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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (http://stockology.blogspot.com/)
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  • Is Natural Gas Really Displacing Coal Demand? - Data Speaks 11 comments
    Apr 23, 2012 6:27 PM | about stocks: BTU

    I have heard lots of claims that the US coal demand is being displaced by natural gas, as natural gas is at un-precedent low price. Is it really so? I will let the data speaks.

    This will be an expanding and updating instablog post, as I attempt to add content to it and supplement with additional data. Please check back often. This instablog post will be linked to from one of my main Seeking Alpha articles.

    Here are some data of US electricity generation, provided by EIA:

    (click to enlarge)

    In the above data table, row 2, 3, 4 are electricity from coal, from NG, and total, respectively. For the past 13 years. Row 5 and 6 are installed coal and gas electricity generation capacities. Row 7 is the ratio of coal electricity versus all electricity except for NG. Row 8 is the ratio of NG electricity versus all electricity except for NG. Row 9 and row 10 are coal and NG unit usage rate, defined as percentage of hours that the coal or NG units are likely running.

    The usage rate is calculated by averaging the total electricity generated in a year, over number of hours in that year to get average power. Then the average power divided by installed capacity, is thus the capacity utilization rate.

    What can we tell from the data? Row two remains essentially flat, meaning coal's consumption remains roughly flat. Despite of increase of NG consumption. The coal usage was down in 2009 only to go up again in 2010. It was down a bit again in 2011, which probably like 2009 will go up again. Row 7, which is the ratio of coal electricity versus all electricity except for NG, remains at roughly 60%, which is another evidence that coal consumption was not displaced by NG.

    Particularly interesting is the NG's installed capacity has consistently expanded, roughly double in 12 years, or about 5% a year increase. In the most recent 4 years, from 2007 to 2011, the increase slowed down to an average of 3.2% a year. Whether 3% or 5% a year, this is not a big pace of capacity expansion.

    Note NG generated electricity grows at the same pace of capacity growth, but not faster. The year around NG unit usage rate remain flat at about 28%. If utility companies try to run the NG units as base supply unit, we should see this usage rate begin to deviate towards 50% or higher. That is not occurring. Once again it shows natural gas displacing coal demand is not occurring.

    Was 2011 really a year that NG displaced coal? Based on EIA data on 2010 and 2011, coal generated electricity droped from 1847.090 to 1734.265 (in units of giga-KWH), a net drop of 112.825, or 6.1%.

    Total electricity generated dropped by 19.326, mostly due to a year of mild weather. This drop is responsible for 17.13% of the coal drop.

    Hydroelectricity went up from 260.203 to 325.034, up 64.871, or responsible for 57.5% of the coal drop, a big chunk. Higher generation of hydroelectricity was largely due to the weather as well.

    Other renewable went up by 27.82, or responsible for 24.66% of coal drop in 2011. This is mostly due to wind turbine. Again it was purely a weather effect: It was due to stronger wind.

    Let's add up the above three weather related contributions to coal's drop in 2011: Less electricity due to mild weather; more hydroelectric; more wind power. The total comes to 99.3%, almost 100%.

    Coal's in 2011 displacement was entirely due to weather, not NG.

    NG electricity in 2011 was up from 987.697 to 1016.595, up by 28.898, or 25.6% of coal's drop. As we discussed, NG's usage could change drastically due to weather condition. So this might also be due to weather, not due to cheaper NG price!

    Let's dig out other EIA data. From the data of electricity generated and fuel consumed. I reached the average of 1 metric ton of coal generates 1900 KWH of electricity, while one mmBtu of natural gas generates 128 KWH of electricity. This gives a coal to natural gas equivalence ratio of 1900/0.128 = 14.85. Thus one ton of coal equals to 14.85 mmBtu of NG. One ton of coal also contains 22.4 mmBtu of energy. 22.4/14.85 = 150%. So NG is roughly 50% more efficient than coal in generating electricity.

    The actual fuel cost per mmBtu from EIA was $2.41/mmBtu for coal and $3.73/mmBtu for NG. Adjusted for energy efficiency, coal is priced to the equivalent of $3.62 for NG. Thus coal is (surprise!) still cheaper than NG as recently as January, 2012.

    Dr. Arthur Berman has been one of the outspoken experts who point out that shale gas is a commercial failure. He pointed out that typical shale wells ultimately will produce 1 BCF of natural gas, a far cry from the rosy prediction of 5 BCF or more. One thousand cubic feet of NG is about one mmBtu. So one BCF is roughly one million mmBtu, or worth $2M. Drilling a shale well alone costs $15M or more, not counting the production and maintenance cost. There have been a lot of attacks and rebuttals to Dr. Arthur Berman, but I see NONE of them challenging the conclusion that the ultimate recovery per well is roughly only 1 BCF of NG, way below original expectation.

