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Oct. 27, 2023 - Epoch Times
33:59
California's Skyrocketing Natural Gas Prices Explained | Mike Umbro
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Time Text
There are a lot of alarm bells going off within the industry.
The real threat that if we don't ramp up our storage capability and our capacity, we simply won't have power.
We will be living by candlelight.
Natural gas utility bills in California jumped over 100% in January, while natural gas prices across the nation have gone down significantly this past year.
Production in our state, we only supply 10% of the natural gas that we need as a state.
So as we produce less, we are more prone to these supply shocks.
We don't buffer those shocks as well.
Also, a major portion of our electricity is produced by natural gas, so our electricity bills may go up as well.
43% of our power generation on the electricity side is generated by natural gas.
So as natural gas prices increase in California because we are on quote-unquote the end of the pipeline, we're left bearing the brunt of paying whatever cost we can just to get that gas.
My guest today is Mike Ombro.
An energy expert and investor with a master's degree in energy, business, and environmental management.
Today, he will explain why our utility prices are skyrocketing and why he believes the high prices are here to stay.
I'm C.M.I. Korami.
Welcome to California Insider.
Thank you for having me.
I appreciate it.
There is a phenomenon in Southern California right now that the gas prices, the utility gas prices, have almost more than doubled, right?
Can you tell us what's going on?
So we have a phenomenon in California that really is born out of poor policy making.
We have Production in our state and we only supply 10% of the natural gas that we need as a state.
And as a result, we're dependent on surrounding states to import that natural gas via pipeline to our communities.
And through a confluence of cold weather this season, short storage inventories in our state, and poor trading policies, I believe, we have been left exposed to this supply shock that has occurred in our state.
And as a result, that cost is being passed on to You, me, any consumer, whether it's PG&E, SoCal Gas, San Diego Gas and Electric, it's really Shared by all.
It's hard to understand this because if an average person looks at the natural gas prices, they're down compared to last year.
Right.
But we're paying significantly higher.
Can you explain what are these factors that goes into this that makes it a lot more expensive here?
Absolutely.
There are several layers to this story.
California only produces 10% of what we need, so we utilize underground gas storage.
And those storage fields are typically depleted oil and gas reservoirs, and we have these throughout California as well as the Northwest.
And we went into this winter season with 30 to 40% of our inventory in underground storage.
So we went in underprepared, and I guess the next question beyond that is why did that happen?
Dating back to March of 2021, as Russia was starting the war in Ukraine, we saw natural gas prices across the country rise from $3 and change and double up to $6.
So there was an immediate price jump as speculators started trading natural gas.
From there, we began shipping LNG to Europe and natural gas prices rose even further, up to $9, $10 across the country.
And that happened in a period of time in the spring and summer, When you traditionally have lower natural gas prices.
So how that affects us, the traders in California probably looked at the prices and said, well, we're normally filling up our gas storage right now on cheaper gas in the warmer months, spring and summer.
But last year was A war.
So it wasn't economic to fill gas storage at six to ten dollars when you're thinking prices are going to drop later.
So I think...
While it went up.
While it went up.
So we didn't store...
Right.
So we're not buying the gas because the price is elevated.
And I think a little bit of...
I wouldn't call it hubris, but an expectation that, oh, it's California, we typically have warm winters.
Maybe there was an element in the utilities and the trading desks across these utilities that we didn't necessarily need a full inventory and storage, and maybe we could get by with 30 or 40 percent.
And I think there was a big misdirection.
We were planning on a cold winter in Europe, and And saving our friends in Europe.
And we miscalculated that we could actually have cold weather at home.
And nobody has a crystal ball.
And so we're just vulnerable as a state to these unforeseen supply shocks.
Also, it's a monopoly, right?
So if one group, and it's interesting, it's only one player for each region.
So you don't have competition.
So if somebody else does a better job at it, They won't get rewarded for doing a good job.
Whatever mistakes you make, your customer has to pay, right?
Yeah, I won't be starting a utility company, and neither will anybody else.
We're dependent on these massive utility companies to provide natural gas and electricity, and what we're seeing with both of these trends from the utilities is prices tend to go up, and they very rarely, if ever, come down.
So that is...
Why we are now getting these written notices from, in my case, SDG&E saying, hey customer, your price is double this January, just be forewarned that you're going to be paying more.
