U.S. Natural Gas Output May Get Boost From Japan Nuclear Crisis

The $99 trillion U.S. natural-gas industry, led by Exxon Mobil Corp. (XOM) and Chesapeake Energy Corp. (CHK), is prepared for a surge in demand as Japan’s nuclear crisis shakes confidence in atomic energy, executives said.

Natural gas futures have risen 11 percent since the March 11 record earthquake and tsunami in Japan spurred a round-the- clock battle against a meltdown of nuclear reactors there. Futures gained as much as 0.5 percent to $4.275 per million British thermal units on the New York Mercantile Exchange and were at $4.264 at 11:11 a.m. in Singapore. Nymex gas contracts for delivery in March 2015 touched $6.083 on March 16. The contract has since fallen 1.5 percent to $5.99.

Production of the heating and power-plant fuel can be ramped up within months, thanks to the industry’s ability to extract gas cheaply from vast shale deposits in North America, Larry Nichols, executive chairman of Devon Energy Corp. (DVN), the third-largest U.S. oil and gas producer, said in an interview.

Devon halved the amount of rigs drilling for natural gas in the Barnett Shale deposit of Texas as gas prices fell in the past year. “We have 7,000 identified, undrilled locations that are surrounded by producing wells there,” Nichols said. “In areas like that, it’s fairly easy to ramp up. There’s no geological risk to speak of.”

The U.S. Nuclear Regulatory Commission said March 21 it will begin a review of domestic nuclear safety after an earthquake and tsunami overwhelmed the six-reactor Fukushima Dai-Ichi station of Tokyo Electric Power Co., wrecking its cooling systems and threatening a meltdown of radioactive fuel. Even as the crisis eased this week, radiation released from the damaged plant contaminated food, seawater and drinking water.

The Queen Rules

“Natural gas is queen for a decade, maybe two,” John W. Rowe, chief executive officer of Exelon Corp. (EXC), the largest U.S. nuclear-power generator, said in an interview last week on Bloomberg’s “Taking Stock” with Pimm Fox. “It gives you a lot of advantages economically and it allows you to take time and work out the mix of renewable and nuclear in the future in an orderly way.”

The prospect of stricter regulation of the industry prompted Exelon to reconsider $3.65 billion in planned nuclear spending and NRG Energy Inc. (NRG), the largest U.S. independent power producer, to slow work and postpone orders for two 1,365 megawatt reactors planned in Texas.

“We’d reached a point where we had a much higher level of public confidence and that will be changed by this event,” Rowe said.

Delayed Licenses

The NRC probably will delay the first new reactor licenses in a generation beyond year-end as the agency assesses whether design changes are needed to avert failures similar to those in Japan, said Michael Worms, a New York-based analyst for BMO Capital Markets.

“Nuclear, it’s toast,” Thomas D. O’Malley, chairman of PBF Energy Co. LLC, the private-equity backed oil-refining partnership, said at an industry conference in San Antonio yesterday. “Who’s going to sign a permit today? Absolutely no one after this disaster.”

Ample gas supplies have led to low prices that damped shares of producers, while raising the appeal of gas as a low- cost fuel for power plants, Rowe said.

“Never in my career have there been so many forecasts that the price of natural gas will be so low for so long,” Rowe, 65, said. Any new plants Exelon builds will be fueled by gas, wind or solar energy, Rowe said.

Losers Gain

Gas producers Southwestern Energy Co. (SWN) and Cabot Oil & Gas Corp. (COG) led gains among U.S. independent oil and gas producers in the Standard & Poor’s 500 Index since the earthquake in Japan, after trailing the index in 2010. Southwestern, based in Houston, has risen 16 percent to close at $42.03 yesterday, the highest since June. Cabot, also based in Houston, has risen 15 percent to $49.29.

Sustained gas prices as high as $6.50 a million British thermal units may be needed for companies like Devon to return to gas fields, Nichols said. Devon, like many producers, has shifted more onshore production to oil and petroleum liquids over the past two years as oil prices nearly doubled to more than $100 a barrel.

Japan, the world’s biggest importer of liquefied natural gas, is increasing demand for the fuel to replace damaged nuclear capacity. That will have little effect on the U.S. and Canadian market because North America is neither a big importer of gas, nor has significant export capacity, Leo P. Mariani, an Austin, Texas-based analyst for RBC Capital Markets, wrote in a March 18 note to clients.

Global Outlook

“Gas should receive a benefit in 2012 through 2015 if nuclear power is de-emphasized globally and gas demand increases,” Mariani wrote. He recommended EQT Corp. (EQT), Forest Oil Corp. (FST), Petrohawk Energy Corp. (HK), Newfield Exploration Co. (NFX), Rex Energy Corp. (REXX) and Southwestern.

Exxon Mobil, the largest U.S. gas producer, along with Chesapeake and Range Resources Corp. (RRC), are among the many companies that would benefit from more power plant demand for the fuel, Curtis Trimble, an energy analyst at MKM Partners LP in Houston, said in an interview. Gas production is profitable for Range at $4 per million British thermal units, CEO John Pinkerton said in an interview yesterday.

Gas-fueled power plants are the second-largest source of electricity in the U.S. behind coal, according to the Energy Information Administration. Nuclear reactors, the third-largest source, provide about 20 percent of U.S. power.

Market Share

Gas accounted for 24 percent of power supply last year, a three-percentage-point gain in market share in two years, the U.S. said in a March 11 report.

Calpine Corp. (CPN), owner of the largest group of U.S. gas- fueled plants, stands to gain as nuclear delays and higher coal prices drive up demand for its output in Texas, California and the U.S. Southeast, Angie Storozynski, a New York-based analyst for Macquarie Capital USA Inc., said in an e-mailed message.

New federal air-pollution standards for utilities will likely lead to the retirement of some coal plants, which also will drive more demand for gas-fired plants, Storozynski said.

“We expect natural gas to be the fuel of choice for U.S. power generation going forward,” she said.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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