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Experts predict it will be a couple of years before liquefied natural gas, or LNG, hits the mainstream market as a less costly substitute for diesel fuel, but Big Oil could soon be betting on its popularity with investments in Louisiana.

The Wall Street Journal blog The Source reported today that Shell has OK’d plans to build plants in the United States that could convert natural gas mined from the nation’s rich shale deposits into valuable LNG.

Reports say the company is looking at sites in Louisiana and Texas for plants that could produce at least 70,000 barrels of LNG a day.

Natural gas prices hit historic lows earlier this month and now hover at $2 per million Btu.

State leaders see the rock-bottom prices as the perfect window to encourage and promote a natural gas vehicle industry in Louisiana, which already has infrastructure in place from more traditional oil and gas production as well as more recent production in the Haynesville Shale.

Part of the mission includes attracting producers and exporters of LNG to the state as well as encouraging companies to use the fuel.

Federal regulators approved Cheniere Energy’s LNG gas export plant at Sabine Pass in mid-April, the first U.S. LNG gas export plant approved in nearly 50 years.

Days later Sempra Energy Inc. said it will develop a $6 billion LNG export plant in Hackberry, with Mitsubishi Corp. and Mitsui & Co. Ltd. as partners.

Now it seems Shell could be filling in another piece of the puzzle if it finds a suitable Louisiana site.

But, as the Wall Street Journal article notes, the golden price window could be fleeting. There is no guarantee the U.S. surplus in natural gas, fed now by booming shale activity, is a long-term deal.

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The Environmental Protection Agency (EPA) has released the first ever federal air standards for hydraulic fracturing–also known as fracking. A key component of the rule forces operators of new wells to use technology by 2015 to capture harmful substances that could possibly escape during the fracking process.

Fracking is a procedure in which drillers inject water, chemicals, and sand into underground geological formations to create fractures that enable natural gas to flow up to the surface level and be collected. The Wall Street Journal reported that shale gas, which is recovered by fracking, was 1% of the US gas supply in 2000 and 25% in 2011.

As the use of fracking has increased, environmental concerns about the substances emitted during the procedure, such as methane and benzene, have contributed to an ongoing debate about whether or not the United States should continue to allow fracking. According to the EPA, methane “is the primary constituent of natural gas” and ”is a potent greenhouse gas–more than 20 times as potent as carbon dioxide when emitted directly to the atmosphere.” 

Additionally, a recent study from the Colorado School of Public Health cited the risks from benzene which it found in the air near wells where fracking had been performed. A March 2012 news release from the school stated: “We also calculated higher cancer risks for residents living nearer to the wells as compared to those residing further [away]… Benzene is the major contributor to lifetime excess cancer risk…”

EPA Administrator Lisa P. Jackson said in a press release that the new rules will help reduce pollutants: “By ensuring the capture of gases that were previously released to pollute our air and threaten our climate, these updated standards will not only protect our health, but also lead to more product for fuel suppliers to bring to market.” The new rules are estimated to yield a nearly 95% reduction in harmful emissions from the more than 11,000 new fracking wells each year.

The EPA also estimates that the required technology will result in costs savings of $11-19 million by 2015 because the natural gas industry will be able to sell or use the gas that it captures.

The Western Energy Alliance, a nonprofit association representing 400 oil and gas companies, challenged the EPA’s calculation of cost savings. In a press release it stated: “Only a federal agency far removed from real-world economics and on-the-ground conditions could say with a straight face that a regulation is cost effective when it has $745 million in costs and only $11-19 million in benefits. Even with that disparity, we believe EPA seriously overestimated the benefits and underestimated the costs of compliance.”

The new EPA regulations were issued in response to a US District Court decision that required the agency to review air toxins and the natural gas industry and take action by April 17, 2012.

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U.S. natural gas for delivery this fall is trading at a record premium, signaling the fuel may be poised to rebound from its worst quarter in two years because of production cuts and rising demand from power plants.

Gas futures for delivery in October traded at an all-time high of 48.1 cents per million British thermal units above the May contract on April 11, when prices dropped below $2 per million British thermal units for the first time since 2002. The spread was 19.7 cents on Jan. 30. Near-month gas may rebound to $4 “relatively quickly,” Goldman Sachs Group Inc. said in an April 24 report.