Really nothing we can do other than turn the heater off and put a sweater on inside.
So, is this going to have an impact on our electricity costs?
Absolutely.
So, 43% of our power generation On the electricity side is generated by natural gas.
So as natural gas prices increase in California, because we are on quote-unquote the end of the pipeline, we're relying on piped gas from other regions of the country and even Canada, As those supplies become in more demand due to these weather events in those states, we're left bearing the brunt of paying whatever cost we can just to get that gas.
So we will see our home heating prices continue to be elevated as well as our electricity rates.
Yes, absolutely.
Absolutely.
And are these prices here to stay?
Or you mentioned the utility costs go up and they never come down.
Right.
Can you tell us why you think that?
Right.
Because it's a huge jump.
It is.
It is.
And if you look back historically at natural gas prices delivered to residential customers...
Dating back really 25 years, you see a trend line that does nothing but rise.
So there are some characteristics in that trend line where you'll come down.
It's supply and demand.
It's basic economic principles.
But over time...
We're producing less as a state.
So now, where we were producing maybe 20-25% of the gas we consume, now we're producing 10.
So as we produce less, we are more prone to these supply shocks.
We don't buffer those shocks as well because we're not producing enough as a state.
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Now let's go back to the interview.
Are we going to replace this?
So it's 43% of our electricity is coming from natural gas, right?
Right.
43% of our electricity is generated by natural gas.
Where is this natural gas going to come from?
Or are we going to replace this?
What's the state's plan on this?
So we're rapidly trying to decarbonize our electricity grid as a state.
We have the most aggressive greenhouse gas emissions reduction plans out of any state, as we all know, living here.
And as we decarbonize the grid, we're putting on a tremendous amount of photovoltaic for solar energy during the day.
And wind, we hear a lot about offshore wind, and we're trying to move away from natural gas.
However, Every day it gets dark and that's the biggest hurdle that I see as a state is the night time.
And at night time your solar goes off and you really depend a lot more on natural gas during the evenings and we see prices really elevated the past six to eight weeks in the evening time.
Up to 200, 300 dollars a megawatt, which translates to about 20 to 30 cents a kilowatt hour at your home price.
So all of these prices are going up, and as we decarbonize, we're still heavily reliant on natural gas.
So I don't see these prices coming down.
And another factor at play here The states around us are also trying to decarbonize their grid.
So places like Arizona, Colorado, Wyoming that still have coal production for power generation, as they phase out coal production, they're going to want to use their natural gas or the natural gas in their state to replace that.
Which we're buying now.
Which we're buying now.
So what I see looking out into the future, as we all, as the Western United States attempt to decarbonize, there will be more and more competition for natural gas, which is cleaner burning than coal.
And as a result, We will pay more for our natural gas in California because, like I said, we sit at the end of the pipeline network that is distributing.
And we don't have our own.
And now we're down to 10% of our own.
Yeah, now we're down significantly.
So do you think that, from what you're telling me, the prices are going to go up significantly, and it seems like the renewable side is not ready to handle what our needs are, right?
Yeah, and really what the renewable side needs is storage, and we're going to hear a lot about that into the future.
There will be a dramatic need for energy storage when it gets dark.
So peak power in California is typically 4 p.m.
to 9 p.m.
That's when everybody's coming home from work, everybody's turning on their dishwasher, their ovens, cooking dinner.
So those times, specifically in the winter, when the sun drops early at 5 p.m., now we're seeing the wintertime, it's going to be a very costly time for Californians to heat their home, to cook, because we will need We won't have what we need to keep the grid.
Because we need to store them during the day because the renewables are coming during the day and then at night we have to use them, right?
Exactly.
We don't have the storage.
Now, what's going to happen?
Are the prices going to go up?
Are we going to have blackouts?
Are the state leaders thinking about this?
Absolutely.
What's happening now?
Absolutely.
If you look long term to 2045, which really isn't that far away, 2045 there are reports written for the California Energy Commission that say we will need somewhere between 60-70 gigawatts of storage.
Today we have 3 gigawatts of battery storage.
Now battery storage is only a four hour duration so what they do is they stack the batteries throughout the evening or whenever they're drawing on those batteries.
