Texas is the nation’s top producer of natural gas – an industry that provides nearly 1.3 million jobs and $60 billion in labor income to our economy annually. However, Texas’ use of natural gas has been decreasing – slowly but steadily – displaced by out-of-state coal.
Given how tightly integrated natural gas producing and natural gas consuming industries are to the Texas economy, this decrease in natural gas use translates to significant losses of revenue for the state across both private and public sectors, according to a newly released study by Dr. Michael J. Economides, a chemical and biomolecular professor at the University of Houston, and petroleum engineering consultant Philip E. Lewis.
The analysis was commissioned by America’s Natural Gas Alliance (ANGA).
It compares the direct and value-added economic impacts from the three dominant power generation energy sources in Texas: coal, natural gas and wind. Over the past two decades in the U.S., natural gas has increasingly become the preferred energy source for power generation. Starting in 2005, however, Texas’ reliance on natural gas began to decrease, as national use continued to rise.
Since virtually all the natural gas used for electric generation in Texas is produced in-state, this divergence represents a loss of more than $7.7 billion to the state since 2005. For 2011 alone it represents $2.5 billion in lost potential revenue, including leasehold improvements, production royalties, severance taxes to state and local governments, sales taxes, and local property taxes.
The loss can be expected to grow larger each year unless current trends are reversed. Wages lost in 2011 were $530 million and $1.65 billion over the period 2005-2011. Most importantly, 8,600 long-term Texas jobs in the natural gas industry have been forfeited to coal imported from out-of-state.
Bucking National Trend
The decreased reliance on natural gas for Texas electric power generation is counter to national trends. Texas and the United States saw a moderate increase in natural gas-fueled power generation during 1990-2005. Since then, the national trend has continued, while the state’s trend began to diverge (see Figure 1 and Figure 2).
Since 2005, Texas has seen flat to declining market share for natural gas-fueled power generation. Figure 2 also shows the relationship between the national trend and the Texas fuel mix. The figure shows a substantial reduction (over 1 Tcf as indicated by Table 1) in the volume of Texas natural gas used for electric power generation compared to what would have been consumed had Texas followed the national trend.
Table 1 and Table 2, respectively, show the direct and total impacts of the natural gas loss to Texas and the divergence between actual natural gas used versus the national trend, based on several conservative estimates.
The majority of coal used in Texas for power generation is imported from other states. While the mining of coal certainly provides economic development in those states, importing it as a substitute for Texas natural gas does little for economic development or job creation in Texas.
As a result, Texas employment will continue to suffer to the benefit of coal-exporting states if it continues on its current divergent trend. This increasing reliance on out-of-state coal as a substitute for Texas natural gas rose from 54 to 64% over the period 2005 to 2010.
This does little for our economic development and job creation,” according to Economides. “Greater use of Texas natural gas will aid the state’s employment, which has suffered as a result of this trend.” And in fact, Texas jobs in the coal-mining sector continue to decline each year as a total coal imports increase and shift employment to coal-exporting states.
Also overlooked is that water consumption for the latest generation coal-fired power plant technology is more than twice as much as that for a natural gas-fired generation plant. The amount of water used by Texas’ older, less efficient fleet of plants can be more than three times the amount of water used by a natural gas plant, he said.
The time is ripe for such a transition, and the recent CPS Energy announcement that it will mothball an older coal plant and purchase an 800-MW natural gas plant may signal a slowing or reversal of this trend.
Natural gas is affordable and available at competitive costs for Texas electricity consumers and projections show long-term stability in natural gas markets. Texas natural gas companies also pay five times more in state and local taxes and royalties on a per-job basis than the average
company in other industries.
Community hospitals, emergency services and Independent school districts in Texas depend on the benefits from natural gas. In fact, about 75% of the total independent school districts in Texas each receive an average of $1.35 million per year in ad valorem revenues from the production of natural gas.
In addition to its economic benefits, the environmental advantages of natural gas far outweigh other fossil fuels, the report notes. Of the criteria pollutants, a natural gas combined cycle plant (NGCC) emits virtually zero sulfur dioxide (SO-2) and particulates, while smog-forming nitrogen oxides (NOx) emissions are about one-tenth that of current technology coal-fired power plants – Subcritical and Supercritical PC (pulverized coal)(see Figures 3,4, and 5).
Texas natural gas is a unique energy source, given the compounded benefits it provides the state – from direct use as cleaner fuel, to the significant jobs it creates and substantial boost to the state’s economy, to its use as a vital feedstock for ancillary industries that in turn also create jobs and economic benefits.
“A failure to take full advantage of Texas natural gas in power generation is a substantial missed opportunity for our state because of how tightly integrated natural gas development and related industries are with the state’s economy,” Economides said.
“Texans ignore the benefits of this abundant local resource at their economic and environmental peril. Embracing greater use of natural gas is key to Texas’ long-term growth, prosperity and clean air.”
The natural gas industry in Texas is far more important than the mere wellhead value of the commodity. “Messing” with natural gas as a power generating fuel has a far larger impact than the mere replacement cost by other fuels. The foregoing analysis has shown that the displacement of natural gas by wind and coal has cost the Texas economy over $7.7 billion over recent years.
Natural gas, coal and wind – because of its mandated preference and increased use in the Texas marketplace – can currently make an impact by generating large amounts of electricity in both the short and medium term. Nuclear cannot make a significant contribution to meet increased power generation demands over the short term and medium term because of its very long lead times, prohibitive capital requirements and regulatory uncertainties.
The study noted that the other fuels used to produce electricity in Texas provide little added benefits to the state as a tax base, economic development engine or job creator.
Coal and wind provide the only competition to natural gas for new electric power generation in the state of Texas. The only current and foreseeable applications for coal and wind are for power only; the potential for these fuels to be applied to the multiple uses of natural gas is minimal.
These remaining fuels are small contributors to the power mix, and therefore:
1. Petroleum liquids, based on per-unit energy cost and presumed preference as transportation fuels and chemical feedstocks only;
2. Hydroelectric power, based on its maturity and limited opportunity for expansion throughout Texas;
3. Solar and other sources, which begin from too small of a base to make a significant impact in the short and medium term.
In the national trend, natural gas gained about 1.3 points of market share per year compared to the mix of coal and renewables.
Natural gas produced in Texas generates a substantially higher added value than either coal or wind in a number of important sectors. These include fuel for electric power generation, in both steam and gas turbines in combined cycle power plants, as a chemical feedstock, as export to other jurisdictions either by pipeline or as liquefied natural gas and in-state commercial and residential space and water heating.
The associated hydrocarbon liquids produced along with natural gas are as valuable as the gas itself. All of these sectors generate very large capital expenditures and especially jobs, not only in the oil and gas extraction, but also throughout the Texas economy.
This is hardly surprising since only about $4 of each $12 value of electricity generated in Texas is spent at the wellhead; the remainder is largely for capital and operations of the conversion facility and return on investment, all largely remaining in Texas, the study found.
For every million cubic feet of Texas dry gas brought to market about 53 barrels of lease condensate plus natural gas liquids are also sold. These liquids tend to track crude oil prices and can be expected to sell at similar prices. Assuming $100/bbl for the liquids price, Texas gas production comes with an average bonus of $5.33/Mcf at current pricing.