Prices have tumbled 31 percent this year as the fourth- warmest winter on record crimped demand and output from shale formations increased. Energy companies including ConocoPhillips and Encana Corp. (ECA) have responded with production cuts, reducing the chances that supplies will overwhelm storage before winter. Demand for gas from power plants will climb 16 percent in 2012, according to the Energy Department.

“We’re going to see production curtailments and an uptick in power demand this summer that will prevent us from reaching maximum storage capacity,” said Scott Hanold, an analyst at RBC Capital Markets in Minneapolis. “Short-term gas contracts can take a beating, but investors have a more constructive view of longer-term contracts.”

Natural gas for May delivery increased as much as 6.9 cents to $2.137 per million British thermal units in electronic trading today on the New York Mercantile Exchange, and traded at $2.12 per million Btu at 8:57 a.m. That follows yesterday’s gain of 4.7 percent, the biggest since Feb. 16, and brings this week’s increase to 10 percent. The spread between May and October futures was 40.7 cents.

Tumbling Prices

Gas is the worst performer this year on the Standard & Poor’s GSCI Index of 24 commodities, falling 39 percent on a total-return basis. Prices on the Nymex dropped 29 percent in the first quarter, the biggest decline since the first three months of 2010.

The futures slid to $1.902 per million Btu on April 19, the lowest price since September 2001. Gas plunged as an inventory surplus to the five-year average reached 61 percent at the end of March, the biggest gap in six years. Marketed gas production will increase 4.5 percent this year to average 69.22 billion cubic feet a day from an all-time high last year, the Energy Department estimated April 10 in its Short-Term Energy Outlook.

Stockpiles totaled 2.512 trillion cubic feet in the week ended April 13, a record for that time of year, department data show. Barclays Plc and Bank of America Corp. predicted that inventory levels would approach or exceed 4.103 trillion cubic feet, the department’s estimate for physical storage capacity, by the end of October.

Output Cuts

That outcome is less likely now that prices at 10-year lows have prompted energy companies to scale back production, according to Hanold, who was third among gas-price forecasters ranked by Bloomberg in the eight quarters ended March 31.

ConocoPhillips (COP) said April 23 that first-quarter output of oil and gas fell 3.8 percent.

Encana, Canada’s biggest natural-gas producer by volume, plans to reduce production by 600 million cubic feet a day, according to the Calgary-based company’s first-quarter earnings statement yesterday. The number of rigs drilling for gas has tumbled 22 percent this year, data from Baker Hughes Inc. in Houston show.

“There is a current weakness in market fundamentals due to an oversupply of natural gas and it is clear that a continued reduction of drilling activity will be required to restore market balance,” Encana said.

Price Rebound

Natural gas may rebound as production growth slows and colder weather returns later in the year, Goldman Sachs said in its report this week. The 2011-2012 winter was the warmest since 2000 in the contiguous U.S., according to the National Climatic Data Center in Asheville, North Carolina.

About 51 percent of U.S. households use gas for heating, Energy Department data show.

Gas may drop below $1.80 if hot summer weather fails to materialize, Laurent Key, a gas analyst at Societe Generale SA in New York, said in an April 24 telephone interview.

The possibility of an El Nino, a warming of the mid-Pacific Ocean, has forecasters predicting lower temperatures across the U.S. this summer, which may mean less electricity will be needed to run air conditioners, according to Weather Services International in Andover, Massachusetts. About 35 percent of U.S. gas demand comes from power producers.

The El Nino pattern may also cause a below-average Atlantic storm season, with four hurricanes expected this year compared with 19 last year, according to researchers at Colorado State University who pioneered long-range Atlantic forecasting. About 6.4 percent of U.S. gas production comes from the Gulf of Mexico, where storms can disrupt supplies.

Power Plants

Falling gas prices are compelling power-plant operators to switch from burning higher-priced coal, Sabine Schels, head of fundamental commodities research at Bank of America in London, said in a telephone interview yesterday.

Gas costs for power plants slid to the equivalent of $1.3783 per million Btu less than coal on April 19, the biggest discount since coal futures began trading in 2001, according to data compiled by Bloomberg.

