Shifting ground

Russell
Russell Wangersky
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Weeks ago, a provocative letter to the editor talked about the rapid change in energy markets as a result of the “shale gale,” the huge expansion of U.S. natural gas production as a result of fuels from massive shale gas fields.

The letter had a simple thesis: things are changing quickly in the energy export industry, and the Muskrat Falls project should be considered in light of those changed baselines.

Now, support for that argument can be found in a very interesting place: in a report filed by the very consulting company that Nalcor hired to review its analysis of the Muskrat Falls project.

 

Other report

Interestingly, three days after Nalcor released consulting firm Navigant’s study on the Muskrat Falls project, Navigant’s American arm was delivering a much different energy analysis for a company that wants to ship liquified natural gas out of the United States — a report that says that shale gas exploration will provide 100 years’ worth of

phenomenally cheap gas that will replace many other sources of electrical power in the United States.

Abundant gas, Navigant says, will also make wind power and solar generation much more feasible by filling in the gaps when that renewable power is not available.

It’s a very different view of what energy demand will do off this electrically isolated island.

The report was done for Dominion Cove Point LNG LP, and filed with the United States Department of Energy.

“Navigant projects that the overwhelming majority of growth in natural gas demand will come from the electric generation (EG) sector of the market. EG is expected to grow at an annual rate of 2.1 per cent through the study period, with a higher rate of 4.9 per cent through 2015. These expectations are based mainly on expected coal-fired power plant retirements.”

Interestingly, coal plant retirements have been cited as one of

the reasons higher-priced Muskrat Falls power will find a market in the United States.

 

Gas advantages

Natural gas wouldn’t just be cleaner than coal; under Navigant’s forecast, it would be cheaper, too.

Navigant also talks about the fact that shale gas will not require the creation — and green-field construction costs — of a whole new infrastructure.

“Demand will also be supported by the existing pipeline network throughout North America. The delivery infrastructure for natural gas is mature and, with the exception of a few highly urban areas such as greater New York City, relatively cost-effective and quick to expand.”

The report is also quick to point out that natural gas is more environmentally friendly then coal, and that quick-fired gas turbines have an excellent fit with intermittent solar and wind power.

“Natural gas is also well-

positioned to support renewable generation. For the support of wind and solar generation, dispatchable gas-fired generation is ideal to ‘shape’ the output profile or support the intermittency of both these forms of renewable electric generation.”

Or, in more detail: “Gas demand growth in our forecasts is also supported by growth in the deployment of renewable electric generation. Gas, being transported continually in pipelines, is far more suited to respond in real time to intermittent generation from wind and photovoltaics than coal.

“Coal-to-liquids and coal-to-gas technologies still appear to be expensive and energy-intensive. Oil and its products are not seen as viable electric generation fuels in any circumstance due to price. … While renewable technologies will improve and may be augmented

by improved electrical storage,

and coal technologies may also improve, Navigant’s opinion is that gas-fired generation will be the dominant mode of smoothing intermittent electric generation for the foreseeable future.”

 

Dollars and sense

But of all of the factors in the Navigant report, cost is the most interesting.

Navigant is forecasting that natural gas prices will hold steady right through 2040 at roughly US$6.01 per million British thermal units, or MMBtu. That number rises to US$6.83 per MMBtu in the case of extreme demand, with no new gas sources. (And 2040, you might remember, is just one year before rights to super-cheap power from the Upper Churchill revert to this province.)

In energy terms, US$6.01 is roughly equivalent to oil at $36 a barrel, or as Navigant puts it “well below oil prices.”

Current gas prices hover around US$4 per MMBtu, while comperable oil prices are US$15 MMBtu, or US$91 per barrel. That kind of disparity makes natural gas more than attractive.

Now a caveat, I’m a journalist, not a mathematician or an economist. But if I’m reading energy unit conversion tables properly, converting US$6 MMBtu natural gas to kilowatt hours brings the simple conversion rate to a cost of around US $0.02 per kilowatt hour.

Two cents a kilowatt hour.

That’s admittedly only raw feedstock, without the capital costs and financing costs of building new gas turbines and without the inevitable losses of energy that occur in production and transmission — but, as Navigant points out, natural gas-fired would be unlikely to need major new pipeline infrastructure. Or, for that matter, any new electrical transmission infrastructure.

