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Last Updated: August 19, 2020
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Natural gas-fired generation in the Lower 48 states increased nearly 55,000 gigawatthours (GWh), or 9%, in the first half of 2020 compared with the first half of 2019. Natural gas was the fastest-growing source of electric power generation, according to data from the U.S. Energy Information Administration’s (EIA) Hourly Electric Grid Monitor. The increase in natural gas-fired generation was the result of recent low prices and natural gas-fired power capacity additions, despite a 5% decline in total electricity generation. The decrease in electricity consumption resulted from reduced business activity as a result of COVID-19 mitigation efforts. Natural gas-fired generation from electric power plants reached record-high levels on July 28 as summertime heat began reaching its seasonal peak.

lower 48 states power generation by source

Source: U.S. Energy Information Administration, Hourly Electric Grid Monitor

Coal-fired generation absorbed most of the decrease in electrical load in the first half of 2020, registering a 138,000 GWh (30%) decline in output. Because of historically low natural gas prices so far in 2020, coal-fired generation this year has been uneconomical in most regions compared with natural gas-fired generation, leading to price-driven coal-to-natural gas fuel switching. The monthly Henry Hub natural gas spot price, a national benchmark for U.S. wholesale prices, averaged $1.81 per million British thermal units (MMBtu) through the first half of the year, compared with an average of $2.74/MMBtu in the first half of 2019, and averaged $1.63/MMBtu in June 2020. Coal prices were relatively more stable in the first half of 2020; the average delivered cost of coal was $1.91/MMBtu this year through May compared with an average delivered cost of $2.07/MMBtu at the same time last year.

power generation by source in select regions

Source: U.S. Energy Information Administration, Hourly Electric Grid Monitor

Coal-to-natural gas switching was most prominent in the PJM Interconnection (PJM), which covers an area stretching from New Jersey to Illinois, and the Midcontinent Independent System Operator (MISO), which primarily includes areas in the Midwest. PJM and MISO together account for about 35% of the total Lower 48 states’ electric power generation. In both interconnections, competition exists between natural gas and coal as generation fuels, so relative shifts in fuel prices can influence the type of power plant that is dispatched. By the end of June, the natural gas spot prices at the Tetco M3 hub in eastern Pennsylvania and the Chicago Citygate fell to $1.58/MMBtu and $1.66/MMBtu, respectively, down nearly 50¢/MMBtu each from last year. As prices fell, natural gas-fired generation increased by about 17,000 GWh in PJM and 15,000 GWh in MISO in the first half of 2020, while coal-fired generation declined about 34,000 GWh in PJM and 40,000 GWh in MISO.

In the Electric Reliability Council of Texas (ERCOT), which generates about 10% of total power generation in the Lower 48 states, declines in coal-fired generation were not offset by increases in natural gas-fired generation like in PJM and MISO. Despite coal-fired generation declining 8,650 GWh in the first half of 2020 compared with the first half of 2019, natural gas-fired generation also declined slightly. Instead, most of the decline in coal-fired generation was offset by increases in wind and solar generation, which together increased about 8,400 GWh in the first half of 2020. In addition, coal-fired generation remains reasonably competitive in ERCOT because power plants have access to low-cost subbituminous coal from Wyoming’s Powder River Basin and to lignite—the lowest quality of coal—produced at mines near several plants.

Capacity additions have also contributed to the growth in natural gas-fired generation. According to the Electric Power Monthly, about 18,000 megawatts (MW) of net capacity from new combined-cycle natural gas turbine plants has entered service since 2018. Output from these highly efficient plants has been steadily ramping up and helping to drive increases in generation. During the same 30-month period (January 2018–June 2020), about 31,000 MW of net capacity for coal-fired plants retired along with about 2,400 MW in net capacity for nuclear power plants.

Natural gas-fired generation is facing increased competition from solar and wind capacity. Since 2018, about 23,200 MW of new net solar and wind capacity has been added. Renewable energy, consisting of wind, solar, and hydroelectric generation, has increased by about 5% and has been the only other fuel source other than natural gas to grow in the first half of 2020.

Principal contributors: Stephen York, Mark Morey

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Pricing-in The Covid 19 Vaccine

In a few days, the bi-annual OPEC meeting will take place on November 30, leading into a wider OPEC+ meeting on December 30. This is what all the political jostling and negotiations currently taking place is leading up to, as the coalition of major oil producers under the OPEC+ banner decide on the next step of its historic and ambitious supply control plan. Designed to prop up global oil prices by managing supply, a postponement of the next phase in the supply deal is widely expected. But there are many cracks appearing beneath the headline.

