A. D. Koen
Senior Editor--News
Economic expansion and regulatory reform are combining to boost global opportunities for burning gas to generate electric power.
Companies producing, marketing, or transporting gas are capitalizing on the improved outlook by seizing on synergistic roles in the power generation chain.
Much of the improved outlook for gas stems from projected hearty increases in global demand for electricity. For example, Bechtel Power Corp., Gaithersburg, Md., estimates global power generation capacity during 1994-2003 will increase to as much as 1.2 billion kw, about 25% of which could be added by independent power producers (IPPs).
Since about 200 bcf of gas reserves producing about 20 MMcfd of gas is needed to fuel a 100,000 kw electric generating station for 25 years, that adds up to a major growth opportunity for gas producers.
International Energy Agency predicts power spending--to keep pace with growing electricity demand in developing countries of Asia, Latin America, the Middle East and Africa in 1991-2010--could total as much as $745 billion. Power demand in developed countries is not expected to increase at comparable rates.
AN ATTRACTIVE FUEL
Gas is becoming a more attractive power generation fuel for a host of basic economic reasons from wellhead to power plant. Improved exploration and production technology is driving down wellhead costs at the same time recently revised estimates put global gas reserves at more than 4,300 tcf.
Cambridge Energy Research Associates (CERA), Cambridge, Mass., estimates North American power companies now pay only half as much in real terms for oil and gas of what had been projected for this time a decade ago. Meantime, advances in gas based electricity generating technology--including cofiring with coal or oil, combined cycle generating units using advanced gas turbines, or gas reburning of effluents are proving capable of lowering power plant operating costs and reducing emissions.
Because a gas fired electrical power generating plant requires lower up front investment in capital facilities than a solid fuel plant of comparable size and generally can be installed in less time, it is an especially attractive fast track power option.
In the U.S. and some other developed countries, lower production and consumption costs are being underscored by regulatory reforms unleashing competitive forces on energy markets and reflecting growing commitments to protecting the environment. Many power Generation opportunities arising for gas outside the U.S. derive from ambitious integrated energy plans combining hungry regional power markets with affordable--often nearby--gas reserves.
Still, the extent to which the global electrical power industry accepts gas as a base load fuel will depend mainly on perceptions of its reliability.
ASSESSING GAS RESERVES
Much concern among power companies about the adequacy of gas supplies for future generation needs likely has been eased by recent increases in reserves estimates.
Petroconsultants SA, Geneva, estimates worldwide gas reserves at yearend 1993 of 4,569 tcf, not including reserves that could be produced with future technology. Based on average global gas production in 1993 of 222 bcfd, the company calculates the reserve life of world reserves at 56 years.
Other sources predict significant further additions. An IEA conference panel in Vail, Colo., last month estimated that with full deployment of advanced technology the gas resource base by 2015 could increase by as much as 25% worldwide overall and as much as 80% in some parts of the world.
William Fisher, head of the economic geology department at the University of Texas and cochair of IEA's Vail meeting, credited new technology in the past decade with lowering gas production costs while increasing the volume of gas likely to be recovered in the U.S. by a factor of two and the remaining gas resource by a factor of six.
"Extension globally of the U.S. experience will have a major effect on world gas reserves," Fisher said.
Even with the rapid hike in gas resource estimates, many believe the fuel's fate on U.S. power generation markets depends mostly on the vagaries of regulatory evolution. But observers in the U.S. gas and electric industries alike expect a growing role for gas in U.S. power generation.
A projection by the North American Electric Reliability Council (NERC) has gas accounting for 40% of new utility generating capacity in the next decade and one third of all new U.S. electricity generating capacity. Cogenerators and independent power producers are expected to add as much gas fired capacity in the U.S. as utilities are.
Another 50 million kw of gas fired electrical generating capacity could be added by 2003--including a mix of baseload, intermediate, and peaking facilities--creating incremental demand for 2-3 tcf of gas.
Gas Research Institute (GRI), Chicago, predicts that gas by 2000 will account for about 12.9% of all electricity generated in the U.S. Growth of market share will come partly at the expense of coal. Estimates of gas volumes consumed to generate electricity in the U.S. are 5-7 tcf during 2000-2005.
