vulcan.pdf

ENT BY: GREEN POWER;541317~e79 ;AUG-0~ 4:10PM;
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PAGE ~J4
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FILED
(1)
STEVE MUNSON
VULCAN POWER COMPANY
1 J 83 NW Wan Street, Suite G
Bend, OR 9770
Telephone: (541) 317-l984
Fax: [phone]
2flUZAUG -5 Pr-1 5:
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:": PU5L1C
UTILftis' COt"H11SSION
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
INVESTTGA TION OF THE CONTiNUED
REASONABLENESS OF CURRENT
SIZE LIMIT A nONS FOR PURP A QF
PUBLISHED RATE ELIGIBIliTY (i,e..
1 MW) AND RESTRICTIONS ON
CONTRACT LENGTH (i.e., 5 YEARS)
CASE NO, GNR-O2-O1
COMMENTS OF
VULCAN POWER CONW ANY
AUGUST 5, 2002
This filing is oftered in rebuttal to filings of self-interested Idaho electric utilities who
continue thirty YEmI'S of opposition to expansion of clean renewable non utility generation in Idaho.
This comments upon ti1ings of a consultant to the Independent Energy Producers of Idaho (TEPI),
apparently with little lristorica1 understanding of fossil fuel supply and price lessons across North
America whose testimony relies upon thoroughly discredited gas price pI'edi~ot1s of the Northwest
Power Planning Council.
The gas price information upon which that IEPI filing is based has been consistent in only one
way. the predictions have been consistently wrong. The author s own background in energy analysis
and power policy proces~s is appended hereto.
Massive Gas Declines Lead to Power Price Increases
Oil history holds lessons for Idaho, Tn 1983, the Utl1ted States complacently assumed that its
oil energy supplies were secure. that oil would remain a. low cost source of unlimited industrial
~xpansh)l'j ftom its own oil supplies. Few in the oil business and fewer in energy policy leadership
were prepared to deal with the immediate profound repercussions of the then peaking domestic supply.
'Th.is crucial energy supply reality was explained by the work of Shell oil economist named M.
King Hubbert. The work of Hubbert explained why the United States was. so susoeptibJe to the foreign
cartel oil cmbw:go. shortages and price incceases which followed in their wake. It is now known $ the
Hubbert Peak. Detailed analysis of decline C1.U'Ves bas been applied to North American gas supplies.
As with past oil peak impacts on vehicle fuel and industrial feedstocks prices. gas fuel $hortages and
price spikes will have profound negative impacts upon power prlce~ in Idaho.
Hedge Gas Prices With Seven Ceot Renewables
Today Idaho is facing lIledium term impacts of a second massive fossil fuel prodl,l.ction peak,this time in methane gas, with resultant domestic gas shortages and gas fIred power price increases
much larger than forecast by utilities and respondents to this. process. The on1y avaHab1e hedge againstsuch massive gas fuel price impacts are indigenous sources of J:enewable energy, most notably reliable
baseload goothC1'J'J'lal and biQ1t1a$S power.
"..~,".~-~
ENT BY: GREEN POWER;541317~a79 ;AUG-0~ 4:11PM;PAGE 3/4
This response focuses upon concrete examples of why Idaho requires a renewable insurance
policy in the range of $0.07 per kwh against over-reliance ?n gas fuel R~ables will prove to ~ a
bargain for Idaho customers over time. Based upon specific North Amencan gas supply an~ pnce
data. analysis indicates new supplies of gas fuel will be driven by expmlsive new LNG and Arctic gas.
Future gas plants with long term fuel supply contracts (when tbose are even available) arc it'!. the range
of $0.07 per kwh or n10fe. Renewable fuel supplies are local, not foreign. hence much more secure.
