Free Markets
&
Natural Gas
Presentation to:
CREA Energy Innovations Summit
Denver, CO
October 14, 2011
By:
John A. Harpole
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Forward Looking Statements/Cautionary Note
This presentation is incomplete without reference to,
and should be viewed solely in conjunction with the oral
briefing provided by Mercator Energy.
Except for the historical information contained
herein, the matters discussed in this presentation are
forward-looking statements that are based upon current
expectations. Important factors that could cause actual
results to differ materially from those in the forward-looking
statements include risks inherent in exploratory drilling
activities, the timing and extent of changed in commodity
prices, unforeseen engineering and mechanical or
technological difficulties in drilling wells, availability of
drilling rigs and other services, land issues, federal and
state regulatory developments and other risks.
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Presentation to Senate Business and Commerce Committee & Senate Natural Resources Committee, April 15, 2008.
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Lost in Beijing
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Free Markets
“Consider for a moment that any
one person can only know a
fraction of what is going on around
him. Much of what that person
believes will be false rather than
true…”
- F.A. Hayek in his “The Constitution of Liberty”
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Free Markets
“It is because every individual knows so
little and, in particular, because we
rarely know which of us knows best
that we trust the independent and
competitive efforts of many to induce
the emergence of what we shall want
when we see it.”
- F.A. Hayek in his “The Constitution of Liberty”
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Range of Levelized Cost of New Generating
Technologies Due To Regional Cost Differences, 2016
Plant Type
Range for Total System Levelized Costs
(2009 ¢/megawatt hour)
Minimum
Conventional Coal
Average
Maximum
8.55
9.48
11.08
10.07
10.94
12.21
- Conventional Combined Cycle
6.00
6.61
7.41
- Advanced Combined Cycle
5.69
6.31
7.05
10.97
11.39
12.14
8.19
9.70
11.50
Wind - Offshore
18.67
24.32
34.94
Solar PV
15.87
21.07
32.39
Solar Thermal
19.17
31.18
64.16
Advanced Coal
Natural Gas-fired
Advanced Nuclear
Wind
Source: Institute for Energy Research, Levelized Cost of New Electricity Generating Technologies, Updated February 1, 2011;
Energy Information Administration, Annual Energy Outlook 2011, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html
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Scientific Observation
Science is common sense at its
best that is rigidly accurate in
observation and merciless to
fallacy in logic.
- Thomas Huxley
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Output is Not Correlated with Load
5500
5000
4500
4000
3500
3000
2500
2000
System Load (MW)
100
90
80
70
60
50
40
30
20
10
0
12:00 AM
1:00 AM
2:00 AM
3:00 AM
4:00 AM
5:00 AM
6:00 AM
7:00 AM
8:00 AM
9:00 AM
10:00 AM
11:00 AM
12:00 PM
1:00 PM
2:00 PM
3:00 PM
4:00 PM
5:00 PM
6:00 PM
7:00 PM
8:00 PM
9:00 PM
10:00 PM
11:00 PM
Wind Generation (MW)
Typical 100 MW Wind Plant Generation vs. Hourly System
Load
Wind Generation (MW)
Load (MW)
Source: Brett Oakleaf, Invenergy LLC
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When Wind Blows At Night, Coal Gen
Ramps Down
Xcel Defined Wind Event:
7/2/2008
Wind
Coal
Gas
4:00 AM
8:00 AM
Source: PSCo Training Manual
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Cycling of Coal Plants Has Increased
