Long-term natural-gas contracts haven’t been used in Colorado in more than 20 years, but the Clean Air-Clean Jobs Act could set the stage for their return.
The act, passed by legislators and awaiting Gov. Bill Ritter’s signature, directs Xcel Energy to come up with a comprehensive plan to cut nitrogen- oxides pollution at the utility’s smaller, aging coal-fired plants on the Front Range.
Xcel directed to “give primary consideration” to switching to natural gas, is offered long-term contracts as the tool to do that.
“It is an idea that is attracting a lot of interest . . . around the country,” said Colorado Public Utilities Commission chairman Ron Binz.
The utility industry shied away from installing more natural-gas capacity because of volatile prices — in the past 10 years, the price ranged from $1.83 to $15.38 per million British thermal units on the New York Mercantile Exchange. That can mean big price swings for consumers because the cost of fuel is passed on to utility customers.
“We realize that we need to offer longer-term stable pricing for our customers to be competitive and make this legislation work,” said Jim Hackett, chief executive of Anadarko Petroleum Corp., which operates in Colorado.
To facilitate that, the act says utilities may, with PUC approval, enter into guaranteed gas contracts of three to 20 years.
“The legislation will make it possible for a utility and a natural-gas producer (to enter a long-term contract) without a PUC down the road disallowing the contract,” Binz said.
The guarantee was key.
“Producers wanted the legislature to give its blessing on long-term contracts,” said John Harpole, president of Mercator Energy LLC, a Denver- based natural-gas broker.
But executives from both industries caution that long-term contracts aren’t a given.
“There are risks on both sides with long-term fixed-price contracts,” said Renee Zemljak, vice president for marketing at EnCana USA, one of the largest natural-gas operators on the Western Slope. “If either party is on the wrong side of the market price, they are subject to scrutiny by shareholders and public utility commissions.”
Xcel’s comprehensive plan with its decisions on contracts and natural gas use won’t be filed with the PUC until August.
Recent moves by Progress Energy, based in Raleigh, N.C., shed light on industry thinking.
In December, Progress said it would close four coal-powered plants and replace them with two new natural-gas plants.
Progress was trying to deal with nitrogen oxides and sulfur dioxide standards and was anticipating new rules on mercury emissions and coal ash, said firm spokesman Scott Sutton.
“Then at some point there might be carbon limits as part of climate legislation,” Sutton said. Natural gas has about half the carbon content of coal.
Progress found adding pollution controls at the old plants would cost $2 billion and building the two gas plants would cost $1.5 billion, Sutton said.
“Natural gas was the most cost-efficient solution,” he said.
The utility has also entered into long-term contracts with a pipeline company to guarantee delivery of gas, Sutton said.
For the natural-gas producers, contracts could be a way to cope with growing reserves that have helped depress prices, industry executives say.
Estimated U.S. reserves — due to new shale plays and improved drilling technology — grew by 38 percent between 2006 and 2008 to 1,800 trillion cubic feet of gas, according to the nonprofit Potential Gas Committee.
That is enough gas for 100 years at current consumption and “has changed the market,” said Mercator’s Harpole.
The price of natural gas in the past 12 months has averaged $4.29 per million BTUs on the NYMEX.
Nevertheless, many operators may be reluctant to forgo the upside of the price swing, said Porter Bennett, chief executive of energy consultant Ben- tek Energy LLC in Evergreen.
“Someone has got to jump in the pond and see how cold the water is,” Bennett said. “Then you may get some other producers looking at long-term contracts.”
Will Xcel even want long- term contracts?
Oklahoma City-based Devon Energy Corp. has been promoting the use of three- to nine- year contracts, said Darryl Smetty, the company’s executive vice president for marketing
“Most utilities we deal with are reluctant to enter in a contract of more than two or three years,” Smetty said. “They believe that prices aren’t going to go much higher and that there will be plenty of gas.”
Mark Jaffe: 303-954-1912 or mjaffe@denverpost.com
