Making Sense of Natural Gas Investments

Is natural gas a good thing for the climate?

There are a number of topics which are controversial in the world of sustainable investing such as Nuclear Energy and genetically modified organisms or what is commonly known as GMOs.  

Such potential solutions have both good as well as potentially bad sides to consider, and that is certainly true as well on this week's subject, Natural Gas.

As the EPA, says here, natural gas has formed from layers of buried plants and animals which have come under intense heat and pressure over thousands of years.

In effect, the energy which plants and animals originally obtained from the sun is stored in the form of the carbon found in natural gas.  This gas is then burned to generate electricity, enabling the stored energy to be transformed into usable power.

Natural gas is a nonrenewable resource because it cannot be replenished on a human timescale.

Using increasingly refined technologies, wells are drilled into the ground to remove natural gas, and fracking techniques have enabled the extraction and use of gas resources which had previously been thought to be inaccessible.

After the natural gas is extracted, it is treated at gas plants to remove impurities such as hydrogen sulfide, helium, carbon dioxide, hydrocarbons, and moisture. Pipelines then transport the natural gas to power plants, or it is concentrated and/or liquified and can be then shipped over long distances.   

Gas has proved to be most beneficial as a replacement fuel.

 Power plants which use gas instead of coal have led to the financial collapse of the largest publicly traded coal producers such as Peabody Energy.  This former S&P 500 constituent is sinking like a proverbial stone from $72.63 on March 21, 2011 to where it is right now at $1.79.  

Amazingly, many large investment institutions have held on to Peabody for the ride including large pension funds otherwise heralded for their focus on environmental issues.

 Investors may not be as willing to hold onto stocks that lose over 97% of their value in future one would think.

But is natural gas better for the environment?  

Not necessarily as it turns out.  The Union of Concerned Scientists (UCS) found that on average gas is more efficient than coal by about 50 percent or so, but that's comparing new coal plants to new gas plants.  Separately, UCS said methane emissions need to be kept within 3.2 percent for gas to be better than coal, but also cited a Nature article citing up to 9 percent leakage of methane.  Reducing methane emissions is considered a main driver of avoiding the worst climate change and its expected effects.

Then there are the abandoned gas wells, thousands of which are scattered throughout the country in states such as Pennsylvania leaking unknown quantities of methane. Pennsylvania has a program for capping old wells,  which should be a big industry unto itself, creating needed jobs especially for the likes of former coal miners as one example.

Then there are the satellite pictures showing a very intensive methane emission area in the Four Corners of the US which is suspected to be from coalbed methane exploration.  

Suffice it to say methane efficiency is an important new concept if gas is to be a viable option, or at least one that is better than coal from a climate change perspective.

What about Water?  

Movies such as Gasland have focused attention on drinking water being spoiled, and a larger issue is emerging on use of water for fracking in regions where there is drought such as California, or where water resources are expected to become a major concern such as in China.  Fires and drought in British Columbia may make earlier excitement about gas potential less of a sure thing.  All of this may put pressure on gas investments.

Earthquakes are also increasing and it is due to waste water insertion from gas exploration.  Many states are seeing an increase in seismic activity, even Texas.

So where does gas exploration make sense?  Here's an interesting chart of global gas reserves and the accompanying PPT found within shows that gas consumption is on the rise as is accessible gas resources, much of which is in countries such as Russia, Iran, Qatar, as well as the US and Canada.

  In theory anyway, standards could be developed for regions where gas can be relatively safely developed at least for the time being.  

If gas is to be a bridge fuel then its use will increase at least for now, while other sources such as coal and oil are reduced.

Will gas be a good investment?  The Carbon Tracker Initiative's latest report finds 16 of the world's largest 20 LNG companies considering projects that could be "stranded" due to climate change or cost concerns.  US$280 Billion of such investments are considered at potential risk in future.  

It would be wise for longer term investors to keep such possibilities in mind, especially as solar and other alternatives become cheaper.

Quite a few investors have done quite badly investing in coal, oil and gas in recent years.  

Profits were made in the 2000s, but we seem to be entering an age of increased climate change awareness.  Politics always intervenes but it is getting harder to deny the trends towards renewable energy given the likes of Pope Francis and his focus on the subject.

Watch for more academic research to emerge on natural gas, for example this Stanford initiative is one to keep an eye on.  

It's sort of amazing to say this, but natural gas and its potential benefits and downsides have not been solved for, at least as of yet.  

That day is likely coming, but for now, natural gas may be seen as an important "bridge fuel," but how long will this perception last?  

Who will be the winners and losers and where also remains to be seen. Successful investment in natural gas can hardly be considered a sure or simple thing.