Weakness in Natural Gas’ “Golden Age”

While the natural gas boom has generated dramatic benefits across America's energy, jobs, and national security landscape, that ground is far from solid. Several factors could compromise the shale gas miracle. Exposed companies will either benefit or suffer, depending on the choices they're making today.

If it seems too good to be true...
A report out today from the nongovernmental Environmental Integrity Project, or EIP, finds that a multiindustry clamor for cheap, domestic natural gas has paved the way for a massive increase in domestic greenhouse gas emissions. Given that one of the big arguments in favor of natural gas is that it helps to reduce those emissions, this is not a happy development.

To be clear, the EIP's "Gas Rush" report doesn't dispute the fact that natural gas burns more cleanly than coal. Rather, it highlights the "tidal wave" of new projects at oil, gas, and petrochemical plants that depend on natural gas as a feedstock or fuel.

As the natural gas infrastructure expands and matures, and the Environmental Protection Agency approves permits for new chemical, fertilizer, and petrochemical plants, the impact on the climate is considerable. The EIP calculated that based on permits that have already been approved, these new developments will pump as much greenhouse gas into the atmosphere as would 20 large-baseload, coal-fired power plants. Annually.

In natural gas' defense, that's a lot less than it would have been if the same projects were developed on the basis of coal, but it's still a huge net increase in greenhouse gas emissions at a time when the whole world is struggling to put a lid on climate change. While the outcome of the recent climate change talks in Warsaw was pathetically tepid, the world is still inching closer to a stronger climate accord.

Modeling a carbon price
Don't believe me? Maybe you'll find BP (NYSE: BP  ) , ExxonMobil (NYSE: XOM  ) , and General Electric (NYSE: GE  ) more convincing. Those companies are among a group of at least 29 major corporations that have begun assuming a carbon price in their forecasting models.

A new report from the Carbon Disclosure Project, or CDP, finds that some of the biggest companies on the planet, including all five oil majors, are integrating a carbon price into their long-term financial plans and growth strategies. This is because they assume eventual government action on climate change, plain and simple. While carbon is only one of the greenhouse gases, and not even the most important one where natural gas is concerned, a carbon price would likely be just a first step toward broader regulation.

The CDP report is based entirely on these companies' voluntary disclosures. Consider BP's statement:

We factor a carbon cost into our investment appraisals and engineering designs for some new projects. We do this by requiring larger projects, and those for which emissions costs would be a material part of the project, to apply a standard carbon cost to the projected GHG emissions over the life of the project.

BP estimates its carbon price at $40 per ton. General Electric, for its part, doesn't disclose its estimated carbon price, but the company is deeply analyzing the broader factors that could threaten the natural gas infrastructure expansion in which GE is investing heavily. In a GE report published this October, the industrial giant acknowledged leakage and emissions in the existing natural gas infrastructure as "legitimate concerns," adding:

...with a focus on reduction technologies, and appropriate regulatory policies, many of these negative externalities can likely be mitigated. Actions that can improve emissions monitoring and ensure greater adoption of technologies that can cost-effectively reduce methane leakage, while maintaining safety and reliability of the network, should be pursued. More broadly, natural gas is more likely to reach its potential if it is accepted as a safe, sustainable, efficient, and reliable energy source.

But perhaps the biggest surprise in the CDP report came from ExxonMobil. Not even 10 years ago, that company was running an aggressive campaign to deny climate change. Today, ExxonMobil publicly acknowledges the fact that fossil fuels contribute to climate change. Notably, shareholder pressure contributed to that evolution.

ExxonMobil's CDP disclosure assumes the highest carbon price per ton -- $60 -- of any of the reporting companies. Considering that the company is now the U.S.' biggest natural gas producer -- indeed, many of its projects are among those highlighted in the Environmental Integrity Project report -- ExxonMobil actually stands to benefit from a future in which carbon costs.