Executive Summary Conclusions
Ana1y~s of key power policy gas fuel q\iesnons present grim results. They inctu&:
Future gas prices will exceed $5,00 per mcfrising rapidly over time with resultant new power
prices well in excess of$O.O7 per kwh rising over time with new gas plants and relatedly the
CQnversion 1ilii1\ or some inefficient old gas plants to more efficient new plants is a 8hort term
effect;
AU major North American gas basins are mature and are not now and cannot add signit\C811t
new supply even at high gas drilling levels undc:rway in 2001, all new basins together win not
neady match new gas power fuel demand and new gas from mature basins is always more
costJy~
Even both proposed Arctic pipelines add far too little--tou late Witl1 about l()% to 12% addition
in 7 to 8 years, long after gas demand is up well over 30 % (some estimate over ~O% by then);
Breakeven CQ~ fOT LNG exceed $ 4.00 per mer, and risk adjusted and time adjusted most of
that gas can be expected to exceed S ~.OO per mcf~ tbe 7 potential new LNG pliU~ts announced
will add about) 0% per cent to gas supplies, mO$t take 5 to 10 years to permit and construct.
again far too tittle-too late to avoid major gas constraints and major gas price increases, even
wong with construction of the both of the announced Arctic pipelines~ and
Plans ofm~jor 011 and gas flIII1S to convett gas to liquid fuels will reduce gas supplies further;
The combination of the above factors together all inweate new gas fired power phuus coming
on line over the next 2 to 5 years, willlike1y have breakeven power prices above $ 0,07 per kwh for
with operating lives. There is also a distinct posstbHity that the next 3 to 10 year period will -see
massive gas fuel price volatility sjmilar to and perhaps even 1'T1(:)re chaotic than, the gas prices
experienced 1n California, the Northwest and Nevada last year.
By comparison. stable fuel price renewables at $0.07 per kwh will prove an excellent hedge
against gas fue) power rate shock and may will prove a bargain as they have been in California,
providing of course that renewable prices are not in any way linked to natural gas prices,
Lessons Of Past Year Pose Future Questions
Natural gas prices reached record levels in the past year. A result was power price rate shock.
The United Srates has been warned again for the third time. this warning in the fOIUl of massive utility
IOS!JC1:9 and CUfltom~ outrage, of the fragility of added gas supplies from mature gas basins, even while
the gas fuel mix component has been a relatively low portion of the national mix. whioh is about to see
massive increases.
Key power policy questions are: (1) what are likely future gas prices and power prices given
plans fOf mot'(; than 40 000 MW of new gas plants still being advanced, even after cancellations due to
energy company and gas fuel price increases; and (2) can mature North American gas basins supply
the new gas deman~ and (3) where will new gas C()JIJe trow if not from mature gas basins, when and
at what cost; and (4) what are the air pollution impacts of new gas plants particularly in light of the
June. 2001 White House global wanning study results; and (5) what are tlte costs of massive air
pollution and how are they to be paid.
ENT BY: GREEN POWER;541317~e79 ;AUG-3:57PM;PAGE 4
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For the rust time in history in 2000, United States ga.c; use for power production exceedooindustrial use according to Simmons and Company energy investment bankers. However gas wen
decline rates are up dramatically in US basins and the West Canadian Sedimentary Basin. Simmonsand Company charts from May 2001 reported Canadian Well Decline Rates at 40 % in 1998, which
W81t up from 20 % in 1990. Other reports by the: f111U desclibe the reasons for 1h~ d~1im:: rates thereand in other North American mature gas basins. Their analysis entitled "Normalized Gulf of MexicoDecline Rates-1970 to 1996 found an increased gas. weU declin,e ratt: to 49 % in 1996 from 17 % per
year in 1970.
