Home > Federal Regulatory Stuff, Marcellus Shale, Natural Gas, Oil and Gas Investing > SCOTUS, EPA, and Greenhouse Gases…what this means for natural gas

SCOTUS, EPA, and Greenhouse Gases…what this means for natural gas

This last week the Supreme Court of the United States (SCOTUS) came down with a significant ruling about Greenhouse Gases, the EPA, and your local utility company.  This case pitted the Obama Administration (on behalf of the Tennessee Valley Authority, a government-owned utility) and four other major utilities against six states, New York City and a handful of conservation groups.  The Eviro-States-NYC coalition sought to use federal common law to force the country’s largest utility companies to clamp down on their global warming emissions.  The SCOTUS affirmed that climate change (greenhouse gas emissions, carbon sequestration and the like) was squarely within the EPA’s administrative jurisdiction, regardless of whether the EPA has issued plant-specific pollution rules.  Rather than bringing suit against these utilities, plaintiffs can take the EPA to court if they think the agency is not following the law.

In a unanimous decision, the court said climate change regulation is the business of the federal government. Justice Ruth Bader Ginsburg writes that under the Clean Air Act, the Environmental Protection Agency has the duty to regulate carbon-dioxide released into the atmosphere. Nowhere in the law, she says, is there a basis for “control of greenhouse gas emissions by federal judges.”

Before any of you get litigation trigger-fingers, the EPA has until May 2012 to come up with new greenhouse gas emission standards.  So what does this mean for the energy industry?

If the EPA is to make some substantial reductions in the greenhouse gases emitted from coal-fired power plants, they must address the world’s dependency on coal for a quarter of its energy demand.   If coal is to remain a staple in our country’s energy production, we would naturally require more aggressive developments of carbon sequestration (CCS) technology.  However, a major challenge for this CCS technology is that it has failed to meet any market demands and thus has failed to become fully commercialized.  Absent market manipulation where either demand-pull mechanisms or new regulations require it, CCS technology for coal-fired power plants will naturally increase the cost of electricity generation because of efficiency losses.  In other words,  CCS technology, at this time, is cost-prohibitive.

This doesn’t mean that the push towards decreasing our greenhouse gas emissions is DOA.  Just the opposite.  The cost-prohibitive element of CCS technology for coal-fired power plants will give utility companies a choice; pay through the nose for CCS or use a cleaner, cheaper fuel.  The smart money seems to be quite risk averse to the traditional coal-fired power plant by hedging their bets on greenhouse gas reduction-type policy.  This recent SCOTUS decision reinforces that risk aversion and the smart money is becoming increasingly shy, regardless of the CCS technology the power plant may deploy.

So where is the smart money going?  Natural gas.  As the costs of creating electricity with coal go up, more power generators are going to look for a less expensive alternative to CCS technologies.   Rather than retrofit their plant with expensive CCS equipment and run the risk of liability of releasing Carbon above EPA standards, power plants will naturally move to natural gas as their primary energy source.

Natural gas combustion produces almost 45 percent fewer carbon dioxide emissions than coal, emits lower levels of nitrogen oxides and particulates, and produces virtually no sulfur dioxide and mercury emissions. The lower levels of these emissions mean that the use of natural gas does not contribute significantly to smog or acid rain formation. In addition, because natural gas boilers do not need the scrubbers required by coal-fired power plants to reduce SO2 emissions, natural gas plants create much less toxic sludge. [13]

Exxon, for example, has made a very aggressive play to increase their holdings in natural gas.  Not only have they bought a significant chunk of the Marcellus Shale play, they have also increased their presence in other shale plays in Colorado, Texas, and even Poland.  My guess is that Exxon sees the proverbial “writing on the wall” and they have begun to position themselves as the nation’s top producer of natural gas.

Chevron is not too far behind.  By purchasing Atlas Energy, Chevron increased their holdings in the Marcellus by 486,000 net acres and 623,000 net acres in the Utica Shale, which stretches north into Canada.

Long story short, energy creation in the U.S. is going to go through some major changes in the next decade.  Smart money is moving to natural gas.  Increased regulation of coal-fired power plants and the low cost of natural gas is naturally going to cause an increase natural gas-based energy production.  While the current natural gas market is limited to home heating and fleet vehicles, this will not last very long.  Once the EPA takes full advantage of this SCOTUS ruling, they will regulate greenhouse gases and that will force the market to shift.  I am not pretending to know anything about investing, but, if I were a betting man…and had a job, my money would follow the Big Fish.  Watch where Exxon, Chevron, Shell, et al are putting their money.  No other group of business will stand to gain, or lose, in the natural gas play.

Dan Garcia is a graduate of Pitt Law and Texas A&M University.

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