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|updated 1/12/2001 7:09:00 PM by iNet News Manager|
|Report: USA's Triple Energy Whammy in Electric Power, Natural Gas & Oil|
By Brian J Fleay
10 January 2001
The crisis coincides with an emerging world oil supply crisis as production of cheap oil outside the Persian Gulf countries peaks. The focus of oil supply is shifting to the latter countries who are not ready to invest in stabilising and expanding their production capacity to meet normal demand growth through to 2005 and beyond. Rising oil prices reflect this scenario. The US consumes 26% of the world's oil and imports nearly 60% of that for an import bill in 2000 of some US$100 billion.
US ELECTRIC POWER CRISIS
Electric power consumption has been growing at 3% pa since the mid-1980's, two-thirds of the increase being supplied by the utilities the remainder by the rapidly growing non-regulated gas-fired merchant generators, including industries now generating their own power with options to sell to the grid. The merchant generators chase the peak loads in deregulated markets - see below. These high growth rates have been driven by population increase, air conditioning and now by the internet. The proportion of houses with air conditioning has nearly doubled since 1975, increasing summer peak power demand. The internet has also been driving electric power consumption growth in the 1990's. electric power consumption grew by 5.4% in 1998, according to the Edison Electric Institute. The internet needs high power supply reliability.
US ELECTRIC UTILITY DEREGULATION
Before 1990 there was a 25% installed generator capacity margin over peak summer demand in the USA, necessary for supply security - electricity cannot be stored. The uncertainty introduced by deregulation led to a cut back in investment in power stations and transmission lines so that by 1998 the capacity margin was below 10% - and worse in states like California where utilities import about 25% of their peak summer power load from other states. During 2000 there were over 40 occasions in California when Stage 2 emergencies were called with repeated incidents of blackouts and brownouts - these continue.
The spot market for electricity in California at the peak has reached US$1.50/kwh whereas their sale price was capped at 6.5c/kwh and was only 3c/kwh before deregulation. There average purchase price last year was around 30c/kwh. The price of natural gas has increased as well from US$2.20/1000c.ft. in late 1999 to spot prices over US$9 in December - see below for a discussion on natural gas supply. The merchant generators have been able to make windfall profits in this environment by exploiting the futures market in both electricity and natural gas. Similar situations have arisen in the US north east and elsewhere, but not on the scale of California,
PG&E and SCE (over 9 million customers) have accumulated losses of over US$9 billion since June and face bankruptcy. They applied to the Californian Public Utilities Commission (PUC) on 2 January for permission to increase their rates by 26% to 30% for six months to overcome the crisis. The PUC on 4 January only agreed to a 90 day 9% increase for residential rates and 7 to 15% for businesses. Stock prices of both companies immediately fell while their credit rating is now near junk bond status - which affects their continuing capacity to borrow and buy peak electricity. The following day stocks of major banks with significant loans to PG&E and SCE also fell, like the Bank of America and Citigroup. Further action is inevitable within weeks to resolve the hiatus.
PUC Commissioner Carl Wood said: "We are voting the epitaph for deregulation in California today. Deregulation is dead." Consumer advocates see no reason why consumers should pay for this fiasco for which they are not responsible.
The publicly owned power utilities in the Los Angeles region have yet to be deregulated and have not experienced problems on anywhere near the scale of PG&E and SCE. Some states took steps to ensure that deregulation did not undermine investment in new capacity through the uncertainty arising from the reform.
US NATURAL GAS SHORTFALL
Natural gas is the principal fuel for winter heating in North America, winter consumption is 50% higher than in summer while winter residential and commercial consumption is four times that in summer. Natural gas consumption has exceeded US production since the mid-1980's and Canadian imports now supply 15% of US consumption. However, US production has declined since 1997 with the increasing number of new wells unable to offset a doubling of production well decline rates to 40% since the mid-1980's. A similar pattern has emerged in Canada. Running faster and faster in order to stand still - or even go backwards! There is no way US production and imports from Canada can grow at 2.6% pa to fuel gas turbines to meet electric power growth through the next 5-10 years.
