'People Think if They Can Stop Pipelines They Can Stop Fracking,' says Tom Russo

http://www.bloombergbriefs.com/power-gas/

Tom Russo, who founded energy consultancy Russo on Energy after spending 30 years at FERC, spoke to Bloomberg's Christopher Long about the state of pipeline build-out in the U.S, and the future of the U.S. natural gas market. The interview also appears in Bloomberg Brief- Power & Gas.

Q: What's behind the uptick in pipeline opposition we've been seeing?

A: Especially with denial of the Constitution Pipeline that's going from Pennsylvania to New York and on to Massachusetts, I think people believe that if they can stop pipelines they can basically stop fracking. New York State today has about 4,500 miles of natural gas pipeline. The same New York State Department of Environmental Conservation mitigated and approved those pipelines that FERC found in the public interest. So, what's different today? It can't be that New York State doesn't know how to mitigate water quality impacts because they've been doing it over the years. So, the only thing that I can see is that people are trying to stop the fracking.

Q: So pipeline opposition is really fracking opposition. How do you address that?

A: Senator Bernie Sanders has basically said he is against fracking, and I think that's short sighted. If you look at the local community impacts caused by fracking and drilling they may be temporary. Those communities undergo a great deal of disturbance, and I'm not one to sugarcoat that. But if you balance that against the benefits from shale gas, that is we have a greener power sector, where you're throwing coal-fired power generation under the bus, simply because the price of natural gas is much lower than coal by the time you get it to the plant. And natural gas is abundant. The benefits are cleaner skies. We've reduced our carbon dioxide levels significantly in the last couple of years, all because of our plentiful shale gas. So it's a tradeoff. Local community impacts can be pretty horrendous if you're living there, but we get larger national and global benefits.

Q: With these abundant supplies keeping prices low right now, what kind of catalyst could cause demand to catch up?

A: A year ago we had 222 active gas rigs, we're now down to 85. Gas supply would be relatively low if it were not for the Marcellus shale gas production that's coming out of Pennsylvania and Ohio. Marcellus is so productive that they have made up for the deficits across the country. I believe natural gas is the fuel of the future. It's got half the carbon dioxide of coal. Our power sector is using more, people are getting on board with natural gas because of its environmental quality.

Q: Will the Panama Canal expansion have an impact on the supply/demand balance?

A: Cheniere for example, if they're shipping to Asia, obviously an LNG supplier in Australia or Qatar or Russia is a lot closer. The Panama Canal is going to have some benefits in reducing transportation costs to Asia, and increase Asian purchases of U.S. LNG. Especially in Japan, they're looking to diversify their sources of LNG. Australia, Russia, Qatar, in the future you may have Iran getting in on that, they all have tremendous gas supplies in the Persian Gulf area.

Q: And exports to Mexico?

A: I think the Mexican power sector is going to get a lot greener as a result of U. S. shale. It's going to be quite exciting in Mexico, the reforms they are putting in place, they will be using a great deal more gas. LNG will also be exported to the Caribbean and farther south as well. Most nations in the Caribbean are tied to crude oil or coal, and everybody wants cleaner air, so gas is going to play a role in that. Prices could rise if higher gas demand from the power sector is realized.

Q: Are supplies plentiful enough that increasing exports won't lead to higher prices within the U.S.?

A: It may have a slight impact on prices. But I don't think it's something that is really going to be hurting U.S. consumers. With the conventional gas and oil plays you get 50 percent of the product out of the ground. With shale plays you leave 95 percent of the product in the ground, because we don't have as good an understanding of shale basin geology as we do with conventional oil and gas wells. So if you're leaving 95 percent in the ground, you're assuming that technology and engineering and know-how will improve over time, you always have the option of going back in and re-fracking those wells and getting more product out. Aside from the pipeline constraint, I just think we're in very good shape.

Q: So pipelines are key?

A: Williams, the pipeline company, is litigating New York State's denial of the Clean Water Act water quality certificate for the Constitution Pipeline. That could produce uneasiness in markets. What if Constitution and other pipelines don't come on board? It has a ripple effect.  I think New York State and Williams ought to be settling this and not just litigating, because eventually it could go to the Supreme Court and then you get Congress involved. So in the meantime, prices could go up and all of these benefits of clean air, etc., could all be jeopardized, or we don't reach the full potential.

Q: Do you have a view on where natural gas prices might be at the end of the year?

A: It depends on this summer and next winter. If we have a very hot summer and power burn is up, we could see higher prices. Aside from a severe winter, I just don't see gas getting too high, unless the perception of the market with respect to these pipeline constraints changes. The Aliso Canyon Gas Storage Facility in CaliforniaIn is also problematic and out of service. Natural gas prices might increase this summer as a result. In the absence of extremes in weather, If prices got higher than $4 by the end of the year consistently I would be really surprised. This interview has been condensed and edited.

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