The ideal mix of energy sources for generating power in the United States has long been debated. The “right” answer depends on a host of factors, including economics, stability and political acceptability. Recently, coal has been losing ground to natural gas in this discussion, as evidenced by President Obama failing to mention coal in his recently announced “all of the above” energy strategy. There are two main reasons for this development: increased natural gas supplies and increased regulatory hostility to coal.

The domestic gas supply changes are largely the result of the successful development of US shale gas reserves. The combination of hydraulic fracturing and horizontal drilling has dramatically increased US technically and economi­cally recoverable natural gas resources. While uncertainty is inherent in those estimates, there has been a substantial increase in the number of producing natural gas wells. That increase, in turn, has yielded a glut in the domestic gas market, much to the financial conster­nation of gas producers. Recent Henry Hub gas prices have been near historic lows. Low prices and abundant supply currently are giving natural gas a huge advantage over coal, as well as over renewables, in power producers’ decision making, even as several utility execu­tives warn of an overreliance on gas.

At the same time, the US Environmental Protection Agency (EPA) has been accused of waging a war on coal. The basis for this charge is a slew of regulatory actions having the effect of discouraging coal mining and coal combustion. These include trying, retroactively, to veto a US Army Corps of Engineers permit for disposal of mine fill, objecting to proposed state permits for discharges of wastewater from coal mines, promulgating new restrictions on mercury and other air emissions from coal-burning power plants, and proposing that new power plants meet carbon dioxide emissions standards based on the performance of com­bined cycle natural gas plants, which likely will require new coal plants to use commercially unproven carbon capture and sequestration technology.

Coal currently is used to generate approximately 45 percent of US electricity, and, for now, it appears likely to remain a substantial part of the mix. Between market and regula­tory forces, however, older coal-fired plants are being taken out of service, coal mines are closing and US thermal coal consumption is falling. Thus, in the EPA’s words, natural gas generation “is already the technology of choice for new and planned power plants.”

Still, the picture could change. Natural gas producers recently have been shifting away from dry gas and have been focusing on wells producing oil and natural gas liquids, which are providing superior economic returns. That move may help ease the natural gas supply, but those wells will yield some additional gas as well. The industry also is looking at gas-to-liquids (GTL) technology to boost received prices.

In addition, the low Henry Hub prices are drawing the attention of foreign energy players looking for alternative supplies of liquified natural gas (LNG) for their home countries. Asian buyers, in particular, are seeing that US LNG priced to Henry Hub levels can be competitive with LNG priced to Japan Crude Cocktail (JCC). At present, Henry Hub-linked LNG appears to have an advantage over JCC-linked LNG of approximately $10 per mmbtu on a delivered basis. Not surprisingly, a US LNG export market is starting to take shape.

The proposed Cheniere LNG export terminal appears to have secured purchase interest from foreign buyers for most of its LNG, and several additional applications for export approval are before the US government. However, adding GTL or LNG infrastructure takes time (if it happens at all). Moreover, further environmental regulation remains a significant wild card going forward. Environmentalists have been attacking oil and gas, including fracturing and LNG exports, while the EPA appears inclined to impose additional requirements on the use of fracturing. Also, it is possible that sometime after this election year, Congress will take additional steps to address greenhouse gases or energy diversity.

In the near-term, natural gas can be expected to maintain its current competitive advantage in US power generation. In the longer term, much will depend on whether or not the oversupply of domes­tic natural gas continues. If it does, gas will likely continue to gain ground in power production. If it does not, its current price advantage over coal and renewables will dissipate, and power producers will have more of an incentive to pursue their own “all of the above” strategies. We expect the next two years to be critical in seeing how the power generation market is most likely to move.