Thread by @TimMLatimer

1/The new drilling rig count numbers today show the historic reduction continuing, but also an increasing divergence of the fate of oil and natural gas. This has important implications on pricing, and as a result the clean energy transition, so, a THREAD.

2/In terms of the clean energy transition, oil mostly impacts adoption of transportation technologies while mostly impacts the electricity sector (simplifying a bit), so you need to understand them separately to evaluate the impacts.

3/Oil and natural gas prices used to be correlated. This interesting chart from @EIAgov shows strong positive correlation between oil and gas throughout the 2000s, followed by essentially no correlation through the 2010s.
eia.gov/finance/market…

4/And there is even evidence that there is an emerging *negative* correlation between oil and natural gas prices in the US. To understand this, we need to look at where US gas supply now comes from and understand “associated gas”.

5/(side bar, I in no way claim to understand where natural gas prices are going. As the saying goes, if I could do that I’d be a billionaire. Other macro factors could completely dwarf the oil/nat gas price dynamic, but it’s useful to understand the relationship anyway)

6/Associated gas is natural gas that is produced by a well that is primarily drilled for oil. It has been a major source of natural gas supply in the US in recent years, now accounting for about 15% of all US natural gas, up from ~5% a decade ago.
eia.gov/todayinenergy/…

7/Because the wells are drilled for oil, less value is placed on the natural gas. This can lead to some whacky outcomes, for example negative local pricing and the disastrous rise in gas flaring in recent years.
reuters.com/article/us-usa…

8/When the oil price crashed, oil rigs were laid down and with recent, even negative pricing, oil wells were shut in. This means less associated gas, which leads to an overall reduction in nat gas supply.

9/Here is where the negative correlation comes in. Look at the HH forward curve now compared to the beginning of the year. COVID causes current prices to drop, but now by the end of year natural gas prices are now substantially higher.
rbnenergy.com/hey-look-ma-i-…

10/You can see how operators are responding to this too. Since the Price War began in March, oil rig counts are now down over 50%, while natural gas rig counts are down just ~25%

11/So what does this mean for clean energy, and building more wind, solar and geothermal? Well, the oil price crash won’t make it harder, since it won’t on its own drive nat gas prices lower. But gas is already absurdly cheap. We’ve been bouncing between $2 and $3 for years now.

12/Those low prices make natural gas highly competitive. Take a look at Lazard, assuming gas prices of $3.45 translates to fuel costs of only $21/MWh, and an overall LCOE of $44/MWh for gas CC.
lazard.com/media/451086/l…

13/And the low price environment for gas may not change for a while. Future curves show pricing staying in that $3 range throughout the decade. Even with a cutback in associated gas, there is just a ton of other cheap US supply.

14/With coal quickly falling out of the US electricity mix, renewables will be competing directly with that cheap gas more and more. Without policies to actually price carbon pollution or other incentives, it will put a damper on renewable buildout.

15/The oil price crash won’t hurt renewables, the opposite may be true if it forces higher nat gas prices. But the effect will be modest, we may have $3 gas for years. Policy to properly price fossil pollution is as important as ever for a robust clean energy buildout. END