During my recent low production periods for new posts on Atomic Insights, I received some well intentioned advice from a frequent commenter – he told me that it would be less frustrating for me to maintain Atomic Insights if I focused more on innovations in nuclear energy than on the efforts of competitive energy suppliers to hamstring the technology. He told me to move away from the idea that “a well organized conspiracy is driving free markets, governments and investors”. He also told me to stop trying to convince people that there is any such thing as a harmless dose of radiation and told me to stay completely away from any suggestion that small amounts of radiation might actually be beneficial.

I thought about that advice for a while, but then decided to ignore it. Quite frankly, there is not much real innovation in nuclear energy to write about, there really is a well organized effort to market natural gas as the best fuel source, even in markets where nuclear has several natural advantages, and there really is such a thing as a harmless dose of radiation. The science I have read has also convinced me that the likelihood of beneficial effects from certain doses of radiation is at least as high as the likelihood of beneficial effects from exposure to a certain amount of sunlight.

Aside: With regard to my comment about innovation, I need to clarify. There is a lot of discussion about unconventional ways to make use of fission heat, but it has been a very long time since I read about any fission technology that was not known at least 2-3 decades ago. It is exciting that some old ideas – like integral pressurized water reactors – are being refined and developed, but that is not innovation that I can write much about. The techniques are either old and well understood, or so new that they are still under proprietary protection. End Aside.

I also happen to think it is important to remain skeptical in the face of what appears to be an almost overwhelming tidal wave of enthusiasm about the onset of the era of “cheap gas” (natural gas, not gasoline). According to many politicians, pundits and utility industry decision makers, there is no longer a business case for considering any new power source other than a gas turbine combined cycle supplied by our technology-enabled shale gas abundance. After all, the machines are fairly cheap, easy to permit and relatively simple to construct. As long as there is a pipeline near the site, a simple branch line construction project opens up access to cheap, relatively clean burning (compared to coal) natural gas.

That is the myth that is being vociferously and effectively sold. I’m a contrarian. The physics, economics, chemistry and math do not convince me that the myth is even close to reality. Don’t get me wrong; I recognize that natural gas is a useful fuel source, that a certain amount of it can be produced and distributed through our existing infrastructure for a very low marginal cost, and that it is far quicker and cheaper to build a gas turbine combined cycle than a nuclear heated steam turbine under current rules.

However, if you are a corporate decision maker who really wants to supply low cost electricity over the long term to a growing customer base, you should be putting a substantial portion of your capital investment budget into nuclear energy. The only way that natural gas in the US will remain anywhere close to as cheap as it is today is if more people invest more money into nuclear energy development. Abundant, competitive energy supplies will do more to keep prices low than any other factor I know. (I know. I am biased because I am employed on a project to build new nuclear power plants.)

If you do not believe me, I suggest that you take some time to read two articles carefully. The first one is titled The dumbest guys in the room: Is Cheniere Energy a contrarian indicator for natural gas?. The basic premise in that article is that Cheniere Energy has a recent history of making big bets on the direction of the gas market just before it changed dramatically.

In late 2004 when Cheniere received federal approval to construct a new LNG import facility at Cameron Parish, Louisiana, most experts believed U.S. natural gas production was already entering a long-term irreversible decline. Imported LNG would be needed to meet natural gas demand in the coming years. Named Sabine Pass, the facility received its first LNG cargo in April 2008 near the tail end of the last natural gas bull market. Prices peaked above $13 per thousand cubic feet (mcf) just two months later. It would have been a supremely good time to short everything related to natural gas. In the months that followed Cheniere’s stock price collapsed.

Four years later U.S. natural gas prices hover around $2 per mcf due to a glut caused by a flood of new production from deep shale deposits. Domestic demand for high-cost imported LNG has evaporated. With Europeans bidding $12 for LNG cargoes and Asians bidding $16, there is simply no way for Cheniere to obtain LNG supplies that can compete with $2 natural gas.

The point in mentioning Cheniere’s decision to build an LNG reception terminal just before gas prices collapsed is that Cheniere is now applying for permission to build a liquifaction facility to enable it to export gas from the US. If they are as close to right as they were for their last big bet, the price of domestically procured gas is due to skyrocket.

The other piece worth reading critically is a Fortune article titled Exxon’s big bet on shale gas.

Unlike Cheniere Energy, ExxonMobil has a recent history of making big bets that look ill-timed when they make them, but that turn out later to have been made just at the right market inflection point. In 2010, ExxonMobil purchased XTO, a shale gas specialist with expertise in hydraulic fracturing technology, in an “all stock” deal. The deal was originally valued at $41 billion, but later stock market movements discounted Exxon’s value by 15%; the deal was only worth about $36 billion to XTO stockholders.

That deal, even at the bargain price, has not looked so good to analysts for the past few quarters, but ExxonMobil leadership remains positive about the purchase.

My logic question to you is this – do you think Rex Tillerson remains positive about XTO because he believes that natural gas in the United States will continue to sell for 1/8th of the price that it captures in Japan? ($2 per MMBTU at Henry Hub vice $16 per MMBTU as LNG delivered to Japan.) Read the below quote from the Fortune article and tell me if you think ExxonMobil believes that natural gas is going to remain cheap for very long.

Why is Tillerson so confident in the future of natural gas? In December, Exxon released its annual “Outlook for Energy,” which is the company’s view of future demand and consumption trends out to the year 2040. The biggest single theme in the research, which Exxon uses to guide its strategic planning, was the growing demand for electricity. Exxon estimates that worldwide electricity demand will increase 80% by 2040 as hundreds of millions in the developing world achieve a middle-class lifestyle. An increasing amount of that electricity will be generated by natural gas, which will pass coal as the world’s second-largest fuel source, behind crude oil, by 2025.

Exxon has been preparing to meet the emerging demand for natural gas for some time. In Qatar, which has huge natural-gas reserves in its offshore North Field, the company has invested heavily in facilities to produce and export liquefied natural gas, which is supercooled and transported in massive tankers. The company has a $15.7 billion LNG project in Papua New Guinea that will begin supplying gas in 2014 to customers in Asia. And Exxon is also a partner in the massive, Chevron-led, $37 billion Gorgon LNG project in Australia.

Over the next five years Exxon plans to invest $185 billion in its business, most of it to explore for and develop new sources of oil and gas. The cost of the “next barrel” is on the rise, says Tillerson, as easy-to-access reservoirs are depleted.

Additional Reading

Guardian (UK) (April 17, 2012) This is the fracking truth

Matt Ridley, author of Rational Optimist, thinks that allowing shale gas production in the UK would be a good thing and believes that the only opposition to it comes from Russian gas interests, coal, nuclear and renewable energy lobbies. Opposition to shale gas is a storm in a teacup. I freely admit that he may have a point about the source of some of the opposition, but can he really believe the following statement?

Just consider the effect that shale gas has had in the US. It has lowered the price of gas to a quarter of that in Europe, thus slashing the cost of energy, reviving manufacturing, creating jobs, halting the expansion of expensive nuclear power and cutting carbon emissions.

How does halting the expansion of nuclear power cut carbon emissions? By the way, Ridley admits to having interests in coal mining. His blog does not accept comments, so perhaps we could have a discussion about his fracking promotion efforts here.