Some summer gas production is stored in depleted onshore oil and gas fields close to the demand centres to meet residential and commercial heating demand in winter. About 20% of winter supply is met from these storages. However, gas turbines supplying peak demand electricity in summer (the air conditioning load) is rapidly eroding the capacity to recharge these storages. The current winter is a cold one following three warm winters and these storages will reach record low levels by end March. Consumption is being met by drawing down the storages which could be depleted during 2002/3 winter or earlier. The weather and a possible decline in industrial uses will have a bearing on the outcome. For example, some nitrogen fertiliser manufacturers have shut down as rising gas prices make them non-competitive with imports. Kaiser aluminium has shut down an aluminium smelter. It is more profitable to on-seIl electricity purchased under long-term contracts than to convert it in to aluminium. Some have stopped stripping ethane, butane and propane from natural gas - it is more profitable to sell it as gas. Ripple effects in industry will follow and perhaps influence the price of liquid petroleum gas (LPG) world-wide.
Gas withdrawal rates from these storages will decline as the winter drawn down progresses and curtailment of industrial consumption may be needed during February-March cold spells to meet residential heating needs. Heating bills this winter will be 30% higher than 12 months ago.
US GAS SUPPLY OPTIONS
There is some spare LNG terminal capacity at US ports, but insufficient uncommitted LNG supply or tanker capacity to supply them. New LNG production capacity is needed, most likely in Venezuela and Nigeria, plus a fleet of LNG tankers at US$150 million each, plus expanded US port facilities. Alaskan sources require a minimum investment of US$10 billion to develop gas fields and construct several thousand of pipelines on a minimum 6-7 year time frame. Long term gas prices of over US$3/1000 c.ft. are required to justify these investments.
Two-thirds of lower 48 states gas potential is thought to be onshore east of the Rocky Mountains in deep formations. Drilling costs will be double or more because of the greater depth and the time to drill a well will more than double. The east and west coasts are off limits for environmental reasons and will require new infrastructure such as offshore pipelines. A massive number of new and specialist drill rigs are required that is well beyond the current capacity of the rig manufacturers to build. 40-50% of the experienced staff (eg petroleum geologists) in the US upstream petroleum industry will retire over the next 10 years and there are few new ones in training. 15 years of low oil prices have taken their toll on the petroleum exploration and development industry world-wide, but especially in the USA. An ageing oil tanker fleet is now fully committed.
The constraints to the massive expansion required to exploit these hydrocarbon resources are as much in the physical resources and skilled personnel required to do the job. Such constraints cannot be overcome quickly.
Suddenly the upstream petroleum industry has to run more than twice as hard to keep pace with growing demand for oil and natural gas, especially in the US where circumstances have also conspired to produce a major electric power crisis. A triple whammy!.
The only immediate solution for the US is to systematically reduce consumption of electric power, natural gas and oil, it takes time and dollars to overcome physical constraints. Any attempt to massively expand energy production must divert energy from the general economy to achieve this task, just as existing hydrocarbon supplies are declining. There are severe limits to the rate at which the energy industry can be expand under these circumstances. In the jargon of economics there is an "opportunity cost" of no small proportions.
So President-elect George Bush has the USA's greatest energy crisis in it's history on his agenda. He will of necessity have to preside over a contraction of oil and gas consumption in the USA, shortly after the US refused to do so at The Hague Greenhouse conference last year to reduce Greenhouse gas emissions!
The present thrust of economic development in the USA has hit an energy supply ceiling, economic growth in the old way is no longer possible. In California energy efficiency measures to get more service by consuming less energy are already on the agenda.
Articles under "energy" in the Houston Chronicle, Texas. www.HoustonChronicle.com
Campbell, CJ, Perrodon., A, & Laherrere, J 1996. The World's Gas Potential, Petroconsultants SA, Geneva.
Articles in leading oil industry journals since the early 1990's.
Campbell, CJ 1997. The Coming Oil Crisis, Multi-Science Publishing Coy UK, and Petroconsultants SA, Geneva.
Fleay, BJ (1999) Climaxing Oil: How Will Transport Adapt? Paper presented to the Chartered Institute of Transport in Australia's National Symposium, Beyond Oil: Transport and Fuels for the Future, Launceston Tasmania, 6-7 November 1998. Published as Occasional Paper 1/99 by the Institute of Sustainability and Technology Policy, Murdoch University Western Australia. wwwistp.murdoch.edu.au. See Section 5 in particular for constraints to expansion of the upstream petroleum industry.
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