases, of course, there is the other side that cites a dangerous exposure to radon gas and the possibility of a large explosion. They also call into question the demand for the pipeline.

There is even a YouTube video by Occupy the Pipeline—a branch of Occupy Wall Street—all about how the gas from the Marcellus Shale has radioactive radon gas and causes a major threat to surrounding states.

And it’s true that natural gas might not be deemed the perfect source of energy—it has its problems and risks. But compared to coal, it’s a dream come true. It’s definitely a step in the right direction.

It would be a lie to say that the placement of such a pipeline in a dense urban setting doesn’t pose its set of risks. This is especially true after some recent natural gas pipeline explosions have taken place: Sissonville, West Virginia; Goldsmith, Texas; and one that resulted in fatalities in San Bruno, California—one with which Spectra was involved.

But amid concern, Spectra officials assure citizens and government officials alike that those problems have been resolved.

This new pipeline will exceed safety requirements set by the Department of Transportation. The safety factor required of most buildings and bridges that are at a 1.5 or 2—this pipeline will have a safety factor of 2.5. A thicker pipe is also used in construction—thicker than is required under regulations.

It will be one of the safest, if not the safest, pipelines in North America.

Still, environmental groups like Sane Energy Project are holding their ground and have organized demonstrations, held public forums, and even taken legal action to stop the completion of the project.

It really comes down to necessity and doing things that right way, in a healthy economical manner.

The Marcellus Shale may contain up to 489 trillion cubic feet of natural gas. If so, that would make it the second largest unconventional natural gas field in the world—second only to one in Iran and Qatar.

Upon completion of the Spectra pipeline, gas could be gathered from five different sources: the Gulf of Mexico, Pennsylvania, the Marcellus Shale, the Rocky Mountains and Nova Scotia’s offshore reserves. These sources are currently out of reach.

The Federal Energy Regulatory Commission (FERC), which oversees the project, is in accordance with this statement. The FERC also acknowledged the concern for radon and stated that concentrations of the gas will be diluted by commingling streams of gas. An explosion is highly unlikely.

The EPA and Department of Energy both state that there is no health risks associated with this pipeline and radon gas.

Come November, when the pipeline is complete (which it most likely will be) natural gas should flow freely and gas prices should be subdued. If not for this new, safe pipeline, 2008 would happen all over again, and again, and again. We may have to struggle through it this summer, but this should be the last.


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