Natural gas moves in on coal as prices fall
A precipitous decline in the price of natural gas has allowed electric utilities to use it to replace coal in their generating plants.
By Mark Jaffe
The Denver Post
Posted: 10/23/2009 01:00:00 AM MDT
Updated: 10/23/2009 01:37:18 AM MDT


The off-a-cliff drop in natural-gas prices in the past 10 months created one bonus — it made gas cheap enough to grab some market share from coal.

Since late winter, electric utilities have been switching from coal to gas, said Robert Roth, the PIRA Energy Group's senior director for North American coal.

"Natural-gas prices fell more quickly than coal prices," he said. "That drove the fuel-switching."

The reason for the switch is that about 50 percent of natural gas is bought on spot or short-term markets, while up to 90 percent of coal is bought via annual or two-year contracts, Roth said.

"Coal prices were stickier than gas prices," said Brandon Blossman, a vice president for research at Tudor, Pickering, Holt & Co. Securities Inc.

So natural-gas producers were selling an extra 1.5 billion to 2 billion cubic feet of gas to utilities — primarily in the Northeast, according to analysts' estimates.

Colorado is the sixth-largest natural-gas-producing state as well as the sixth-largest producer of coal.

In July 2008, the New York Mercantile Exchange one-month price for Central Appalachian coal was $143 a ton and the spot price for natural gas was $13.57 per million British thermal units.

Since then, the Appalachian coal price has dropped as much as 70 percent and the low for gas was 82 percent off the July 2008 price.

The average prices during that period are $67.42 a ton for coal and $5.40 per million BTUs for gas.

"Any time the price of Eastern coal is 8.7 times above the Henry Hub price for gas, you see switching," Blossman said.

Louisiana's Henry Hub is one pipeline gathering point where natural-gas prices are set.

As cold winter weather eats into gas storage, which will help raise prices, and utilities negotiate new, lower-cost coal-supply contracts for 2010, utilities will shift back to coal, said Ray Deacon, an analyst with Pritchard Capital Partners LLC.

The utilities are under some pressure to use coal since they must take their contract coal, said Porter Bennett, chief executive of energy-industry consultant Bentek Energy.

"The coal trains keep coming, and the stockpiles grow," Bennett said.

Natural-gas-switching, however, could make a resurgence next spring if production levels stay high and the winter is mild, which would keep prices low, Bennett said.

If Congress moves ahead with legislation to curb carbon emissions — natural gas emits about 37 percent less carbon dioxide than coal — that would also boost fuel-switching, Bennett said.

"It's hard to forecast the future, but there is a chance we could see utilities switching back to natural gas next spring," he said.

Mark Jaffe: 303-954-1912 or mjaffe@denverpost.com


Buck