Small Gas Production Increase
The following page charts from large gas prodll~er Anadarko sets forth a very disturbing
projection of gas production which has increa..o;;ed very little in the past five years. (See Anadarko chart
next page)
Richard Sharples, Anadarko Services president reported in 2001, "... incretiSed drilling for gasin North America is countered by severe decline rates in many mature basins. In the Midcontinent,
there siJnply aren t enough new prospects to reverse the IS% to 18% decline rates in the area nomatter how many rigs are at work in the region. On the Gulf of Mexico shelf, jmt maintaining cuuentproduction requires new drilling opportunities, And in the deep water, discoveries ate mostly oil. with
some associated gas, "
William A Wise. CEO of El Paso Corp reported at a conference,. "re drilling a lot more,but we re not getting a lot more gas, In order to meet the prQ.lected United States demand of 30Trillion cubic feet of gas per year .in the next decade, supply must increase by an average of about
5Bcfd each year from 2000 to 2015. However the average tmnuaf increase over the last 5 years bas
been 1ess than 1 Bcfd. If
North America Mature Gas Bu!lio Production Decline Rates
The largest gas basin in North America is the West Canadian Sedimentary Dasin which
prov1dc::s- about 25% of all Nolth American gas. Tl ill not II likely source for increased supplies and/or
cost effective prices required to meet new gas fired generation even though it is directly north of
Idaho. This is a result of production decline rates, tower find rates, lower average fmd size and
increased costs per unit output.
In April. 2002 at the North American Gas Strategies Conference in Houston, the COO ofPanCanadian Energy (now Encana) said. "Despite a nearly 30% jump in completions in wcsa during1999-2000, production rose only about 1 % and in 2000-, the number of" completions were upanother 20% with production increasing by just 3%.This is not good news for Northwest gas
supplies and future prices since the WCSB has historically been a stable 1ew CO$l source of gas.
Petroleum industry standard, "Oilweek" reported on May 6, 2002 that investment bankingt'inn First Energy Capital Corp stated that
, "
Given the first year docHne rates that we are seeing for
Alberta gas wells- stiU close to 40%- and initial product101\ rates thllt are the lowest on record, weremain bearish on the potential for any gas PToduCtion :increases for Canada. during 2002 in .fight of theslower drilling,According to Onweek, the brokerage reported "higher prices in 2003 shouldencourage more drilling, but any gains will merely make up foc dectines this year and full short of
inOt'eased demand for gas as.. - power developments in Alberta and Ontario push domestic
consumption higher,
However that has also changed dramatically in the past two year~ with the construction of two
gas pipelines connecting WCSB with the American midwest and northeast tbro~h the Chicago hub.This author was an. investment banker twenty Y~$ agQ in New York working on financial analysis ofw"at was then called the Northern Tier Pipelinr: projcx.1: proposed to tap the WCSB for midwest-northeast markets. What is important is that it was nearly twenty y~ars before the pipeline was built
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ENT BY: GREEN POWER;541 31 7~879;AUG-0~ 3:59PM;PAGE 8/14
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and dlen within a two year span, not one, but two pipelines were constructed due to gas fired
generation demand across the United States,
In 8 late 2000 specx:h. respected Houston invesb11ent banker Matthew Simmons, president of
Simmons find Co said, "It is a sad commentary to mal.; but 1 fear we are now in the early days of a
severe energy crisis that will take at least a decade to fix." In Jooe 2001 , Mr. Simmons discussed high
w(\ll decHne rates and low find rates despite much increased drilling acuvities. He summarized the
grim gas $ituation in North America, I'm sayjng a 2 % gas supply increase this year but 1 can , $(:0wh,,'fC its gomg to come from.
In late 2001 an investment banking rum Raymond James reportedL'
...
adding gas reserves is
the only 1hing that will belp me industry as a whole. And that's something the exploration andproduction sector has nol been able to do despite a 130% increase in natw"al gas drilling over the past
18 months or SO.
The implications are clear for that gas supplies to the Northwest, much inorc:ased competitionand hence increased prices for a huge gas basin wbich is clearly about to hit production declines in
output, despite massive new drilling there,
The:: status of North American gas demand, supplies, fuel prices directly inJpacts Idaho power
price levels in this decade and sooner than is generally recognized. Therefore an overview of North
American gas is relevant. North Amerioan gas supplies substantially 1ag gas demand at present and
this imbalance has driven gas prices to teCOtd high levels in 2000. That is not expected to change soon.
