Where Fracking Falls Short

WINTHROP, MA - FEBRUARY 9: A house along Winthrop Shore Drive is covered in snow and ice on February 9, 2013 in Winthrop, Massachusetts. The powerful storm has knocked out power to 650,000 and dumped more than two feet of snow in parts of New England.
National Journal
Patrick Reis
Dec. 1, 2013, 6:41 a.m.

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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