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State Revenue Secretary Jane Smith disputed Wednesday that an alternative fuel tax credit possibly could expose state government to $400 million in claims by taxpayers.

Smith said claims for the credit will be reviewed based on the intent of law rather than on guidelines issued earlier this year by her agency.

“The reality is that the law … was not followed,” she said in written answers to questions on the issue. “We went back to determine the proper scope of the law.”

In the process of drawing up new guidelines for the 2009 law that she authored as a legislator, Smith and state economist Greg Albrecht wrote an impact statement estimating the state’s exposure to be $400 million through mid-August. The estimate was based on the number of eligible vehicles dating back to Jan. 1, 2009, that have yet to receive the credit.

Smith said she disputes that estimate despite the inclusion of her name on the impact statement.

She said the $400 million is based on earlier guidelines that the governor rescinded because they did not reflect the intent of the law.

At issue are financial concerns that imploded over the tax credit three years after Gov. Bobby Jindal signed it into law.

Complicated laws such as the alternative fuel tax credit often require state agencies to write rules or guidelines governing how they are to be applied.

Amid confusion by financial experts on which vehicles to apply the tax credit to, Smith’s predecessor, Cynthia Bridges, authorized a rule allowing taxpayers to claim the lesser of 10 percent of the cost or $3,000 on flexible-fuel vehicle purchases.

Smith and Albrecht reported that flex-fuel vehicles, which are designed to run on more than one type of fuel, accounted for 96 percent of alternative-fuel vehicle registrations in Louisiana over the last four years.

They estimated that state government could be forced to pay $250 million a year to car buyers without a rule change. With a change eliminating flex-fuel vehicles from the credit, the state’s exposure shrinks to $10 million a year.

The governor rescinded Bridges’ guidelines in June. Bridges resigned a day later.

The Jindal administration then got to work on new guidelines.

The biggest change in the rule recently published by the revenue department is the exclusion of flexible-fuel vehicles. Beginning Dec. 20, vehicles must be capable of running independently of petroleum fuel to qualify for the credit.

The state Department of Revenue will hold a public hearing at 10 a.m. Oct. 25 on the new rule. The agency did not give a location for the hearing.

The lingering question is what will happen with vehicle purchases made before the rule change and tax credit requests filed in the interim. The revenue department stopped processing requests once the governor rescinded the original guidelines.

Smith and Albrecht reported a backlog of $4 million in possible claims since the rule’s recension. They said roughly $30 million has been paid or claimed.

Albrecht, chief economist for the Legislative Fiscal Office, said Wednesday that he believes most alternative-fuel vehicle owners will be excluded under the new guidelines, even if they bought their cars or trucks before the rule changed.

“I think that the Revenue Department would say that the new rule negates all that exposure, that the door is closed. I’m pretty sure that’s what they would argue. I can’t opine one way or the other there,” he said.

Only eight to 10 percent of eligible vehicle owners typically have filed for the credit.

Smith said the new rule will be prospective once it is promulgated.

“The claims filed after the emergency rule was rescinded will be reviewed based on the actual intent of the statue, not the (original) rule,” she said in a written response.

 

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A new report from a Washington, D.C., energy policy group urges the federal government to begin allocating its $150 billion budget for transport services to carriers that fuel their fleets on domestically produced natural gas, electricity, biofuels and other alternatives to diesel and gasoline.

The report, by the non-profit American Clean Skies Foundation, says a switch of just 20% of the U.S. government’s business to freight and package carriers using alternative fuels would lead to taxpayer savings of up to $7 billion annually and approximately $25 billion by 2025 (assuming a gradual fuel shift, beginning in 2015). Much of the savings is attributable to reduced fuel costs because major alternatives, such as compressed natural gas, cost less per gallon than petroleum-based fuels.

The 55-page ACSF report — Oil Shift: The Case for Switching Federal Transportation Spending to Alternative Fuel Vehicles — finds that shifting federal transportation contracts to vans and trucks running on alternative fuels could reduce oil imports by billions of gallons annually; cut greenhouse gas (GHG) pollution by over 20 million metric tons a year; and stimulate the nationwide introduction of tens of thousands of new alternative fuel vehicles.