U.S. POWER GROWTH
The gas industry's interest in power generation in the U.S. generally began growing after passage in 1978 of the Public Utility Regulatory Policies Act (Purpa). Purpa spurred nonutility generation of electricity by requiring U.S. electric utilities to interconnect their transmission grids with nonutility generators (NUGs) or IPPS and purchase excess power from any qualifying facility. By purchasing power from NUGS, the theory held, investor owned utilities could postpone or substitute for the need to build baseload generating capacity.
As a result, Energy Information Administration estimates, NUGs in the U.S. increased combined generating capacity to 56.8 million kw by yearend 1992 from 17.4 million kw in 1979, a growth rate of 9.5%/year. Total U.S. electric capacity during the same time increased to 741.7 million kw from 598.3 million kw, or only 1.7%/year.
Meantime, nonutility power generation in 1985-92 increased at a rate of 17%/year to 296 billion kw-hr. Of the yearend 1992 capacity, investor owned utilities bought 164.2 billion kw-hr, up from 28.3 billion kw-hr in 1985.
The drive set in motion by Purpa to open access to electrical transmission facilities and boost competition on U.S. power markets entered a new phase with passage of the Energy Policy Act of 1992 (Epact).
EPACT'S INTENT
By amending provisions of Purpa, the Federal Power Act (FPA), and the Public Utility Holding Co. Act (Puhca) dealing with NUG power generation and wholesale power transactions, Epact further lowered barriers in the U.S. to competitive wholesaling of electricity by making it easier for IPPs and NUGs to produce and sell power to investor owned, regulated utilities. Basically, the law:
- Created a new category of power suppliers, exempt wholesale generators (EWGs), and exempted them from corporate ownership and geographic provisions of Puhca to make it easier to supply incremental power.
- Overhauled FPA authority over transmission services by instructing the Federal Energy Regulatory Commission (FERC) to allow interstate wholesale wheeling of electricity, as long as a specific deal doesn't violate a state law or affect power reliability.
- Set efficiency, standards that protect the power options of small businesses by requiring utilities weighing investments in conservation and energy efficiency to consider integrated resource planning that systematically compares supply and demand options, all conservation, management, and efficiency programs and measures that are at least as profitable, and rates that provide incentives to invest in cost effective power efficiency improvements.
Also, Epact requires states to consider ratemaking standards for wholesale power purchases, including effects of long term wholesale power purchases on utility capital costs and retail rates, of leveraged capital structures on the reliability of power wholesalers, of advance approval/disapproval of long term wholesale power deals, and of the adequacy of fuel supplies in long term power purchase contracts.
EFFECTS OF EPACT
Debate rages about the ultimate effects of Epact.
But proponents on all sides of the controversy agree the law has caused competition to begin moving from power generation into power marketing. Many say growing competitiveness on U.S. power markets likely will heighten the drive among power generators to further cut the cost of electricity while maintaining supply reliability and quality, inevitably allowing power wheeling to spread from wholesale to retail markets.
State power regulators have responded to Epact in varying degrees. At the forefront, the California Public Utilities Commission last spring proposed a deregulation transition beginning in January 1996 with large industrial customers that could lead by 2002 to retail competition for all power customers. Meantime, Michigan's electric utility regulators put in place a retail power wheeling experiment involving some large customers representing 12% of the state's electric markets.
Earlier this month, Jefferson Electric Inc., San Francisco, a unit of Jefferson Gas Systems Inc., said CPUC's retail power proposal could be enhanced if all consumers--including residential and commercial users--were allowed direct and equal access to power in the state on the same timetable. Jefferson Electric said utilities would be able to serve retail electric customers of all types if retail power access occurred gradually, with 20% of each customer class becoming eligible on a first come, first served basis starting Jan. 1, 1996. The proposal would have another 20% of each customer class becoming eligible to compete on retail power markets each year until 2000, when all California electricity customers would be allowed direct and equal access to power in the state.
"Direct access for all consumers will lead to lower electric prices, new and improved services, and broader customer choice," Jefferson Electric said in making the proposal. "These improvements should not and do not have to come for one customer class at the expense of all others."
While open wheeling of retail power might not work in all instances because of legal or technical constraints, the message is clear from U.S. electric customers and regulators: Downward pressure will be maintained on the pricing of electric power.
GAS INDUSTRY RESPONSE
Some oil and gas companies-mainly affiliates of large integrated firms for years before passage of Purpa had been involved in power generation.