American Electric Power Co., the biggest U.S. producer of coal-fueled electricity, said April 20 that it used 62 percent more gas in the first quarter than a year earlier because of low prices.

Southern Co. (SO), once the largest U.S. consumer of coal, expects to generate 57 percent of its power from natural gas by 2020 if low prices and new environmental rules remain in effect, Thomas Fanning, Southern’s chairman and chief executive officer, said during an interview today.

Normal Winter

“Slower production growth combined with a return to more normal winter weather next year will reduce the amount of price- induced coal-to-gas substitution required,” Jeffrey Currie, a New York-based analyst at Goldman, said in the report.

Gas prices will recover next year as normal winter weather, lower output growth and increasing demand bring storage back to usual levels by October 2013, according to Schels.

“We are close to a bottom, but equally we think any price recovery from there will be very long, drawn out and gradual,” Schels said. “We’re generating a humongous amount of coal-to- gas switching. You don’t need prices to go lower to generate more switching, unless coal prices drop.”

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A “perfect storm” of economic and regulatory factors is driving major United States utilities to rapidly switch from coal to natural gas as an electric power source, the top executive of one of the nation’s largest utilities said on Thursday.

Nicholas K. Akins, chief executive of Ohio-based AEP, said the company plans to retire 5 of its 25 coal-burning plants and shut down coal-powered units at other plants it owns in a shift that collectively means the elimination of about 5,000 megawatts of capacity. The result will be that by 2020, only about half of the power AEP produces will come from coal, down from about 67 percent last year.

The surge in domestic production of cheap natural gas, largely yielded by the rise of the controversial technique of forcing gas out of shale through hydraulic fracturing, has been a big factor in this shift. A series of new environmental regulations and pressure from environmentalists are also leading major utilities to either shut down older plants or spend billions of dollars to upgrade them.

Mr. Akins estimated that AEP alone would have to spend about $300 billion through the end of the decade to expand natural gas power generation capacity or retrofit older coal-fueled plants so they can meet new environmental standards — investments that it is asking regulators to allow it to pass on to its customers, at least in part, which total five million accounts in 11 states.

Renewable energy is expected to contribute a larger share of power to AEP’s mix by 2025, Mr. Akins said, but perhaps not as much as expected because of a decline in federal subsidies and continuing repercussions from the bankruptcy of Solyndra, the California solar manufacturer that collapsed last year despite receiving a $535 million federal loan guarantee.

And the once-anticipated nuclear power renaissance will probably not materialize, he added, in view of the Fukushima disaster in Japan last year.

Domestically, coal mining will be the hardest hit by this historic shift, he said. Last year alone, the amount of electricity produced by AEP’s gas-powered plants jumped 24 percent, with most of that resulting from a drop in production at coal plants.

“Our industry is in the midst of an extraordinary period of transformation and investment which will affect how we produce and delivery electricity — and what you pay for it — for decades to come,” Mr. Akins said in his remarks before the United States Chamber of Commerce,

At the Southern Company, another major coal-burning utility, natural gas is now responsible for 46 percent of its electricity, up from 16 percent four years ago. That translates into about 45 million tons of coal slated to be burned this year by Southern, down from 80 million tons in 2007, Southern’s chief executive, Tom Fanning, said in his own remarks on the topic on Wednesday.

Mr. Akins said he was somewhat concerned that the nation may end up too reliant on natural gas, particularly given the history of price volatility of natural gas. The price has dropped from $10.8 per thousand cubic feet at the wellhead as of July 2008 to $2.89 as of January.

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The last few years have seen state Sen. Robert Adley, R-Benton, introduce one measure after another to smother the flames created by so-called legacy lawsuits in Louisiana. Legacy lawsuits arise from old — sometimes decades-old — contamination of land by oil and gas drillers. The litigation gets its name because subsequent drillers on contaminated lands “inherit” the liability created by previous, often defunct companies.

As Adley has carried the legislative ball for Big Oil, which constantly seeks to limit its exposure to environmental litigation, landowners and environmentalists have likewise ramped up their opposition campaigns.

With the Legislature beginning the latest incarnation of the ongoing debate, Adley, a licensed Christian minister, is serving as the Upper Chamber’s Jeremiah, telling all what’s to come. “You need to be prepared,” he says. “I’m telling you, they’ll start running TV. They’ll run radio.”

