INSIGHT: Pickens Plan for natgas fires up petchem worries

21 April 2011 16:17  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--Legendary oilman and financier T Boone Pickens was in Washington this week calling for tax incentives to help convert most commercial trucking in the US from diesel fuel to natural gas, an idea hailed in Congress but not popular among chemical makers.

Pickens, now chairman of hedge fund BP Capital Management, began to build his fortune in the middle of the last century as a wildcatter and then as an aggressive and canny corporate raider and acquisition specialist through the 1980s and 1990s.

His fledgling 1950s oil firm, Mesa Petroleum, grew to be one of the largest independent energy companies by the 1960s, and then leap-frogged to fame by taking over Hugoton Production Co in 1981, an energy firm 30-times larger than Mesa.

Along with the output of other bolt-on energy acquisitions, Mesa was said to have produced more than 3,000bn cubic feet (bcf) of natural gas and 150m barrels of oil over a 32-year period ending in 1996.

In the 1980s he expanded his philanthropic work and political activism, with a focus on energy issues, including alternative, renewable and conventional fuels.

In July 2008, he launched the “Pickens Plan”, an outline of energy policy recommendations that he contends could largely free the US from dependence on oil imports from the Middle East.

Although the Pickens Plan advocates greater use of, and government incentives for, wind and solar power, its principal focus is on natural gas as a transportation fuel, especially in fleet vehicles such as municipal buses, taxis, delivery vans, utility and service trucks, among others.

He particularly wants to see federal tax incentives to convert as many as possible - if not all - of the 8m long-haul commercial trucks on US highways from high-pollutant diesel fuel to more environmentally friendly and cheaper natural gas.

Pickens has thrown his considerable support to a bill introduced in the US House of Representatives earlier this month, HR-1380, that would set up much of the government policies and tax incentives that could move the Pickens Plan forward.

Introduced by a large bipartisan group of House members, the bill, titled “New Alternative Transportation to Give Americans Solutions” (NAT GAS Act), would provide tax incentives for the purchase of natural gas-fuelled vehicles (NGVs), construction of natural gas retail fuelling stations and use of natural gas as a vehicle fuel.

The bill also would provide a new tax credit for auto manufacturers to produce more NGVs and incentives for the conversion of large commercial vehicle fleets - such as service companies, utilities and taxis - from gasoline to natural gas.

Initially sponsored by some 75 House members, the bill has already attracted more than 100 additional co-sponsors.  HR-1380 would need the votes of only 40 more members of the House to win the 217 votes needed for passage.

The measure might face less of a hallelujah reception in the Senate, but the NAT GAS Act already has the endorsement of President Barack Obama.

As the Pickens Plan bandwagon gathers speed and HR-1380 moves toward what could be quick approval by Congress and the White House, US petrochemical producers and other gas-dependent industries are alarmed.

US petrochemical producers and downstream chemical makers are heavily dependent on natgas as both a feedstock and energy fuel.

The sudden stampede to natural gas as a transportation fuel could put chemical makers and other industries in a supply/demand price bind.

“Federal incentives for natural gas vehicles could divert much-needed supplies from manufacturers, threatening competiveness and jobs,” said Cal Dooley, president of the American Chemistry Council (ACC).

“Supply diversion and its impacts must be considered as lawmakers discuss this bill,” Dooley added.

“Congress needs to recognise how the NAT GAS Act favours one US sector over another, and that it distorts markets,” he said.  “Congress should not subsidise some natural gas uses at the expense of others.”

Paul Cicio, president of the Industrial Energy Consumers of America (IECA), similarly warned that Congress should not intervene in what should be market-driven energy choices.

“Greater demand of natural gas in the transportation sector is the responsibility of markets, not Congress, subsidies or mandates,” he said.

“Subsidising natural gas demand is not sound energy or economic policy and will have the long-term effect of increasing the price of natural gas to all consumers,” he added.

Cicio said that if natural gas provides added value to vehicle owners and fleet operators, “private sector investments will be made and demand for natural gas will increase”.

“Given the reported abundant supply of natural gas and the high price of existing transportation fuels,” he said, “natural gas should be able to compete without subsidies.”

IECA’s member firms include chemical makers but also manufacturers of steel, paper, glass, packaging, minerals and auto parts, among others.

The Pickens Plan and HR-1380 are predicated on the new and abundant domestic natural gas resources that have been made available through hydraulic fracturing (“fracking”) and horizontal drilling to free-up vast shale gas plays across the US that previously were not economically recoverable.

In large part because of newly recoverable shale gas resources, the Energy Department’s Energy Information Administration (EIA) noted late last year that US proven reserves of natural gas reached 284,000 bcf at the end of 2009, the highest level in nearly 40 years.

The EIA said that shale gas advances were chiefly responsible for the 11% gain in the nation’s oveall natural gas proven reserves in 2009 from 2008, with a 76% increase in shale gas reserves alone.

Next week, the independent Potential Gas Committee is expected to announce yet another expanded estimate of US natgas reserves, again due to shale-based resources.

But manufacturers worry that the energy windfall represented by shale gas developments could quickly be absorbed as natural gas is called on to fill and fuel more and more of the nation’s energy needs.

As Congress rushes toward approving incentives for natural gas as a transportation fuel, federal regulators are pressing US electric utilities ever harder to abandon dirty coal in favour of gas-fired power generation.

And, what had been expected to be a new renaissance in US nuclear power has now been thrown into serious doubt by the Japanese earthquake and tsunami tragedy.

In addition to its widespread human toll, that disaster has precipitated what is likely to be a long-running crisis over the "fail-safe" failures at Japan’s Fukushima Daiichi nuclear power plants.

If nuclear power once again becomes a pariah in the US - as it was for 30 years after the 1979 Three Mile Island nuclear plant accident at Harrisburg, Pennsylvania - there would be still more power demand placed on natural gas.

With the new abundance of shale gas plays, there might well be enough to feed expanding demand for its use as power-generating and transportation fuels, and still keep US chemical plants and other manufacturing humming along.

However, waiting in the wings is the real possibility that federal or state regulators, or even the public, could turn against hydraulic fracturing, barring or severely restricting its use for fear of adverse environmental consequences.

If shale gas were to be backed out of the US energy profile for some reason even as demand for natural gas was being accelerated by government fiat for power and transportation use, gas-dependent manufacturers could be facing sharply higher gas prices.

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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