TIle Company expects high natural gas prices through tl1js decade due to the basic dynamics of
the North American gas market, This market is driven by natural resource cons1ramts and the
implementation of longe:r term eJq)Ioration drilling and pipeline projects,
Gas produc.1:ion in two major North American basins, Western Canada and Texas coastal plam,
drive gas prices where Vulcan conduCts business. Because gas is the primary fuel for new power plant
competitors, Vulcan current and future prices are set by gas supplies from these basins. The mapbelow locates those major gas production basins i.n North Amerioa.
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ENT BY: GREEN POWER;541317~B79;AUG-0~ 4: 11 PM;PAGE 4/4
Source: (National ~nergy Board, November, 2000)
The Wall Sti'eet Journal reported on January 3, 2001, on the natural gas situation in North America.
The headline read, "How Fed~ Policies. Industry Shifts Created A NaturaHbtft Cruncb:
Federal efforts to promote dean air and t:ncJ'gy independence have fed a surge in
demand, in part by creating an expanding market for natural gas 8IIlong the nations
electric utilities,...in addition to heating about 53% of American homes; natural gas is
also being used to generate about 16% of the COlO1.try's electricity, a percentage that is
still growing... .gas conswnption by poweI.' plants grew at a 7.5% clip Wt year. and the
big surge 111 consbuction of new generating fa.cilities is just now getting under wa)'.
Today about 90% of new power genemtion facilities under oonstruction arc gas fired.
... the US now contromes more natural gas than it supplies, relying on Canada \0 make
up most of the difference. "
The following three charts from the US Energy Informmion summarize United States gas production
declinc:s and the gas shortage in the United States which have increased dramatically over the pMt
decade.
Natural Gas: Struggling to Keep Pace
lJ. S. natural-gas reserves are going nowhere fast As production lags, gas cullswnption. fueled by gas-fired
power plants and a hot eoouomy. is climbing fast. Imports are struggling to fill the gap.
Proved
Reserves
In trillions of cubic feet
Production vs,
Consumption
In trillions of cubic feet
Net
Imports
In trillions of cubic feet
99 00 1989
(Prelim.
99 00
(Prelim. )
Source: Energy Information Administration, as
Reported in The Wall Street .JOUT11QZ, 1/3/00
Volted Stftm ('.;as Production Declines
The Wall Strc~t JourJral report swnm.arized reasons for the American gas indu..q,try supply
shortage, In the early nineties ""ederal, ",., policies lped make natUral gas the new fuel of choice for
ENT BY: GREEN POWER;541317~B79 ;AUG-0~ 4:02PM;PAGE B/14
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electricity prodUC\.."ts who started moving away from dirtier burning fue1s such a..... coal and oil, 111e
electricity industry started planning to bring scores of new gas fired power plants into service. At the
same time big changes were underway in the stru(..1:ure of the domestic oil and gas industry. Many of
the nation' So deep pocketed major energy companies began to shift focus abroad... where production
costs were lower than in the United State!!.... .majot"$ $(Itd or abandoned much of m~t' production. m the
continental US. That left a greatet' share of domestic exploration and production in t.he ands of smaller
independent companies.
The article described drilling expenditures of the smaller companies and even more
importantly the rapid decline rates of the mature gas production basins in the United States.
Nowadays around 7 000 relatively small independent operators, drilling on 1ond and in Gulf shallowwaters. account for roughly 65% oftbe t:'1aturaJ gas produced in the lower 48 states. The indepen~ts
face a host of problems. For starters. many of the nations older fields are rurunng low. In the Gulf of
Mexico, the source of about a qnarter of the nation s natura) gas supply, dfiHcrs have adopted new
tecbnologies. . . to wrest more gas from matut'e fields. But the additional gas has come at a cost: Fields
that were experienc,ing 25% annual decHnes in production now are Jogging 50% drops.
The cumulative impacts of American gas industry resource produCtion declines and other
problems over the past decade have resulted in gas supply shortages that have been ameliorated by net
gas imports prim.ari\y nom western Canada, growing in 2000 to 3.3 trillion cubic feet.
