Kavulla: Natural gas may return to Hi-Line
Public service commissioner pessimistic about boom hitting soon
June 5, 2014
The public service commissioner representing the Hi-Line said he expects energy and natural gas production to increase in this region, at least eventually, but not with any major changes any time soon.
“Everyone wants to be an optimist,” said Public Service Commissioner Travis Kavulla. “I get to be a little bit of the designated pessimist today.”
Kavulla was a keynote speaker at the inaugural Hi-Line Economic Summit in May, and talked about energy issues in the world, in the United States, in Montana and on the Hi-Line.
Energy issues on the Hi-Line
A major economic driver at times on the Hi-Line has been natural gas, with large reserves of the substance under the ground in this area.
Kavulla said the production of that gas has a huge impact.
“As natural prices go, so do the royalties that pump a lot of money into both local governments as well as local mineral rights owners along the Hi-Line,” he said.
And a recent drop has had a major impact — the Hill County government alone has seen a drop in revenue from natural gas of near a million dollars in the last 10 years, with other entities including other school districts and other local governments in a similar situation.
Kavulla used Phillips County as an example. In 2008, the county government’s natural gas revenue peaked at about $1.5 million, but now is less than a quarter of that.
“The good news is, it’s picking back up slightly,” he added.
Right as demand for natural gas was at a high, with a shortage of supply and people planning to liquify it overseas to import to the United States, two things happened. The Great Recession hit, and hydraulic fracturing, or fracking, started new horizontal drilling in shale plates.
“The shale revolution hit … ,” Kavulla said. “It has just exploded in the last few years.”
That has primarily been in Texas and Pennsylvania “and in our own Bakken,” he said.
While drilling in the Bakken Formation in North Dakota and northeastern Montana has primarily been after oil, it also is releasing a huge quantity of natural gas.
The natural gas obtained from shale plates has helped depress prices, glutting the market, Kavulla said, and that has had another effect. Kavulla said major energy companies like Devon and NFR — which have sold natural gas interests in this area to NorthWestern Energy — tend to sell their interests at times of low prices to invest in areas with a higher chance of return, like Texas, Oklahoma and the Bakken.
“And that’s exactly what you’ve seen in large companies like Devon,” he said.
Kavulla: Gas production likely to pick up eventually
But, Kavulla said, increased production of natural gas is likely to happen, especially with an increased focus on the emissions from coal-burning plants like those at Colstrip.
Kavulla said the Energy Information Administration does not expect the amount of energy produced by coal to drop — it projects about level coal production in the following decades — but the amount produced by natural gas will increase to meet increased energy demands.
Using natural gas for energy production already has nearly doubled between 2000 and 2012, from 16 percent of the U.S. energy produced to 30 percent, and increased a bit more in 2013, he said.
While EIA does not predict the number of coal-burning plants to drop, it does predict the amount increased by natural gas to continue to expand, Kavulla said.
And, while a lot of talk about renewable resources like wind and solar power has been said, the amount of energy produced has not increased greatly, he said.
Increased use of natural gas-powered vehicles also will drive increased production, he said, as does a reversal of the importation of liquified natural gas.
Kavulla said that some companies now are looking at taking the stalled plans to import liquified gas and converting the facilities to export the commodity.
“Pretty much all of the growth in America’s demand for electricity is going to be made up of natural gas,” he said.
But, he said, as long as the price of natural gas remains lower than $5 a decatherm — a unit used to measure natural gas, based on how much heat is produced by burning that amount — production likely will remain low. Once the price consistently goes above $5 a decatherm, “then things will get started again,” Kavulla said.
An interrelated issue, especially on the Hi-Line, is having transmission lines to move the electricity when produced, Kavulla said.
He said the Hi-Line has a huge potential for both wind and natural gas energy production.
“This is the story, and here’s my pessimistic conclusion,” he said. “This is, unfortunately, the story that hinders the Hi-Line.
“You know what it’s like to be hampered by not having a four-lane interstate highway,” he said. “I think it’s a little less visible, but you should certainly be aware that what’s hampering energy development, at least in terms of producing megawatt hours and electrons, is the lack, similarly, of an electric transmission highway that you just don’t have.”
He said the impact of what happens with Colstrip could include that. A line now is dedicated to transmitting power from Colstrip to the west — while it seems unlikely that Colstrip would shut down, if that did happen that line would be opened to other sources.
“If colstrip stops using that line, this suddenly becomes an engine of economic development,” Kavulla said.
A failed experiment
Kavulla also talked about the impact of energy deregulation, passed by the state Legislature in 1997, that allowed Montana Power Company to sell off its power generation and transmission facilities.
After it sold its generation operations to Pennsylvania Power and Light-Montana and its transmission facilities to South Dakota-based NorthWestern Energy, Montana Power converted to the telecommunications company Touch America — and went bankrupt and out of business early last decade.
After declaring bankruptcy, NorthWestern Energy reformed and since has pursued going back to being a regulated utility that owns generation as well as transmission facilities.
NorthWestern has purchased interest in a Colstrip plant, bought natural gas wells and transmission facilities from Devon and NFR in north-central Montana, and is awaiting the PSC’s decision on a $900 million purchase of hydroelectric facilities — which it sold to PP&L after deregulation.
The company says it will provide stable pricing of energy, despite volatility in the energy market.
Kavulla said the timing has hurt NorthWestern. It is buying facilities at a time of low energy costs, and the price of buying facilities is adding to its production costs.
Much of the cost of the energy produced for NorthWestern at Colstrip reflects the purchase cost — actually paying for coal-produced energy is fairly inexpensive, he said.
That, he said, is a lesson on deragulation and “how it went completely haywire,” Kavulla said.