What Makes Up the Cost of a Gallon of Gas?
April 9, 2012
By Chris Persaud | Bankrate.com – Fri, Mar 23, 2012 3:01 AM EDT
$4 gas prices got your attention? If the cost of gasoline is already back at that lofty level where you are, or is simply headed in that direction, you’re probably asking where all the gas money you’re shelling out at the pump is going.
There are a couple of ways of answering that.
Industry shows how gas price breaks down
The American Petroleum Institute, or API, has a general breakdown for you. According to the trade group’s February estimates, most of what you pay for gasoline — 71 percent — goes to refineries, to buy oil.
API says it takes one gallon of oil to make a gallon of gasoline. The price of oil is determined in commodities markets, where companies and traders buy and sell the petroleum for purposes that can include refining it into gasoline or holding it as an investment. The markets, and the prices they set, are influenced by supply-and-demand factors, such as trouble in the Middle East that could result in less oil coming from that region of the world.
After oil prices, the rest of the price of a gallon of gas comes from taxes (14 percent) and costs associated with refining, moving and selling the gasoline (15 percent), according to API.
At the time of API’s most recent study, in late February, the national average price of regular-grade gasoline was $3.58 per gallon. By the group’s estimates and percentages, about $2.54 of that price covered crude oil costs, 50 cents went to taxes, and about 54 cents went into refining, moving and retailing.
Get geeky for more exact gas cost analysis
If you want to get geekier about where your gas money is going, you can do a more exact and up-to-date calculation on your own.
Here’s how:
- Find the price of a gallon of gas. Go online to AAA’s Daily Fuel Gauge Report. For example, as of March 22, the auto club showed that a gallon of regular gasoline sold for about $3.88.
- Find the price of a gallon of oil. Head to Bloomberg.com’s Energy & Oil Prices page. As of March 22, it showed a barrel of oil selling for about $105.46. There are 42 gallons in a barrel of oil, so divide $105.46 by 42 to get $2.51 as the price of one gallon of oil. Again, a gallon of oil can be refined into one gallon of gasoline, according to API. So, about $2.51 of the March 22 price for a gallon of gas went toward the cost of the underlying oil. That works out to about 65 percent of what you paid at the pump.
- Find the cost of taxes. The federal tax on gasoline is 18.4 cents per gallon. On top of that, there are state taxes and, depending on where you live, local gasoline and/or sales taxes, too. If taxes are typical where you are, the API estimates you’re paying 49 cents per gallon in federal, state and local gas taxes, making up 12.5 percent of the average $3.88 gas price.
- Determine the cost of refining, transportation and retailing. The rest of the cost of gasoline goes to turning crude oil into fuel, moving it to gas stations and retail markup. Get this number by subtracting the amounts in steps 2 and 3 from the average price in step 1. In this case, that’s $3.88 minus $2.51 and minus 49 cents, which comes out to 88 cents for refining, transportation and retailing — or about 22.5 percent.
And that’s how you do the math. Keep in mind that taxes and other factors making up gas prices can differ by region, state, metro area and city. Check out our map on gasoline taxes by state to see how much of your gas money is going to federal and state taxes.
If you want more detail about your own local taxes, contact your city, county, and/or state department of revenue, department of finances, or the equivalent.
Gas prices fuel congressional campaign rhetoric
April 4, 2012
President Barack Obama isn’t the only candidate who has to worry about gasoline price spikes.
Take a look at members of Congress and their challengers, who are going all out to express concern about the plight of American motorists — often with personal stories of their own sticker shock.
Illinois GOP Rep. Bobby Schilling took a page from that playbook this month when he invited reporters to watch him fork over a C-note to fill up his Chevy Suburban at a Phillips 66 U-Save Mart in Moline. So did Rep. Judy Biggert (R-Ill.), who opened a recent weekly e-newsletter by bemoaning her last $58 pit stop.
Others are content just to empathize.
Hence, Republican Jason Plummer — running to replace retiring Rep. Jerry Costello (D-Ill.) — visited ConocoPhillips’s Wood River refinery outside St. Louis to slam EPA policies that he blamed for driving up fuel prices. New York GOP Rep. Ann Marie Buerkle’s YouTube moment came when she gave explicit instructions on what she wanted Energy Secretary Steven Chu to tell his administration colleagues: “The American people are hurting. They need you to do something now.”
Expect to hear a lot of the same until November.