Exxon Energy Ltd. (EEL) unit of Exxon Corp., for example, for 3 decades has owned 60% interest in Castle Peak Generating Co., which owns four power stations in Hong Kong with more than 6.4 million kw of capacity. EEL's partner China Light & Power with the remaining 40% interest operates the plants and owns and operates all transmission and distribution facilities in Kowloon and the New Territories.
Following implementation of Purpa, many companies began moving into independent power production, including many cogeneration projects. One such leading IPP is Destec Energy Inc., Houston, formed in 1989 by Dow Chemical Co. to focus on long term growth opportunities in power generation and synthetic gas manufacturing.
Destec for the past 5 years has been building gas fired cogeneration plants. Currently the company holds interests in 15 cogen plants with combined rated capacities of 1.78 million kw and more than 2 million lb/hr of steam. The company also has interests in six cogen projects under construction with combined rated capacity of 1.2 million kw.
Despite rather limited power experience, the gas industry's response to opportunities created by Epact also has been rapid, with more than 50 integrated firms applying for FERC permission to sell power on wholesale markets. In addition, shaking up power marketing rules in the U.S. has stirred a flurry of realignments among companies with expertise in power and/or gas.
Because fuel is an important component in the cost of power, gas companies believe creating wholesale power marketing affiliates will allow them to cash in on gas production or transmission efficiencies to create added value.
In addition, many players in the U.S. gas industry see analogies between recent gas regulatory evolution and goals of power regulation evolution. With passage by FERC of Order 636, many in the gas industry feel they already have adapted to an increasingly competitive marketplace and might be able to apply something of what they learned the first time around to increasing competition on domestic power markets.
POWER MARKETING UNITS
Many companies with experience marketing gas in the U.S. through the open access environment created by FERC Order 636 are seeking permission to market wholesale power under Epact based on the premise that the more competitive power marketing structure seeded by the law will create needs for innovative marketing services. Many also see power marketing as a launching pad for bigger things in power generation.
Companies that recently have announced formation of unregulated power marketing affiliates include NorAm Energy Corp., Natural Gas Clearinghouse Inc. (NGC), Consolidated Natural Gas Co. (CNG), and Coastal Corp.
Gas officials say existing relationships between many gas and utility companies' executives could help ease deal making as the number and pace of transactions quickens on power markets.
"Also, we feel we bring the skills of a deregulated marketing company to bear on power markets," William A. Kellstrom, president of NorAm Energy Services (NES), said of the company's plan to expand wholesale power marketing. "The link for us in the electric power business is we know how to manage buying and transporting gas."
Following FERC approval in August of NES' power marketing filing, the company plans to start out by buying and selling wholesale power in the U.S. Southwest Power Pool, which covers Arkansas, Kansas, Louisiana, Oklahoma, and parts of Mississippi, Missouri, New Mexico, and Texas.
"That's where we have our assets and our relationships," Kellstrom said. "Our plan eventually is to back into some power generation projects."
Kellstrom said wholesale power customers with whom NES has been in contact are mainly investor owned utilities, municipal utilities, electric cooperatives, and a few IPPS.
"Those kinds of companies sometimes have excess power--or they might be short--and we try to match sellers with buyers," he said.
SYNERGISTIC POSSIBILITIES
NGC formed Electric Clearinghouse Inc. (ECI) in February to capitalize on its strengths as a gas marketer. ECI in April applied to FERC for approval to begin buying and selling gas on wholesale markets and aims to have its real time power operations up by yearend.
"We think that as the power industry restructures we'll be able to employ a lot of the skill sets and capabilities and infrastructure that we built up in gas to the power sector," said Dan Ryser, ECI vice president and general manager.
In contrast to marketers at electric utilities--which essentially sell excess power generated by company owned assets--ECI sees most new power marketers acting as intermediaries to provide a merchant function for customers at both ends of the power grid, aggregating power and repackaging it for resale. But similar to the way in which NGC began marketing gas as a commodity in 1985 and in 1990 began acquiring interests in gas gathering, processing, and pipeline assets, ECI is likely eventually to take interests in power generation or transmission facilities.
"We see a parallel at some point in the power industry, possibly sooner than was possible in the gas business," Ryser said.
In addition, NGC envisions synergistic activities in which its power fuels group would sell gas to a power generator and ECI would buy back part of the power for resale.