With Greater Wind Generation
ERCOT
10,000
800
9,000
600
7,000
6,000
500
5,000
400
4,000
300
3,000
2,000
200
Incidence of
Coal Cycling
1,000
# of Cycling Events
8,000
MW of Capacity
700
Wind Capacity
100
0
0
2003
2004
2005
2006
2007
2008
2009
Cycling event is defined as a > 5% change in generation
output hour over hour
Source: Bentek Energy
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Generation Stacks Differ Across The Country
Nat
Gas
17%
MISO
Nuclear 4%
Nuclear
24%
BPA
Nat
Gas
56%
CAISO
Source: Bentek Energy
Nat
Gas
4%
Nuclear
11%
ERCOT
Nat
Gas
47%
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MW of Wind Needed To Save 1 Ton CO2
Average US Cost For Saving CO2: $56/ton
Assumes tax subsidy of $22/MWh, with pre-tax value of $34/MWh
Source: Bentek Energy
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Colorado as a Laboratory
The Renewable Energy Standard Promise:
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Cleaner Air
Cheaper Energy
2004 Campaign Yard Sign
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Expensive Laboratory
• Bills for Xcel Energy’s 1.4 million electricity
customers in Colorado are up 21 percent
in the past six years
• Over the next six years, rates are
expected to increase another 20 percent
Source: http://www.denverpost.com/fdcp?1297096466537
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Source: Informational Briefing before the Colorado Public Utilities Commission, HB10-1365, Clean Air/Clean Jobs Act Air
Quality Implementation, Paul R. Tourangeau, Colorado Department of Public Health & Environment, April 26, 2010
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75 Worst Coal Power Plants
Percent of Total Pollution
ME
WA
MT
ND
1%
1 plant
VT0.4%
NH
1 plant
OR
MN
MA
ID
SD
WY
PA14%
8 plants
IA
NE
NV
UT
CO
KS
OK
AZ
NM
TX
4%
2 plants
Population
< 1 million
1-5 million
5-10 million
10-15 million
> 15 million
Shale plays
CT
RI
0.3%
1NJplant
OH
13%
MD DE 1%
3%
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plants 6% 4 plants 1 plant
1%
8%
1 plant 8 plants
5WV
plantsVA
2%
1%
3%
3
plants
MO
1 plant
3 plants
KY
7%
NC
6 plants
3%
TN
3 plants
SC 2%
AR
4 plants
GA
AL
8%
MS
5%
1% 3 plants 6 plants
1 plant
IL
CA
NY
5%
3MIplants
WI
IN
LA
FL
1%
1 plant
Sources: “Dirty Kilowatts – America’s Most Polluting Power Plants”, Environmental Integrity Project (July 2007),
EIA-860 December 2008, Analysis/Summary by F.P. LeGrand
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EVOLUTION IN GAS WELL COMPLETION TECHNOLOGY
- THE KEY TO TODAY’S NATURAL GAS REVOLUTION
Source: America’s New Natural Gas, America’s Natural Gas Alliance
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NEW SHALE PLAYS IN NORTH AMERICA
Horn River
Montney
Deep Basin
Colorado Group
Bakken
Cody
Utica
Gammon
Mowry
Antrim
Baxter/Mancos
Niobrara
Marcellus/Ohio/Huron
Mancos
New Albany
Mulky
Lewis
Pierre
Woodford
Barnett/Woodford
Fayetteville
Floyd-Neal
Barnett
Haynesville
Eagle Ford
Source: America’s Natural Gas
Alliance website
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Eastern U.S. Gas Shale Basins
Resource
Endowment
(Tcf)
Produced/Proved
Reserves (Tcf)*
Undeveloped
Recoverable
Resource (Tcf)*
Barnett
250
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40
Fayetteville
320
3
50
Woodford
300
2
30
Haynesville
790
1
130
Marcellus
1,760
-
220
Total
3,420
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470
*As of end of 2008
U.S. Proved Natural Gas Reserves as of 2005: 192.5 Tcf
Source: Gas Shales Drive the Unconventional Gas Revolution, Vello A.
Kuuskraa, Advanced Resources International, Inc., 3/5/2010
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Forecasts for Shale Gas Resource?