“This train stretches from New York City to Los Angeles with how many people have jumped on it,” said Patrick DeHaan, a senior petroleum analyst at Gasbuddy.com., a fuel price tracking website. “Either you are for low gas prices or you are going to get voted out of office. Everyone running is forced to talk about it because the other party is.”
There’s good reason for all the gas pump bickering. A Gallup poll in March found that 65 percent of Americans think Congress and the president can take actions to control gas prices, and that 85 percent want “immediate actions to try to control the rising price of gas.”
Blame is also easy to spread around. Senate Democrats tried to put Republicans on the spot in March with a floor vote to repeal oil subsidies, while House Republicans see rewards from a legislative agenda heavy on domestic drilling and embarrassing the Obama administration on the Keystone XL pipeline.
“I’m certain that with $4 gas, the American people will remember who listened to them and who didn’t,” House Speaker John Boehner said in May before passing one in a series of energy bills.
During last year’s price spikes, freshmen fanned out to meet with voters and hear their complaints about fuel costs. Wisconsin GOP Rep. Reid Ribble’s visit to an Appleton gas station made local TV newscasts, as did Republican Rep. Robert Hurt’s stop with Virginia farmers, where he talked up offshore development and alternative energy.
The House websites for Ribble, Scott Rigell (R-Va.) and Indiana GOP Rep. Larry Bucshon all feature gas price surveys asking people to vote on policy solutions.
Indicative of this year’s political stakes, Senate Republican candidates hoping to help their party reclaim the majority are being much more aggressive than their House counterparts with their attacks on Democrats.
Virginia Republicans, for example, have posted a video picking at the opening line of a response from Democrat Tim Kaine at a town hall event when asked about gas price spikes. “I’ve got to admit there’s some aspects about the gas price thing that makes me scratch my head,” Kaine says in the clip — a comment his campaign says was taken out of context.
Kaine’s likely opponent, former Republican Sen. George Allen, is also up with a website that allows visitors to type in the make and model of their car to see how much more it costs to fill up their tank compared with when Obama came into office.
California Sen. Dianne Feinstein’s long-shot Republican opponent Elizabeth Emken features a “#FeinsteinOnEmpty” hashtag on her website. She also questions Feinstein’s past praise for Chu, who said in 2008 — before joining the Obama administration — that he supported Europe-style gas prices in the United States.
Democrats are in on the action too.
Indiana Democrats are squeezing Sen. Richard Lugar with a Web ad slamming the Republican over his support for a gas tax hike of $1 or more.
Sen. Bill Nelson (D-Fla.) sent an email to voters in February talking up legislation he has co-sponsored that would curb oil market speculators.
He also solicited voters’ ideas on “what else you think we could do to bring down gas prices.”
Sen. Claire McCaskill’s website tries to bust what she lists as six myths about gas prices (No. 5: “Nothing can be done to bring down the price of fuel”). The Missouri Democrat also promotes her call for Obama to tap the Strategic Petroleum Reserve for the second time during his term.
Democratic candidates for House seats are also going after Republican incumbents’ campaign contributions from the oil and gas industry, pairing them with votes against repealing the industry’s subsidies.
Nearly identical press releases came out in late February from New Hampshire Democratic candidate Annie Kuster, who is challenging Republican Rep. Charlie Bass; Nevada state Assembly Speaker John Oceguera in his race against Rep. Joe Heck; former New York Rep. Dan Maffei in his rematch against Buerkle; and Manan Trivedi in his second attempt to unseat Rep. Jim Gerlach (R-Pa.).
“High gas prices? You can thank Washington insiders influencing Washington insiders,” Trivedi posted on Twitter, where he linked to a statement criticizing Gerlach for supporting oil and gas subsidies while taking more than $132,000 in campaign contributions from the industry.
Outside groups are also weighing in on the gas price debate.
Public Campaign, a group with ties to MoveOn.org and labor unions, sponsored two weeks of cable TV ads against Republican Rep. Scott Tipton in his Western Colorado district, knocking him for taking more than $100,000 in campaign contributions from the oil and gas industry and questioning his vote against repealing the industry’s subsidies.
The American Petroleum Institute has already spent generously this cycle, mostly to help Republicans, including House Energy and Commerce Chairman Fred Upton (R-Mich.), Natural Resources Chairman Doc Hastings (R-Wash.), Science Chairman Ralph Hall (R-Texas), Majority Whip Kevin McCarthy (R-Calif.) and Boehner. The trade group also ran radio and print ads ahead of the Senate subsidy debate in the Senate and presidential battleground states of Maine, Massachusetts, Missouri, Nevada, North Carolina, Virginia and West Virginia.