    Read this TOD piece on shale gas boom and burst: Shale Gas - Abundance or Mirage?

    A more technically oriented detailed discussion on both sides of the shale debate: A Miracle in the Marcellus Shale? By Dave Cohen.

    Dr. Arthur Berman himself discussing why the hyperbolic decline model does not work and what the ACTUAL production data from the Barnett Shale wells told us: Lessons from the Barnett Shale suggest caution in other shale plays by Arthur Berman. Taken from the article, there are 12,000 Barnett shale wells and cumulative production is only 5.64 TCF, averaging only 0.47 BCF per well.

    Another nice piece by Chris Nelder: What the Frack? Is there really 100 years' worth of natural gas beneath the United States?

    Disclosure: I am long JRCC, PCX, ACI, ANR, BTU.

    Themes: JRCC, PCX, ACI, ANR, WLT, ARLP, UNG, EOG, CHK Stocks: BTU
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Comments (11)
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  • mooowi
    , contributor
    Comments (62) | Send Message
     
    From the chart it looks like the amount generated from coal the last 3 years is lower then any year on the chart. Something is replacing coal it seems.

     

    I actually don't know this but is the electricity generated from coal per unit higher then in 1999. If it is you could be generating less electricity with less coal per unit which would look pretty bad for coal.

     

    Also since the price of nat gas has only been very low this year how does looking at past years when the price was higher prove that natural gas is not replacing coal this year because of the lower price.
    20 Apr 2012, 07:11 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Mooowi:

     

    You can not draw that conclusion on the last three years. The year 2010 seems to be a normal year with normal coal usage. The 2009 was hit by economic crisis and the overall electricity generation was down, but recovered in 2010. And then 2011 was down a bit, probably due to an unusually quiet summer. One year does not tell a trend yet.
    20 Apr 2012, 01:41 PM Reply Like
  • mooowi
    , contributor
    Comments (62) | Send Message
     
    Your information says that that the last 2 years had the largest power usage out of any year and the coal usage is pretty far down on your chart. But 2009 would be explained in part by lower overall usage.

     

    Coal usage should not be effected very much durring the summer being a base load provider.

     

    Your numbers right there say something is replacing coal. The actual amount of coal used would be a much better metric as well.

     

    You could be missing a senario where more energy is produced from less coal.

     

    Looking at your numbers the growth for coal will have to be in exports. And exports will have to cover the lower usage of coal as well.
    20 Apr 2012, 02:53 PM Reply Like
  • steve miller70
    , contributor
    Comments (364) | Send Message
     
    Goldman Sachs gave CHK $3 BILLION Friday and EIG must be stupid too.

     

    How much has Dr. Berman invested? I must be dumb too. I'm betting on the big money.
    14 May 2012, 08:36 PM Reply Like
  • JAC
    , contributor
    Comments (27) | Send Message
     
    Mark,

     

    Ok lets just say for argument's sake that your figures are accurate and coal still costs less to produce electricity. However, what about the costs of building and amortizing the plant with all of its scrubbers and any taxes and fees etc from the state and feds? And other costs of which I have no idea.
    20 Apr 2012, 12:48 PM Reply Like
  • steve miller70
    , contributor
    Comments (364) | Send Message
     
    In Jan & Feb nat gas traded from $3.20 to $2.60.

     

    Eating mercury and other poison is another benefit from coal.

     

    His cost comparison is wrong. Coal shipments dropped 30% in the 1st quarter.
    14 May 2012, 08:30 PM Reply Like
  • Justin M. Hall
    , contributor
    Comments (753) | Send Message
     
    Excellent work Mark Anthony. Like you, I am also long PCX. Obviously, I also like both JRCC and BTU.

     

    I plan to share your article with others on my site. Thank you.

     

    Justin M. Hall
    20 Apr 2012, 11:28 PM Reply Like
  • minorman
    , contributor
    Comments (227) | Send Message
     
    Another good piece, Mark.

     

    One again, I'd advocate that this data recommends a (contrarian) long position in gas (e.g. Henry hub futures) as much as it does a long position in the coal producers.

     

    I know that "the market can remain irrational longer than you can remain solvent" is a universal truth, but I'd weigh that against your mantra that commodities (such as gas) won't sustain production for long if they are selling below production costs.

     

    Nat gas spot is <$2. Nat gas is actually selling for about $3-3.5, but production costs are in the $5.5-8 range. This is unsustainable.
    And, as Joseph Stiglitz says: "That which is not sustainable, will not be sustained."

