The Real Meaning of Kewaunee’s Demise

A commentary by Michael Vickerman, Director, Policy and Programs at RENEW Wisconsin: 

 Shock waves reverberated across the Upper Midwest when Dominion Resources announced in late October that it would permanently shut down its Kewaunee nuclear generating station in early 2013. Operational since 1974, the Kewaunee station, located along Lake Michigan 30 miles east of Green Bay, currently generates about 5% of the electricity that originates in Wisconsin.

Virginia-based Dominion, which bought the 560-megawatt Kewaunee plant in 2005 from two Wisconsin utilities, attributed its decision to its inability to secure long-term power purchase agreements to keep the plant going. Without securing purchasing commitments from utilities, Dominion would have to sell Kewaunee’s output into the regional wholesale market at prices well below the plant’s cost of production.

While the pricing environment for all bulk power generators is nothing short of brutal these days, Kewaunee carries the additional burden of being an independently owned power plant, since the entities most likely to buy electricity from that generator—utilities--have power plants of their own that compete for the same set of customers. And a growing number of these utility-owned generators burn natural gas, which is currently the least expensive generation source in most areas of the country.

Dominion’s decision comes down to simple economics. Wisconsin utilities believe that over the foreseeable future natural gas will remain cheap and supplies will remain abundant. That would explain their unwillingness to enter into long-term commitments with Dominion, even though Kewaunee recently acquired a 20-year extension to its operating license and does not need expansive retrofits to comply with environmental standards, unlike a host of utility-owned coal plants in Wisconsin.

But even if Dominion’s managers were convinced that natural gas prices have nowhere to go but up in 2013 and beyond, the company, lacking a retail customer base in the Midwest, could not risk producing power below cost while waiting for the turnaround.

Wisconsin utilities have placed heavy bets on natural gas in the expectation that it will remain the price-setting fuel for years to come. Over the last 12 months, they have bought several combined-cycle generators from independent power producers. Buying power plants enables them to pass through their acquisition and operating costs directly to their customers while generating returns to their shareholders. I suspect these utilities are anything but broken up over the impending demise of a nonutility competitor that could have supplied electricity to Wisconsin customers for 20 more years.

But there is another side to this story; the low-price energy future that Wisconsin utilities are embracing can only materialize if natural gas extraction companies continue to sell their output below production costs. This expectation is unrealistic, given the massive pain being inflicted on these companies in the form of operating losses, write-downs, and credit rating downgrades.

Don’t just take my word for it, ask Exxon Mobil ceo Rex Tillerson, whose company spent $41 billion during the shale gas boom to acquire XTO, a large gas producer that is now yielding more red ink than methane. As reported in a recent New York Times article, Tillerson minced no words in assessing the impact of its recent misadventures on the company’s bottom line. “We’re all losing our shirts today,” Tillerson said. “We’re making no money. It’s all in the red.”

Much of the industry’s woes are self-inflicted. The lease agreements that drillers eagerly signed during the height of the shale gas boom obligate them to extract the resource by a certain deadline, regardless of whether such activity is profitable. That these companies cannot disengage quickly from existing leases is greatly diminishing their appetite for exploring new natural gas prospects. Until a pricing turnaround occurs, they will refrain from spending money on exploring new resource provinces like Ohio and Michigan.

Sooner or later, this slowdown in exploration activity will tip the supply-demand equation in the opposite direction, resulting in lower-than-average gas storage volumes. Barring a repeat of last winter’s unusually mild weather, the crossover point should occur around January 1st . But with so many balance sheets in tatters from this highly unprofitable market environment, nothing short of a strong and sustained price increase will be required to persuade drillers to start taking risks again.

When this corrective price increase begins rippling through the electricity markets, it will be interesting to observe how the customers will respond. Right now Wisconsin utility managers are convinced that they are making the right call on natural gas. So completely have they swallowed the shale gas “game-changing” mystique that they were willing to let a 560 MW nuclear plant fall out of the supply picture for good. In this brave new world of theirs, gas is the new coal, and resource diversity is passé.

In the aftermath of Dominion’s announcement, a few commentators have defended the impending closure as a textbook example of how markets work. But this view ignores the delusional thinking that sent shale gas extraction into overdrive, causing prices to plunge below the cost of production. The real game-changer, as it turns out, here was not the emergence of “fracking” technology but the industry-generated public relations campaign that implanted the narrative of a nation awash in cheap natural gas into virtually every American cranium. But as we now see, this narrative has boomeranged on the natural gas industry, and they are paying for their current woes in ways that guarantee a pronounced pendulum swing in the direction of higher prices.

The question going forward is: will this narrative also boomerang on Wisconsin electricity users, after the last employee leaving Kewaunee turns out the lights?

 Michael Vickerman is program and policy director of RENEW Wisconsin, a sustainable energy advocacy organization. For more information on the global and national petroleum and natural gas supply picture, visit previous posts Madison Peak Oil Group’s blog: http://www.madisonpeakoil-blog.blogspot.com. This commentary is also listed on RENEW Wisconsin's blog: http://www.renewwisconsin-blog.org/

Natural Gas: Wrestling With Reality

August 10, 2012
A commentary by Michael Vickerman, RENEW Wisconsin

Wholesale natural gas prices are once again flirting with the $3.00/MMBtu mark after the Energy Information Agency (EIA) reported this week that working gas in storage increased by 24 billion cubic feet (bcf) over last week’s totals. Compared with the five-year average of 45 bcf for the first week in August, the volume injected is modest. The August 9th report marks the 15th week in a row where the weekly injection volumes trailed the five-year average by a minimum of 20 bcf.