Karl Rove’s American Crossroads is also going after vulnerable House and Senate Democrats, including $1.5 million spent so far challenging McCaskill. The attacks include a website called “The Truth About Claire” that questions her commitment to lowering gas prices.
The group’s spokesman Nate Hodson said the group “won’t be shy” when spending tens of millions more this cycle to raise the gas price issue in congressional races. “It’s what voters are paying attention to right now,” he said.
This article first appeared on POLITICO Pro at 5:41 p.m. on March 30, 2012.
Read more: http://www.politico.com/news/stories/0312/74690_Page2.html#ixzz1r6jsxV7S
As reported By Christopher Martin Bloomberg News 3/21/12
NEW YORK – U.S. solar developers are luring cash at record rates from investors ranging from Warren Buffett to Google and KKR by offering returns on projects four times those available for Treasury securities.
Buffett’s Berkshire Hathaway Inc., together with the biggest Internet search company, private equity companies, and insurers MetLife Inc. and John Hancock Life Insurance Co., poured more than $500 million into renewable energy in the last year. That’s the most ever for companies outside the club of banks and specialist lenders that traditionally back solar energy, according to Bloomberg New Energy Finance data.
Once so risky that only government backing could draw private capital, solar projects now are making returns of about 15 percent, according to Stanford University’s Center for Energy Policy and Finance. That has attracted a wider community of investors eager to cash in on earnings stronger than those for infrastructure projects such as toll roads and pipelines. “A solar power project with a long-term sales agreement could be viewed as a machine that generates revenue,” said Marty Klepper, an attorney at Skadden Arps Slate Meagher & Flom, which helped arrange a solar deal for Buffett. “It’s an attractive investment for any firm, not just those in energy.”
With 30-year Treasuries yielding about 3.4 percent, investors are seeking safe places to park their money for years at a higher return. Solar energy fits the bill, with predictable cash flows guaranteed by contract for two decades or more. Those deals may be even more lucrative because many were signed before the cost of solar panels plunged 50 percent last year.
Buffett’s MidAmerican Energy Holdings Co. agreed to buy the Topaz Solar Farm in California from First Solar Inc. on Dec. 7. The project’s development budget is estimated at $2.4 billion and it may generate a 16.3 percent return on investment by selling power to PG&E Corp. at about $150 a megawatt-hour through a 25-year contract, according to New Energy Finance calculations. It will have 550 megawatts of capacity and is expected to go into operation in 2015, making it one of the world’s biggest photovoltaic plants.
“After tax, you’re looking at returns in the 10 percent to 15 percent range” for solar projects, said Dan Reicher, executive director of the Stanford center. “The beauty of solar is, once you make the capital investment, you’ve got free fuel and very low operating costs.”
The long-term nature of solar power purchase deals makes them similar to some bonds. And because a solar farm is a tangible asset, these investments also function much like those for infrastructure projects, with cash flows comparable to toll roads, bridges and pipelines, said Stefan Heck, a director at McKinsey & Co. in New York who leads the firm’s clean-tech work. Once a project starts producing power, investors can earn a return that’s “higher than most bonds,” he said. “There are a lot of pension funds with long-term horizons that are very interested in this space.”
Governments remain the biggest backers of the solar industry; President Obama’s administration suffered criticism for investing in Solyndra, a solar manufacturer that went bankrupt last year. Worldwide, the U.S. Treasury’s Federal Financing Bank was the biggest asset-finance lender for renewable energy companies in the past year, arranging 12 deals worth $11.2 billion, according to New Energy Finance. The Brazilian development bank BNDES, Bank of America, and Banco Santander followed.
In 2009, solar technology was so unfamiliar that few banks would back projects that required billions in upfront investment and wouldn’t begin producing revenue for years, Klepper said. The biggest financiers for the industry that year were Madrid- based Santander, HSH Nordbank of Hamburg and Banco Bilbao Vizcaya Argentaria of Bilbao, Spain, New Energy Finance said.
That year, the Energy Department began funding a program to guarantee loans for solar farms and other renewable energy projects that supported almost $35 billion in financing before winding down in September. The government’s endorsement assuaged investors’ concerns and built up a bigger community of people who understand how to make money from solar deals, said Arno Harris, chief executive officer of Sharp Corp.’s renewable power development unit Recurrent Energy.
