Betting Big on a Boom in Natural Gas
With prices low and the promise of vast new supplies, businesses are making the switch from oil-based fuels and coal
By Steve LeVine and Adam Aston

This Issue
October 19, 2009


CEO Pinkerton expects Range Resources to double its gas output next year Dave Shafer

Earlier this year the time came for Lloyd M. Yates, CEO of Progress Energy (PGN), to decide how the big Raleigh (N.C.) utility would meet the state's stringent smokestack laws. First he considered the easy solution: installing pollution scrubbers on the utility's old coal-fired plant in Sutton, N.C., at a cost of $330 million. Then his attention turned to natural gas, the price of which had plunged by two-thirds in the previous year. Sure, the recession accounted for some of the slide. But reports were also circulating of massive discoveries of natural gas in the U.S. Moreover, because the fuel emits half the carbon of coal, it seemed safe from the climate legislation being considered in Washington, which could impose steep penalties on emissions.

After weighing their options, Yates and his board decided against the scrubbers and opted to upgrade another coal plant to natural gas—a $900 million project. In Yates' calculations, that would satisfy the smokestack law and more than pay for itself over time. "It was like deciding whether to put a catalytic converter on a '52 Chevy," Yates says. "It was: 'When do you buy the new car?'"

The U.S. natural gas industry hopes that as Lloyd Yates goes, so goes the country. In summer 2008 the U.S. and much of the rest of the world were consumed by talk of peak oil and natural gas and fears that high fuel prices would persist forever. Today analysts still worry about the oil supply but far less about natural gas. U.S. gas producers, capitalizing on a technological breakthrough, have in recent years unlocked an enormous volume of natural gas in the shale rock under Colorado, Oklahoma, Pennsylvania, Texas, and other states. According to a July report by the Colorado School of Mines, the U.S. now holds 1,800 trillion cubic feet of natural gas, one third of it in shale, the equivalent of some 320 billion barrels of oil. That's more than Saudi Arabia's 264 billion barrels.

Of course, natural gas isn't interchangeable with oil and won't solve America's energy woes by itself. While natural gas can be used to heat homes and power vehicles, it's mostly used, like coal, to generate electricity.

But the supply estimates for natural gas are so vast and the plunge in prices so steep that they're forcing business leaders to rethink their long-term energy strategies—quickly. Utilities are debating whether to retrofit coal plants for gas. Big corporations such as AT&T (T) and UPS are beginning to convert large truck fleets from oil-based gasoline to natural gas. Even renewable-energy players are jumping in: As they try to coax more power from unpredictable wind and solar generators, they're finding that inexpensive natural gas helps keep their output steady.

It's not certain that the gas boom will fulfill its promise. "We don't know if it will be truly awesome or only theoretical in its impact," says David G. Victor, a professor and energy expert at the University of California at San Diego. While natural gas producers say they're sitting on the greatest volumes ever, they also face considerable barriers to getting their commodity to market. Prices are so low that many producers have closed their wells. Most utilities fitted with coal-burning units remain reluctant to invest in natural gas equipment. Critics say the water-intensive shale-drilling process poses risks to nearby drinking water supplies. And skeptics point to the late 1990s, another era when prices seemed permanently lowered, only to spike a few years later. "Utilities have been burned many times," says Andre Begosso, an energy strategist at Accenture (ACN), a consulting firm.


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