"In doing that, we'd be creating more interdependence between the two commodities and more opportunities to trade in and out of both commodities," Ryser said.
EFFECTS ON U.S. UTILITIES
How power markets are evolving in the U.S. is having mixed effects on U.S. electric utilities.
A recent study by R.J. Rudden Associates found three of the nine NERC regions--Northeast Power Coordinating Council, Mid-Atlantic Area Council, and Mid-America Interconnected Network--are threatened by competition. Rudden found utility rates in the three regions are 1.1-2.1 times higher than the cost of onsite NUG and wheeled power and in some cases as much as 4 times greater than the least costly alternative. Utility power rates in other regions and markets were less than those of nonutility competitors.
A study by Edison Electric Institute, meanwhile, concluded that U.S. electric utilities have renegotiated 232 power purchase agreements with NUGs affecting sales of more than 8.57 million kw. Another 200 agreements covering sales of 4.35 million kw of power are being renegotiated or under review. If all agreements under scrutiny are revised, Edison estimates consumers of NUG power would save about $9 billion.
Based on the fact that Tenneco Inc. affiliated gas pipeline systems intersect with about 60% of the U.S. electric utility grid, Tenneco Power Generation Co. (TPG), Houston, is keying its U.S. independent power activities on developing cogeneration projects inside the fence of industrial power customers near the interstate pipelines of Tenneco affiliates.
To focus on the best prospects first, said Roy Cavanaugh, vice president of TPG, the company listed utilities with service areas within a roughly 20 mile corridor around Tenneco pipelines that were expected to experience the greatest cost and rate increases the next few years because of required emissions reductions, nuclear power station writedowns, and other environmental compliance issues.
"We were able to pinpoint industrial customers that are going to have the greatest increases in their rates, and we're attacking those first," Cavanaugh said. "We've identified more than 100 opportunities ranging in size from 20-300 million kw, including chemical facilities, refineries, and fertilizer plants."
Because there also is a growing need for peaking power in the U.S., TPG is looking into developing peaking power plants for electric utilities with needs for new peaking capacity.
"Obviously, the best place to site a peaking facility is right on a pipeline system, since gas is an excellent fuel for peaking applications," Cavanaugh said.
Outside the U.S., TPG is involved through affiliate Tenneco Gas in the BTB Group, which is helping develop a gas pipeline infrastructure to move gas from fields in Argentina and Bolivia to South American markets, mainly in Brazil and Chile. Earlier this month, Tenneco Gas agreed in principle to develop two gas fired power plants in Chile.
In Asia, Tenneco projects include performing a feasibility study of proposed 190 mile offshore gas pipeline and storage project in Taiwan. Also, TPG is working on a 400,000 kw power station for a large industrial park and power infrastructure south of Ho Chi Minh City.
INTERNATIONAL POWER IMPERATIVES
The combination on U.S. power markets of slow demand growth, downward pressure on prices, and increasing competitiveness is speeding the internationalization of power.
Scores of larger gas affiliated power industry players are participating in gas fired power projects in other countries, where power development depends heavily on the availability of fuels.
In fact, most developing countries using gas in power generation planning are planning substantially more power development fired by solid fuels. But in such countries where adequate gas reserves are thought to exist, international financing sources sometimes promote gas power applications by tying power project funding to developing a source of fuel to improve energy sector efficiency.
"If a developing country can package a fuel supply with a downstream market, more value is created," Bechtel Power's David Walker said.
Power projects including gas development are especially attractive in developing countries where privatization is under way, because the latter is often considered a goal of investment. Often, gas is the fuel of choice because of the short time allowed to repay a loan.
"Since a gas project is less capital intensive, the capital charge for a gas project can be one-half to one-third that of a solid fuel project on a kilowatt-hour basis, because of the loan policy for repaying the debt," Walker said.
NON-U.S. PROJECTS
The list of U.S. companies working on power projects in other countries includes large integrated firms and independent companies.
Earlier this year, two oil and gas companies announced integrated gas power projects in South America. Maple Resources Corp., Dallas, in May unveiled an integrated energy project in Peru (OGJ, May 9, p. 27). The $150 million project includes development of Aguaytia gas field, installation of gas pipelines, and development of a gas fired power project in the area. Broken Hill Pty. Co. Ltd. and King Ranch Inc. announced a joint integrated gas power project in Ecuador that could begin generating about 100,000 kw of electricity for the country's power grid as soon as summer 1995 (OGJ, Oct. 17, p. 48).