“Solar is now bankable,” Harris said. “When solar was perceived as more risky, it required a premium,” and now it’s “becoming part of a much broader capital market.”
Long-term power-purchase contracts are the key to making solar a reliable investment, Harris said. Utilities in sunny states such as California, Arizona, and Nevada have agreed to pay premiums for electricity generated by sunshine.
Read more: http://www.philly.com/philly/business/homepage/20120321_Solar_returns_beat_Treasuries__drawing_investors_from_Buffett_to_Google.html#ixzz1plWe9SD0
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NJ Energy plan goals debated
August 19, 2011
As reported in Courier Post 8/19/11
New Jersey’s proposed energy policy calls for 22.5 percent of the state’s power to come from renewable sources within 10 years a goal that was the subject of heavy debate at a legislative hearing attended by nearly 100 people Thursday.
Environmentalists said they want a 30 percent target, but business leaders said that would drive their costs up.
State Sen. Jennifer Beck, R-Monmouth, defended the goal proposed in Gov. Chris Christie’s draft energy master plan, calling it fair and an “aggressive standard.”
Only eight states have higher renewable portfolio standards than 22.5 percent, according to the U.S. Department of Energy website. The standards are state policies that require electricity providers to obtain a minimum percentage of their power from renewable energy resources, including the sun and wind, by a certain date.
After Jeff Tittel of the New Jersey Sierra Club made a case for the higher benchmark, Beck said: “I’ve been told on many occasions that’s a stretch for us. We know solar and wind are great sources, but they’re not particularly reliable, and that’s a challenge. There’s also a responsibility for us to be realistic to set goals that can be met.”
New Jersey currently obtains less than 10 percent of its electricity supply from renewable energy sources.
But Tittel noted that New Jersey has ramped up, with more than 10,000 solar arrays installed. Only California has more.
“We’re No. 2 in solar installations. We shouldn’t go back,” said Tittel, who added that he fears Christie’s policy could jeopardize funding for renewable energy projects for homeowners and small businesses and affect more than 200 solar companies in New Jersey.
Corporate executives who testified said the current relative high costs of solar energy should not be discounted.
Michael Egenton, senior vice president of government relations for the New Jersey Chamber of Commerce, said the poor economy underscores the need for an energy policy that loosens restrictions. He praised Christie’s plan.
“I think you have to look at everything in context,” said Egenton, who said money spent on higher energy costs by companies would lead to less money spent on operations and investments. “You have to look at the bigger picture.”
The joint legislative hearing took place at the Toms River town hall and was co-chaired by Sen. Bob Smith and Assemblyman John McKeon, both Democrats.
State energy regulators also are holding hearings this month and will vote to adopt a final energy policy later this year.
The lawmakers on the panel received an admonishment from Janet Tauro, an environmentalist who is co-chairwoman of Grandmothers, Mothers and More for Energy Safety.
With the topic turned to energy conservation, Tauro made a common sense suggestion:
“We can turn down the air conditioning and turn off lights,” said Tauro, also of the New Jersey Environmental Federation.
Most of the panel members were in jackets or sweaters.
There was little reaction from the panel after Tauro, a Brick resident, made her comment. Later the room became colder, and more lights were turned on.
The California-based solar leasing firm Sungevity announced a deal on Monday with home improvement giant Lowe’s that could make obtaining a personalized estimate for installing solar panels a push-button affair at Lowe’s outlets.
The deal gives Lowe’s just under a 20 percent stake in Sungevity, according to a solar industry source, though neither company would discuss specific dollar figures.
Under the agreement, scheduled to launch in 30 Lowe’s stores in California in July, customers will be able to access kiosks equipped with Sugevity’s iQuote system, a Web-based application that allows homeowners to simply enter their address and receive a firm installation estimate within 24 hours, eliminating the expense of an on-site visit.
The system combines aerial and satellite image analysis with research by Sungevity engineers at the company’s Oakland headquarters to assess the geometry of a home’s rooftop, its disposition to the sun at different times of day and year and any potential occlusions presented by nearby vegetation or built objects.
In addition to an installation estimate, customers can also get a visual rendering of their home with solar panels installed. And if interested parties provide information on typical power usage, such as an account number or past electric bills, the iQuote system can estimate potential savings expected from using the equipment.
The iQuote system can already be used online, and the company’s founder, Danny Kennedy, estimated that roughly 25,000 users had taken it for a test drive, though only about 1,500 of those had been converted to sales.
