Why Dirty Natural Gas Doesn't Matter
Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of coal stocks have been bogged down by the beginning of an industry shift to the cheaper, cleaner burning natural gas. Conventional wisdom states that burning natural gas results in fewer greenhouse gas emissions than burning coal. While natural gas certainly emits less mercury and sulfur new research shows that it may actually result in higher greenhouse gas emissions. Furthermore, the increasing demand for energy ensures that coal will be around for the long-term. So increased growth in natural gas usage will only slow growth in coal, not replace it completely.
The emissions rundown
Robert Howarth lead a team of researchers at Cornell University studying greenhouse gas emissions from conventional gas wells and “fracked” wells. The team found that emissions were anywhere from 30 percent to 100 percent higher in “fracked” wells. Emissions escaping from hydraulic fluid and downstream pipe work can account for nearly 8% of a well’s total production. Compared to coal, burning natural gas resulted in 40 percent to 100 percent higher carbon dioxide emissions. Perhaps the most worrisome trend is the increased amount of methane emitted. According to the Intergovernmental Panel on Climate Change atmospheric methane has 72 times the warming capacity of carbon dioxide over a 20 year period. “Without controlling methane we’re in a lot of trouble”, Howarth stated.
Furthermore, the World Bank states that over 150 billion cubic meters of gas is flared annually which contributes up to 400 million tons of carbon dioxide into the atmosphere. Thats the equivalent of 25% of the United States' total gas consumption! Flaring can occur at any well, but is common practice for "off-the-grid" wells that don't have easy access to pipelines.
What does it mean for natural gas?
Despite picking a fight with the coal industry, shares of natural gas producers have also been hurt by lower prices. As the largest natural gas player in the United States, Chesapeake Energy Corp. (NYSE: CHK) has not yet reaped the rewards of its bet on the future of natural gas. Shares have fallen 26% over the past year. The company is looking to sell up to $2 billion of assets to shore-up its balance sheet. The move isn’t great for the company’s long-term prospects, but it will benefit from higher prices.
Regardless of your view about “free-market” capitalism it is next to impossible to expect the industry to regulate emissions on its own. That being said, the natural gas industry won’t get burned by scientific data on emissions. There is too much invested and too much at stake. But don't count out innovation. Privately held Synfuels International of Dallas, Texas has some of the industry's most efficient GTL and gas to jet fuel technology. The company can build small, super efficient GTL facilities at high-frequency flaring wells that are far from pipelines. Instead of flaring excess gas, Synfuels' alternative non-Fischer-Tropsch process allows natural gas producers to turn it into valuable liquid products such as gasoline blendstock and gases such as acetylene and ethylene - which sells for 2.5x that of gasoline.
What does it mean for coal?
Financially flexible coal companies are hedging their bets that cheap natural gas won’t last forever. High-purity coal producer CONSOL Energy (NYSE: CNX) is committing $755 million to natural gas in fiscal year 2012. The company’s proximity to the Marcellus Shale coupled with its steady coal revenues makes it an intriguing growth play in the energy industry. As it straddles the two largest sources of domestic energy consumption, CONSOL controls its own destiny regardless of industry shifts. The company also enjoys added protection against slowing demand for coal, since it sells some of the finest – and cleanest – burning coal on the market.
Westmoreland Coal Company (NASDAQ: WLB) recently purchased a Wyoming coal mine for $76.5 million. The company is clearly thinking long-term as it expects the mine to produce coal for the next 20 years. The company is still much too small to compete with the industry leaders, but it may be an underappreciated growth stock.
While just about every coal company has taken a hit, they aren’t all weathering the slump the same. Arch Coal (NYSE: ACI) felt the sting of the market as cheap gas and a mild winter hit revenue and profitability last quarter. The company expects the unusual weather to be an anomaly, but has lowered production guidance along with industry peers.
Both the coal and natural gas industries are suffering from lower natural gas prices. However, slowing economic growth in China and an unusually warm winter may have done more damage than natural gas takes credit for. As it stands, many natural gas companies are still awaiting a revival in prices.
And while emissions data will have little effect on either industry, possible new regulations from the EPA would have an impact. Will government implement tighter emission controls for the natural gas industry? If the coal industry can serve as a guide then the possibility cannot be ruled out.
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