Carbon Economics: Coal vs. Natural Gas

Includes: DVN, ECA, EOG, XTO
by: Kurt Wulff

Global warming could be worth a 25-70% boost in natural gas price and enhance the investment
appeal of independent producers Devon Energy (NYSE:DVN), EOG Resources (NYSE:EOG), Encana (NYSE:ECA) and XTO Energy (XTO) among other buy recommendations.

At the lower end of the range we assume it would cost a coal-based power plant about $4 a million btu to eliminate carbon dioxide emissions by adding about 50% to capital and operating costs. Since it would cost a natural gas-based power plant only about half as much, the value and therefore price of natural gas could be $2 a million btu, or 25% higher than today’s quote for natural gas to be delivered over the next six years.

At the same time, the worst emitting coal plants could be curtailed and more gas could be burned in the natural gas-based power plants we already have, but are using only on the hottest or coldest days. Moreover, new natural gas-based power plants can be built relatively quickly while it would take decades to make all the changes for coal-based power.

Meanwhile, natural gas is being produced near capacity currently. Even a modest program to reduce carbon dioxide emissions would contribute favorably to drive natural gas price toward the refined oil equivalent at crude oil price divided by 5, or up 70% from today’s level of crude oil price divided by 8.5.

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