Western Canada Gas Supply Problems
The Western Canadian Sedimenta(y Basin (WCSB) provides about 2S % oHota1 gas in North
America, about 16b11lion cubic feet per day ("Bcf7d"). Remaining basin gas. content, number of newwells drilled, exploration find rates, now production and decline rates tOgether determine future
suppJit's and powc;r fu~1 ~a5 p.nct':S dir(;cl1y impact both pow~ m~ket prices 1:IJld gas supply avaiJablt1
to meet demand. 'I1u~ National Energy Board of Canada conducted two landmark studies of the WCBS
titl~ Short tenn N3tutal Gas Deliverability :from WCSB 2000-2002 and RYn.1I~CS and Pric~
Deo::ember and November 2000. respectively. Excerpts from these reports follow.
Two key trends were identified (by the Board in the WCSB). First, recent1y dril1ed
wens start produci11S at 1ower rates than wens driBed more than five years ago. The
second trend indicates that produetioJ:'l nom these wens d"olines more quickly than from
older wells. Over the past fow years the d,Qcline rates from recently drilled wdls have
been higher than nom older wells, reaching as high as 40% per year. Assuming tl1a1~ent trends in production characteristics will continue over the sh.ort term it is fair to
say that future wells. will generally be less productive than wells drilled a few yeats ago.
. . .
the Board recognizes that there are a number of uncertainties that will affect
delJverabitity. the major factor being the level of driUing activity. With the increase of oil
prices in 1999 and the accompanying increases in industry cash flow, Canadian
produOl..'1'$ jn~reasoo drilling to a rccotd 6,300 wolls. D(;spioo tho strong level of activity
however, naturul gwI production fTOT11 the wcsa increase omy marginally, by ~m\: .
Hcf/d, or about 2 per cent. Th1S sluggish increase in natura! gas production has Ct$atcd
some ooucem about the robustness of supply from the WCBS, especially if the coming
winter in Canada is cOlder than the past few years.
Gas Transmission Pipelines Support Higb National Gas Prices
All IlU\ior gas North AmericlIO. gas production basins now linked by major transmission
pipelines. The TransCanada pipelines system moves 12 Bcf7d of gas to mid America. The Westcoast,
Northwest and POT pipelines to southern California were the other majoT West Canada gas pipe1ines
Wltil 2000. A recent development in response to new power plant gas fuel demand in the Midwest was
ENT BY: GREEN POWER;541317~B79 ;AUG-0~ 4: 03PM;PAGE 9/14
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the startup of the new Alliance pipeline system Iransporling 1.3 Bcfld W~'tem Canadian gas to the
Chicago Mea and the Vector pipeline transporting 700 million d7day of this gas into Ontario province.
A second new gas pipeline started in NovemhfJi' 2000 moving West Canada gas east to
Chicago and beyond. Most Texas region gas services the Midwest and Northeast with laterals to
California and the Northwer;;t. The new markets ft)f Western Gas created by the new West to East
pipelines from Canada are likely to keep Western U.S. gas prices CQnsistent with the national ga5
trlm'ket whereas it bad been protected through the lack of linkage previously.
Gas Drill Rig Count "Beeline
Adding fuel to the bleak outlook tor gas supply and price impacts, the Baker Hughes gas drill
rig count has dropped dramatically since hitting a highs a year ago and that. means further drops 111
new gas finds and of course reduced supp1y. (See chart below)
100
950
800
650
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Baker J~lughes Natural GdS Rig (~ount
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1/26/01
, I
5/16101 9/3/01 12/22/01 4/11/02
Scu:'()-~: Ba~2f Hughett
ENT BY: GREEN POWER;541317~e79 ;AUG-0~ 4: 04PM;PAGE 10/14~~,,~~~
Excerpts From CEERT Gas Fuel Power Study
The Center for Efficiency and Renewable Technologies published a study in May 2002 which
elaborated upon some of the earlier comments in this response, E."'tCeIpts of that study follow in this
section. This respondent did not participate in the creation of that study and is not in tit" agreement
with all data contained therein, HowevCI'. the general findings agree willi our findings to wit. gas
prices are going to increase substantially and gas fuel supply and prices may become extremely
chaotic over the next three to ten years as power demand driven gas fuel shortages occur. Excerpts
from that study fo)Jows.