You don’t have to get the power to market: it’s already there. (By comparison, Muskrat Falls power is pegged at 14.3 cents a kilowatt hour before transmission costs beyond Nova Scotia.)

 

Two different reports

Does that mean that Navigant’s Dominion Cove report is right and Navigant’s Muskrat Falls report is wrong?

No. The two energy reports are looking at vastly different markets, so it’s like comparing apples and oranges.

The problem comes when part of what you want to do is to export oranges into an apple market.

Does it mean that Muskrat Falls is a bad project?

The jury’s out on that.

What it does mean is that

the energy landscape is changing incredibly quickly, and that assumptions made even a year ago may not hold true any longer.

There’s a campaign in Nova Scotia to get out of the Muskrat deal in favour of cheaper hydro power from Quebec. Likewise, if the U.S. has so much shale gas it can export huge volumes of liquified natural gas, it might even be able to export electrical power.

One thing’s for sure. The way the deal is structured now, consumers in Newfoundland and Labrador will pay to build Muskrat Falls, and will pay the interest on money borrowed to build it.

World capital markets are

in flux, and energy markets

are extremely fluid. American researchers are saying shale gas gives their country the opportunity to regain its own energy security — producing its own power internally at competitive prices and shedding its dependence on foreign sources. And, they’re saying, for America, that’s a very good thing.

As far as consumers on this island are concerned, a power corridor to the rest of North America may not make us any less isolated than we already are.

If we do it, we’re still going it alone. Paying for it alone, too, and therefore through the nose.

 

Russell Wangersky is The Telegram’s

editorial page editor. He can be reached by email at rwanger@thetelegram.com.

Organizations: Dominion Cove Point LNG, United States Department of Energy

Geographic location: United States, North America, New York City Nova Scotia Quebec Newfoundland and Labrador

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Comments

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Recent comments

  • Pierre Neary
    October 24, 2011 - 18:49

    What's wrong with being a former cab driver??

  • Pete
    October 24, 2011 - 11:05

    About caveats and apples and orange markets......... 1,000,000btu/3412=293kwh>>$.02/kwh but it is comparing thermal energy with electrical energy. It is ok when comparing an electric heater with a gas heater, but the US is starved for High Grade energy - for lights appliances and Air conditioner motors!! To generate that energy from gas turbines might be about 6 cents/kwh at least. Then about that tricky thing - capital costs and financing? If Muskrat generates 5.0Twh/yr and IF it were financed interest free for 35 years the elect. cost would be less than 4 cents/kwh? @5% say 7cents and 10% 13 cents/kwh. Ah yes that loan guarantee and the financing rate and term -are current Canadian rates better than a US rates? IMHO it is still a technical solution to a political problem. First QC tried to buy NB power and now entices QC with power partly from the upper Churchill. Good politics/business would use or buy 1,000MW of UC power to finance a link to the island and buy some of that cheap Shale Gas (via LNG?) for Holyrood? IMHO JRS was in a justified hurry to develop the interior of Labrador before Duplessis did - good show Joey!! - but this one has to be thought out a little more!

  • Mount Pearl Guy
    October 24, 2011 - 07:10

    Some of the research I have seen on Shale Gas also indicates environmental concerns regarding the contamination of the water table. We have to remember shale gas in largely unproven right now and although there are reports of the potential of the energy potential of Shale Gas but it may not be the Magic Bullet that the industry is claiming.

  • Maurice E. Adams
    October 23, 2011 - 15:11

    Where is the demand? There is none. There has been ZERO average growth since 1989, and 15% NEGATIVE growth over the last 6 years (an average negative growth of 2.5% per year). Nalcor's own numbers forecast no industrial growth past 2014 (and Vale's Long Harbour plant represents only 4.5% of our existing installed net capacity). Also, up to the limit of available population forecasts, population is expected to go DOWN, not up. And last year both industrial and residential electricity demand went down a total of another 120 GWh (80% of which was reduced residential demand). SO WHERE IS THE ISLAND DEMAND? This is a tax grab (for government) and a profit grab (for Nalcor) --- all in the guise of 'needed' electricity. What a snowjob.

