Why is natural gas now being pushed to top-tier energy prominence? In a word -- 'supply.' Five or so years ago, pundits were predicting a natural gas crisis. Natural gas was declining according to just about every measurable metric. Since then, technology has created a natural gas renaissance, enabling us to unlock vast resources from reserves previously perceived as uneconomic.
Additionally, these new reserves have been exploited by a large group of relatively unknown players, the independents. They approached these new reserves opportunistically, and leveraging new technologies such as horizontal drilling and hydraulic fracturing, they broke the mold. They approached reservoir development from a completely new perspective, by thinking about it in terms of a drilling factory.
The results of the intersection of technology and entrepreneurial spirit caught the oil and gas industry a bit off-balance. But it is through these innovative companies that we ushered in this new regime of abundant, low-cost, secure natural gas.
The impact of these newly unlocked reserves is profound. Natural gas is sure to comprise increasing percentages of the power generation mix, displacing dirtier coal, nuclear, and, of course, challenging high-cost renewables. Gas will increasingly play a role in base-load power generation, not just marginal, peak-load power. It is even conceivable that gas will emerge as a transportation fuel -- not overnight, but it may play a large role in fueling fleets in the future.
The sociopolitical landscape is also evolving. Now that these tremendous reserves are being produced, in areas such as Pennsylvania, the political dynamic will certainly evolve. This is no longer a Gulf Coast phenomenon. Additionally, the industry has also had to respond. Given how fragmented the natural gas business is, it was caught relatively flat-footed politically. Waxman-Markey largely ignored natural gas. The industry responded, organized itself, and is making itself heard and felt through organizations such as the American Natural Gas Alliance (ANGA).
On the demand side of the equation, natural gas usage will be driven by prices and price stability. These new reserves have flattened the supply curve, bringing with them a new level of reduced volatility. Prices will still be volatile, but perhaps at levels much lower than has historically been the case. Additionally, production profiles lend themselves to long-term price contracts, muting volatility issues to some degree.
Fundamentally, the lower cost and practical aspects of natural gas will drive usage. Natural gas-fired power generation is more competitive than ever. Its role as a supplement to intermittent renewable sources is sure to grow. The clean-burning nature of gas will also drive demand, as generators seek to lower their carbon profiles.
What's the upside -- and the downside -- of the natural gas revolution that's currently unfolding?
The advantages of low-cost, clean power will certainly drive increased natural gas-fired power generation. The low costs will also drive increased usage of natural gas as a transportation fuel, although it will be incremental for the foreseeable future, despite the growing popularity of the Pickens Plan.
However, natural gas will continue to face challenges. Overdrilling, dumping of excess LNG cargoes on U.S. shores, and continued economic weakness may continue to depress prices. Volatility may return, challenging unsophisticated buyers of natural gas. Fracking legislation may create obstacles to production in the short term, necessitating technological solutions that are still in the early stages of adoption. On that same note, given the newness of this resource, technological challenges are sure to emerge. But from our vantage point, the solutions are close at hand. The oft-repeated reference, 'energy technology revolution,' is not limited to cleantech alone.
Who stands to win, and who stands to lose, in the natural gas markets over the next few years?
It depends on the scenario, but for the sake of brevity, let's assume a likely set of circumstances that will manifest as a long-term, low-to-mid-price natural gas price regime. Winners will be producers who can secure advantaged acreage and execute the 'drilling factory' approach to unconventional gas development. Additionally, this vast reserve has been unlocked through new technologies such as horizontal drilling, hydraulic fracturing, and microseismic monitoring. Advantaged technology providers such as MicroSeismic Inc. and others will succeed as they allow producers to lower their costs and recover more of their reserves.
The economy and consumers will benefit from the low-cost, secure source of energy provided by natural gas, as will the environment. Natural gas has long been considered 'clean burning' due to its lower levels of particulate, mercury, and other emissions relative to coal and fuel oil. Now, given the world's concerns around climate change, the lower CO2 profile of natural gas also provides a benefit versus other fossil fuel options.
Losers will be few, but will include much of the world's LNG market that expected to land shipments at U.S. regasification facilities when prices were much higher. Renewable energy, on one hand, will be challenged by a low-cost natural gas regime, but on the other hand, renewable energy may be supported, given the role gas plays in smoothing out the intermittency issues of both wind and solar. Lastly, competing fossil fuel sources will certainly be incrementally displaced.
Can natural gas blend and bring together the old and new energy economies?
For Altira, this is an unnatural distinction. It's all one big sandbox. BTU parity is not yet here, but the 'either-or' debate between renewable and traditional energy serves no purpose. There is no one answer. We need a variety of solutions, so we can pursue all energy options that provide sound economics while delivering cleaner power generation.
No matter how you frame the challenge, natural gas will play a big role. Our energy needs have proven to be insatiable. Renewable sources, while growing rapidly, still face many technical and economic challenges. Natural gas can play a key role in building a bridge to a carbon-free future.
Founded in 1996, Altira Group, LLC, is a Denver-based venture capital firm that is committed to a full spectrum of investments that will transform the energy sector.