Risky Diet North America s Growing Appetite for Natural Gas
Executive Summary
The u.s. Department of Ettet's Energy Infonnation AdmiuistratiOfi (USEIA) projects
that demand for natural ga.s win increase rapidly in the next two decad~, and that gas.supplies for North America win continue to be larg~y prodnced domestically trom
inexpens.ive co11venrionaJ resources, However. there is strong evidence to the contrary. This
evidence indicates that North America increasingly will depend an more ~pensive
unconventional natural gas resources, including imports Hom othec connnefits.
Three alternative supply options dominate among the more expensive unconventional
natural gas resources. Industry is actively pursuing al1 of these options. They include
pipeHne construction to bring gas from the Arctic to southern markets; expansion of
deepwater production in the Gulf of Mexico; and development of liquefied natural ~as
(LNG) importation infrastructure.
The salient feature of all these options is that capital requirements are substantially higher
than for Nor!.h America s cuJ'Cel1t, conventional natural gs..i supplies. As North America
increasingly is forced to rely on alternative sources, natural g8.1;1, prices will be higher thanthose projected by USEIA. The fact that indusny is pursuing more capital intensive
altemati ve sources is a. good indjcat1on that industry insiders do not agree with llSEIA
supply projections. Moreover, oontracts for future gas deliveries are trading at prices
significantly higher than USEIA projections,
The prospect of dependence on LNG imported from other continents raises important
national security concerns. North America already depends on imports for more than half
of it'.; pctrolann supply, and protl;(,,'ting access to this peuo1cum is a foremost concern ofS. foreign policy. "Ibat the U.S, and its Nonh American nei,ghbors are positioned to
become dependent on imported LNG for natural gas, its second largest source of energy,
suggests additional foreign policy and energy security concerns for the u.S. This prospect
and the country's ability to avoid it by exploiting reasonable alternatives to imported
natural gas, deserve vigorous public scrutiny and debate.
The large amounts of capital and long lead rimes required to develop LNG import facilities.
Arctic pipelines, deepwater wens, and other unconventional sources of natural gas pose
additional problems, There is reason to doubt whether sufficient investtnent wHJ be made
soon enough to prevent disruptive price; spikcs like those seen in the; winter of 2()()o-2001.
Actual shortages of gas may OCCtll".
In the next decade or two, North America is expected to become dependent on natuTw gas
impOJ'k;d oom ol.h~ continents, ju$l as it now dqJends on imported pet1'Oleum. TIletransition from self-sufficiency to dependence on overseas imports of natural gas is likely
to be marked by more market tunnoj) of the sort experienced in the winter of 2000-200 t .
Pub\ic pohcy meas~res shoUld be considered to moderate the increase in demand t"Ol"
natural gas in order to reduce the need for imported gas and minimiz~ market iw.1ability.
ENT BY: GREEN POWER;541317~e79 ;AUG-4:05PM;PAGE 11/14
Demand for natural gas used to generate electricity in the United SbU:es is projected to
double in the next two decades, an average annual increase of 4.5%, Unless poIi,,"ies arc
implemented to reduce this use, demand in electricity sector all)ne is projected to account
for 55% of the expected increase in U,S. gas requirements. The forecnst thus expects that
the supply of elecni.city in NoI1h America will become increasingly dependent on natura)
gas while at the same time natural gas markets are likely to become increasingly to:rbuJcnt.