A quick recap. After Saudi Arabia and Russia triggered a price war in March 2020 that led to a collapse in oil prices (with US crude prices briefly falling into negative territory due to the technical quirk), OPEC and its non-OPEC allies (known collectively as OPEC+) agreed to a massive supply quota deal that would throttle their production for 2 years. The initial figure was 10 mmb/d, until Mexico’s reticence brought that down to 9.7 mmb/d. This was due to fall to 7.7 mmb/d by July 2020, but soft demand forced a delay, while Saudi Arabia led the charge to ensure full compliance from laggards, which included Iraq, Nigeria and (unusually) the UAE. The next tranche will bring the supply control ceiling down to 5.7 mmb/d. But given that Covid-19 is still raging globally (despite promising vaccine results), this might be too much too soon. Yes, prices have recovered, but at US$40/b crude, this is still not sufficient to cover the oil-dependent budgets of many OPEC+ nations. So a delay is very likely.

But for how long? The OPEC+ Joint Technical Committee panel has suggested that the next step of the plan (which will effectively boost global supply by 2 mmb/d) be postponed by 3-6 months. This move, if adopted, will have been presaged by several public statements by OPEC+ leaders, including a pointed comment from OPEC Secretary General Mohammad Barkindo that producers must be ready to respond to ‘shifts in market fundamentals’.

On the surface, this is a necessary move. Crude prices have rallied recently – to as high as US$45/b – on positive news of Covid-19 vaccines. Treatments from Pfizer, Moderna and the Oxford University/AstraZeneca have touted 90%+ effectiveness in various forms, with countries such as the US, Germany and the UK ordering billions of doses and setting the stage for mass vaccinations beginning December. Life returning to a semblance of normality would lift demand, particularly in key products such as gasoline (as driving rates increase) and jet fuel (allowing a crippled aviation sector to return to life). Underpinning the rally is the understanding that OPEC+ will always act in the market’s favour, carefully supporting the price recovery. But there are already grouses among OPEC members that they are doing ‘too much’. Led by Saudi Arabia, the draconian dictates of meeting full compliance to previous quotas have ruffled feathers, although most members have reluctantly attempt to abide by them. But there is a wider existential issue that OPEC+ is merely allowing its rivals to resuscitate and leapfrog them once again; the US active oil rig count by Baker Hughes has reversed a chronic decline trend, as WTI prices are at levels above breakeven for US shale.

Complaints from Iran, Iraq and Nigeria are to be expected, as is from Libya as it seeks continued exemption from quotas due to the legacy of civil war even though it has recently returned to almost full production following a truce. But grievance is also coming from an unexpected quarter: the UAE. A major supporter in the Saudi Arabia faction of OPEC, reports suggest that the UAE (led by the largest emirate, Abu Dhabi) are privately questioning the benefit of remaining in OPEC. Beset by shrivelling oil revenue, the Emiratis have been grumbling about the fairness of their allocated quota as they seek to rebuild their trade-dependent economy. There has been suggestion that the Emiratis could even leave OPEC if decisions led to a net negative outcome for them. Unlike the Qatar exit, this will not just be a blow to OPEC as a whole, questioning its market relevance but to Saudi Arabia’s lead position, as it loses one of its main allies, reducing its negotiation power. And if the UAE leaves, Kuwait could follow, which would leave the Saudis even more isolated.

This could be a tactic to increase the volume of the UAE’s voice in OPEC+, which has been dominated by Saudi Arabia and Russia. But it could also be a genuine policy shift. Either way, it throws even more conundrums onto a delicate situation that could undermine an already fragile market. Despite the positive market news led by Covid-19 vaccines and demand recovery in Asia, American crude oil inventories in Cushing are now approaching similar high levels last seen in April (just before the WTI crash) while OPEC itself has lowered its global demand forecast for 2020 by 300,000 b/d. That’s dangerous territory to be treading in, especially if members of the OPEC+ club are threatening to exit and undermine the pack. A postponement of the plan seems inevitable on December 1 at this point, but it is what lies beyond the immediate horizon that is the true threat to OPEC+.