Gas reserves aren't always discovered in places where needed or where extraction and transportation are realistic. But a reliable supply of gas near the site of a proposed power project can be a key factor in deciding to move forward.
Exxon's EEL unit is taking advantage of a recently developed gas source to help construct a 2.5 million kw intermediate load power station at Black Point near Hong Kong. Gas to fuel the first 625,000 kw train in the project is to be delivered by a 486 mile subsea pipeline from Yacheng field off Hainan Island. Yacheng is being developed by a group of companies led by ARCO. More than 90% of EEL's existing power capacity at Hong Kong is coal fired.
In planning the project, EEL wasn't looking for a place to develop a gas fired power project but rather was responding to a perceived need for more power capacity in the Hong Kong area. The possibility of synergistic gas deals with affiliates was neither a goal nor part of project planning.
"We determined that we needed intermediate load and that there was gas available that could be purchased at an economic price to make the combination work, versus the alternatives," said Dick Swersey, manager of corporate affairs for Exxon Coal & Minerals Co.
FUNDING GOOD PROJECTS
Among large integrated companies, Enron Corp. considers itself a leader in development of gas fired electric power generation, even creating market opportunities by assembling pieces of complex integrated projects. With expertise in gas production, marketing, transmission, and distribution, the company also has concluded financing for large infrastructure projects with multilateral and commercial capital market lenders.
Earlier this month, Enron Chairman and Chief Executive Officer Kenneth L. Lay said Enron Development Corp. (EDC) has the strongest and most diversified portfolio of international projects under development since its formation in 1991. Countries with EDC integrated gas fired power projects in advanced stages of development include Bolivia, Brazil, Colombia, India, Indonesia, Turkey, and China.
Rebecca Mark, EDC chairwoman and chief executive officer, said few of the international projects talked about are completed.
"Of the projects that actually move into contracting stages, some--not ours--won't be structured well enough to attract financing and will take a lot of work before financiers will be able to deal with them," Mark said. "Well structured projects always will find money, good money."
In the U.S, Enron is actively engaged in wholesale power marketing. As of mid-October, Enron Gas Services had executed 50 enabling power agreements and was marketing almost 500 million kw-hr of electricity.
Amoco Corp. last summer formed Amoco Power Resources Corp. to construct and operate electricity generating facilities worldwide.
With experience gleaned from more than five decades of international power development--mostly combined cycle, inside the fence cogeneration projects at company refining and petrochemical facilities--Amoco began exploring the IPP business in 1992. Earlier this year, Trinidad and Tobago picked a group of Amoco and Southern Electric International Inc. to negotiate purchase of 49% equity interest in a project involving three gas fired power facilities with combined capacity of 1.178 million kw. Trinidad and Tobago Electricity Commission is to retain 51% interest in the project.
A ROSY FUTURE?
Given recent gains and bright outlook for gas on global power markets, one might wonder why gas fired electric capacity has not been added more rapidly.
The answer likely lies in the power industry's institutional memory of past problems.
It's not necessary to think back even a decade--a relatively short time on the power plant development horizon--to recall expectations that apparently finite and diminishing oil and gas reserves apparently meant no more oil or gas fueled power plants would be built anywhere in the world.
The perception of gas deliverability also is an important factor. Glenn Wattley, head of the corporate utilities practice of Arthur D. Little Inc., Cambridge, Mass., said many of the fuel buyers he deals with are wary of the role gas might play long term.
"Even in the U.S. there would be a dramatic change in the way gas is viewed if gas availability was in question, forget about the price," Bechtel's Walker said. "In the rest of the world, it's hard to say how political forces might react in various countries. Legislation or regulations could radically change today's economic environment.
"Similarly, if gas prices were to double in 2-3 years, we'd also see a radical shift in expectation for gas."
While gas producers would like to see prices slightly higher, Wattley says the way to gain the confidence of the electric industry is to prevent any big price surprises.
"Gas prices rising slowly and in a managed way helps the electric generators plan," he said. "But if all of a sudden regulated power generators are paying high gas prices and tell state utility commissions it is a problem, then they'd start convening prudency reviews over why the generators were depending on gas so much. It will be the nuclear review thing all over again."
