NATURAL GAS

Utilities must embrace long-term contracts, market forces -- report

New technologies and discoveries have made natural gas less likely to undergo wild price swings, so utilities and regulators should embrace it with longer-term supply contracts and a heavier reliance on the relatively clean fuel, according to a new multi-stakeholder report.

Citing "fundamental changes" in the domestic supply of natural gas -- namely the ability to extract it cheaply from shale formations, along with extensive storage and import capacities -- the report suggests a range of policy proposals for groups including a national regulators' association and the Commodity Futures Trading Commission (CFTC), aimed at ensuring a fluid and free market for the fuel.

"The Task Force findings and recommendations reflect optimism that the robust supply horizon for natural gas presents fresh opportunities -- not only to move beyond prior price volatility concerns shared by both consumers and producers, but to develop new tools for managing price uncertainty," said Marianne Kah, chief economist with ConocoPhillips' planning and strategy group and a member of the authoring group.

The assessment comes from a "producer-consumer task force" led by the Bipartisan Policy Center think tank and the American Clean Skies Foundation, which promotes natural gas, renewables and energy efficiency on climate and energy security grounds.

But an array of sponsors signed off on the assessment, including the American Gas Association, ConocoPhillips, Pacific Gas & Electric Co. and the Natural Resources Defense Council, as well as individuals formerly associated with Ford Motor Co., the Consumers Union and the Energy Department.

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"When it comes to talking about a major energy source, it's rare that you get major suppliers, consumers, regulators and environmentalists saying the same thing. But that's what happened here," said Gregory Staple, CEO of the American Clean Skies Foundation and co-chairman of the task force.

"Provided we have a sound environmental framework in place, shale gas can provide America with a growing low-carbon fuel source. And prices will remain comparatively stable."

The report repeatedly refers to the need for appropriate environmental safeguards for natural gas development, a hot-button issue as drilling and particularly hydraulic fracturing, or fracking, have expanded into new areas and become more visible. But it avoids going into specifics on what safeguards are needed.

The report says the natural gas industry should move quickly to address concerns such as contamination of drinking water from faulty well casings, heavy industrial water use in areas with many production wells, safe disposal of the potentially chemical-laced water used in production, leaks of the greenhouse gas methane, and general disruptions that come from heavy industrial activity.

"Ongoing efforts by industry, working in conjunction with [U.S.] EPA, to implement best practices to reduce all forms of harmful emissions and to update estimated emission factors for transmission and distribution facilities are needed, as are improved data concerning emissions from production facilities," the report warns. "Importantly, confidence in these efforts must be maintained or the benefits of natural gas usage could be called into question."

In an interview, Ralph Cavanagh, co-director of NRDC's environmental program and a report author, said the report rightly puts an emphasis on continuous environmental improvement by the industry.

"The one way that we can blow it is ... a failure by all aspects of the industry to meet high levels of environmental performance," he said. "I think they're capable of it. I don't think this is, in any sense, a lost cause."

Cavanagh said a combination of voluntary standards that mobilize companies' own safety cultures and mandatory standards that would apply uniformly to all developers will ultimately be needed. "I want the industry mobilized around a culture of continuous improvement, and I want the government involved," he said.

Some key recommendations:

  • For federal, state and municipal governments: encouraging domestic natural gas development "subject to appropriate environmental safeguards." The report advises against policies that mandate particular demand levels, which could tamper with market mechanisms.
  • For the National Association of Regulatory Utility Commissioners: endorsing long-term contracts and mechanisms through which utilities can hedge their price bets on long-horizon natural gas purchases.
  • For the CFTC: ensuring that financial reforms such as the Dodd-Frank Wall Street Reform and Consumer Protection Act don't limit natural gas derivatives trading, which major natural gas end users can use to limit their exposure to risk.
  • For public and private policymakers: removing barriers to entering long-term contracts and hedging, which can allow buyers to manage price risk. The task force particularly noted tax measures and certain accounting rules as barriers to wider natural gas use. Also, the report recommends supporting pipeline, storage, import and other critical infrastructure investments.

Click here for the report.

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