A high-dollar political consultant — Roy Fletcher of Baton Rouge — was perhaps too effective in attacking Adley’s message in a previous battle. “I ended up hiring him for my next campaign,” Adley recalls.

The legacy issue is complicated. Contaminated lands require mitigation, and lawsuits have led to huge judgments — which may or may not lead to cleanups. This issue is not your typical business-versus-trial lawyers scrap. In many lawsuits, both sides are millionaires. That makes it tough for lawmakers to choose sides.

Landowners argue that the current system gives too much leverage to Big Oil. Big Oil argues that trial lawyers are milking the issue to line their pockets. Environmentalists say the state Department of Natural Resources inevitably backs Big Oil.

How should liability be addressed? Who should mediate? How should the fields be restored? There are no easy answers.

During last year’s legislative debate, opponents unleashed robocalls in the districts of lawmakers on a key House committee. The calls stirred up voters and prompted them to press “1” to be connected directly to their lawmaker.

Rep. Truck Gisclair, D-Larose, who has a bill this year to regulate robocalls, says his office was “swamped with hundreds of calls, about 400 to 500 in a three-hour period” last year.

For those who can’t afford robocalls, there are always mass emails. House Civil Law Chairman Neil Abramson, D-New Orleans, said someone recently threatened him with a “firestorm” if he moved forward with his legacy bill, which is backed by Big Oil.

Last week, the night before a committee vote on Abramson’s bill, New Orleans political consultant Cheron Brylski issued a statement accusing Abramson of having a “conflict of interest” in authoring a legacy bill because his law firm represents oil companies. Brylski asked in the email, “Is Neil Abramson working for himself, his law firm, and his big oil clients while serving as a state representative and committee chairman?”

Abramson practices law at the New Orleans firm of Liskow & Lewis. According to the firm’s Web site, he represents “oil and gas companies in legacy suits involving claims of property and groundwater contamination.”

Abramson says he has handled only a “few matters” involving legacy cases. He said the conflict of interest claim is a lie, adding that lawmakers file bills in regard to their professions all the time. “That’s how the process works,” he said, calling Brylski’s attack “totally out of bounds and inappropriate.”

Part of Brylski’s criticism was based on Abramson’s decision to move forward on the bill while negotiations continued between landowners and Big Oil. Opponents of the bills felt betrayed because they believed no bills would move forward while the two sides were trying to forge a compromise.

Additionally, attorney Don Carmouche, who is aligned with Jimmy Faircloth, Gov. Jindal’s former legal council and attorney for landowners, has filed an ethics complaint to the Louisiana Ethics Board against Abramson stating the same charges.

Abramson’s House Bill 618 won committee approval last week. It allows the courts to admit as evidence cleanup plans submitted by DNR. The provision was backed by the oil industry and opposed by landowners, who claim Big Oil virtually owns DNR.

The bill has a long way to go, but already it’s clear that both sides of this fight have money and political muscle to spare.

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Oil capped the longest rally in two months after Federal Reserve policy makers said they expect growth to accelerate gradually and held off on more steps to boost the economy.

Futures climbed 0.6 percent and equities rose as the Federal Open Market Committee said it “expects economic growth to remain moderate over coming quarters and then to pick up gradually.” Crude fell earlier as U.S. supplies gained and Iran’s envoy in Moscow said his country is considering a proposal to halt the expansion of its nuclear program.

“We’re seeing an impact of the Fed statement in all the markets,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The fact that the economy is expected to grow is good for demand. They also left room for stimulus at some point in the future.”

Crude oil for June delivery rose 57 cents to $104.12 a barrel on the New York Mercantile Exchange, a one-week high. Prices have advanced 1.8 percent in the past four days, the longest rally since the period ended Feb. 24. Futures are up 5.4 percent this year.

Brent oil for June settlement increased 96 cents, or 0.8 percent, to end the session at $119.12 a barrel on the London- based ICE Futures Europe exchange. It was the highest settlement since April 13.

The Fed remains prepared to take additional action if needed to boost the economy, Chairman Ben S. Bernanke said at a press conference today following the FOMC meeting in Washington.

