Natural gas costs unlikely to remain low through 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.”

New Jersey is now a true solar power

Thursday July 16, 2009

In just a few short years, the Garden State has become the Sunshine State

BY JOE TYRRELL

NEWJERSEYNEWSROOM.COM

As Congress wrestles with national energy policies and gubernatorial candidates tout their plans here, New Jersey officials say the state deserves credit as a leader in promoting solar power.

In just a few years of coordinated efforts, New Jersey has gone from a non-factor to number two among the states in solar installations connected to the power grid. While far behind California, New Jersey currently generates about twice as many solar kilowatt hours as number three Colorado.

While applauding the gains, many in the industry also say the state, like the nation, has fallen well short of performance goals. New Jersey rose to the top of solar charts in a period when there was little competition from other states.

Now, as the federal government begins to pay attention to renewable energy, New Jersey is in the midst of a challenging transition away from an easy to understand program, which gave rebates to install solar power cells.

The new program shifts the focus away from consumers to utility companies and investors by creating a marketplace for renewable energy credits. The concept has its supporters, though many are more hopeful than confident.

Still, at a time when solar businesses believe the technology is on the verge of a belated boom in the United States, recent New Jersey statistics wowed some attendees at a recent industry conference in Philadelphia.

“Making this even more remarkable is that in 2001 New Jersey had only six” solar cell installations connected to the power grid, compared to more than 4,000 today, wrote Bob Haavind of Photovoltaics World.

His report can be viewed here.

During the session, the state’s top regulator, Board of Public Utilities President Jeanne Fox, proclaimed that when it comes to government policy, New Jersey is “the best place to do solar in the country.”

Around the country, many in solar trade groups and businesses credit New Jersey for showing what a small, partly cloudy state can do to grab its place in the sun.

“Obviously what they have been doing has worked,” said Monique Hanis, director of communications for the Solar Energy Industries Association in Washington, D.C.

“What makes New Jersey stand out is the specific language in the state’s energy master plan, calling for the generation of 2.1 percent of its electricity to be coming from solar in 2021,” said Neal Lurie, director of marketing and communications for the American Solar Energy Society of Boulder, Colo.

Closer to home, though, reactions are more muted.

The rebate program “came out of advocacy” by solar power proponents, “it was not a BPU idea,” said Delores Phillips, the society’s Mid-Atlantic executive director.

Even with improving technology and rising costs for fossil fuels, the cost of solar power remains higher than those dirtier energy sources. Solar advocates maintain other forms of energy benefit directly and indirectly from government subsidies, such as state funds to decommission nuclear facilities, or cleanups of coal ash landfills.

New Jersey’s small spurt of solar power materialized during a BPU rebate program that turned out to be too popular for the board’s limited financial commitment. The initial surge in applications eventually bogged down as the release of funds slowed.

So the board decided on an innovative approach, creating financial instruments, solar renewable energy credits, or SRECs. The idea is that investors buy credits from solar producers, each pegged to 1 megawatt of power. The investors help producers expand, while reaping benefits from energy sales to utilities.

“We’re all looking to see how it’s going to make out,” Hanis said.

Compared to the rebates, grants or tax credits offered elsewhere, New Jersey’s approach is more ambitious but “still a little bit vague for some people,” she said.

“It’s not really tried and tested,” Phillips said, adding it requires two inter-related factors to success.

To be attractive to investors, SRECs need to be based on reliable values, meaning utilities must contract for long-term power purchases, she said. To serve those utilities, the investments must finance enough power to meet their requirements for more clean power, she said.

Judged on that basis, “New Jersey’s program is good, but only half as good as they said it was going to be,” said Edward O’Brien, a partner in McConnell Energy Solutions of Wilmington, De. Last year, instead of a projected 90 megawatts of solar power, the state was at 45, the result of continuing uncertainty over credit values, he said.

The theory is simple, O’Brien said. While not completely supplanting the mom-and-pop approach to solar panels, securitizing the solar marketplace should put it on the same funding as other major energy sources.

“Why are you out putting solar panels up on your house, which is hard to do, instead of buying five kilowatts worth of solar power from some producer?” O’Brien said.

In practice, though, the SREC system “has not been fully thought out,” he said.

Added to the current recession, investors are cautious because of America’s patchwork of energy policies and regulations, which vary from state to state, O’Brien said. States have not helped by altering programs, he said.

“Every state is different, and every state has a bait-and-switch,” O’Brien said.

