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Kurt Cobb

Kurt Cobb

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has also appeared in The Christian Science…

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Is The U.S. Becoming Overdependent On Natural Gas?

Natural Gas

The story sounds familiar. For decades, oil and natural gas drilling have been proceeding and creating prosperity for those involved. At some point, significant earthquakes occur in areas where they were formerly very rare or nonexistent. Those quakes are linked to oil and gas drilling and production. The industry denies the link.

The quakes continue, get worse and finally get strong enough to do damage.

To those living in the United States, this reads like stories coming out of the fracking boom in states that include Oklahoma, Texas, Ohio, Kansas and Arkansas. To those living in Europe, it's the story coming out of The Netherlands, home to the Groningen Gas Field, one of the largest natural gas finds ever.

The Groningen field has been both a blessing and a curse for the Dutch. Since its discovery in 1959 the Dutch have reaped huge financial benefits from having their own secure and abundant source of natural gas. Beyond that, the country has, until recently, been a major exporter of natural gas to its European neighbors.

But the field has also proven to be a drag on the rest of the economy, inflicting what has been dubbed the "Dutch disease." In short, the Dutch disease refers to negative effects that a huge natural resource find can visit upon a society. These include a decline in other sectors of the economy and a strong currency which makes exports less affordable to foreign buyers. The moniker "Dutch disease" results from the fact that The Netherlands was the first place such effects were studied in detail. Related: Oil Prices Rise On OPEC Compliance Data And Plunging Dollar

What has caught the Dutch by surprise--and may someday soon catch America by surprise--is the speed with which its decades-long reliance on a large initial endowment of natural gas has turned into a liability.

First, there were the earthquakes linked to drilling and production operations in Groningen which have forced the government (part owner of the field) to scale back production to reduce the frequency and severity of those quakes. This production decline of more than 50 percent has meant a serious loss of revenue for the government which used those revenues for decades to supplement the government's budget. Government gas revenues dropped by more than half from €13 billion to around €5 billion from 2013 to 2014.

Second, as a result of the production cutbacks The Netherlands is now a net importer of natural gas, instantly losing its self-sufficiency status. Europe's gas now will likely have to come increasingly from Russia whose relations with Europe are replete with complications.

Third, the Dutch have failed to prepare for this day. Instead, they blithely made themselves deeply dependent on natural gas for their energy needs. Some 98 percent of Dutch homes use natural gas for heating and cooking. Renewable energy makes up a paltry 5.5 percent of the country's energy mix as of 2014.

Fourth, the Dutch are still obliged to honor long-term contracts which force them to deliver substantial quantities of natural gas to customers outside the country. The country is increasingly facing the strange predicament of having to import more and more natural gas to offset what it must ship abroad. This is in a country whose dominant field, Groningen, is now 80 percent depleted.

And, here is where the Dutch situation ought to be a warning to the United States. America is entering into more and more long-term contracts to export liquefied natural gas (LNG) to customers in Europe and Asia even as the country remains a net importer. There is good reason to believe that most estimates of future natural gas production in the United States are far too optimistic. Let me quote for the second time in three weeks from an independent analysis of U.S. shale gas production trends (the only class of natural gas experiencing production growth in recent years):

Shale gas production overall has declined by 4.7 percent since peaking in February 2016 (down 2.1 billion cubic feet per day...). All shale plays have peaked and older plays, like the Barnett and Haynesville, are down 38 percent and 52 percent, respectively. Related: Oil Rig Count Hits A 17-Month High

Second, the U.S. electric utility industry has added significant natural gas-fired generating capacity in response to two trends: government regulation of greenhouse gas emissions and the low price and rising availability of natural gas. Despite the election of Donald Trump, who favors a return to coal, the low price of natural gas will probably allow the conversion to and expansion of natural gas-fired capacity to continue...until it can't. At which time, we may be stuck with much higher electricity costs.

The promised natural gas deliveries will likely not be available at low prices. Production declines will result in a battle over who gets the remaining supplies, thereby hiking prices for U.S. consumers. The U.S. utility industry may rue the day it chose to make itself so heavily dependent on natural gas.

Finally, states that became addicted to money from the natural gas boom are finding the bust difficult to navigate. In comparison, the Dutch had one large boom that lasted for decades. The kind of exploration and development that is taking place in U.S. shale gas fields requires constant drilling just to maintain production at current levels. We can expect boom and bust in short spurts from here forward. That signals that the cost of exploiting the remaining shale gas resource (again, until now the only growth area in U.S. natural gas production in recent years) will almost surely stair step higher as lower-quality deposits are tapped at greater and greater expense.

