Shale gas is starting to affect markets….

The oil gas ratio hit a new record high December 27th with gas trading at $3.11/mmBtu and WTI going for $101.25/bbl yielding an energy ratio of 5.61.   In simple terms this means gas is  trading at the equivalent of $18.05/bbl crude.

The market is starting to notice this rapid shift in natural gas economics.  Back on Dec 10 I mentioned a few of the sectors, such as chemical processing, that would be likely winners due to lower priced gas.  Companies are now starting to announce their plans to build new plants.  Royal Dutch Shell PLC is planing an ethylene plant in the Appalachian region, Nucor is building a gas fired iron plant in Louisiana, Dow Chemical Co. is planning two new chemical facilities in the Gulf coast, and CF Industies is planning to boost its ferterlizer production made from gas.  (WSJ, 12/27/2011, A3) .  All due to relatively low gas prices.  If LNG importers are not able to “reverse to flow” and turn into LNG exporters, then the price of gas can stay low until domestic consumption has a chance to absorb these lower cost supplies.

One of the other sectors that should benefit from the relatively high oil/gas ratio is the CNG (compressed natural gas) transportation buisness.   In October I analyzed Clean Energy Fuels’ [CLNE] stock performance relative to the energy ratio and couldn’t really see any coorelation between the fundamental driver of their business (the oil/gas ratio) and their stock price.   Checking back today I’m still not seeing any sustained improvement in the company’s stock price.  So I’m still looking for the breakthrough in the transportation business.

In other news, shale gas is certainly affecting the price of electricity, both spot prices and prices offered for term contracts for renewables.   In the western US, on-peak spot prices in southern California today were $30.37 $/MWh….lower then they were 30 years ago in 1981 when our company (www.henwoodassociates.com) started producing power.  And the natural gas based market reference price (MRP) used by the California PUC for evaluating renewable projects is off about 15% from the last MRP posted by the CPUC.

While this is happening the solar sector is having problems with oversupply and a softening market.  The oversupply is drivien by the rapid increase in Chinese production (including two IPOs in October and November – Changzhou Almaden and Sungrow Power).   Coupled with  German demand for 2011 reported to be 29% below 2010 levels two German producers, Solar Millennium and Solon SE filed for insolvency this month.  The supply/demand combination is also driving layoff such at those reported at SMA, Suntech, and First Solar.   And stock prices for solar companies, as measured by the solar ETFs KWT and TAN, have dropped by over 60% YTD and their market cap has fallen below the $70 million level that was related to me as a break-even size for an ETF.   In fact, all of the sponsors of sector specific ETFS –  KWT, TAN, FAN, PWND, GRID –  are losing money on their offerings if this is still the break-even number.  Which one will close up first like the progressive transportation ETF did in 2010?

How much of the market woes facing solar producers stems from gas competition?  I’m not aware of any analysis of the relationship of subsidies and RPS mandates to gas prices in the US, but reason tells us there must be some connection beyond a mere correlation of gas prices and solar woes.

I think this is just the start of the disruptions caused by low gas prices.  On a very small scale our company is affected in contract renewals and the prospects of lower electric prices/subsidies for new project development.  Many other businesses will be forced to adapt and potentially sooner then anyone expects.

Originally posted here .

Disclosures – no postions in any securites mentioned.

 

3 replies
  1. Muir Woods
    Muir Woods says:

    Good post, but I think you might be mixing the sheep and the goats a bit. Low natural gas prices have certainly led to construction commitments for chemical, energy and fertilizer plants and I'm surprised we haven't seen a Gas To Liquids refinery announcement, but I expect we will eventually.

    But the depressed solar PV stocks are more than a couple of links removed, driven more by an oversupply than the economics of retail electricity.

    In fact, at the installation level, the PV module glut is depressing prices and increasing installations in North America. In some areas, tax incentives and subsidies have followed module prices down, but retail electric rates haven't dropped much, if at all. One could even make the case that low natural gas prices are going to have the mid-term effect of raising rates by driving fully depreciated coal plants out of the market, their output to be replaced by natural gas fired plants that still have some capital cost to recover and generate more expensive electricity.

    To be sure, when this happens, the utilities will blame it on the "high cost renewables" they've been forced to adopt.

    • Mark Henwood
      Mark Henwood says:

      Muir – thanks for your thoughts. PV serves two markets – (1) grid connected utility scale and (2) inside the meter. The grid connected utility scale projects are competing in a market where gas powered combined cycle projects are a very real option – so natural gas prices count and solar will feel the pressure. Inside the meter projects currently are the darlings of regulation – in most markets a PV project gets to offset average rates and may even get to net meter accross time periods. But remember, average rates include costs for generation, transmission, and distribution. To the extent a PV owner gets this deal their share of the transmission and distribution costs are getting picked up by other customers. This won't go on forever (so consumers need to install while the installing is good) and utilities have a zillion rate/tariff tools to attack this issue. And when they do inside the fence PV will start getting evaluated against generation costs.

  2. Muir Woods
    Muir Woods says:

    Mark,

    You are absolutely right, the current pricing model for utility electricity benefits rooftop PV in some perverse ways. One might expect a model that looks more like cellphone pricing to emerge, except that brings other challenges to the business. Much like the telecom model, thing current group of monopolies probably have to die off and be replaced by new and different players for this to all sort itself out. It's a crying shame, but creative destruction is not just a theory, it's a fact.

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