To get shippers that handle government business on the right course, the report recommends that Washington simply apply the same measurement and reporting tools developed by federal agencies over the last two decades to ratchet down petroleum use and harmful emissions associated with the government’s own transportation fleet.

“Most people are probably unaware that the freight services which are used by the government and major product suppliers provide a 30 times larger opportunity for oil savings and emissions reductions than the cars and trucks that the government owns itself,” said Warren Lavey, co-author of the report and ACSF’s senior regulatory counsel.

“Moreover,” added Lavey, “our proposal does not require any new legislation or spending — federal agencies already have the legal authority required to track the oil used and pollution associated with third-party shipping services. And agencies also have the authority to begin buying those services from freight carriers that increasingly rely on cleaner, domestically sourced alternative fuels.”

The ACSF report makes three main recommendations:

1) Starting in 2014, federal agencies should publish annual targets and initiatives for buying more alternative fuels, reducing petroleum and lowering emissions associated with major transport services.

2) Starting in 2015, agencies should require major carriers to use alternative fuels for at least 5 percent of contracted shipments (measured in ton-miles). This requirement should increase by at least 2 percent each year from 2015 to 2025.

3) Starting in 2016, federal agencies should publish annual targets, and initiatives for using more alternative fuels, reducing petroleum and lowering emissions associated with the transport services used by major vendors to deliver products to the government (i.e., for vendor contracted shipping services not covered by the prior recommendations).

In addition, ACSF says Congress should encourage a transportation spending shift by directing the GAO to report annually, beginning in 2013, on the effectiveness of federal programs to increase the use of alternative fuels and to reduce costs related to transport services directly or indirectly purchased by federal agencies. Congressional oversight hearings may also be appropriate.

The federal government owns or leases about 660,000 cars and trucks and, in 2011, U.S. taxpayers spent $1.4 billion to purchase about 400 million gallons of gasoline and diesel fuel for use by these federal vehicles. Non-petroleum fuels currently account for only 4% of the fuel used by these fleets.

By comparison, federal agencies spend about $50 billion directly to procure transportation services each year from private-sector trucking companies and other carriers. In FY2010, the U.S. Postal Service alone spent roughly the same amount on fuel reimbursements for third-party suppliers ($1.3 billion) as all federal agencies spent on fueling their own fleets.

Several existing laws and executive orders, such as Executive Order 13514, require federal departments and agencies to “lead by example” in reducing petroleum use, raising energy efficiency, and mitigating adverse environmental impacts associated with federally owned vehicles and contracted transportation services.

As a result of these standards and reporting requirements, most federal agencies have implemented vehicle purchasing, fueling and optimization initiatives for their fleets. Yet much more could be achieved by extending this framework of standards, performance tracking and purchasing targets from federally owned fleets to third-party transportation service providers, says this report.

Established in 2007, ACSF seeks to advance America’s energy independence and a cleaner, low-carbon environment through expanded use of natural gas, renewables and efficiency.

 

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The U.S. is the closest it has been in almost 20 years to achieving energy self-sufficiency, a goal the nation has been pursuing since the 1973 Arab oil embargo triggered a recession and led to lines at gasoline stations.

Domestic oil output is the highest in eight years. The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal. Methanex Corp., the world’s biggest methanol maker, said it will dismantle a factory in Chile and reassemble it in Louisiana to take advantage of low natural gas prices. And higher mileage standards and federally mandated ethanol use, along with slow economic growth, have curbed demand.

The result: The U.S. has reversed a two-decade-long decline in energy independence, increasing the proportion of demand met from domestic sources over the last six years to an estimated 81 percent through the first 10 months of 2011, according to data compiled by Bloomberg from the U.S. Department of Energy. That would be the highest level since 1992.