The Dutch have had a very long love affair with natural gas. But, as it turns out, a seemingly comfortable, stable relationship with natural gas can unravel just as quickly as a real love affair, leaving one dazed and asking how it all happened so fast.

Americans may not be as dependent on natural gas as the Dutch. But they have rushed into their own torrid love affair with natural gas and lost sight of the fact that affairs which start out torrid are the same ones that tend to flame out quickly, surprising everyone with their sudden demise.

By Kurt Cobb via Resource Insights

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  • Bud on March 04 2017 said:
    The U.S. May be the worlds strongest and most diverse economy with a gross pop in excess of 350 million people spanning the most resource, including water ways, abundant continent. About 17 million Dutch in an area 2x New Jersey.

    The additional discovery, development, and production of unconventional oil and gas resources has given the U.S. The worlds largest reserves based on 60-70 dollar oil and 3-4 dollar nat gas prices, according to the EIA. U.S. Imports are now based on logistics, infrastructure impediments, and politics as much as price, so whether we use 3 dollar Canadian gas in Detroit one 3 dollar Ohio gas in North Carolina not that big of a diff.

    The ingenuity from this industry over the past decade has added hundreds and hundreds of billions to the U.S. Economy, kept energy prices, especially for nat gas, low during the worst recession in U.S. History. Without this industry we would likely have had a second Great Depression while the Russians and Middle East strangle us.

    That last point shows that we do need a diverse energy base, which includes coal and we should continue to look to sequester co2 or find marginal uses such as statoil is doing. However, the Russians and Iranians are not going to stop producing, so we have to take the lead.

    Most Americans don't understand grid dynamics and economics or the need to not be fully susceptible to emp attacks, etc., but the idea that we will go 100 percent or even 50 percent solar and wind is fancy and you know it, And the Germans will prove it.

    Hydrocarbons have helped us add 5b humans and bring that many out of subsistence poverty in the last century plus. Telling people to get poor is not the answer and the Russians will not allow it without a fight in any case. The last decade tells us that as well.
  • Dan on March 04 2017 said:
    Natural Gas has been way below production costs for about 8 years. What other product price is held down for 8 years besides gold and silver and we know who does that. Even when we had the super cold winters n.g. was held down in relationship to historical pricing. They flood the N.E. with Canadian imports of n.g. to maintain their price below cost, clearly a manipulated market. Of course that's why you have an ex Morgan trader to head the EIA during the Obama administration. Why would coal or anything else survive, natural gas is free.
  • Bill Simpson on March 04 2017 said:
    Shipping any finite energy resource to foreign countries is stupid, unless you have little choice because you don't have much else to sell. The US isn't Kuwait or Libya.
    Selling to foreigners means you bring the day closer when you have to go begging for a scarce critical energy resource.
    This gas exporting is the same as the transfer of manufacturing out of the USA. A few very rich folks are controlling it for their own benefit, without considering the long term consequences for the rest of us. A few very wealthy people get much richer, while everyone else could suffer a lot, once the gas is gone. The billionaires' kids will fly off to their ranches in New Zealand when things go south here. Becky Quick on CNBC is the only person I've seen discussing the folly of exporting our natural gas. And I watch way too much TV, with 3 giant flat screens lined up across the room.
    And the worst thing about using gas to generate electricity is that gas is the feed stock for most fertilizer used on the planet today. How stupid is that? But don't worry. The people making billions on the gas exports won't ever go hungry.
  • Ronald C Wagner on March 05 2017 said:
    A very fanciful article. Fake News. There is enough natural gas in the USA for over a hundred years. We should be increasing use to vehicles, but oil is cheap too. Worldwide there is also a glut of availability.

    As fracking becomes worldwide the glut of natural gas and oil will only increase.

    The minor earthquakes are a price well worth paying, as Oklahoma is doing.
  • Seth on March 06 2017 said:
    "Second, as a result of the production cutbacks The Netherlands is now a net importer of natural gas, instantly losing its self-sufficiency status."

    Haha, now we have "Peak Gas;" and from whom? Look at the source: "Kurt Cobb is a freelance writer and author of the peak oil-themed thriller Prelude."

    "In this romantic thriller Cassie Young is a rising star at a prestigious energy consulting firm when she discovers secret files that reveal the truth about the world's oil supplies; and, it's not good news. Soon, she finds herself locked in a game of cat and mouse that places her career and ultimately her life on the line."

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