The deal with Lowe’s, Kennedy said, could help Sungevity — a petite player in the solar leasing market compared to bigger players like SolarCity of San Mateo, Calif., or San Francisco-based SunRun, which raised $200 million in financing earlier this month — significantly expand its reach.
Despite tough economic times and often uncertain economic incentives, a number of analyses predict a boom year for solar power in 2011.
A report published in December by IDC Energy Insights, a market research firm based in Framingham, Mass., estimated following a healthy 2010, the solar market in North America could well see two gigawatts of solar power installations this year.
Jay Holman, the report’s lead analyst, told The Huffington Post that those numbers had been revised somewhat, but that 2011 was still expected to bring in 1.6 gigawatts of new solar installations, roughly double the 2010 total.
Part of the reason for America’s interest in solar energy may be a decline in the robust incentives the once drew a deluge of equipment and installations to the European market, particularly countries like Germany, the Czech Republic and Italy, Holman said. Those countries have begun to scale back their subsidies, forcing companies to look to other markets.
Meanwhile, federal tax incentives, including a 30 percent tax cash grant extended through the end of 2011, have helped keep solar alive. Several states have healthy incentives in place as well, including the eight states where the Sungevity/Lowes deal will eventually be rolled out: Arizona, California, Colorado, Delaware, Maryland, Massachusetts, New Jersey and New York.
Holman also said solar leasing companies like Sungevity, SunRun and Solar City, which retain ownership of the equipment while reducing or, in many cases, eliminating the up-front installation costs, also help drive the expansion of solar power.
“Obviously, we’re obsessed with being customer-focused,” said Kennedy. “We hope that this deal will make going solar as easy as shopping for light bulbs.”
Natural Gas Revolution Is Overblown, Study Says
May 12, 2011
Written by Tom Zeller Jr
For the Huffington Post
A veritable explosion in the number of natural gas wells in the United States in the late 2000′s resulted in only modest gains in production, a new study finds, suggesting that the promise of natural gas as a bountiful and economical domestic fuel source has been wildly oversold.
The findings, part of a broader analysis of natural gas published Thursday by the Post Carbon Institute, an energy and climate research organization in California, is one of a growing number of studies to undermine a natural gas catechism that has united industry, environmental groups and even the Obama White House in recent years.
It also comes on the heels of another study, published Monday, lending credence to claims that modern natural gas drilling techniques are contributing to methane contamination of drinking water wells in surrounding communities.
According to the author of Thursday’s study, David Hughes, a geoscientist and fellow at the institute, the bedrock assumptions of the natural gas revolution — that new drilling techniques have cracked open deep layers of shale and made available a 100-year supply of clean, domestic energy that could displace dirty coal and oil — are simply not true.
“The real takeaway here is scale,” Hughes said in a telephone interview. “If you look at the production estimates as the government is making them now, you’re talking about a near quadrupling of shale gas by 2035.”
The estimates come from the Energy Information Administration, which suggested in its most recent projections that shale gas would account for 45 percent of all natural gas production in the U.S. by 2035 — up from roughly 14 percent currently.
But the actual productivity profile of new, unconventional wells — often tapped at tremendous expense — is far less clear than is normally portrayed, Hughes said. Studies at existing fields, or plays, suggest that many shale wells tend to be highly productive in their first year, and then decline steeply — sometimes by as much as 80 percent or more — after that, requiring new wells to be plumbed
Indeed, while the number of active gas wells, which has nearly doubled since 1990, to half a million, has increased in the U.S, production per well has declined by nearly 50 percent over the same period, Hughes said, suggesting that as the industry converts increasingly to shale gas, more and more wells will be needed to maintain even a baseline level of production — much less to create a substantive increase.
If that’s the case, Hughes said, then those hoping that the shale gas boom might one day provide enough natural gas to replace coal for electricity generation, or oil as a transportation fuel, will be sadly disappointed. Indeed, he said, the number of new wells that would be needed to meet these goals would create a dystopian landscape of well pads and gas pipelines that few people would want to inhabit.
“If that were to happen, for those people living in Pennsylvania and New York, well, they haven’t seen anything yet,” Hughes said, referring to those states now sitting atop major shale gas deposits.
Mr. Hughes also highlighted the growing number of environmental costs that come with natural gas development. These include everything from water intensity and heavy truck traffic to the risks of localized pollution associated with hydraulic fracturing, or fracking — the high-pressure injection of water, sand and chemicals underground to break up rock formations and release gas.