Still, he is optimistic that New Jersey will regain its momentum, and others in the field view the problems as a hiccough in the growth of solar power.

In the short-run, “there could be a shake-out” during the transition from rebates, said Rick Brooke of Jersey Solar in Hopewell. But 25 years in the business and a number of false dawns, this opportunity looks golden.

As long as the state SREC market allows small systems to participate, people who installed solar panels on the roofs of their homes or businesses still have a chance to participate, Brooke said.

Moreover, people in the industry are expecting good things from the energy bill making its way through Congress. Nearby states have launched incentive programs, whether inspired by New Jersey or California, which has roughly two-thirds of the nation’s grid-connected solar systems, Brooke said.

“It’s a good time to be in the business,” he said. “The state is committed to it, they have goals. People are moving ahead with it. Before, the interest came and went, but now it’s here.”

Rebates and SRECs are not the only way to support the growth of solar power. This month, Gov. Jon Corzine and Republican challenger Chris Christie each highlighted their support for renewable energy.

Democrat Corzine was able to announce the availability $20 million in federal grants for projects at public institutions in the state. Christie promised to create a new agency to promote clean energy technology and jobs, and would remove those functions from the BPU.

The Republican’s approach seemingly echoes Phillips’ complaints about the board’s “antiquated” procedures and primary purpose to regulate rates. But she said members of her association “were very underwhelmed by Chris Christie’s plan,” because it looks at the big picture and avoids the nitty-gritty.

While the Corzine Administration has set laudable goals for increasing clean energy, Phillips said most of the growth in solar power can be traced to his predecessor, former Gov. Jim McGreevey. There’s been “some stagnation” in state efforts since then, she said.

“Everybody likes to talk about clean energy job creation, but nobody explains how they’re going to do it,” she said.

Whether the New Jersey approach catches on remains uncertain. Around the nation, some communities are coming up with their own answers. Many solar advocates are looking beyond America to more successful programs abroad.

For more information on state incentives for renewable energy, visit njcleanenergy.com.

Our Perspective:

NJ has made great strides to join the alternative energy evolution. Not to say it is perfect, but for the first time people can see an acceleraed return on their investment that makes sense.

Rebates for systems under 5okw and the REC program has allowed funding to help underwrite these investments. Add the Federal incentives of a 30% tax credit and accelerated depreciation and the market is positioned to take off.

Would you like to know more? Contact us 856-857-1230 or email george@hbsadvantage.com.

We can provide an overview of your return on investment and help to develop the opportunity and make it become a reality.

Visit us on the web www.hutchinsonbusinesssolutions.com

CoStar Convenes Experts to Discuss Opportunities, Challenges of Green Building

By Andrew C. BurrJune 17, 2009

Panel Examines Greening the Built Sector

CoStar’s green building panelists, from left: Marc Heisterkamp of USGBC; Laurie McMahon of Cassidy & Pinkard Colliers; Steve Teitelbaum of Jones Day; and Thomas Olson of Environmental Defense Fund.

If the energy consumption of commercial buildings was likened to the fuel efficiency of cars and trucks, it would look something like this: one quarter of Americans currently work in buildings that are the equivalent of a Toyota Prius or other type of fuel-efficient hybrid while the remaining three-quarters work in buildings comparable to gas-guzzling Hummers, Winnebagos and Mack tractor trailers.

But while it’s fairly obvious which vehicles are more efficient and environmentally friendly, it’s very difficult to tell from observation which buildings are designed and are being operated in the most environmentally efficient and responsible way.

That is one of the challenges currently facing tenants and landlords who favor green workplaces and stores, according to a CoStar Group-sponsored roundtable discussion on green buildings that convened Wednesday.

Hosted by CoStar Group President and CEO Andrew C. Florance, the panel included Marc Heisterkamp, director of commercial real estate at the U.S. Green Building Council; Laurie McMahon, managing director and principal of Washington-based Cassidy & Pinkard Colliers; Thomas Olson, a consulting attorney for the Environmental Defense Fund’s National Climate Campaign; and Steve Teitelbaum, principal of the law firm Jones Day.

The issue of tenants, real estate brokers and landlords all having access to more transparent and readily available information to enable them to make better informed decisions remains one of the biggest challenges facing the industry today, noted the panelists. At the same time, they credited the growing awareness of sustainability and energy efficiency issues associated with commercial property largely to the success of the U.S. Government’s Energy Star label for energy efficiency and USGBC’s LEED green building certification.