So it's a little bit of a misconception to call batteries long duration storage because four hours of course there's another Five to eight hours of the night, depending on what season we're in, that need to be met.
And so what I see happening is prices continuing to rise and the real threat that if we don't ramp up our storage capability and our capacity, we simply won't have power.
We will be living by candlelight.
So you're telling me that the policymakers Are not seeing this?
No, they see it.
They see it, but they're doubling and tripling down on policy under the notion that we will be able to build it fast enough, that we will be able to build enough storage to meet the demand in 20 years or 15 years for the community.
If we can't build it, then what?
Do we have a backup plan?
I don't see a backup plan, no.
I think we've saved...
I wasn't a part of the movement, but there have been a lot of advocates to save Diablo Canyon, the nuclear generation facility, because that's baseload.
And so Governor Newsom...
Kind of pivoted.
He was planning on shutting that facility down and I think wisely realized that that's not a viable option.
We need that base load because we are under threat of blackouts currently.
And we all received those text messages in September of 2020.
2021 that said, hey, we're about to go dark here and everybody got the text message, but you can't rely on the whole state of California to respond to a text message when we're talking about the long-term viability and sustainability of our electricity infrastructure.
That's a very precarious cliff to be teetering on.
How far do you think we are from the worst-case scenarios, if there was one?
I think we're very close.
So the last time, looking back at the data, the last time we saw natural gas prices elevated like this was the Enron scandal in 1999-2000, in that era, where prices were about $15 to $16 million cubic foot for gas.
Well, we've seen prices go up to $30 and even $50 in MCF just this past December.
So the price crisis is arguably worse than it was in 2000.
However, the Enron scandal really climaxed in the fall, and we had rolling blackouts in, was that 2001, during heat waves?
And this is really manifesting itself in the form of the utility providers telling us our rates are doubling.
You know, not going up 5% or 10%, but your rate is literally going to double.
And so I think we're there from a price crisis standpoint.
We have not felt the blackout because of the text message we all received in September.
And it's not funny, but it's very real.
And I worry that this summer we will see record gasoline prices and record electricity prices.
You actually, you were in the oil and gas space, and now you're going towards the renewable yourself.
Why are you doing that?
Well, we came together as a management team.
I have really smart partners.
I come from a finance background.
My partners are engineers.
And we said...
If we continue to pursue a strictly oil and gas development, we're going to be fighting policymakers, state agencies that are giving us permits for our project.
We're going to be fighting an uphill battle through 2050.
So we decided to re-engineer our project and develop a clean power project out of our subsurface reservoir.
So we will be storing heat subsurface and bringing that back to the surface to provide clean power at times when California needs it.
Similar to a geothermal Asset in the state.
And we did that really for a number of reasons.
One, to align with the state of California.
Two, because we believe that a better, cleaner environment is important.
So we in the industry want to decarbonize and have a better energy mix into the future.
And number three, jobs.
Because if we're shutting down these Oil fields or these energy fields, let's call them broadly, if we're shutting down all of this critical infrastructure, we're losing jobs, we're losing tax revenue, we're losing what makes our communities vibrant, and then we're just relying on paying somebody else to do it.
So we really lose all of the economic benefits and we gain all of the added costs.
So it's a double whammy if we don't solve this.
So that's why we went ahead and Why is the rest of the industry not doing it?
Is it difficult to do this?
I think the rest of the industry for the past 20 or 30 years there has been complacency.
There's been this thought that the major utility providers, the major oil and gas operators, they will figure this out for us and who are we to share our voice when these big companies are basically in charge of everything or producing 70% of the resource, but the science backs up the idea that we should be producing this locally.
I'll give you an example.
We now produce just 30% of the oil that we need as a state, and we buy 70% of that product from overseas.
While you and I and our neighbors fill up our gasoline tank, we unknowingly are buying barrels of oil that are produced from the Amazon jungle in Ecuador, the most biodiverse place on the planet.
In favor of what?
Because we're shutting down the oil fields on the west side of the San Joaquin Valley, which receive less than six inches of rain a year, have very little potable water to access in the ground.
What groundwater there is there is contaminated with oil because it's so saturated with oil.
So when I, as a When an entrepreneur and a young person in the industry saw that, I thought, why are we not sharing this?