Any effective policy to reduce demand fot natural gas and minimize the impact of gas
market instability must reduce projected demand by the electrl,city sector
One option CJ.lrrently under consideration in many states is to increase significantly the use
of renewable energy resources for electric generation. By displacing natural gas-tired
generation, renewable energy resources can 'fed nee the impact of natural gas market
volatility on the essential electricity sector, This paper summarizes developments in North
American natural gas markets that are likely to have serious impacts on society and the role
that development ofrenewable energy resomceS can play to redu.ce these impacts,
Free market proponents are fond of identifying this event as a market success. High prices,
even expectations of high prices, appear to have provided the nece$saty incentives to
incteasc production ootivities, Although gas pri.ces leached unprecedented levels. th~
msrket did adjust and prices declined from their peak. The applicability of a benign market
theory is suspect,. however. Even with the marked increase in drilling activity, there was
significant increase in U.s. production of natural gas. Figure 3 shows that production in
2001 is nearly identical to production in 2000.
In anticipation of higher prices, drilling activity did increase. but production did not. Prices
continued to rise until the immediate threat of shortages had passed and declined because
seasonal demand decreased, not because higher prices attracted additionaJ supplies. As
discussed below. official projections are thal u.S. production will increase 50% above
current levels with little increase in price. The events of winter 2000-2001 cast considetable
doubt on the$e projections. At some price level, remaining gas resources in North America
would be developed and brought to market But judging from recent experience. that price
is Jikely lO be $ubstantia.11y higher than, currently forecast by USEIA.
Moreover, the situation in 2000-2001 was relatively trivial compared to the chaHenges
facing the U.S, in the future. Potential supply Slhortage..~ were small; gas :in storage for the
winter of 2000~200 I was only a few hundred bef lower than the previous year. There were
still opportunities for additional domestic production that were re1atively .inexpensive to
deve1op quickly.
However. in the longer tenD it appears that domestic production of natural gas cannot meet
demand projections without large im.'fea::IC~ in price, Alternative sources include gas from
the arctic and overseas imports. but these alternatives are capital intensive and requi'fe long
lead tUnes. If demand for natural gas increases as projected and C8IlJlot be met by domestic
production. price episodes such as those seen in the winter of 2000-2001 may become
commonplace until sufficient infra$trocture is built to import natural gas to North Am.er1ca
tIom other continents.
EXpectatiOr.5 for a dramatic and unprecedented increase in domestic gas production w;th
only a modest increase in year 2020 prices above historical levels also are at odds with the
experience of winter 2000-2001. Current trends in tho industry suggest that more troubling
scenarios are more likely,
For examp1e, natural gas trom the average $. won is now depleted much more quickly
than those drilled only a decade ago. When a well is drilled into a gas reservoir, initial
pressures are high and the gas escapes inK) the wen rapidly- As, the gas is rc::\C:fl-sed, the
--,.- .
pressure and ;flow rates ~~rease. At some point the !:~!L~oes not produce gas at a high
ENT BY: GREEN POWER;541317~e79 ;AUG-0~ 4:06PM;PAGE 1~/14
.._,.,-",",----'
enough rate of flow to be economical1y viable and the well is said to be depICted. A useful
measure of the depletion rate is the ~ha1f~life'" of the resource, the time required for the rate
off1ow of gas from a w~11 to fall to one-half of the original rate. In J990, the average ha1f-
life was 40 n1onth$, while by 1999 the half-life was nxiucoo to 24 months. (See figure 4)
The rapid depletion of ga.c; we1t~ benefits producers by maximizing near term cash flow
much as "just in time" supply chaitlS benefit manufacturing businesses, However, it also
means that more capitaJ is required to drill more new wells just to replace: the production of
older depleted wells. IfproducdOtl is to increase by 50% in the next two decades as USEIA
projects, even more capital win be required. As we discuss below, the capital. I'tquired to
meet projected North American demand, whether through domestic or overseas supplies, is
a fundamental issue that has profound implication!; for supp1ies and prices,
Many factors contribute to the more rapid depletion of gas wells; improved technology
allows higher initial extraction rates. for example. But a troubling development that also
contributes is that the best reservoirs of gas in the U.S. have already been tapped and
increasingly smallec and/or u.noonv$ntional plays. namely tight sands. coal bed and gas
shales, are being exploited, A recent article in th\: Oil and Ga$ Journal cited the difficulty of
exploiting these unconventional resources: "the deep, tight fonnations challenge CWTent
dritHng techno1ogy. Wells are being drilled to depths exceeding 14 000 ft, with horizontal
laterals of as much as 5 000 ft that must be s.timulated. Industry sources put the cost of
those wells in the neighborhood of $4.5 million each." As a consequence, the US.