Market Outlook:

  • Crude price trading range: Brent – US$44-46/b, WTI – US$42-44/b
  • More positive news on Covid-19 vaccines have underpinned a crude price rally despite worrying signs of continued soft demand and inventory build-ups
  • Pfizer’s application for emergency approval of its vaccine is paving the way for mass vaccinations to begin soon, with some experts predicting that the global economy could return to normality in Q2 2021
  • Market observers are predicting a delay in the OPEC+ supply quota schedule, but the longer timeline for the club’s plan – which is set to last until April 2022 – may have to be brought forward to appease current dissent in the group

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November, 25 2020
EIA expects U.S. crude oil production to remain relatively flat through 2021

In the U.S. Energy Information Administration’s (EIA) November Short-Term Energy Outlook (STEO), EIA forecasts that U.S. crude oil production will remain near its current level through the end of 2021.

A record 12.9 million barrels per day (b/d) of crude oil was produced in the United States in November 2019 and was at 12.7 million b/d in March 2020, when the President declared a national emergency concerning the COVID-19 outbreak. Crude oil production then fell to 10.0 million b/d in May 2020, the lowest level since January 2018.

By August, the latest monthly data available in EIA’s series, production of crude oil had risen to 10.6 million b/d in the United States, and the U.S. benchmark price of West Texas Intermediate (WTI) crude oil had increased from a monthly average of $17 per barrel (b) in April to $42/b in August. EIA forecasts that the WTI price will average $43/b in the first half of 2021, up from our forecast of $40/b during the second half of 2020.

The U.S. crude oil production forecast reflects EIA’s expectations that annual global petroleum demand will not recover to pre-pandemic levels (101.5 million b/d in 2019) through at least 2021. EIA forecasts that global consumption of petroleum will average 92.9 million b/d in 2020 and 98.8 million b/d in 2021.

The gradual recovery in global demand for petroleum contributes to EIA’s forecast of higher crude oil prices in 2021. EIA expects that the Brent crude oil price will increase from its 2020 average of $41/b to $47/b in 2021.

EIA’s crude oil price forecast depends on many factors, especially changes in global production of crude oil. As of early November, members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) were considering plans to keep production at current levels, which could result in higher crude oil prices. OPEC+ had previously planned to ease production cuts in January 2021.

Other factors could result in lower-than-forecast prices, especially a slower recovery in global petroleum demand. As COVID-19 cases continue to increase, some parts of the United States are adding restrictions such as curfews and limitations on gatherings and some European countries are re-instituting lockdown measures.

EIA recently published a more detailed discussion of U.S. crude oil production in This Week in Petroleum.

November, 19 2020
OPEC members' net oil export revenue in 2020 expected to drop to lowest level since 2002

The U.S. Energy Information Administration (EIA) forecasts that members of the Organization of the Petroleum Exporting Countries (OPEC) will earn about $323 billion in net oil export revenues in 2020. If realized, this forecast revenue would be the lowest in 18 years. Lower crude oil prices and lower export volumes drive this expected decrease in export revenues.

Crude oil prices have fallen as a result of lower global demand for petroleum products because of responses to COVID-19. Export volumes have also decreased under OPEC agreements limiting crude oil output that were made in response to low crude oil prices and record-high production disruptions in Libya, Iran, and to a lesser extent, Venezuela.

OPEC earned an estimated $595 billion in net oil export revenues in 2019, less than half of the estimated record high of $1.2 trillion, which was earned in 2012. Continued declines in revenue in 2020 could be detrimental to member countries’ fiscal budgets, which rely heavily on revenues from oil sales to import goods, fund social programs, and support public services. EIA expects a decline in net oil export revenue for OPEC in 2020 because of continued voluntary curtailments and low crude oil prices.

The benchmark Brent crude oil spot price fell from an annual average of $71 per barrel (b) in 2018 to $64/b in 2019. EIA expects Brent to average $41/b in 2020, based on forecasts in EIA’s October 2020 Short-Term Energy Outlook (STEO). OPEC petroleum production averaged 36.6 million barrels per day (b/d) in 2018 and fell to 34.5 million b/d in 2019; EIA expects OPEC production to decline a further 3.9 million b/d to average 30.7 million b/d in 2020.

EIA based its OPEC revenues estimate on forecast petroleum liquids production—including crude oil, condensate, and natural gas plant liquids—and forecast values of OPEC petroleum consumption and crude oil prices.

EIA recently published a more detailed discussion of OPEC revenue in This Week in Petroleum.

November, 16 2020