The Current Natural Gas Competitive Advantage

on June 19, 2014 at 10:00 AM

Dow Chemicals Plans To Layoff 5,000 Employees

Ever since new natural gas resources have become available as a result of horizontal hydraulic multi-stage fracking, there have been many attempts to quantify how beneficial these new resources are to the U.S. economy. Since natural gas is often used for power production and as a feedstock for the petrochemical industry, it makes sense to take a closer look at these industries to see if natural gas has made new inroads.

First, power production. In April, the EIA reported that of the 13,506 MW of new power plant capacity additions in 2013, 6,861 MW came from natural gas power plants. In 2012, 9,210 MW of natural gas-fired power plants were added. The second-largest source of added capacity in 2013 was solar. As more solar is added to the grid, natural gas power plants will have an even larger competitive advantage against their peers because of natural gas plants’ ability to help manage solar energy’s intermittency challenges. Florida Power & Light’s so-called “hybrid” solar facility is an example of this.

Looking forward, the EIA predicts that natural gas-fired power plants will have the lowest estimated Levelized Cost of Electricity (LCOE). The U.S. levelized costs (2012 $/MWh) for plants entering service in 2019 for conventional coal is $95.60; advanced combined cycle $64.40; and advanced nuclear $96.10.

Second, the petrochemical industry. There is a project taking place in southern Louisiana that shows the significance of the nation’s newly accessible natural gas reserves. Canadian-based Methanex, the world’s biggest methanol producer, is dismantling a chemical plant that was located in Punta Arenas, Chile and shipping the large structure on a barge to be rebuilt in Geismar, Louisiana. Speaking about the decision to move the plant, Methanex Chief Executive Officer Bruce Aitken declared, “The outlook for low North American natural-gas prices makes Louisiana an attractive location.”

In addition to Methanex, large multinationals such as Dow, Royal Dutch Shell, Sasol and LyondellBasell have all made multi-billion dollar investment decisions to build chemical plants in the United States. All of these projects are being built in locations that have access to the newly accessible shale gas deposits, such as the Marcellus, Bakken, or Haynesville. In 2012, Dow Chief Executive Officer Andrew Liveris announced, “The discovery of shale really recreated the value proposition to build these facilities in what is the world’s largest market.” As these companies invest substantial amounts of capital to build these projects, it is clear they are confident that U.S. natural gas prices will be competitive on a global level for the next 20-30 years.

Though natural gas does have a competitive advantage today against its peers, circumstances change and one of the best tools for a reliable energy future is a diverse supply of fuel sources. The U.S. should not make the same mistake it made when it enacted the Powerplant and Industrial Fuel Use Act (FUA), restricting the use of natural gas for electricity generation. This type of legislation distorts the power sector and creates an energy scenario in which the country is too dependent on one fuel source. The lifetime of power plants and petrochemical plants can be 30-50 years; some last much longer. Therefore, even if it is evident that natural gas is the darling of the energy world today, it is unclear which energy sources will thrive in the future.

Chris Pedersen is the Managing Director of U.S. Operations for Oak Leaf Energy Training Inc., an energy education firm with offices in Houston and Calgary. Chris is a California native, completing his undergraduate degree in International Relations at the University of California at Santa Cruz. While obtaining a graduate degree in Energy Policy at New York University, Chris studied the highly integrated and interdependent relationship between the United States and Canada concerning oil, gas, and electricity. Chris is an Energy Risk Professional – Certified by the Global Association of Risk Professionals.