Why are we not sharing this with our neighbors?
And I'm in San Diego, and now my neighbors are asking me how my project's going.
They're enthusiastic about local production.
So I think the more we can spread that message as independence And the bigger companies are coming around to this, but there's less urgency for them to do this.
So are we being hypocritical?
We are doing stuff...
We are not allowing things to happen here, but we're going to third world countries and we're kind of taking from them or...
Absolutely.
...essentially destroying certain parts of their environment.
Right.
But we are okay here because we don't see it.
Yeah, it's not in my backyard.
And if we produce...
Or we're not producing it.
If we buy 50 million barrels from the Ecuadorian Amazon, which we did in 2021, nobody sees that.
And nobody in California is asking why we're doing that.
And oh, by the way, we bought 48 million barrels from Iraq, where they openly flare gas So violently that there's increased leukemia rates for children in villages in Iraq.
And we're buying Iraqi barrels.
And what this is called is environmental leakage.
And the Global Warming Solutions Act of 2006, which was signed by Governor Schwarzenegger at the time, specifically forbids Any practices or any purchases of products that result in human rights abuses, that result in environmental leakage.
So we're literally ignoring the Landmark environmental laws that we've put in place because we want to extend this image that California is not producing the resources that it badly needs.
And there's emissions, a lot of emissions to transport this.
Oh, absolutely.
The port of Los Angeles and Long Beach is the number one Source of pollution in Southern California, and anybody can look that up on the South Coast Air Quality Management District's website.
The pollution at the port is more than all six million of our vehicles combined.
So we're bringing in tanker loads of crude and these tankers emit sulfur dioxide, nitrogen oxide, particulate matter from their diesel engines.
So these tanks and these cargo ships bringing in our computers and televisions are spewing pollutants Into the very disadvantaged communities in Long Beach and Los Angeles that we're claiming we're protecting by shutting down an oil well in Inglewood, California that emits no diesel particulate matter and emits no harmful pollutant.
But the policymakers will not look at the port whatsoever.
Now, how does all this make you feel?
Because you're an insider, you're seeing all of this.
Right.
It's frustrating.
It's frustrating because we in the energy industry in California, we want a cleaner environment just as bad as Sacramento.
But we are not given the opportunity to share our information and be a part of the decision-making process.
We're told, pack it up, shut it down.
We're not even going to let you transition your oil fields to sequester carbon or to bring clean power to our energy systems.
We just want you to go away.
And that's the most frustrating part, is these solutions exist, but we're not turning to the experts.
We're turning to the advocates.
Now, what are the industry experts are saying about this?
This seems like a really big gamble.
For a state like California, we're one of the top economies in the world, and we have a lot of tech infrastructure, tech companies, we have businesses here.
It's hard to understand that we're kind of Taking this big gamble without a backup plan.
Right.
What are the experts are saying in your industry?
We're transitioning our own project to align with the state's goals, and I think what you would find if you surveyed those within the energy spectrum in California, regardless if it's renewables, oil, natural gas, geothermal, There is concern across the spectrum.
Nobody in the industry is thinking we're going to meet these goals and have an easy time doing it.
So I think there are a lot of alarm bells going off within the industry.
And then calls within the industry to engage Sacramento and to engage policymakers.
One of the shortcomings that a lot of folks see within the industry is a lack of Practical experience with energy developments and this idea that we're almost trying to decarbonize and build this grid as we go and without enough careful planning and really the resources dedicated to make sure we're going to meet We're good to
you need to buy electric appliances.
And all of those things exacerbate the stress on our electricity infrastructure because you're moving away from a liquid fuel and putting these massive power-hungry devices onto the grid.
So there's a lot of concern within the industry.
Because people can die with these blackouts, hospitals.
There's a lot of consequences for an outage.
Absolutely.
Now, what is it going on?
Who are the policymakers?
Who's there that's making decisions?
How much experience do they have?
Or how connected are they with the industry?
Are they talking to you guys?
Do you hear any discussions among you guys with the policy makers?
Yeah, I think one of the biggest opportunities, and it really saddens me as a younger professional, my older colleagues seem to be hardened to Sacramento wanting to shut down local production of energy.
I am more of an optimist, and I feel like there's a tremendous bridge opportunity that we could be building between Sacramento, both sides of the aisle, Democrat and Republican.
