Burning Bright: Why Investment Capital Is Needed to Support the Emerging Opportunity in U.S. Energy Future

Burning Bright: Why Investment Capital Is Needed to Support the Emerging Opportunity in U.S. Energy Future (Daniel X. O'Neil on flickr)

The U.S. Energy Future Burns Much Brighter than Previously Thought, but Investment Capital Is Needed to Support the Emerging Opportunity.

By Drew Campbell.

Natural gas exploration and the infrastructure investment required to refine, transport and sell the product is one of the most anticipated and compelling investment opportunities there is today. In fact, the rush to stake claims and drill is outpacing the policies and infrastructure needed to better support sales and distribution of rapidly increasing supplies of natural gas in the United States as well as in some cases satisfy environmental and health standards.

In June, The Hamilton Project — an economic policy group launched in 2006 by the Brookings Institution — hosted the “New Directions for U.S. Energy Policy” forum at Stanford University to encourage solutions to these and other problems emerging in the United States as new technologies tap previously unreachable sources of natural gas and petroleum.

Forum participants included former U.S. Treasury Secretary Robert Rubin; James Rogers, CEO of Duke Energy; Sally Benson, director of the Global Climate and Energy Project at Stanford University; and Hoover Institution Distinguished Fellow George Shultz, former U.S. Secretary of Labor, Treasury and State.

The complete program is available in multimedia, including videos, transcripts, white papers and photos in the events section of the Hamilton Project website: www.hamiltonproject.org.

Americans got their first jolt of real sticker shock at the pump in the mid-2000s as the price of gasoline topped out at about $5.00 in some places, and not surprisingly, the use of alternative fuels, including natural gas, finally seemed cemented in the discussion of energy solutions. Now we can see the result of this demand pushing entrepreneurs and industry to supply an emerging market.

“We have a very, very positive outlook for natural gas relative to what was assumed as recently as five to seven years ago,” David O’Reilly, former chairman and CEO of Chevron Corp. and current vice chairman of the National Petroleum Council, told forum attendees. “In fact, it is in the range of a 100 years’ supply at reasonable prices.”

For the infrastructure investor, there are several risk/return opportunities to gain exposure to natural gas. For those focused on higher returns, there is exploration; however, now might not be the best time for that.

“There has been a surge in supply in the United States that has driven prices here down,” Michael Levi, senior fellow with the Council on Foreign Relations, told forum attendees. “[And] there continue to be rigid pricing schemes in the rest of the world that connect natural gas prices to oil prices. But the third [reason] is that there is not a lot of trade between the United States and the rest of the world. … That is in part because there was no reason to build infrastructure in the past, but also because you are not allowed to build infrastructure to export natural gas right now without receiving a permit.”

This underdevelopment looks like a good opportunity to a lot of infrastructure investors — a growing supply of natural gas but a substantial portion of which is still cut off from the market because of a lack of infrastructure. The opportunity to develop or own new or existing pipelines and terminals — anticipated by some will carry and store more than double the current level of U.S. natural gas capacity during the next two decades — looks like a winner.

As Levi explained, just one permit has been approved and many more are pending to export about 12 billion cubic feet of liquefied natural gas per day from the United States and to build terminals to do so. “By way of context, the United States produces about 60 billion cubic feet of natural gas each day,” he explained.

RISK AND REWARD

Of course, with opportunity comes risk. Will the U.S. public accept natural gas fracking in the anticipated volumes? How do natural gas consumption and drilling affect climate change and environmental policy? And as more natural gas supply is consumed, prices will rise. How high of a price are users willing to bear?

“If I had a concern, it’s that we get so wrapped up in the ‘are we going to/should we develop shale, should we regulate, should we not,’ that we fritter away that big upside,” said Kathleen McGinty, senior vice president and managing director for strategic growth at Weston Solutions and former director in the Clinton White House Council on Environmental Quality. “I hope we don’t miss the opportunity to seize the big brass ring, which is, to me, driving advanced manufacturing in the United States — chemicals, pharmaceuticals and advanced materials — with gas.”

The industry is trying to manage the risks and rewards and deciding how fast it can and should pursue the opportunity. Perhaps the greatest risk is a loss of trust not only in the industry’s ability to control the process and frack in a responsible way, but to communicate the specifics of a process that necessarily heightens people’s anxieties. Building trust would probably lower the risks and invite more investment capital.

“If we do shale smart, it’s about job creation and it’s about national security being enhanced,” McGinty said. “If we do shale not so smart, it’s about communities disrupted and water quality adversely impacted. It’s about bans that we have in some states today and in some countries in the world.”

The industry understands it could open itself to a backlash and, with it, missed opportunities. Of particular concern, especially as state and local governments struggle to deliver services as budgets continue to shrink, is: “Do you have the boots on the ground to ensure that the best management practices are being followed?” McGinty asked. “The situation is a tough one because, to the extent the state has money to put to their oil and gas program, the draw is to hire staff to process the thousands of permit applications that are coming in, not to put the dollars toward necessarily the boots on the ground [in the field].”

In a Natural Gas–
Powered World

One of natural gas’s greatest advantages as a fuel source is its low cost compared to alternatives (see “Cost of New U.S. Power Generation,” above).

The low cost of natural gas to generate power is expected to ripple through development and manufacturing processes, passing energy savings on to industries of all kinds from pharmaceuticals to manufacturing and freeing capital to be put toward more innovation.

“I’m talking about putting our heads around making it attractive for chemical, pharmaceuticals, advanced materials to do business in the United States and grow those industries for this and future generations as an economic powerhouse,” McGinty said.

Drew Campbell is senior editor of Institutional Investing in Infrastructure. Find out more here.

To learn more, download the prospectus for Infrastructure Investment World Europe 2013 by clicking here.

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