On the trading front, the trend this summer has been a steady upward drift punctuated by sharp sell-offs whenever gas prices momentarily settle above $3.00. The last week in July was a case in point. Though the reported number for that week (28 bcf) was only half the five-year average for that date, the announcement triggered a pullback of nearly 10% down to $2.80 from $3.10. It turns out that EIA’s number came in 5 bcf higher than the traders’ own estimate, triggering a wave of serious unloading of positions by those who had bet long.

Everyone in the energy industry, including the traders themselves, knows that $3.00/MMBtu is well below the cost of producing natural gas, and cannot support exploration and extraction activity at the level we saw in 2008 through 2010. Producing shale gas, the so-called “game-changer” that industry flacks contended would loosen King Coal’s grip on the electricity sector, is an even more expensive proposition. High-profile exploration and production (E&P) companies like Chesapeake Energy tried to maintain a jaunty look while wholesale prices were scraping along the $2.00 floor, but they can no longer conceal their distress. Consider the following developments that occurred over the last fortnight.

• Chesapeake Energy announced plans to reduce domestic gas production in 2013 by 8%;
• BHP Billiton wrote down $2.84 billion on the value of Fayetteville shale gas assets it had acquired in 2011; and
• The most recent count of rigs drilling for natural gas in the United States is 498, nearly 70% off the levels seen in September 2008, when prices were above $10/MMBtu.

“Write down” is a fairly bloodless way to describe the loss of $3 billion; “carnage” is better at conveying the pain that now grips the natural gas sector. This begs the question: why do wholesale natural gas prices appear to be trapped for now at the $3.00/MMBtu level?

"Frac" sand for controversial natural gas drilling brings 3 companies to Marshfield

From an article by Molly Newman in the Marshfield News Herald:

Three companies have their sights set on excavating a high quality sand that lies about 20 feet below Marshfield's surface.

The hard, round sand, called frac, is found only in older deposits in certain areas, including central Wisconsin. It's used in hydraulic fracturing, or breaking apart rock using sand and water to pump out oil and natural gas.

Several companies have popped up in the area recently because of increased interest from the oil industry, Completion Industrial Minerals President Tom Giordani said.

"There are shortages in the market for the sand -- that's why everyone's looking in Wisconsin," he said.

Completion, formerly TexSand, had some funding delay its business plan during the recession, but now is back on track to begin excavation this summer, Giordani said.

The company is in the process of grading its 57-acre site on 29th Street in Marshfield's Yellowstone Industrial Park and setting up the excavating equipment, including crushers, screens, dryers and belt conveyors. There will be some small control buildings and two 100-foot storage silos on the site, with an office building constructed later, Giordani said.

Some sand excavation is expected to begin in August and the system will be fully operational by September or October, he said. There is enough sand in the Marshfield area pits Completion is using to last at least 25 years, he said.

But it's been a contentious issue in some states that have fracking operations. Critics argue that chemicals used in fracking may be contaminating water supplies. And it's the subject of a documentary titled Gasland.

NewPage to finish biorefinery study by year's end

From an article by Nathaniel Shuda in the Wisconsin Rapids Daily Tribune:

More than a year after garnering $30 million in federal grant money to build an ethanol plant in Wisconsin Rapids, NewPage officials continue to consider the project's viability, a company spokeswoman said.

Although the Miamisburg, Ohio-based papermaker has completed a preliminary phase of the study into the project's viability, spokeswoman Shannon Semmerling expects the study to last until the end of 2009.

"The (Department of Energy) and NewPage will (then) review the findings and determine how to proceed," Semmerling said. "I would expect that we will learn more about Project Independence as 2009 comes to a close."

In January 2008, the Energy Department selected NewPage as one of four companies nationwide to receive a total of $114 million that will be made available to build small-scale biorefineries.

The refinery will produce about 370 barrels of biofuel a day -- or about 5.5 million gallons a year -- out of wood chips and mill residue, according to the Energy Department. The resulting fuel will replace natural gas at the mill and can be converted into renewable diesel fuel.

Wisconsin Rapids Public Schools upgrades save energy

From a the first of two articles by Adam Wise in the Wisconsin Rapids Daily Tribune:

Note: This is the first of a two-part report on how the Wisconsin Rapids School District is spending money that residents approved in a 2006 referendum. The second story will appear Friday.

Wisconsin Rapids School District leaders plan to cope with rising utility costs by increasing energy efficiency with money approved through the referendum process.

A little more than two years ago, residents in the district approved a four-question, approximately $10 million referendum for building, technology and curriculum upgrades.

With most of the money -- about $8.3 million -- slated for district facilities, Buildings and Grounds Director Tom Helgestad and staff members developed a three-year plan to conduct a majority of the work during the district's summer breaks.

As an example of the upgrades, Helgestad said the district achieved an almost 45 percent decrease in natural gas usage at Grove Elementary School after replacing the old heating system.

"Because of the age of the equipment, our infrastructure and heating systems were between 50 and 60 years old," said Helgestad, specifically referring to Howe, Mead, and Grove elementary schools. "They were at the end of their life; parts were unavailable. We had to retrofit to keep things going."

Wisconsin Rapids School Board members have been receiving periodic updates from Helgestad regarding the progress of the three-year plan.

"We're actually going to be able to save even though the prices have gone up," board member Mary Rayome said.