However, we have a supermajority in Sacramento, so it does not tend to lend itself to comprehensive debate.
It's more of a clash, and from what I'm seeing from afar, and I've gone to Sacramento, and Talk to some of the policy makers and it's very much an adversarial feeling to me and that is Frustrating and sad because I don't feel like our best outcomes will be accomplished if we're fighting one another.
But if we come together on both sides of the aisle and the industry and rely on industry experts rather than environmental activists, we're much more likely to solve this problem and we're much more likely to decarbonize the grid together rather than Fighting one another.
And so that's, I think, the most challenging piece of this right now.
Do you think it's solvable?
Absolutely.
I do.
I do think it's solvable if we embrace what we have in California.
If we recognize that California, when I started my career just 15 years ago, was the number three producer in the country for oil and gas.
And now we're the number eight or nine producer and falling quickly.
The oil and gas has been trapped there for millennia, millions of years.
It hasn't gone anywhere.
And to put that in perspective for a non-energy expert, we have as much oil and gas inside of just Kern County as the entire state of Colorado.
We have a tremendous amount of resource just beneath our feet that I would argue 99% of the normal Californian, our neighbors, have no idea that we have phenomenal resources in this state.
And not only can we produce traditional fossil fuels, but we can decarbonize our oil and gas production.
We can store carbon in an oil and gas reservoir.
We can store heat and bring it back for clean power in an oil and gas reservoir.
But it takes Everybody having a seat at the table, rather than this mindset of, we're just going to phase out local production.
If we continue down that path, we will have blackouts.
There's no question.
Have you had a chance to talk to some of these environmentalists that have the ear of the legislatures?
Not directly.
I'm heading that way this year in 2023.
That's my main goal.
Because you're a friendly guy.
Exactly.
I'm not here to yell at anybody.
I'm concerned.
And I will always tell people the truth.
And whatever knowledge I have, I'm always open to sharing.
And I would love the opportunity to sit down with some of these environmental activist groups that really...
Dictate a lot of how the policy is made in Sacramento, because if a liberal, middle liberal politician might be thinking, well, let's keep the oil and gas industry, they will threaten that elected official with a primary in the next election.
So it's very dangerous to have politicians controlled by activist groups, or really even the industry.
I think Maybe it's idealistic to think that way, but our policymakers should be open to any solution at this point because we are in crisis mode with the prices and we will be in perpetual crisis mode with the threat of blackouts and brownouts.
If you find this interview with Mike interesting, I actually had a chance to talk to him about a few more things, like how his technology works and what the big energy player is doing in California.
You can go to InsiderCA.com to watch this exclusive segment.
Now let's go back to the interview.
And Mike, why are you doing this?
You might have an easier time in other states, right?
Yeah, and my friends tell me that.
Come move to Texas.
Come move to Oklahoma.
And I say, you know, my family's here.
I'm born and raised in San Diego.
I've been here 40 years.
I've lived in California all my life.
And it's the most beautiful environment in this country.
And I'm passionate about protecting it.
And it...
It is very painful to see the poverty we have in this state, the jobs that are leaving this state, and I'm not just going to pack up my family and leave my parents, my aunts, my uncles, my nephews, my nieces, you know, all of this.
I'm not just going to leave so I can make more money.
I'd rather be poor and be a part of the solution.
Now, do you have any other thoughts for our audience?
Is there anything they can do or people can do?
Well, one thing we're doing as an industry, we started a non-profit called Californians for Energy and Science and we're opening it up to everybody and I'm very appreciative that you've had me on here but our website is energyandscience.com.
I was surprised that wasn't...
Taken already.
But what we're trying to do as an industry is be an open book, to invite the community in to show them our leases, our developments, and to invite them if they want to come on a field trip and see what a solar field looks like, see what an oil and gas field looks like, see what a geothermal field looks like.
I think that's the next step as we Evolve as communities in social networking and short videos and all the things that seem to draw us in.
That's what we're trying to do is draw people in so we can just share the facts with them and they don't have to wonder why their bills are higher or where their energy comes from.
Mike Umbrough, energy investor and expert.
It was great to have you on California Insider.
Thank you so much for having me.
I really appreciate it.
Hopefully we can do it again.
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