“For 40 years, only politicians and the occasional author in Popular Mechanics magazine talked about achieving energy independence,” said Adam Sieminski, who has been nominated by President Barack Obama to head the U.S. Energy Information Administration. “Now it doesn’t seem such an outlandish idea.”

The transformation, which could see the country become the world’s top energy producer by 2020, has implications for the economy and national security — boosting household incomes, jobs and government revenue; cutting the trade deficit; enhancing manufacturers’ competitiveness; and allowing greater flexibility in dealing with unrest in the Middle East.

Output Rising

U.S. energy self-sufficiency has been steadily rising since 2005, when it hit a low of 70 percent, the data compiled by Bloomberg show. Domestic crude oil production rose 3.6 percent last year to an average 5.7 million barrels a day, the highest since 2003, according to the Energy Department. Natural gas output climbed to 22.4 trillion cubic feet in 2010 from 20.2 trillion in 2007, when the Federal Energy Regulatory Commission warned of the need for more imports. Prices have fallen more than 80 percent since 2008.

At the same time, the efficiency of the average U.S. passenger vehicle has helped limit demand. It increased to 29.6 miles per gallon in 2011 from 19.9 mpg in 1978, according to the National Highway Traffic Safety Administration.

The last time the U.S. achieved energy independence was in 1952. While it still imported some petroleum, the country’s exports, including of coal, more than offset its imports.

Environmental Concern

The expansion in oil and natural gas production isn’t without a downside. Environmentalists say hydraulic fracturing, or fracking — in which a mixture of water, sand and chemicals is shot underground to blast apart rock and free fossil fuels — is tainting drinking water.

The drop in natural gas prices is also making the use of alternative energy sources such as solar, wind and nuclear power less attractive, threatening to link the U.S.’s future even more to hydrocarbons to run the world’s largest economy.

Still, those concerns probably won’t be enough to outweigh the benefits of greater energy independence.

Stepped-up oil output and restrained consumption will lessen demand for imports, cutting the nation’s trade deficit and buttressing the dollar, said Sieminski, who is currently chief energy economist at Deutsche Bank AG in Washington.

Cutting Trade Deficit

With the price of a barrel of oil at about $100, a drop of 4 million barrels a day in oil imports — which he said could happen by 2020, if not before — would shave $145 billion off the deficit. Through the first 11 months of last year, the trade gap was $513 billion, according to the Commerce Department. Crude for March delivery settled at $96.91 a barrel yesterday on the New York Mercantile Exchange.

The impact on national security also could be significant as the U.S. relies less on oil from the Mideast. Persian Gulf countries accounted for 15 percent of U.S. imports of crude oil and petroleum products in 2010, down from 23 percent in 1999.

“The past image of the United States as helplessly dependent on imported oil and gas from politically unstable and unfriendly regions of the world no longer holds,” former Central Intelligence Agency Director John Deutch told an energy conference last month.

Arab Oil Embargo

That dependence was underscored in October 1973, when Arab oil producers declared an embargo in retaliation for U.S. help for Israel in the Yom Kippur war. The U.S. economy contracted at an annualized 3.5 percent rate in the first quarter of the next year. Stock prices plunged, with the Standard & Poor’s 500 Index dropping more than 40 percent in the year following the embargo.

Car owners were forced to line up at gasoline stations to buy fuel. President Richard Nixon announced in December that because of the energy crisis the lights on the national Christmas tree wouldn’t be turned on.

Today, signs of what former North Dakota Senator Byron Dorgan says could be a “new normal” in energy are proliferating. The U.S. likely became a net exporter of refined oil products last year for the first time since 1949. And it will probably become a net exporter of natural gas early in the next decade, said Howard Gruenspecht, the acting administrator of the EIA, the statistical arm of the Energy Department.

Cheniere Energy Partners LP may receive a construction and operating permit as early as this month from the Federal Energy Regulatory Commission for the first new plant capable of exporting natural gas by ship to be built since 1969 in the U.S. Houston-based Cheniere said it expects the $6 billion plant to export as much as 2.6 billion cubic feet of gas per day.