     

    Conclusion: Nat gas *will* increase in price - and much sooner than people think. If you don't think so, then look at rig counts from Baker-Hughes:
    http://bit.ly/JfLZq6
    Gas rig drilling is falling off a cliff. This is particularly true in the "shale" states like Louisiana, Pennsylvania while Oklahoma and North Dakota are peaking. Given the crazy depletion rates of shale plays, this will be evident in production figures within the year. There is no way that "associated" gas increases will offset the plunge in "pure" gas drilling rates. Game over for cheap gas - good for coal.
    21 Apr 2012, 10:19 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3601) | Send Message
     
    Author’s reply » Minorman:

     

    Everything you said is true, except that I would against a long position in gas. You are much better off taking a long position in coal producers.

     

    Natural gas will go up a lot, no question about it. But long position in gas is something hard to possess. If you hoard a few thousand tons of physical coal in your backyard that would be a long position. Owning coal mining stock has the same effect.

     

    But how do you do the same with natural gas? The shale gas producers are going bankrupt because they simply could not recoup their cost from the ultimately produced amount of shale gas. As for future contracts, holding these contracts are NOT holding a long position. They are merely gambles between two sides and you probably end up losing money even if gas price goes up over long term.

     

    Remember, when you buy future contracts, you are paying FUTURE commodity price to buy what's available TODAY. How could that help you? The correct thing to do is you should pay TODAY's price to buy what will be available in the FUTURE. In plain English, the correct way to play a bullish commodity is pay today's price, get the stuf today and hoard keep it, then sell at a future time.

     

    If you do not understand, you MUST read this classical piece, and check what happened to UNG:

     

    http://bit.ly/HG3r7Z

     

    It was an almost 2 years old article. But the principle I discussed is valid forever and every investor should imprint in in his/her mind.

     

    Also very interesting to check my comment left on May 5, 2011:

     

    http://seekingalpha.co...

     

    I recommended shorting ZSL at $24.25, a paper ETF that bets against silver. It was a perfectly timed call, precise to within pennies and minutes of the actual peak. Since then, silver is not much higher than the bottom on May 5, 2011. But ZSL lost a big chunk of its value, to now $10.86.
    21 Apr 2012, 11:21 AM Reply Like
  • bobp55
    , contributor
    Comments (27) | Send Message
     
    Looking at lines 1 thru 3 of the table. Total Elec usage has increased by 11% over the 12 years. Elec from coal is down about 8% and Elec from NG is up 82%. Further, the NG increase has been pretty steady over that time period. It's not a case of NG usage taking a jump over just the last couple of years.

     

    The trend seems clear, whether or not it's called displacement, coal use is in a slow decline, while NG use is in a signicificant incline, sopping up most of the total Elec growth.

     

    The trend for coal usage in the US will continue, due to recent plant closures and stiffer environmental rules being enacted. This decline will likely continue even after NG prices recover.

     

    That said, coal exports will continue to grow, possibly faster than the slow decline in the US. Combine that with what I see as a shakeout of the weaker coal companies, and the ones left standing will prosper due to lower overall output, and thus higher prices, particularly after NG recovers.

     

    I consider BTU the safe play, but it's the one with the least upside potential. I'm looking into ACI as being a possible survivor, one that offers a lot of upside potential. My main concern about ACI is its large debt load. I'll need to look more closely into ACI.

     

    Bob P.
    22 Apr 2012, 12:25 AM Reply Like
  • anu-sha
    , contributor
    Comments (6) | Send Message
     
    Below is what AEP's CFO said about coal to gas switching in AEP's power generation for 2012 Q1 -

     

    "First, it is easy to see that coal-fired net capacity factors had decreased, while gas-fired net capacity factors have increase. This result is more pronounced in the east part of our system, where natural gas capacity is 14% of the total versus the west, where it is 62%.

     

    In the east, net capacity factors for natural gas units increased to 47% in the first quarter of 2012 from 22% in the first quarter of last year. Coal-fired net capacity factors correspondingly had dropped to 47% from 61%. The result is even more pronounced when we focused on our east combined cycle plants, which reached net capacity factors of 78% in the first quarter of this year, up from just 17% from the same period last year.

     

    If you were to exclude the new just [ph] and combined cycle facility, which came online at the end of January of this year, the east combined cycle capacity factor climbs to 85%. East combined cycle generation increased fully 149% quarter-on-quarter.

     

    So what does all this mean? With our east combined cycle fleet operating at such a high capacity factor, we would expect the rate of coal-to-gas switching to remain about the same through the balance of the year. That is, most of our combined cycle gas units are running close to flat out."

     

    It looks like AEP is certainly doing the coal to gas switching to a greater extent. This is true mainly for only the east side of their system. The power generation system, when looked at from overall system perspective, this may not mean much, other than that switching indeed occurring where it can.
    23 Apr 2012, 06:31 AM Reply Like
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