But again, it's about more than carbon. Natural gas presents far greater problems when it comes to methane and nitrous oxide, which are both significantly more potent greenhouse gases than carbon dioxide. The EIP report notes that the EPA has thus far failed to act on a Supreme Court decision requiring it to implement industry-wide standards under the Clean Air Act that would set consistent and enforceable emission limits for large sources of those gases. Much like a carbon price, this is a matter of when, not if. Whenever regulation happens, it will be a rude awakening for natural gas-dependent companies that haven't prepared.

What should a long-term investor consider?
If you are considering a long-term investment in a natural gas company, or one that depends heavily on natural gas as a feedstock or fuel, look for signs that the company is preparing itself for a greenhouse gas-constrained future.

Is the company assuming a carbon price in its financial models? Is it taking steps to reduce its other greenhouse gas emissions? Is the company reporting on its emissions and efforts to reduce them, whether through the CDP or other mechanisms? If it's not, that company's stock could be destined for a tumble.

It's still a golden age
With the above caveats in mind, it's still the case that record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 05, 2013, at 6:45 PM, stanhope59 wrote:

    I am disappointed that the fool would post an article by a representative of the extreme environmental movement, quoting reports from the EIP which is so closely tied to the Earth Justice folks. They wage an unending war against natural gas, despite its proven record of helping the US reduce emissions. This ideologically based message helps no one economically. Isn't that what the fool is allegedly about? While many countries (Australia, Germany, Spain, etc.)are acknowledging the uncertainties of the causes of climate change, we are still bombarded with this crap. Count me out.

  • Report this Comment On December 05, 2013, at 10:27 PM, RichardPhoenix wrote:

    Apparently they are winning the "war" and we will all be paying for a carbon scheme.

  • Report this Comment On December 05, 2013, at 10:39 PM, RHO1953 wrote:

    More global warming garbage on the same day that both the Russian Academy of Science and the Germans issued statements on studies that show global warming stopped almost twenty years ago, that whatever warming there was totally natural, and that we are headed into a prolonged cold snap that will culminate in a mini ice age by about 2050. This global warming crap is becoming more farcical by the day. Yet the shills and the government simply ignore the truth, the science and the obvious cooling and pretend like it is real.

  • Report this Comment On December 06, 2013, at 9:45 AM, JasonFMcCullough wrote:

    Governments need to act and apply still fossil fuel climate impact taxes immediately.

    Until they do, I choose to no longer subsidize the fossil fuel industry and their most abusive customers with the negative effects the use of such products has on my own life and that of my children. I will work up a cost for the health effects, and each hour lost due to the effects of Climate Change. To whom should I send the invoice?

    If you are a fossil fuel abuser and you don't want a carbon tax and a methane tax, fine. I will bill you directly.

  • Report this Comment On December 06, 2013, at 3:00 PM, NOTvuffett wrote:

    Even if you assume AGW is true, how does paying a "carbon tax" ameliorate the problem?

  • Report this Comment On December 07, 2013, at 4:08 PM, sevenheart wrote:

    Thank goodness for global warming or we would be really cold. What? Oh yeah climate change, it can get cold in December and hot in August and it's all because of CO2 from big corporations, yeah that's it. Tax them tax them tax them! That'll prevent corporate CO2 driven greed. We can't let corporations kill off all their customers or our stock portfolios will suffer. Kill! Kill! (Okay, now seriously, I'm just getting myself worked up to generate more CO2 to warm things up for the weekend- even got my dog running laps). (Irrational? yup, that's AGW)

  • Report this Comment On December 07, 2013, at 5:34 PM, HanSoLow wrote:

    Just because the above mentioned giant companies make wise financial plans to account for an abusive tax based on a false premise does not make global climate change true. It might, however, show that large companies are able to successfully lobby for a governmental tax advantage that favors the large companies rather than the small to medium companies (assuming the mentioned companies lobby for a carbon tax). This is a similar argument to the online sales tax issue.

  • Report this Comment On December 07, 2013, at 7:02 PM, cmalek wrote:

    @JasonFMcCullough:

    "To whom should I send the invoice?"

    You could try billing Mother Nature although I suspect you might have a hard time collecting.

    If you wish to quit contributing to Global Warming, please stop breathing and have your family stop also. Ever time you guys exhale, you are adding more CO2 to the already disastrously high amount in our atmosphere.

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