More broadly, questions have been raised about the greenhouse gas footprint of natural gas development over its lifecycle, with at least one study suggesting that it may be no better than coal.
Dan Whitten, a spokesman for America’s Natural Gas Alliance, an industry lobby group, said in an e-mail message that the report was retreading old ground and amounted to a smear campaign on natural gas.
“This report is recycling the widely discredited claims of anti-drilling activists on greenhouse gas emissions,” Whitten said. “Their estimates run counter to the accepted scientific consensus and have been heavily criticized by climate scientists and others who are interested in a fact-based debate about our energy choices as a nation.”
Whitten also argued that it is now “the established scientific consensus” that the U.S. has “vast domestic supplies of natural gas that can play a growing role in meeting our country’s energy needs for generations.”
He also said that no one was seriously suggesting that coal or transportation fuel be entirely replaced by natural gas, and that such arguments amount to “unrealistic scenarios” presented by Hughes simply to be knocked down.
“Most experts in our energy debates understand and agree that it will take all kinds of energy to meet our nation’s growing future needs,” he said. “From our initial review, no new ground was broken with this report. As such, it doesn’t change the fact that the vast supplies of clean natural gas right here in North America give our country a chance to substantially improve energy security, clean our air and improve our economy.”
But while the resource is inarguably vast, Hughes is not alone in suggesting that the industry is overstating how much can be economically pulled out of the ground.
Arthur E. Berman, a geological consultant and director of Labyrinth Consulting Services, Inc., also argues that natural gas is not as abundant or as inexpensive as is commonly believed.
“I do not dispute for a minute that the resource size for natural gas is huge. There’s a lot of gas in place in shales,” Berman said in a telephone interview. “The question for me is how much can be produced for a profit?”
Berman says that reserves — meaning the amount of natural gas that is actually commercially available to produce — will last only about 22 years. This is partly because shale gas plays once touted to be monstrous in size have typically contracted to core areas of production a mere fraction of the originally advertised size.
Hughes, meanwhile, cited Berman and and other analysts who also say that gas, at roughly $4 per thousand cubic feet (mcf), is too cheap for companies to recoup the costs of producing it.
From Thursday’s study:
Analysts like Arthur Berman suggest the marginal cost is about $7.50/mcf compared to a current price of about $4.00/mcf. Others, such as Kenneth Medlock (2010), suggest that the break-even price ranges from $4.25/mcf to $7.00/mcf. The Bank of America (2008) has placed the mean break-even cost at $6.64/mcf with a range of $4.20/mcf to $11.50/mcf. One thing seems certain: Shale gas, which appears to be the only hope for significantly ramping up U.S. gas production, is expensive gas, much of which is marginally economic to non-economic at today’s gas prices.
And yet, with easier-to-reach, conventional sources of gas largely depleted, the ability to pull gas from deep layers of shale rock has been touted as a game changer, and the notion was quickly embraced by a broad cross-section of social, political and business interests.
Writes Mr. Hughes:
First, the shale gas industry was motivated to hype production prospects in order to attract large amounts of needed investment capital; it did this by drilling the best sites first and extrapolating initial robust results to apply to more problematic prospective regions. The energy policy establishment, desperate to identify a new energy source to support future economic growth, accepted the industry’s hype uncritically. This in turn led Wall Street Journal, Time Magazine, 60 Minutes, and many other media outlets to proclaim that shale gas would transform the energy world. Finally, several prominent environmental organizations, looking for a way to lobby for lower carbon emissions without calling for energy cutbacks, embraced shale gas as a necessary “bridge fuel” toward a renewable energy future. Each group saw in shale gas what it wanted and needed.
And at least for now, the 100-year slogan continues.
“A lot of times, things are right underneath our feet, and all we need to do is change the way we’re thinking about them,” says Erik Oswold, an ExxonMobil geologist, in an ad circulating on the online video service Hulu. “A couple decades ago, we didn’t realize just how much natural gas was trapped in rocks thousands of feet below us. Technology has made it possible to safely unlock this cleaner burning natural gas. These deposits can provide us with fuel for 100 years.”
President Obama, delivering a speech on energy policy at Georgetown University on March 30, echoed the industry’s mantra.
“Now, in terms of new sources of energy, we have a few different options,” the President said. “The first is natural gas. Recent innovations have given us the opportunity to tap large reserves — perhaps a century’s worth of reserves, a hundred years worth of reserves -– in the shale under our feet.”
