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The New Energy Paradigm

Where Fracking Falls Short

Some Massachusetts residents pay sky-high prices for heat in the winter, thanks to a shortage of natural gas in the state, an oddity when domestic supplies are booming.(Photo by Darren McCollester/Getty Images)

photo of Patrick Reis
December 1, 2013

BOSTON—Cold weather created a perfect storm here last winter, with demand for natural gas peaking just as supplies ran low, sending prices soaring as New Englanders attempted to keep their homes warm in the unforgiving climate.

At its height, residents were paying nearly nearly 10 times the typical rate for natural-gas heating. The problem was never solved: It simply faded as demand ebbed with warming weather.

Now, with temperatures again dropping and sunlight growing scarce, there's no quick fix to be found—and 2012 appears to be only a preview of the pain to come.

 

It seems anathema that in a country where fracking has created a boom in natural-gas production, a region should encounter supply shortages severe enough to put its residents in crisis. The U.S. produced more than 25 trillion cubic feet of natural gas in 2012, according to the federal Energy Information Administration. That's a trillion cubic feet more than in 2011, adding to a 25 percent production hike nationwide since 2007.

Natural gas has come into vogue for energy uses across the region, as low prices—and an increasing focus on cutting greenhouse gases and other air pollutants—made it the go-to alternative for new power plants needed to replace retiring coal-fueled generators. Its use as a home-heating fuel is also growing, displacing the region's traditional reliance on oil heat.

But that gas isn't being produced in Massachusetts—EIA reports that the state produced exactly none in 2011—and natural gas doesn't magically move itself from wellheads to markets. Instead, the natural-gas supply is distributed largely through a national web of pipelines. And that's where Massachusetts falls short.

The epicenter of the shale boom is in West Virginia and western Pennsylvania, where fracking has allowed developers to tap vast shale gas reserves of the Marcellus formation. As Marcellus producers ship supplies to energy-hungry urban centers on the coast, they have plenty of high-capacity pipelines to get gas up to New York City.

For the 200-plus-mile stretch between New York and Boston, however, pipeline capacity is harder to come by. And when demand surged last winter, there was simply not enough gas traveling up the coast to meet demand, said Frank Katulak, president of Boston-based Distrigas, a subsidiary of GDF Suez that links natural-gas producers to New England users.

The mismatch between production and infrastructure is a reminder that fracking has thrust the country into an energy revolution, one that few anticipated and even fewer planned for. And as Massachusetts scrambles to adjust to a brave new energy world, it faces a string of high-risk decisions as it plans for its future.

The obvious solution would be to build a new, larger pipeline connecting New England with Marcellus producers, creating the capacity to get ample supply to the region even when demand hits its height.

But such a pipeline would not come cheaply: Katulak estimated that it would cost north of $2 billion to stretch from New York City to the Boston area. And the pipelines are not without risk. The pipeline would essentially be a $2 billion gamble that the price of domestically produced natural gas—which currently sits at record lows—will continue to stay low.

A decade ago, New England's energy companies made the opposite bet, and they're paying for it today.

In the mid-2000s, Distrigas and other energy companies predicted domestically produced natural gas would continue to set record highs as U.S. production failed to keep pace with growing demand. Prices would be so high, the thinking went, that it would be cost competitive to ship in foreign, liquefied natural gas and then sell it on the U.S. market.

And so Distrigas spent approximately $350 million on the "Neptune" offshore terminal to receive ships bringing foreign natural gas. Another company, Excelerate Energy, spent about the same to build a terminal of its own. That was back in 2008, when the wellhead natural gas price in the U.S. averaged $7.97 per thousand cubic feet, according to the federal Bureau of Labor Statistics.

By 2012, that average had plunged to $2.66, and since 2010, the terminals have been idle, silent monuments to the fickle nature of energy prices.

Even during last winter's crisis, the offshore terminals were largely useless, as they are meant to operate on a continuous basis, not to meet a sudden surge in demand. Most of the supplies come from producers in Trinidad, a Caribbean island off the Venezuelan coast that is a five-day sail from Massachusetts. And producers can't afford to have ships waiting around for weeks in case their supplies are needed: Katulak said the cost of a onetime, on-the-spot charter for a tanker costs about $100,000 per day.

Now, Katulak wonders if utility companies will be willing to repeat that experiment, this time gambling on domestic prices staying low. The utilities would have to finance the pipelines by adding a surcharge to their customers' costs for years or even decades.

"Is it worth it to build that pipeline?" Katulak asked. "It assumes the current spread [between domestic and foreign prices] will hold steady, but it might only be needed a few days a year? Is that worth it?"

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