David and Goliath - Talking Natural Gas in Court

On July 10th, David Hughes, lifetime geologist recently retired from the Geological Survey of Canada, and Steve Andrews with ASPO-USA testified as “expert witnesses” on natural gas prices and production in a hearing before the Colorado Public Utilities Commission. The procedure-heavy, court-like hearing focused on choices about future electric generation during a utility-sponsored resource plan for Colorado. The Commission plays the role of judge and referee. The reason for sharing a bit of our experience here is to offer it up as a possible small part of a tool kit for intervention and participation by others when faced with similar opportunities in other states.

At the end of the hearing, the Commission’s chair turned to us and posed the critical concluding question: “after your testimony, what is it that you would like Public Service Company of Colorado (PSCo) and our Commission to do, based on your testimony today? What is ‘the ask’ here?” We’ll address that at the end below. First, some context:

• Background: During a December 2000 rate case, I was drafted to challenge the utility’s (PSCo) long-term view of natural gas pricing. From a recent $10 per million Btu high, the utility assumed prices were going come crashing back to earth (which they subsequently did) to the $2/mmBtu range. By 2010, PSCo expected prices to run in the $3 range. The groups on which they based their price forecasts? Two proprietary players—Petroleum Industry Research Associates (PIRA) and Cambridge Energy Research Associates (CERA)—plus the US Energy Information Administration (EIA) and NYMEX futures markets.
• As a progressive heretic, back then I proposed that by the end of this decade $4.50/mmBtu and up would be a more realistic price, and that those prices would continue trending up faster than the rate of inflation. The Commission accepted our higher-price view and proceeded to add to Colorado’s rate base 162 megawatts of wind generation.
• During a 2004 rate case, I again served as a witness, questioning the utility’s continuing reliance, for their low-ball gas price forecasts, on the fearsome foursome listed above. I particularly challenged use of the EIA forecasts, based on their bad track record. We lost that round. And Colorado gas prices remained lower than average, in part due to excess production capacity vs. pipeline take-away capacity.
• Fast forward to April 2008: In the current rate case, PSCo’s assumes that prices in all three cases (see chart below) remain flat for five years, then rise slowly at around 2%/year. Not surprisingly, they rely on the same forecasting foursome as in previous years. They highlighted that natural gas prices are still noticeably lower than the Henry Hub and NYMEX, despite the new Rockies Express pipeline carrying substantial gas to Missouri and beyond.
• PSCo praised their consultants’ use of “sophisticated models” to develop meaningful forecasts. But I asked, in the world of LNG modeling, how do you model a country like Qatar putting a moratorium on building further gas liquefaction facilities? How do you model the impact of Russia slowing down the gas to Europe? How do you square CERA’s forecast that North American natural gas production would increase 15% between 2004 and 2010 with the reality that, two years away, production is flat? What about EIA’s US natural gas supply forecasts for the year 2020 that were at a hopelessly optimistic 34 trillion cubic feet back in 2002 but which have steadily declined by one-third to 23 Tcf in just six years?

Comments From Dave

• A multifaceted intrigue – a public utility wanting to build more gas-fired generation when it already had 50% on its system, a portion of this for baseload, and utilizing the excuse that it is needed to backup wind forecast to be 3% of the grid by 2015, plus wanting to have a higher proportion of ownership of its generation to be just like the other guys (and at the expense of independent power producers that current provide 50% of its generation from renewables and combined cycle gas through power purchase agreements).
• Justifying its decision with a gas price forecast that declined though 2030 in constant dollars.
• Accusing intervenors Steve Andrews and others of having a hidden agenda against gas when they tried to point out the realities of gas supply and risks of price spikes and higher sustained prices at a time when NYMEX gas prices were already significantly higher than PSCo’s 2030 price forecast.
• Declaring that Steve Andrews and others where using outdated data and that gas supply was in a new paradigm thanks to wonders of the most abundant sediment in the world – “shale”.
• Lawyers objecting when I tried to point out in Steve Andrews and others defence the issues that proved they had every right to expect declining US supplies and higher prices: triple the number of gas wells to keep production flat over 10 years (my updated “treadmill – chart” was accepted by the Commisison); EIA and NEB forecasts of declining supplies from Canada and the fact that Canadian production is now falling at 3%/year (chart accepted over the objections of lawyers); issues with current and projected LNG supply and spot LNG prices TODAY of $20/MMbtu (deemed not acceptable for the current proceedings).
• When I tried to point out that most shales are not like the Barnett Shale–the most prolific shale producer today and which has unique geological characteristics that have resulted in great wells with 65% rate declines in the first year (ramping up the treadmill)–the chart showing this that we attempted to introduce as evidence was denied, though there was substantial interest in it. [See Fig. 1]
• After the smoke and mirrors, obstructionism, and a process that left one with little hope for future rational decision making about something as vital as planning the next 40 years of generation alternatives for Colorado, the Commissioners had the last word.
• Questioning by the Commissioners allowed us both to get a lot of licks off and to deliver many of the points that we had wanted to make while the lawyers sat muzzled. It was very redeeming and, although I shook my head about the process, I think in the end the Commissioners, who will formulate the policies, had most of the information they needed to make a balanced decision.

Our responses to “what is the ask” question. Steve: We would like the Commission and the utility to be conservative in their gas-price forecasting assumptions. That is, for all types of electric power generation planning, expect higher prices for natural gas than those currently assumed by PSCo. Don’t be surprised at disruptive changes in pricing, due in part to parallel concerns about peak oil. Dave: We believe there is a strong possibility for higher natural gas prices going forward due to 1) North American production that is unlikely to grow as much as forecast by the optimists, and 2) competition for LNG supplies in the future, due to a growing mismatch between exporters’ liquefaction facilities and importers regasification facilities. Counting on Canadian imports to quell rising gas prices is a non-starter, as production is now falling at 3%/year and export capacity will fall to zero within the next two decades.

David Hughes is a Canadian geologist. He will be presenting at the upcoming ASPO-USA conference in Sacramento on September 22. Steve Andrews is a co-founder of ASPO-USA.