Equity Increase

Equities also advanced as earnings beat estimates at companies including Apple Inc. and Boeing Co. (BA) (BA) The Standard & Poor’s 500 (SPX) Index was up 1.3 percent and the Dow Jones Industrial Average was 0.6 percent higher.

“Equities are quite strong, which is giving us a boost,” said Kyle Cooper, director of IAF Advisors, a Houston-based consulting firm. “There’s a strong correlation between the equity and oil markets.”

Crude inventories rose 3.98 million barrels to 373 million last week as output climbed to a 12-year high. Stockpiles were projected to increase 2.8 million barrels in the week ended April 20, according to the median of 11 analyst estimates in a Bloomberg survey.

U.S. crude oil production grew 70,000 barrels to 6.11 million barrels a day last week, the highest level since November 1999, the report showed.

Iranian Tension

Oil in New York reached $110.55 on March 1, the highest intraday level since May 4, amid speculation that Western sanctions aimed at halting Iran’s nuclear program would disrupt Middle East shipments. Prices have fallen 5.8 percent since that peak since tensions have eased.

“Oil will drop $5 to $10 if the Iranian nuclear crisis is resolved,” said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado. “Investors mustn’t be taking either the Russian offer or Iranian statement all that seriously.”

Iran is studying a Russian proposal to halt the expansion of its nuclear program to avert new sanctions, Mahmoud Reza Sajjadi, the Iranian ambassador to Russia, said in an interview today at the embassy in Moscow. The plan, announced by Deputy Foreign Minister Sergei Ryabkov last week, would allow Iran to avoid a European Union ban on imports of its crude that is scheduled to start July 1.

Russian Plan

Under the Russian proposal, Iran would stop building centrifuges, machines used to enrich uranium, and mothball ones that haven’t been put into use yet.

“There is very little information about the Russian proposal,” said Mike Wittner, head of oil market research at Societe Generale SA in New York. “I’m dismissing it because there have been many failed proposals.”

Iran, the second-biggest producer in the Organization of Petroleum Exporting Countries, pumped 3.39 million barrels of oil a day last month, the lowest level since June 2002, according to data compiled by Bloomberg. Saudi Arabia is the leading producer.

“Any resolution of the dispute between Iran and Europe could see much lower prices, heading toward $100 a barrel,” said Ehsan Ul-Haq, senior market consultant at KBC Energy Economics in Walton-on-Thames, England. “If they are able to find a solution that suits both sides, then Brent is likely to fall to between $100 to $110 a barrel in a matter of days.”

Electronic crude trading volume of on the Nymex was 490,111 contracts as of 3:45 p.m. Volume totaled 369,531 contracts yesterday, the lowest level since March 26 and 41 percent below the three-month average. Open interest was 1.54 million.

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The worst appears to be over. Gasoline prices are going down.

After a four-month surge pushed gasoline to nearly $4 per gallon in early April, drivers, politicians and economists worried that prices might soar past all-time highs, denting wallets, angering voters and dragging down an economy that is struggling to grow.

Instead, pump prices have dropped 6 cents over two weeks to a national average of $3.88 on Friday.

On average, the price of a gallon of regular gasoline in Florida was at $3.876 on Monday.

The average prices in Gainesville were higher than every other market in Florida other than West Palm Beach-Boca Raton, where the average was at $3.968, down from $4.022 a week ago, according to AAA figures.

Drivers might also get to say something they haven’t since October 2009 — they’re paying less at the pump than they did a year ago.

“It’s nice, much more manageable,” said Mark Timko, who paid less than $4 per gallon last Wednesday in the Chicago suburb of Burr Ridge, Ill., for the first time since March. “I wasn’t sure how high they were going to go this year.”

Gasoline prices are lower than they were a year ago in 11 states, according to the Oil Price Information Service. At $3.88, the national average is still high, but it’s down from a peak of $3.94.

Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, expects gasoline prices to drop to just above $3.80 by late this week. Stuart Hoffman, chief economist at PNC Financial Services Group, said the falling prices will put more money into the economy for Americans to spend elsewhere.

A 10-cent drop in gasoline prices would mean drivers would have an extra $37 million per day to spend on other things.

