Bridging an energy revolution

BY NORM SZYDLOWSKI AND GREGORY C. STAPLE Published: May 6, 2011
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A group of unlikely allies recently endorsed a landmark report on the future of natural gas.

The report grew from a yearlong task force chaired by the Bipartisan Policy Center (BPC) and the American Clean Skies Foundation (ACSF). In the end, a large consumer of gas feedstocks (Dow Chemical Company), an environmental group (Natural Resources Defense Council), a major energy producer (ConocoPhillips) and the largest primarily coal-fired power generator (Southern Company) came to see things similarly.

The task force found that a natural gas revolution is under way. Expanded output of U.S. shale gas, coupled with increased storage and improved infrastructure, has dropped prices and created market stability. Potential Gas Committee surveys put the nation's economically recoverable natural gas reserves at more than 2,000 trillion cubic feet, roughly a 100-year supply at current consumption levels.

The robust supply horizon creates opportunities to move beyond market stability concerns. To achieve this goal, the task force recommended removing the barriers to using a diverse portfolio of natural gas contracting structures and hedging options by public and private policymakers. Long-term contracts, in particular, might save producers and consumers significant sums.

Thus, the task force urged utility regulators to consider allowing local natural gas service companies and electric utilities to add longer-term contracts to their supply portfolios. Long-term contracts can underpin a commitment to new gas-fired generation facilities and help the exploration and production industry. One banker estimated that increased use of such contracts could reduce the risk premium paid to finance the E&P costs for the natural gas industry by several percent.

To maintain the current price horizon for natural gas, our task force urged the Commodity Futures Trading Commission to implement the Dodd-Frank financial reform legislation cautiously. The ability of producers to effectively use the derivatives market to manage commercial risk has a significant impact on supply costs.

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