Natural gas costs unlikely to remain low through 2011
January 24, 2011
David Parkinson – Globe and Mail Update Dec. 31, 2010 5:41PM EST
When Arthur Berman argues that natural gas is destined to have better prices in 2011 than it had in a mediocre 2010, he isn’t talking about technical price charts, or historical correlations, or relative valuations, or even supply-and-demand balances.
No, his view is more down to earth. He’s talking about geology.
“I’m a working petroleum geologist, I’m not a financial analyst,” said Mr. Berman, a prominent Houston-based energy consultant whose controversial views on the North American shale-gas phenomenon have raised eyebrows in the industry. “We probably have a lot less natural gas resource than is commonly believed. “So, what I see is that natural gas prices will not remain depressed. I’m not a price forecaster, but I have every reason to believe that a long position in natural gas [investing] is a smart position.”
The natural gas pricing story has been all about shale gas in 2010, and its fate in 2011 is closely tied to this big wild card, too. Thanks to advances in drilling technology for extracting gas from seams in shale rock, there has been a rapid expansion of drilling in shale plays that were once considered impossible to economically exploit. The resulting boom in production has unleashed substantial new supplies on the North American marketplace, outstripping demand and bloating inventories. Volumes of gas in U.S. storage facilities swelled to record levels last month – 40 per cent higher than they were 10 years ago, almost 20 per cent higher than five years ago – even as gas consumption has rebounded to near pre-recession levels.
That kept natural gas prices low and in decline for most of 2010. Even with the high-demand winter season approaching, prices struggled to stay above $4 (U.S.) per million British thermal units on the New York Mercantile Exchange well into December – their weakest December prices in nearly a decade.
The majority of industry analysts believe the shale-gas boom will continue to keep supplies well above consumption levels in 2011, weighing down natural gas prices. “The fundamentals of oversupply are not likely to change in 2011,” said Peter Tertzakian, chief energy economist at ARC Financial Corp. in Calgary. “Since we expect U.S. natural gas demand growth to come to almost a standstill in 2011 and supply growth to stay in positive territory, the inventory glut remains a concern,” said analyst Dominic Schnider of UBS AG in a recent research note.
But a vocal minority – led by the likes of Mr. Berman and renowned long-time oil and gas forecaster Henry Groppe – believe shale gas may be a bubble that could begin to burst in 2011. They are concerned with both the extremely rapid rates at which production from new shale-gas wells drops off, and the high costs of development and production that suggest to them that producers won’t be willing to keep up the high pace of drilling in shale plays at these unprofitable prices much longer. “[Shale] is a great new resource. I don’t dispute for a moment the size of the resource or its importance,” said Mr. Berman, who, like Mr. Groppe, serves as a consultant to Toronto-based fund management company Middlefield Capital Corp. “What I question is, ultimately, what it will cost to produce the resource.” Mr. Berman’s analysis tells him that North American shale-gas reserves have been exaggerated; that “more than half of the commercial reserves are produced in the first year” of each well; and that the full costs for producing shale gas work out to about $7 per million BTU – far above the current selling price.
He believes companies have been encouraged to aggressively drill U.S. shale plays due to regulations requiring producers to either initiate drilling on their properties or lose them – they want to secure the land. But that won’t continue through 2011, he said. “As I listen to the comments of the executives of the companies that are most active in the shale plays in the U.S., they’re all saying that they’re going to continue to hold the land through the first half of 2011, and then you’re going to see a big decrease in [drilling] rig count,” Mr. Berman said. “They’re smart people; they’re not going to continue to do this beyond the time that they have to.” Instead, he said, companies will redirect their drilling rigs to oil properties, where the cost-to-price equation is much more profitable. That will slow natural gas volumes and change market perception of shale’s potential, he said – and that will push up prices. “It would not surprise me to see the end of 2011 start to see a notable recovery of price,” he said.
Mr. Tertzakian acknowledges that natural gas prices must eventually revert to at least high enough to cover “the marginal costs of producing natural gas in North America,” which he pegs at the $5 to $6 range. However, he doesn’t see that happening in 2011 – and he doesn’t envision a major drop-off in shale drilling or a serious hit to supplies over the next year. “There’s no shortage of gas in the ground. We can debate the technical nuances, but at the end of the day, it takes a certain amount of money to exploit these things – the only restriction is the availability of capital.” He expects some slowdown in natural-gas rig count in the second half of next year could moderate supplies, but that won’t do much to make up for what should continue to be a weak market in the first half – making for another year of 2010-like prices.