Mitchell the Pioneer

The shale-gas technology that’s boosting U.S. natural gas production was spawned in the Barnett Shale around Dallas and Fort Worth by George P. Mitchell, who was chairman and chief executive officer of Mitchell Energy & Development Corp.

Helped by a provision inserted in the 1980 windfall oil profits tax bill to encourage drilling for unconventional natural gas, the Houston-based oil man pursued a trial-and-error approach for years before succeeding in the late-1990s. The fracking method he devised cracked the rock deep underground, propping open small seams that allowed natural gas trapped in tiny pores to flow into the well and up to the surface.

Recognizing that Mitchell was on to something, Devon Energy Corp. bought his company in 2002 for about $3.3 billion and combined it with its own expertise in directional drilling, a method derived from offshore exploration.

Hunting for Oil

Traditional vertical drilling bores straight down, like a straw stuck straight in the earth. Directional drilling bends the straw, boring horizontally sometimes a mile or more through the richest layer of rock, allowing more of the trapped fuel to make it into the well. This slice of rock is like the kitchen, where ancient plants and creatures came under so much pressure that they cooked into natural gas and oil.

The oil boom a century ago tapped reservoirs of fuel that rose out of those layers and got trapped in large pockets closer to the earth’s surface, or used vertical wells that could get out only a portion of the fuel stored in the rock. The new technology has Devon and its competitors hunting beneath decades-old oil plays long thought depleted.

About an hour’s drive north from where Devon’s soon-to-be- completed new glass headquarters towers 50 stories above downtown Oklahoma City, the company is exploring for oil in the Mississippian and other formations, where oil majors once made their fortunes. It’s racing companies such as Chesapeake Energy Corp. and SandRidge Energy Inc. to buy leases and drill wells.

North Dakota Booming

Crude production in the U.S. is already increasing. Within three years, domestic output could reach 7 million barrels a day, the highest in 20 years, said Andy Lipow, president of Lipow Oil Associates in Houston, a consulting firm. The U.S. produced 5.9 million barrels of crude oil a day in December, while consuming 18.5 million barrels of petroleum products, according to the Energy Department.

North Dakota — the center of the so-called tight-oil transformation — is now the fourth largest oil-producing state, behind Texas, Alaska and California.

The growth in oil and gas output means the U.S. will overtake Russia as the world’s largest energy producer in the next eight years, said Jamie Webster, senior manager for the markets and country strategy group at PFC Energy, a Washington- based consultant.

While U.S. consumers would still be susceptible to surges in global oil prices, “we’d end up sending some of that cash to North Dakota” rather than to Saudi Arabia, said Richard Schmalensee, a professor of economics and management at the Massachusetts Institute of Technology in Cambridge.

1.6 Million Jobs

The shale gas expansion is already benefiting the economy. In 2010, the industry supported more than 600,000 jobs, according to a report that consultants IHS Global Insight prepared for America’s Natural Gas Alliance, a group that represents companies such as Devon Energy and Chesapeake Energy.

More than half were in the companies directly involved and their suppliers, with the balance coming at restaurants, hotels and other firms. By 2035, the number of jobs supported by the industry will rise to more than 1.6 million, IHS said. Some 360,000 will be directly employed in the shale gas industry.

The oil boom is also pushing up payrolls. Unemployment in North Dakota was 3.3 percent in December, the lowest of any state. Hiring is so frantic that the McDonald’s Corp. restaurant in Dickinson is offering $300 signing bonuses.

State governments are reaping benefits, too. Ohio is considering a new impact fee on drillers and increasing the tax charged on natural gas and other natural resources extracted, Governor John Kasich has said.

In Texas, DeWitt County Judge Daryl Fowler has negotiated an $8,000-per-well fee from drilling companies to pay for roads in the district, southeast of San Antonio.

Lot of Traffic

“It takes 270 loads of gravel just to build a pad used for drilling a well, which means a lot of truck traffic on a lot of roads that nobody except Grandpa Schultz and some deer hunters may have used in the past,” said Fowler, whose non-judicial post gives him administrative control over the county.

