Investing In The Natural Gas Economy: Part 1

Introduction: This is part 1 of a 2 part article. Part 1 will explore the events in Japan and the Middle East and examine why they have accelerated the growth potential in the domestic natural gas industry. Part 2 will examine the various ways that investors can participate in, and profit from, growing demand for domestic natural gas in the United States. The situation in Japan is tragic. Although it is too early to know what the economic consequences will be, history demonstrates that these sorts of shocks tend to have only temporary affects. However, catastrophes of this nature also have a way of permanently affecting human behavior. Case in point: the partial meltdown at Three Mile Island in 1979 – which produced little detectable radiation beyond the plant itself – proved to be a turning point in the domestic nuclear power industry in the United States. Three Mile Island crystallized public safety conce s and provided a big lift to the anti-nuclear sentiment that was already growing within the United States in the 1970’s. The ultimate result was simple: no new nuclear power plant has been permitted for construction in the United States since the Three Mile Island incident in 1979. In fact, of all the nuclear power plants currently operating in the United States, all of them broke ground in 1974 or earlier. Even the most youthful nuclear plants among the fleet are now approaching 40 years of age. There are currently 104 actively operating nuclear reactors in the United States, including the #1 reactor at Three Mile Island. Despite more than 3 decades without a single new plant construction, the installed base of nuclear generating capacity still produces 20% of all the electricity consumed in the United States. The included shows the various locations of the 104 operating nuclear reactors in the U.S. For many years now there has been talk of a “nuclear renaissance” in the United States. After being unpopular for so long, nuclear power had recently become one of the few where both conservatives and liberals seemed to find common ground. Conservatives liked the fact that nuclear power could reduce our dependence on foreign oil. Liberals liked the fact that nuclear power could reduce greenhouse gas emissions. Unfortunately, nuclear power is not without its own problems. Aside from the obvious problems with handling and storage of nuclear waste (read about Yucca Mountain if you want to know more), nuclear power safety considerations contain an asymmetry that makes it unpalatable for many people. Things don’t go wrong with nuclear power plants very often, but when they do wrong, they tend to go horribly, horribly wrong. Thirty years of perfect operating safety can by wiped out in minutes by one human error or natural disaster, leading to a release of radiation. This brings us to the present situation in Japan. A once-in-a-century-magnitude earthquake created a tsunami that knocked out all power at a nuclear facility, which was never designed to withstand such a great earthquake in the first place. We shouldn’t understate the impact of the Japanese nuclear problems on global acceptance of new nuclear development. Events such as Three Mile Island (and later Che obyl) had profound effects on the industry and lead to permanent reductions in new development. The events in Japan will have a similar impact. Rightfully or wrongfully, I predict that there will be no nuclear renaissance in the United States. This will only further increase our dependency on other sources of power and ultimately push prices higher for all other forms of energy, particularly oil and gas. If there is one common conclusion that we should all take away from the recent events in the Middle East and Japan, it is this: the United States will become increasingly dependent on its own sources of oil, gas, solar, and wind power. Middle eastern oil is a terribly unstable source of energy, despite its abundance and low cost. Nuclear power is very expensive and socially unattractive. Coal is becoming more costly, and is quite dirty to begin with. Natural gas, on the other hand, is clean, abundant, cheap, and domestic. At this point, you might think it fair to criticize my conclusions about this matter and label them as reactionary. After all, by declaring the nuclear renaissance over before it ever really began, am I just piling onto the current popular sentiment that stems from the negative media coverage of the events in Japan? Am I simply being short-sighted and ignoring the long-term climate problems, which nuclear power would surely alleviate? Am I ignoring the fact that, even after the incident in Japan, President Obama himself stills affirmed his support for nuclear power and its role in our domestic energy policy? Simply put, no. I am not being populist, short-sighted, or ignorant of the current administrations views on nuclear power. My view of this matter is based on a pragmatic, long-term, fundamental analysis of the facts at hand. Don’t believe me? Well, perhaps you’ll believe John Rowe… John W. Rowe is the Chairman and CEO of Exelon Corporation, the largest owner of nuclear power plants in the United States, including 17 of the 104 aforementioned reactors. John Rowe is widely considered to be an expert in the energy and utility industries and is a self-described “nuclear guy” – which probably comes as no surprise given his employment as the CEO of Exelon. On March 8th, 2011, precisely 3 days before the earthquake and tsunami in Japan, Mr. Rowe gave an interview and speech before the American Enterprise Institute. During the interview Mr. Rowe said the following (edited slightly for readability): “[Natural gas] is the probable source of supply for any new generation that we might build…natural gas is 50-60% the price of new nuclear, it’s cheaper and much cleaner than new coal…its cheaper than wind and much cheaper than solar. Natural gas is queen right now…it is going to be the dominant source of energy for electricity, on the margin, for the next 10 and almost surely for the next 20 years. It simply is more economic than all the alte atives and is likely to be so for every year within a 20 year period.” Looking beyond the next 20 years, Mr. Rowe had the following things to say: “Up until 2 or 3 years ago, I simply could see no alte ative to a major nuclear resurgence at some time, but as we look at a world with relatively slow growth in demand for electricity, wind that actually works, solar that has gone from 40 cents per kilowatt-hour to 20 cents…you do begin to envision that there may be a more complex technology base out there that might be economically competitive with nuclear and socially thought to be preferable.” Mr. Rowe went on to describe his “vision” of a future technology base for electricity generation and it focused on a combination of wind, solar, and natural gas, with natural gas being the “bridge technology” that alleviates our reliance on coal, oil, and nuclear power. In his prepared speech, Mr. Rowe laid-out the case for natural gas, making the following points: • New gas finds, both conventional and shale gas, have dramatically increased our domestic natural gas supplies. The U.S. is now the third-largest producer of natural gas after the Middle East and Russia. • Natural gas enhances energy security; unlike oil, nearly all of our natural gas supply is produced here. • Natural gas can reduce our dependence on oil if we fuel our vehicles with it: replacing 3.5 million heavy duty vehicles with natural gas vehicles would save more than 1.2 million barrels per day of oil – more than the United States imported from Venezuela or Saudi Arabia in 2009. • Natural gas is the cleanest fossil fuel. It emits 80% less sulfur dioxide and nitrogen dioxide than coal, and 55% less carbon dioxide than coal. Finally, Mr. Rowe commented that this isn’t some theoretical ideal that may or may not happen. The transition is underway at this very moment due to free markets at work. Mr. Rowe said: “Natural gas has already jumpstarted the transition to clean energy…18 companies have announced their plan to retire or mothball nearly 12 gigawatts of coal-fired generation nationwide – they are simply no longer economic. Gas usage in the utility sector was up an average of 6% year over year for the first half of 2010 compared to 2009.” Now, if all of these comments were coming from wind or solar company executive, it wouldn’t be particularly newsworthy. But Mr. Rowe happens to be the CEO of the largest nuclear power plant operator in the United States, and that makes his comments very interesting indeed, even more so when you keep in mind that he made these remarks three days before the tragic events in Japan. If Mr. Rowe won’t build a new nuclear plant in the U.S., who will? The answer is – nobody. As I said before, there will not be a nuclear renaissance in the United States, at least not within the next 20-30 years. There will be an energy renaissance in the U.S., but its foundation will be one of natural gas, because natural gas is clean, abundant, cheap, and domestic. In Part 2 of this article (to be published in late March, 2011) I’ll explore the ways in which investors can evaluate, invest in, and profit from the ongoing transition to a natural gas economy in the United States.