  • Dave Marshall
    October 23, 2011 - 15:03

    I'm glad that George Murphy, the Cab driver, has thrown in his two cents here. What's the alternative George? All the poor, misinformed Ed Hollett readers, including Geoff Meeker, will swear by this natural gas idea. Mr. Oil and Gas Murphy should know that no oil company will partake in this natural gas option for the island. Regardless of its costs, which were improperly calculated by Stephen Bruneau, the oil companies would never go for it anyway. For those wondering, Bruneau did not include operations costs, and his pipeline calculation was way off - we would need a pipeline about twice this size to avoid icebergs, etc. But none of this matters, because the oil companies would never do such a deal. Call them. George claims to have experience in Oil and Gas (?) - he should know this. Cabot Martin is upset with the government because of funding disagreements for Deer Lake Oil and Gas. Take his words with a grain of salt. Wangersky, Meeker, Brian Jones, George Murphy, and my favourite, Maurice E. Adams -- all men with ZERO experience in oil and gas, hydroelectricity etc. Fellas, we can all use google. Start giving Nalcor some credit. I'm sure this will spark a monstrous blurb of misinformation from Maurice. Oh well.

  • Maurice E. Adams
    October 23, 2011 - 12:45

    Now I know why Nalcor is only getting the equivalent of about 2 cents/KWh from Emera --- 2 cents/KWh is clear evidence that that is all the Nova Scotian and U.S. market will bear (and we subsidize that on a scale of about 9 or 10 to 1). We are being taken to the cleaners.

  • The plot thickens
    October 22, 2011 - 11:27

    It just proves that consultants will give you whatever you pay them to say. It seems the only thing the two reports agree upon is that oil will not be a viable source of electricity. So we're still faced with the problem of what to do about Holyrood. Lets have MUN do an analysis of energy options for the province.

  • George Murphy
    October 22, 2011 - 10:50

    A really good article here on the effects of natural gas disposition on the electricity market in the US. Last reports I was reading on natural gas inventories showed a supply that would keep the US going for an additional ten years with no waver in pricing of it. With Navigant saying the same thing, except for pricing to hold until 2040, this means that Muskrat is effectively thirty years too soon for it's own economics to catch up to it's own viability. With the next hurdle to jump through in November, I think that there's enough evidence coming out now that the government is going to have to park this project. Don't look for sanction after that date. Start hedging your bets when government is actually going to pull the plug. The sooner that they do it, the more the taxpayer will save. Another report I looked at also talked about the price of electrical supplies used in solar and wind generation projects getting cheaper as time goes by. Things like batteries used for home wind generation projects and solar cells are getting less costly as they perfect the imperfections and increase production to meet consumer demand. All these things are coming around that says that markets are indeed, coming into very swift changes. Muskrat may fail simply because technology has raced ahead of the traditional need for hydro-electrical generation. Again, a great article on gas in the US. Regards, George Murphy

  • John Smith
    October 22, 2011 - 09:18

    Russel, you keep talking about going it alone, and we will have to pay for it alone ect. Who do you think should pay for it??? Muskrat falls was the answer to a question about providing energy for us, here in this province. Do you think people in B. C. or Manitoba should pay for it? Gas is only an option when Hydro is not available. That's why they burn coal, and we currently burn oil. We don't have to burn any non renewable resource, we will have a never ending supply of power, without ever emitting a puff of smoke. As well, the infrastructure needs to create a viable gas burning energy sector would be astronomical in this part of the world. Why, why would you return to gas, or oil when we have water?

  • GodGuardTheeNalcor
    October 22, 2011 - 08:58

    Let me save John Smith the trouble of commenting on this one. Give your fingers a rest John. But Russell, Muskrat Falls isn't about exporting energy to other markets. We don't even need the line to Nova Scotia anymore. As John will tell you, Muskrat Falls is all about meeting the energy needs of this province. That's what it's always been about, right John? Nobody ever said it was about connecting us to the North American Grid. Nobody ever said it was about bypassing Quebec to get power to markets. It's always been about meeting the energy needs of the province of Avalon, oops, I mean province of Newfoundland and Labrador. If you can't see that Russell, then the only conclusion I can come to is that you must be a Liberal. Repeat after me: This is a great project, This is a great project, This is a great project...