The federal government will see tax payments from shale gas rise to $14.5 billion in 2015 from $9.6 billion in 2010, according to IHS. Over the period 2010 to 2035, revenue will total $464.9 billion, it said.

Manufacturing companies, particularly chemical makers, also stand to win as the shale bonanza keeps natural gas cheaper in the U.S. than in Asia or Europe.

Dow Chemical Co., which spent a decade moving production to the Middle East and Asia, is leading the biggest expansion ever in the U.S. The chemical industry is one of the top consumers of natural gas, using it both as a fuel and feedstock to produce the compounds it sells.

First Since 2001

Midland, Michigan-based Dow is among companies planning to build crackers, industrial plants typically costing $1.5 billion that process hydrocarbons into ethylene, a plastics ingredient.

The new crackers will be the first in the U.S. since 2001, said John Stekla, a director at Chemical Market Associates Inc., a Houston-based consultant.

Vancouver-based Methanex said last month it plans to take apart the idled Chilean factory and ship it to Louisiana to capitalize on natural gas prices.

The shift to increased energy independence is also the result of government policies to depress oil demand.

“Vehicles are getting more efficient, and people who travel won’t be driving more miles,” said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates.

Automakers have agreed to raise the fuel economy of the vehicles they sell in the U.S. to a fleetwide average of 54.5 miles per gallon by 2025 under an agreement last year with the Obama administration.

No ‘Silver Bullet’

The 2008-09 recession helped lower oil demand, and consumption has lagged even as the economy has recovered, said Judith Dwarkin, director of energy research for ITG Investment Research in Calgary. Coupled with higher domestic output, “this has translated into an import requirement of some 15.4 barrels per person per year — about on par with the mid-1990s.”

She cautioned against thinking that rising oil and gas production is a “silver bullet” for solving U.S. economic woes.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, agreed, saying in a Jan. 20 note to clients that oil and gas output accounts for just 1 percent of gross domestic production and isn’t likely on its own to be able to pull the economy into above-trend growth.

Cooling on Wind

Some companies are hurting from the shale gas glut. With abundant supplies making it the cheapest option for new power generation, Exelon Corp. scrapped plans to expand capacity at two nuclear plants, while Michigan utility CMS Energy Corp. canceled a $2 billion coal plant after deciding it wasn’t financially viable. NextEra Energy Inc., the largest U.S. wind energy producer, shelved plans for new U.S. wind projects next year.

Investors also are cooling on wind investment, partly because of falling power prices. T. Boone Pickens, one of wind power’s biggest boosters, decided to focus on promoting natural gas-fueled trucking fleets after dropping plans for a Texas wind farm in 2010.

“Wind on its own without incentives is far from economic unless gas is north of $6.50,” said Travis Miller, a Chicago- based utility analyst at Morningstar Inc. Natural gas for March delivery settled at $2.55 per million British thermal units on New York Mercantile Exchange yesterday.

When Obama lauded increased energy production in his State of the Union speech on Jan. 24, he drew criticism from some environmentalists opposed to fracking.

Waning Confidence

“We’re disappointed in his enthusiasm for shale gas,” said Iris Marie Bloom, director of Protecting Our Waters in Philadelphia. Obama “spoke about gas as if it’s better for the environment, which it’s not.”

Deutch, who headed an advisory panel on fracking for the Energy Department, voiced concern that public confidence in the technology will wane if action isn’t taken to address environmental concerns. The potential positive impact of increased North American production are “enormous,” he said.

Higher U.S. output lessens the ability of countries like Iran and Russia to use “energy diplomacy” as a means of strengthening their influence, Amy Myers Jaffe, director of the Baker Institute Energy Forum at Rice University, and her colleagues wrote in a report last year.

While the U.S. will still have to pay attention to issues such as Israel’s security and Islamic fundamentalism in the Mideast, which could affect oil prices, it won’t have to be as worried about its supplies.