increasingly dependent on importS of 8~ uom more recently developed fie1ds in Canada
which have climbed steadily s1uce 1990 and accounted fO1'" 16% of u.S. consumption in
2000 (see figure 5).
u.S. natural gas production is now projected to fitl! 4% in 2002. According to Robert
Morris. oil and gas analyst for Salomon Smith Bamey, Inc" "Produ~J:'s have r~l through a
lot of their best prospects in trying to drill up all they could" when prices were high in
2000-2001. According to Morris, develoPef$ are getting less new productiO11 per wen
because of the smaller fields being found and qu1ckly depleted. "We woutd need 1,200 rigs
in the field next year to keep U,S. production level,
Figures 3. 4, and 5 are on the following page.
ENT BY: GREEN POWER;541317~e79 ;AUG-4 :06PM;PAGE 13/14
Figure 3. U.S. Dry Gas Production
1800 "
1600 ,
1ii 1400.Q,)
1200
:.a 1000
8DO
600
:= 400tfJ
200
.;:.
'fJ s!f~ ':) s;,
~ $)~ ~
~ 5-\
"" $)'::- ~.... ~':'- ~.... ~':'-
')-b.
~:~ ~-;,-:+. ').y.
q;t:l ~O~ ~'l--f' ~'l-~V,
('(
lS-Qurce ~ USEIAJ
Figure 4. Natural Gas Well Production Half~Lives by Region
, Mwi'thG To R~"h50 ~ntot,lok1~.P:rociact.'Oo'": Rfo~I!I50
' '.. . .,... '.,
0 '
. .
jS)(iZ ,003 1994 1995 :1R..C1fJ 1S$?7 !99~ !9~!
40,
:30
:20
Ye;:;r off1m Pl"Cldootk~1'I
(Source" USEIAl
Figure 5. Total U.S. Natural Gas Imports by Month
Biltil;i'\ Cut;',G F~~t
4() \). .
100
111&1)4 1nWOO 1t1t":1'S6 1J15(1X) 11f15A11
roo
. ;:~....,, .'
200
11it~
;ou'ce -. USEIAJ
ENT BY: GREEN POWER;541317~e79 ;AUG-0~ 4:0ePM;PAGE 14/14"'--
Respondent Energy Background
Mt, Steve Munson is an energy professional with thirty years participation in internationalCD.eJ:SY markets including: graduate thesis in the geopolitical jlnpacts of declining oj) supplies; WallStr~t energy investment banking~ and correctly warning FederaJ and state agencies and electriculiliries since 1995 of the recent power shortfalls atld gas supply price impacts throughout the Wcst.
He has warned power policy participants of impending electric power pnce increases driven by North
Ameri~ mature gas basin depletion rates and future foreign LNG supplies.
Mr, Munson is the CEO of Vulcan Power Cumpany whic.h has a multimilHon dollargeothenna1 power investment in ldmw at Raft River. It has been stymied along with others by the past10 years ofldabo Power and Avista opposition to geothermal power gaining a foothold in Idaho. TheRaft River geothennal site is now being developed by US Oeotbermal, a company of which VulcanPower Company is a minority shareholder.
Vulcan Power Company was instrumental in the pa.qsag~ of a 15 % renewable portfoliostandard in Nevada. is a participant in the ongoing 10 % renewable portfolio standard rule process in
New Mexico and the California 20 % renewable portfolio standard law prUi.:ess which looks likely ofpassage, He is a founding memb~ of the Federal Geothennal Working Groups of Idaho, New Mexico,and Oregon" He a board member of the Geothermal Energy Association and a member of theGeotbermal Resources CoWlcit Mr. Munson holds an MeA in Finance ftam the Stanfo."d GraduateSchool of BusinesB and an. MA in ~oliticw. Science from Stanford University,