• 2008 - 347 TCF - Energy Information Administration (EIA)
• 2008 - 840 TCF - Navigant for Clean Skies Foundation
• 2009 - 616 TCF - Potential Gas Committee (PGC)
• 2011 - 827 TCF - Energy Information Administration (EIA)
“In 2010, U.S. shale gas production reached 4.87 Tcf, up
from 0.39 Tcf in 2000, and total domestic natural gas
production was 21.2 Tcf.”*
Source: Various resource estimates
*Docket No. 10-161 LNG, In the Matter of: Freeport LNG Expansion, L.P., FLNG Liquefaction, LLC; Motion for Leave to Answer and
Answer of Freeport LNG Expansion, L.P. and FLNG Liquefaction, LLC to Motion for Leave to Intervene and Protest of the American Public
Gas Association
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Concerns About Fracing Are Misplaced
Water Aquifer
Several Thousand
Feet of
Impermeable
Rock
Cement
Casing
Fracture
Stimulation
Source: BENTEK
Upper Well Close-up
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Foreign Investment in U.S. Shale
$12.1 B
$5.4B
BHP Plans to Acquire Petrohawk
PetroChina/Encana
Reliance/Atlas
$1.7B
ITOCHU/MDU Resources
$.4B
Statoil/Chesapeake
$1.3B
$3.4B
CNOOC/Chesapeake
$1.0B
BG/EXCO
BHP/Chesapeake
$4.8B
Statoil/Talisman
Reliance/Pioneer
$1.3B
$1.3B
$1.3B
Source: Dr. Jim Duncan, ConocoPhillips,
Decoding the Relevance of Abundant
Supply, 2011 COGA Presentation
$2.1B
CNOOC/Chesapeake
BG/EXCO
$1.5B
KNOC/Anadarko
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Conclusions
• Coal: The free market and the regulatory
environment have spoken…coal fired electric
generation will never again see the dominant market
share that it has enjoyed over the last century.
• Wind and Solar: In tough economic times, there will
be much more ratepayer scrutiny on the real
economics and subsidies of both forms of renewable
energy.
• Emission savings due to wind generation vary by
territory based on fuel mix of offset. The greater the
market share of natural gas, the lower the savings
potential.
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Conclusions (cont’d)
• Cost of offsetting carbon through wind generation is
far above values implied by recent legislative efforts
for most of US suggesting that subsidizing wind
generation is not a cost-effective means of reducing
CO2
• Emission savings rates from wind will decline as the
market share of natural gas increases. Therefore,
policies to promote wind are in conflict with efforts
by the EPA to tighten limits on air pollution.
Source: BENTEK, The Wind Energy Paradox, 2011 MITEI Symposium
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Conclusions (cont’d)
• Natural Gas: An overabundance of supply will create
new demand in U.S. and overseas export markets.
• Analysts in the U.S. gas market have historically
utilized linear model forecasts to predict the long
term price for natural gas. The fundamental
assumptions behind those static linear projections
have been incomplete in the past and are subject to
the same deficiencies in the future.
• The ever changing “human element” behind natural
gas supply and demand does not fit a smooth,
predictable linear curve.
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Citations for Report
All of the information utilized for this report is a compilation of information pulled from the following
data sources:
Bentek Energy
Institute for Energy Research (IER)
Energy Information Administration (EIA)
Bernstein Research
Dr. Jim Duncan, ConocoPhillips
Electric Power Research Institute (EPRI)
EnCana
Steve Mufson, Washington Post, 01/02/2011
America’s Natural Gas Alliance
James Dominick, Xcel Energy
Robert Bryce
American Wind Energy Association
Western Energy Alliance
John Eagleton, Kinder Morgan
Bill Bradley, Enterprise
Paul R. Tourangeau
Brett Oakleaf, Invenergy LLC
Tad True
Stephen Moore, Wall Street Journal
George H. Wayne, El Paso Pipeline Group
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Contact Information
John A. Harpole
President
Mercator Energy LLC
26 W. Dry Creek Circle, Suite 410
Littleton, CO 80120
harp@mercatorenergy.com
(303) 825-1100 (work)
(303) 478-3233 (cell)
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