Positive ‘Shock’

Carlos Pascual, special envoy and coordinator for international energy affairs at the State Department, suggested at a Council on Foreign Relations conference in December that the increased production in the U.S. and elsewhere gives Washington more “maneuverability” in using sanctions to deal with Iran and its nuclear aspirations.

The increased U.S. production of oil and natural gas is a “positive supply shock” for the economy and for national security, said Philip Verleger, a former director of the office of energy policy at the Treasury Department and founder of PKVerleger LLC, a consulting firm in Aspen, Colorado.

“We aren’t there yet, but it looks like we’re blundering into a solution for the energy problem,” he said.

 

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IN THE race to shore up energy certainty in the face of peak oil, vastly differing strategies are on the international table.

In his State of the Nation address last week, United States president Barack Obama pinned much of his nation’s future to its vast gas reserves.

Hydraulic fracturing – “fracking” – to extract gas could create 600,000 jobs in America by the end of the decade, Mr Obama said.

“We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy,” he said.

Exploiting gas is part of an “all of the above” US energy policy that also includes renewables, although critics fear that an economy already geared around fossil fuels will retain the easy option at the expense of renewables development.

Meanwhile, Reuters reported early this week that global renewable energy deals climbed 40 per cent to a record high of US$53.5 billion last year, from US$38.2b in 2010.

Solar, wind and energy efficiency projects took precedence over hydropower for the first time, the agency said.

But global economic strains and manufacturing over-capacity in China could dampen the growth of renewables deals in 2012.

BP estimates that despite the growth of renewables, only 5pc of global energy production will come from renewable sources by 2030 – excluding hydro power.

 

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The boom in cheap natural gas in this country is good news for the environment, because relatively clean gas is replacing dirty coal-fired power plants. But in the long run, cheap natural gas could slow the growth of even cleaner sources of energy, such as wind and solar power.

Natural gas has a bad rap in some parts of the country, because the process of fracking is not popular. But many people looking at cheap natural gas from the global perspective see it as a good thing.

Henry Jacoby, an economist at the Center for Energy and Environmental Policy Research at MIT, says cheap energy will help pump up the economy.

“Overall, this is a great boon to the United States,” he says. “It’s not a bad thing to have this new and available domestic resource.” He says cheap energy can boost the economy, and he notes that natural gas is half as polluting as coal when it’s burned for electricity.

“But we have to keep our eye on the ball long-term,” Jacoby says. He’s concerned about how cheap gas will affect much cleaner sources of energy. Wind and solar power are more expensive than natural gas, and though those prices have been coming down, they’re chasing a moving target that has fallen fast: natural gas.

“It makes the prospects for large-scale expansion of those technologies more chancy,” Jacoby says.

Natural Gas: ‘A Bridge To Nowhere’?

From an environmental perspective, natural gas could help transition our economy from fossil fuels to clean energy. It’s often portrayed as a bridge fuel to help us through the transition, because it’s so much cleaner than coal and it’s abundant. But Jacoby says that bridge could be in trouble if cheap gas kills the incentive to develop renewable industry.

Long-term renewable deployment in the U.S. is going to depend primarily on policy. Is there enough concern about environmental consequences to put in place incentives for renewable energy?

- Trevor Houser, energy analyst, Rhodium Group

“You’d better be thinking about a landing of the bridge at the other end. If there’s no landing at the other end, it’s just a bridge to nowhere,” he says.

In the short run, at least, the wind industry isn’t too worried about this. Denise Bode, who heads the American Wind Energy Association, says low gas prices don’t undercut current prices for wind, because those are mostly fixed by 20-year contracts, not market prices.

And even if wind is a bit more expensive than natural gas, she says utilities still want it in their mix. Windmills aren’t subject to changing fuel prices, so the cost of production is quite predictable. That’s not true for natural gas — there’s no guarantee that today’s cheap prices will stay as low as some predict.

“It’s very difficult to really know how certain that is, so you always want to balance that with something that is certain,” Bode says.

Reducing Political Will For Renewables?

What really worries her isn’t natural gas — it’s politics. Wind could lose a huge tax break at the end of this year. And that would have a much more dramatic effect than low natural gas prices.

