Chevron Strategist Warns Era of 'Too Cheap' Natural Gas Will End Soon

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Chevron estimates that the abundance of cheap natural gas in the U.S. will be short-livedChevron estimates that the abundance of cheap natural gas in the U.S. will be short-lived, according to one of its key strategy staff.

Andrew Peterhans, manager of strategic planning, last week told a group at the BERC Energy Symposium at UC Berkeley that "$2 gas has perhaps come and gone."

"Two-dollar gas is really not sustainable when you look at what it takes to go and drill shale gas wells and further develop our industry -- you're not looking at $2 gas forever. It's more likely to be $4 or above that's the message that the market is delivering.

"Yes, there is an abundance of gas, but cheap? Perhaps, not necessarily so. The market is telling us that it has been too cheap and that's not realistically in the future of gas development."

Chevron, one of the world's six oil "supermajors" with revenues last year of $253.7 billion, has increased its natural gas assets with an expanding portfolio of investments in Australia. The California-headquartered company has invested billions already in liquefied natural gas (LNG) projects in Australia, including the $43 billion Gorgon project, to serve the Asian market where prices hover around $15 per mmbtu.

Prices of natural gas have already increased from below $2 per mmbtu in April to around $3.60. Although an increase in prices is expected over the long term, drilling rates are expected fluctuate, leading to short- and medium-term price drops.

Is Natural Gas Killing Renewables?

Although low natural gas prices had been blamed for distracting investors from renewables, Peterhans said that natural gas and renewables could have a "symbiotic relationship" as the world's demand for energy grows, particularly in developing countries.

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"We expect the sector with the fastest growth to be renewables -- 60% faster than even the growth of natural gas.

"We don't expect that natural gas is going to be killing renewables, in fact we think there is a dynamic partnership there and that they are perfectly complementary."

But Jochen Harnisch, coordinator of climate change policy at the German government-owned KFW Development Bank, said that natural gas had already had a negative impact on renewable investments.

"Already in the course of this year this is starting to decline. Without strong additional [policy] measures we will see a significant decline of new deployment of renewables in the coming year."

He anticipated that the decline in renewable deployment would be in the range of 40%-50% because demand is driven by only a handful of countries, such as the US, UK, India, Spain and China, where policy incentives were changing in response to the ongoing global economic recession.

We don't expect that natural gas is going to be killing renewables, in fact we think there is a dynamic partnership there and that they are perfectly complementary."

"We need to broaden the regional penetration of new renewables from just a handful of key markets and provide a global incentive framework and remove the subsidies for fossil fuels," he said.

Nancy Pfund, founding partner of DBL Investors, also said that extreme variation in how the natural gas and renewables industries are regulated also distorted the market and increased regulation of fracking would lead to increased prices.

"Natural gas is having a huge impact on the renewables sector," she said. "At the same time, there is a lack of consistency in the way we approach natural gas."

She said that some operators in the natural gas industry had objected to new regulations that require drillers to notify the Environmental Protection Agency before they start fracking.

"Having to tell the EPA that you're about to frack is seen as an intrusion in the natural gas industry. Whereas if a solar operator doesn't tell you when they're pulling a weed out of a farm that they're developing, if they don't have an iron clad record of what they're doing, they're out of business.

"Solar operators have grown up in an era where everything they do has to be environmentally measured and there's all kinds of costs associated with that. And yet natural gas is still not subject to that same rigour and there is a double standard.

"We feel that's going to become more accentuated over time and that we're going to get into some culture wars over that across the country. And that will be an opportunity for [energy] storage and other renewables-related investments."

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