Before LEED, which was created about a decade ago, sustainable building design and operation lacked a “common framework” for the industry to coalesce around, Heisterkamp said.

Today, the LEED program touches more than 5.6 billion square feet of commercial space and has transformed the once-boutique USGBC into an industry giant. According to McMahon, LEED has become “the glossary on how to be green” for many building stakeholders.

Energy Star, which has enjoyed a similar swell in popularity, has been used to benchmark the energy usage of about 12 billion square feet of real estate, which includes roughly 40% of all U.S. office buildings, according to recent data from the U.S. Environmental Protection Agency.

Buildings with either label have been tied to financial benefits for owners, health and productivity gains for tenants, and lower building operations and maintenance costs. Several academic studies, including one by CoStar, have published compelling evidence that sustainable and energy-efficient buildings command higher sales prices, rental rates and occupancy than their non-green peer buildings.

Even during the recession, CoStar Group data shows that occupancy levels in LEED buildings continue to climb, while occupancy in comparable non-LEED buildings has eroded. “LEED buildings are dramatically outperforming the non-LEED buildings,” Florance said.

According to Teitelbaum, the benefits for those who occupy green buildings go far beyond lower operating expenses. Employers are increasingly correlating their sustainable offices with increased work productivity, lower absenteeism and higher employee retention — significant advantages for businesses of all shapes and sizes.

“We focus a lot, because we’re real estate people, on the operating expenses. It’s an easy one,” he said. “But the benefits go beyond just operating expenses. There are studies that show in many cases, you get productivity benefits out of green buildings that far outweigh any expenses.”

Forces from outside the industry are also driving real estate sustainability. Policymakers are moving briskly to enact sustainability and energy efficiency mandates for commercial structures, which can account for up to 80% of greenhouse gas emissions in large cities.

In April, New York City Mayor Michael Bloomberg proposed a sweeping package of energy efficiency mandates that would require commercial building owners to audit and disclose the energy use of their buildings, and in some cases, demonstrate energy efficiency improvements. Mandates for sustainable development are common now in many cities, and in Washington, DC, and the state of California, energy disclosure laws for privately owned buildings are also on the books.

Those provisions, coupled with a national building energy label that is proposed at the federal level, would help the building industry become more energy-transparent Florance said. “You know if your neighbor drives a Hummer to work every day. You don’t know if they work in a “Hummer” building,” he said.

But the green building movement remains a work in progress, the panelists said, with obstacles and misperceptions about sustainability still prevalent in parts of the market.

For instance, cost premiums for LEED certification are still greatly exaggerated in many circles, and divergent definitions and expectations about what is “green” often put building stakeholders at odds with each other, the panelists said.

And though landlords are often criticized for not being sustainable enough, tenants are known to hedge on rent increases in green buildings, public transit requirements and the cost of green cleaning programs, Teitelbaum said. “You see resistance on the tenant side as much as on the landlord side. It’s not a one-way street.”

The industry is also coming to terms with how to best address the existing building stock, which remains a mostly untouched wilderness of inefficient and unsustainable buildings. Just 1% of all U.S. properties have achieved the Energy Star label or LEED certification, according to CoStar information, and a lion’s share of those have been constructed recently.

To make a real impact on climate change, retrofitting existing buildings is an essential part of the equation, Olson said.

“In the past few years, the amount of carbon dioxide the world has been emitting has actually been more than people thought was the worst that could possibly happen,” Olson said. “We are already seeing the effect of the carbon dioxide we’re putting into the atmosphere.”

But if the commercial real estate industry remains committed to energy efficiency and sustainability, “you can be heroes in terms of climate change, make money, and you can go home and tell your kids that you’re green,” he said.

Our Perspective:

I find the statistics of abuse staggering. When most of the commercial building were developed, the last thing they thought about was energy efficiency.

For companies located in New Jersey, they have developed the Energy Star Program. the state will help to underwrite an energy efficiency audit done by an approved contractor and will also  help to underwrite upto 50% of the investment to make the building more efficient.

New Jersey’s Clean Energy Program – recognized as a national model – is a statewide program that:

• Promotes increased energy efficiency
• Supports installation of clean, renewable sources of energy
• Provides information to help reduce energy use
• Endorses climate change solutions, and
• Offers financial incentives, programs, and services for residential, commercial, and municipal customers to save energy, money, and the environment. 

Would you like to know more? Feel free to contact us george@hbsadvantage.com or call 856-857-1230. We can help walk you thru the process.