“You’ll see very low numbers” for new wind installations if the federal production tax credit expires,” Bode says. “In fact, I think EIA [the U.S. Energy Information Administration] projects almost zero for 2013.”

The solar industry’s subsidies run for several more years, so they are not in that bind, at least not yet. But Trevor Houser, an energy analyst at the Rhodium Group, says these tax credits and other incentives like state renewable standards are key if renewables are to grow and mature during the natural-gas glut.

“Long-term renewable deployment in the U.S. is going to depend primarily on policy,” Houser says. “Is there enough concern about environmental consequences to put in place incentives for renewable energy?”

That partly depends on how much of a premium people and companies will be willing to pay for cleaner energy. Right now, with natural gas so cheap, that premium is fairly substantial.

“If those prices hang around for another three or four years, then I think you’ll definitely see reduced political will for renewable energy deployment, ” Houser says. “But we don’t expect prices that low to hang around that long, because low prices are in many ways self-correcting.”

Gas is so cheap now that companies that produce it are struggling to make a profit. So Houser expects prices to move up. That will help close the price gap between gas and renewable energy.

Even so, there’s still a huge way to go before prices and government policies do enough to significantly reduce emissions of the gases that contribute to global warming.

 

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The average price of U.S. natural gas in 2012 should hit its lowest level in 13 years as mild winter weather slashes demand and record production weighs heavily on the market for most of the year, a Reuters poll found.

With January, traditionally the coldest month of winter, over and no Arctic air on the horizon, analysts cut their price estimates on forecasts that inventories will leave winter at or near all-time highs, cushioning the market for the rest of the year.

Even plans announced by some producers in the past week, after prices hit a 10-year low, to reduce output due to poor margins will not lend the market significant support.

The quarterly poll put the consensus forecast for the average spot price this year at Henry Hub, the benchmark U.S. supply point in Louisiana, at $3.30 per million British thermal units, down 27 percent from last quarter’s estimate of $4.50, and 18 percent below the $4.02 average in 2011.

If realized, it would be the lowest Henry Hub mean since 1999 when it averaged $2.27, according to Reuters data.

Natural gas futures prices on the New York Mercantile Exchange hit a 10-year low of $2.23 early last week, then bounced to the $2.70 area after several producers said they planned to cut back dry gas drilling operations or shut in some output.

While low prices should squeeze producer margins and force some to slow output, analysts noted that higher-value oil and gas liquids wells still produce plenty of associated gas that ends up in the market after processing.

“It’s going to take a really low price to get dry gas production down low enough. Everyone’s focusing on gas liquids and oil, and that’s still releasing a lot of (dry) gas,” said Earl Sweet at BMO Capital Markets in Toronto.

Prices in 2013 were seen gaining 21 percent to $3.99 as the shift away from dry gas to liquids drilling becomes more pronounced, and an improving economy and tighter emission rules lift industrial and electric power demand for gas.

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Just how much natural gas is trapped underground in the United States?

The difficulty and uncertainty in predicting natural gas resources was underscored last week when the Energy Information Administration released a report containing sharply lower estimates.

The agency estimated that there are 482 trillion cubic feet of shale gas in the United States, down from the 2011 estimate of 827 trillion cubic feet – a drop of more than 40 percent. The report also said the Marcellus region, a rock formation under parts of New York, Ohio, Pennsylvania and West Virginia, contained 141 trillion cubic feet of gas. That represents a 66 percent drop from the 410 trillion cubic feet estimate offered in the agency’s last report.

The Energy Information Administration said the sharp downward revisions to its estimates were informed by more data. “Drilling in the Marcellus accelerated rapidly in 2010 and 2011, so that there is far more information available today than a year ago,” its report said. Jonathan Cogan, a spokesman for the agency, added that Pennsylvania had made far more data available than in previous years.

