Natural Gas Future and (CHK) (DVN) (XOM)

No matter what the temporary hoopla over concerns with nuclear energy, it's going to be a big part of our future, as will coal and natural gas, as those are the only places with sustainability and reality to meet energy needs lie, no matter the media love affair with ridiculous wind turbines and solar, which are close to being irrelevant, and should have all government subsidies on them removed in order to let the free market decide what they want.

Natural gas will eventually be a major part of our energy policy, and companies like Chesapeake Energy (NYSE:CHK), Devon Energy (NYSE:DVN), Exxon Mobil (NYSE:XOM) will be among the major and profitable players there, for those with a long term horizon.



Seeking Alpha sees this as the solution:

Step 1. Stop all taxpayer subsidies to wind, solar, and ethanol. This may have some people falling out of their chairs and clutching their chests, but we have to be responsible adults about this and recognize that wanting the green energy dream to be true doesn’t make it so. Here is the link.(pdf) to the EIA illustration for renewable energy consumption.

If you go to PDF p2 and look in the lower-right portion of the page, you’ll find a breakdown of the various renewable sources that comprise the 7.7 quad Btu (which is 8% of the total 94.6 quad Btu). The first thing you should notice is the 2.7 quads of hydroelectric power and the 1.9 quads of wood represent 60% of the renewable total. 60%. Surprisingly, wind and solar are only incremental sources within the renewable category at a total of 0.8 quads -- or just 10% of all renewable sources and <1% of all sources. So, after spending billions of taxpayer money, how can anyone seriously think wind and solar will have any real contribution to our supply sources? Are they even worthy of being included in a realistic energy policy?

What about ethanol? According to a 2007 EIA subsidies report, ethanol/biofuels received a subsidy of $5.72/mmbtu. Ironically, the spot price for NG was $3.79/mmbtu on 3/11/11. Putting aside the argument that ethanol is a net user of Btus (i.e. needs more energy than it creates) and contributes to global food inflation, how can it be deemed a renewable source when it requires NG to process/burn the corn into ethanol. Without NG, you can’t have large ethanol output. How can this be considered a sustainable, green energy source? Why spend all that capital on building ethanol processing plants when we could just burn the NG directly in our heavy transportation fleet? Wouldn’t that be a more economical way of reducing imported oil?

The underlying economic fundamentals of certain renewables can be summed up in two words: wasteful duplication. Wind and solar megawatts do not replace the need for dependable fossil fuel megawatts. A simple illustration of how wind turbines are a wasteful duplication would be for the government to force you to buy a car that doesn’t start-up all the time or, when it does, it’s usually in the middle of the night when you’re sleeping. The unpredictable and untimely run-time of this car requires you to buy a second car as a “back-up” so you at least know you have dependable transportation to get to work. In the end, you really only need one car, but the government policy is causing you to buy a second car, which unnecessarily doubles your cost.

Step 2. Convert the heavy transportation fleet to natural gas. 25.4 Quads, or 72%, of the petroleum supply is used for transportation and 7.7 of those Quads come from diesel/distillates. It would take ~7.5Tcf/year in NG to displace all of the 7.7 Quads of distillate fuels used in 2009 and would increase NG demand to ~30Tcf/year. Based on the abundance of NG shale, it seems like this supply source has the scalability to absorb the demand from a diesel-to-NG shift. There are a number of benefits that come from this conversion including the creation of US jobs in the NG-related industries, royalties to landowners, taxes paid to the government, and a net improvement in the US trade deficit.

Step 3. Look to coal and nuclear to supply future increases in electric vehicle demand. Assuming we have a material shift to electric vehicles over the next 20-25 years, the only economically reasonable supply sources that have the capacity and scale to service this new demand would be nuclear/coal-fueled baseload plants. Before you fall out of your chair again, just understand that any material shift to electric vehicles will create material changes in the demand curve for electricity. This is going to be a good thing in terms of capital expenditures and operating costs. For example, overnight demand (i.e. off-peak hours) could someday increase to the levels of demand needed during the day - as more and more cars are recharged at night. This would cause the “demand curve” to flatten out which would mainly require cheaper baseload megawatts to service electricity demand 24/7 versus having extra megawatts built to just service daytime peaks in demand. The increased cost of electric cars will be more manageable if we have an inexpensive fuel source that can offset that cost.

There were 17.1 Quads of petroleum used for passenger cars in 2009. It will be very expensive to shift even 1 Quad to wind and solar considering there were only 0.8 quads from those sources in 2009. So, if we were to shift 7 of the 17.1 Quads from petroleum to electricity, the most economical way would be to work with the existing baseload fleet and repower old coal-fueled sites with new, super-critical boilers that produce 20-30% less CO2. The side benefit would be a reduction in new routes for transmission lines.

The only way we will be able to realistically reduce some of the 35.3 Quads in petroleum demand (24.8 Quads for ground transportation) is to shift to supply sources that can handle it – i.e. NG, coal and nuclear. Believing in the dream of renewable energy while ignoring the realities of our petroleum demand is no way to run the world’s largest economy.

Devon Energy was trading at $87.10, down $1.47, or 1.66 percent, as of 2:09 PM EDT. Chesapeake Energy was trading at $33.52, down $0.04, or 0.12 percent. Exxon Mobil was at $81.54, down $0.84, or 1.02 percent.




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