“Prices in 2011 will be similar to 2010,” agreed Bill Gwozd, vice-president of gas services at Calgary energy consulting and analysis firm Ziff Energy Group. “That’s not a healthy price for producers – but it’s quite nice for consumers.”
Veto urged for N.J. power-plant bill
January 13, 2011
By Andrew Maykuth
Inquirer Staff Writer
Posted Jan. 13, 2011
The bill’s sponsors said the legislation approved Tuesday by the New Jersey Legislature would lower energy rates. But opponents, including power generators such as Exelon Corp. and large industrial consumers, call it an anticompetitive sweetheart deal that will cost consumers in the long run.
“We cannot afford an energy surcharge to guarantee billions of dollars of revenue to a few select developers,” said George M. Waidelich, vice president of energy operations for Safeway Inc., which says it now spends about $2 million a year on electricity for its five Genuardi’s stores in South Jersey.
The measure would provide a guaranteed long-term income for developers of several large power plants. The legislation was known as the “LS Power Bill” because its initial aim was to provide guarantees for LS Power Development L.L.C. to build a giant natural-gas power plant in West Deptford, the hometown of state Senate President Stephen Sweeney (D., Gloucester).
Tom Hoatson, director of regulatory affairs for LS Power, said the guarantees were necessary to obtain financing to construct the 640-megawatt plant along the Delaware River, which would cost from $800 million to $1 billion.
Hoatson said the bill would provide the New Brunswick company “an opportunity to compete with other generators.” The plant would employ up to 500 people to build and about 25 people to operate.
Christie spokesman Michael Drewniak said the bill was under review. Legislative sources said the governor was expected to sign it because his office was consulted in drafting amendments that addressed some of the administration’s concerns.
In the arcane world of wholesale electrical markets, the New Jersey bill has attracted intense attention because its opponents say it would turn back the clock on years of efforts to open electrical-power markets to more competition.
But supporters of the legislation say those markets, which are managed by regional power-grid operator PJM Interconnection Inc., have failed to lower prices for N.J. residents.
And they say that many of the interests opposed to the N.J. legislation are incumbent power generators like Exelon Corp. and Public Service Enterprise Group of Newark, which stand to gain by keeping new power generators out of the market.
“I don’t think it’s a system that encourages building new generation to keep prices down,” said Stefanie Brand, the New Jersey Rate Counsel, the state’s consumer advocate.
“The market is not a true free market,” she said. “It’s a constructed market that was created by PJM, and as far as we’re concerned, it doesn’t work.”
N.J. officials complain that the Garden State has suffered more than its western neighbors because it has paid up to $1.9 billion a year in extra capacity and congestion charges that PJM imposes on power transmitted into the state.
Lee A. Solomon, a Christie appointee who is president of the N.J. Board of Public Utilities, told PJM in December that “it is incumbent upon New Jersey to promote new generation in locations where it is needed the most to ensure reliability and to control costs.”
Sweeney, whose West Deptford hometown would host the LS plant, introduced the legislation that would allow the board to sign long-term contracts with several power generators to provide up to 2,000 megawatts of electricity at guaranteed rates. If market rates fall below the threshold, N.J. ratepayers would pick up the tab.
“Consumers have been paying inflated capacity charges,” said Derek Roseman, Sweeney’s spokesman. “This is a chance to reverse that. How can that not be a good thing for consumers?”
The Compete Coalition, a Washington lobbying group that promotes open electrical markets, has appealed to Christie’s antitax sentiments by branding the bill the “Energy Tax of 2011.”
John E. Shelk, president of the Electric Power Supply Association, testified in December that the bill would “artificially depress” rates in the short term, but would discourage other generators from investing in the future.
Shelk said the bill likely would be challenged because it would interfere with federally sanctioned wholesale power markets.
Public Service Enterprise Group, the politically powerful Newark energy company that operates the PSE&G utility, announced its opposition to the measure last week.
Anne Hoskins, the company’s senior vice president for public affairs, said the state’s intervention in the past requiring utilities to enter into long-term supply contracts had “disastrous results.”
In the next six years, PSE&G will pay $1 billion for the remaining costs of the long-term contracts, she said. And Atlantic City Electric recently received approval to raise its customers’ bills 5 percent to recover the costs of its out-of-market contracts.
“Subsidies are a slippery slope,” she said, “and will drive away other nonsubsidized private investment in New Jersey.”