Under the agency’s new estimates, the Marcellus shale, which was previously thought to hold enough gas to meet the entire nation’s demand for 17 years at current consumption rates, contains instead a six-year supply. The report comes just five months after the U.S. Geological Survey released its own estimate of 84 trillion cubic feet for the Marcellus shale.

The estimates are important because they underpin policy decisions on energy subsidies and exports. Market analysts look to these estimates in making investment decisions. Historically, they have varied widely based on assumptions about the future of technology, coming regulations on drilling and the long-term price of gas.

Previously inaccessible, shale gas has been unlocked in recent years by advances in a drilling technology known as hydraulic fracturing, or hydrofracking. These advances have prompted a drilling frenzy in states like Louisiana, Pennsylvania and Texas, which has helped create tens of thousands of jobs, lowered energy prices for consumers and offered the promise of lessening U.S. dependence on foreign energy.

Despite the lower estimates, the agency’s report noted that shale gas would continue to have a growing impact on the broader energy market. The share of natural gas produced by drilling in shale formations is projected to more than double, from 23 percent in 2010 to 49 percent in 2035, the report said. The United States will also become a net exporter of liquefied natural gas by 2016, while natural gas prices are expected to remain low for more than a decade, according to the report.

Energy companies are also likely to be undaunted by the new lower estimates because they are confident that whatever the total amount of available gas, technology will improve over time so that they can access the gas more efficiently and profitably. This assumption depends on the price of gas rising soon from the rock-bottom levels, where it has lingered since late 2008.

In his State of the Union address last week, President Barack Obama said the United States had a nearly 100-year supply of natural gas.

That prediction includes gas from shale wells, offshore

wells and Alaska’s North Slope. But many energy experts question these types of projections because they include substantial amounts of natural gas that many scientists and engineers say may never be tapped.

Drilling proponents, including investors and many politicians, tend to embrace optimistic projections, even though estimating resources is an inexact science.

Some of the earliest and most optimistic estimates of gas resources have come from academia. In 2009, Terry Engelder, a geosciences professor at Penn State, helped accelerate the rush to drill for natural gas in Pennsylvania and surrounding states by projecting that more than 500 trillion cubic feet of natural gas could be produced from the Marcellus.

This estimate is more than three times as high as the estimate for the Marcellus region from Energy Information Administration, and it is higher than what federal energy officials now say can be found in the entire country.

Engelder said last week that he stood by his estimates, citing assumptions that he believed remained reasonable, and he questioned whether federal officials were being too conservative.

“I don’t know what EIA did other than cave into peer pressure from the USGS,” he said, referring to the U.S. Geological Survey, which released its new estimates in August.

Energy companies, which use different formulas for calculating their numbers, tend to present even higher estimates.

For example, more than three dozen companies have leased land in the Marcellus region, and each company provides its own estimates to investors for how much gas it believes can be found under the acreage they possess. The combined resource estimates of just two of those companies, Range Resources and Chesapeake Energy, whose acreage holdings represent a small fraction of the Marcellus shale, is roughly equal to the amount federal energy officials now say can be found in the entire region.

Many experts note that it is difficult to predict how difficult or easy it will be to extract gas in different parts of the country because the geology varies drastically.

Since the hydrofracking boom is fairly recent, there is also a shortage of data to indicate how much gas wells will produce over the long term.

In private discussions, some federal energy officials have raised questions about the way oil and gas companies may be inflating estimates of the amount of recoverable gas.

“The variability of shale gas well performance is crucial to any assessment of the resource potential of a shale play,” Philip Budzik, an Energy Information Administration research analyst, wrote in an email to an industry analyst last April.

The email was released this month in response to open records requests, and it echoes comments made previously in other publicly released emails.

“Companies highlight their highly productive and profitable wells,” Budzik wrote, “while ignoring their ‘dogs,’ thereby giving the public the impression that every well is a ‘gold mine.”’ The information administration declined to comment about the email.

Last summer, the New York attorney general and the Securities and Exchange Commission sent subpoenas to several companies to see whether they were accurately portraying the amount of recoverable gas to investors. The offices declined to comment about the subpoenas.

 

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