Natural gas is a valuable commodity in most of the world – but not in parts of Texas. Now, in West Texas, oil well operators will pay you to take their natural gas. The practice is called “negative pricing,” and it could change everything from the price of electricity to the use of renewable energy.
Gas is a byproduct of oil production. In West Texas, there are a lot of oil wells that produce natural gas, but there aren’t enough pipelines to get it easily to market. Instead, companies burn off gas in a practice called “flaring.” A recent report shows that the amount of natural gas destroyed in this manner could power every home in the state.
Even people in the oil business have called flaring a “black eye” on the industry. Critics see it as an indictment of how the state and federal government manage natural resources.
Certain rules prohibit some oil wells from flaring their gas, so they sell it by shipping it out through a pipeline. Several weeks ago, there was a breakdown on a pipeline run by the company Kinder Morgan in West Texas, limiting the amount of gas that could get shipped out.
Because oil prices are so high now, oil companies decided they would pay people to take the gas away. They can afford to do that and still make a profit because of those high oil prices.
“Have you ever gone to the store and seen negative prices on things? It’s just not a thing that happens,” says Joshua Rhodes, a research associate at UT’s Austin’s Energy Institute. “We didn’t design the [energy] market to really handle that.”
Natural gas power plants "pay for natural gas, they burn it, make electricity and sell that electricity on the market,” he says. “But now they might actually be able to get paid to take that natural gas and get paid to make electricity.”
Up until recently, natural gas power plants were not allowed to sell electricity at negative prices. But now they want to. Why? They could still make money selling negative-priced electricity, because someone’s paying them to take the gas.
The Electric Reliability Council of Texas, which operates the state's electric grid, is changing the rules to allow natural gas power plants to sell electricity for negative-$20 per megawatt hour. It's a ripple effect from those original negative natural gas prices.
For one thing, low natural gas prices can bring lower electric bills. Negative natural gas prices may make those bills go even lower in some parts of the state – though because this phenomenon is confined to West Texas, that impact would likely be local.
Wind generators traditionally offer lower prices, so with negative pricing, gas generators will be able to undercut wind plants and knock them offline, ERCOT’s Kenan Ögelman said at a recent board of director’s meeting.
Experts don’t expect those impacts to last long.
“Negative price natural gas is not a sustainable thing,” says Rhodes. “Somebody will build a pipeline, and there are companies out there building pipelines right now to move that gas to market.”
In fact, one of those pipelines is Kinder Morgan’s Permian Highway project. The proposed pipeline, which would run right through the Hill Country and other parts of Central Texas, has faced a lot of local opposition.