Gasoline prices have been pushed high by crude prices that have averaged $104 per barrel this year. World oil demand is expected to set a record this year and a series of production outages around the world have kept supplies low.

Oil rose to $110 as the West tightened sanctions on Iran in an effort to make it harder for that country to sell oil and pressure it to abandon its nuclear ambitions. Fears that retaliation by Iran could disrupt Middle Eastern supplies pushed oil prices up by as much as $15 per barrel, experts say.

Closer to home, there were concerns about restricted supplies of gasoline on the East Coast after three refineries closed and two more were set to be shuttered.

Gasoline futures prices, which are quickly reflected in pump prices, rose to their highest levels in nearly a year.

But several factors have contributed to the lower prices at the pump:

Oil prices have fallen in recent weeks. Iran and the West are negotiating, the growth in demand for oil has moderated, and world oil supplies are rising again thanks to more production from Saudi Arabia, Libya and the United States. Oil has fallen to $103.05 per barrel, down from a peak of $110.55 on March 1.

Potential buyers for the two East Coast refineries have emerged, so they are now expected to stay open.

U.S. drivers have gotten frugal at the gas pump. Gasoline demand has dropped by about 6 percent, compared with the same period last year, according to the latest government data.

In response, gasoline futures have since dropped by 8 percent. That’s expected to cut the price of wholesale gasoline, and those savings will be passed on at the pump.

Prices are not expected to plummet. Even if the Iran situation were totally resolved — an unlikely event — analysts say oil would not fall much below $90 per barrel.

And there’s a possibility prices could still reverse themselves. Hurricanes in the Gulf of Mexico, inflamed Middle East tensions or fighting in a major oil-producing country like Iran or Nigeria could reduce supplies. A surge in world economic growth could increase demand.

Gasoline prices rise nearly every spring, and often peak in May.

This year, they’re falling a little earlier, and motorists are already making summer vacation plans.

Timko of Illinois was going to take the train to Washington. D.C., this June with his wife. With gas prices down by about 40 cents per gallon — and more importantly below $4 — in their neighborhood, they’ve decided to drive instead.

“Under $4 makes a big difference,” he said. “Just from a perception standpoint.”

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The Obama-appointed Environmental Protection Agency official who explained that the agency uses a “crucify them” enforcement philosophy against oil and gas companies apologized for his comments on Wednesday night.

“I apologize to those I have offended and regret my poor choice of words,” Region 6 EPA Administrator Al Armendariz said in a statement provided to The Daily Caller. “It was an offensive and inaccurate way to portray our efforts to address potential violations of our nation’s environmental laws. I am and have always been committed to fair and vigorous enforcement of those laws. ”

On Wednesday morning, Oklahoma Republican Sen. James Inhofe highlighted a speech Armendariz gave in 2010 in which he described the manner in which the agency keeps oil and gas companies under their thumb.

“I was in a meeting once and I gave an analogy to my staff about my philosophy of enforcement, and I think it was probably a little crude and maybe not appropriate for the meeting but I’ll go ahead and tell you what I said,” Armendariz said. “It was kind of like how the Romans used to conquer little villages in the Mediterranean. They’d go into a little Turkish town somewhere, they’d find the first five guys they saw and they’d crucify them,” Armendariz said.

“And then you know that town was really easy to manage for the next few years. And so you make examples out of people who are in this case not compliant with the law. Find people who are not compliant with the law, and you hit them as hard as you can and you make examples out of them, and there is a deterrent effect there,” he added.

Inhofe used Armendariz comments to announce that he has launched an investigation into the agency and its handling of three natural gas cases in Parker County, Texas, in Pavilion, Wyoming, and in Dimock, Pennsylvania.

While Armendariz apologized, EPA Assistant Administrator for Enforcement and Compliance Assurance Cynthia Giles asserted that the agency is still committed to ethical enforcement of the law.

“Strong, fair and effective enforcement of the environmental laws passed by Congress is critical to protecting public health and ensuring that all companies, regardless of industry, are playing by the same rules,” she said in comments provided to TheDC. “Enforcement is essential to the effectiveness of our environmental laws, ensuring that public health is protected and that companies that play by the rules are not at a disadvantage. The same holds true for companies involved in responsible and safe development of our nation’s domestic energy resources.”

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