Problems at Nuclear Plants Increase Pressure on Gas Prices

Abstract: Natural gas prices, already under pressure because of badly drained storage levels, could get another big boost later this year if boric acid corrosion turns out to be an industry-wide problem at U.S. nuclear plants.

Analysis: Problems at a large nuclear power facility in Texas and a new program in Ontario to encourage more generation sources should add more pasture in which natural gas bulls can roam freely.

Corrosion caused by boric acid, discovered recently in the South Texas 1 plant, may turn out to be the biggest wild card in this year's gas game.

Located about 90 miles southwest of Houston, the plant has been closed since late March after routine inspection showed small boric acid deposits on the underside of its pressurized reactor vessel. The acid, used in coolant water to control radioactivity, is highly corrosive and can chew holes in metal.

Officials from the South Texas Project Nuclear Operating Co., a consortium of four owners which runs the plant's two reactors, have said the leak does not threaten public safety.

Much more worrisome, from the nuclear industry's perspective, is the potential for a wider problem resulting in safety shutdowns at the U.S.'s other 68 plants of similar design. These reactors generate roughly 10 percent of U.S. electricity.

"It's very possible that this would have wider industry-wide implications," Richard Barrett, director of the engineering division of the U.S. Nuclear Regulatory Commission's (NRC) reactor office, said during a public briefing last week.

This is not the first time boric acid corrosion has flicked the off switch at a U.S. nuclear plant. The NRC last year ordered all pressurized water reactors, the design employed in the Texas plant, to check their reactor heads after a problem was discovered at FirstEnergy Corp.'s Davis-Besse facility in Ohio. Boric acid ate a hole, about the size of a small honeydew melon, in the outer hull of a reactor.

FirstEnergy and other operators have spent millions of dollars on inspections and repairs. The exact cause of the corrosion is unknown, although one theory suggests it could be associated with insulated tubes which allow measuring devices to enter the reactor and monitor operations.

The South Texas 1 plant can produce up to 1,250 megawatts of power, enough electricity to feed more than one million average homes. A back-of-envelope calculation, based on a fuel conversion efficiency rate of 45 percent, indicates replacing the nuclear facility with a gas-fired plant would boost U.S. demand by 200 million cubic feet per day.

Taking this analysis one step further, replacing all 69 stations (assuming they are of similar size) would boost the nation's gas demand by 13.6 billion cubic feet per day (bcf/d). That number, to put it in perspective, amounts to roughly 23 percent of current U.S. consumption of 60 bcf/d.

The chance of all pressurized water nuclear plants being shut down is small. Turning off all these reactors would have a catastrophic effect on electricity and gas prices.

It would also have a devastating impact on investors as higher bills would hurt homeowners and industrial customers, not to mention utilities that would slip into bankruptcy after watching assets turn into liabilities faster than Marilyn Manson can offend parents of teenagers.

In a worst-case scenario, it could result in government regulating prices and supply to ensure the U.S. economy does not suffer a blackout and head into a depression.

But the corrosion problem should not be dismissed lightly, as evidenced by Japan's experience. Tokyo Electric Power Co. had to shut down all 17 of its reactors in the past year after admitting to years of workers falsifying records about corrosion.

The utility won approval this week to restart one of the units, but the firm has warned of power shortages in Tokyo unless it is allowed to restart at least 10 reactors capable of generating a total of 10,000 megawatts. The Japanese government has established a task force to find ways to mitigate or prevent outages this summer in the Tokyo metropolitan area. There's no evidence of false safety reports in the U.S., but Japan's unhappy times vividly demonstrate the risk corrosion poses to the nuclear industry.

Woes with nuclear reactors in Ontario, Canada's largest electricity market, also augur well for gas producers. The province is facing a power crisis because its aging fleet of nuclear reactors is becoming less reliable and a bungled deregulation effort has scared away private sector investment in additional generation capacity.

The province's Independent Electricity Market Operator has warned of blackouts if unusually hot weather, similar to the sweltering temperatures of 2002, arrives again this summer. Adding risk is the fact that Ontario is depending on the return of several nuclear reactors, capable of generating just over 2,000 megawatts, to keep its electricity supply in balance with demand.

The repairs for corrosion and other problems at the Bruce A and Pickering A plants are years behind schedule and billions of dollars over budget. Some critics doubt the units will make their return this summer, the latest of their oft-delayed deadlines.

If their dour outlook proves correct, it will certainly boost demand for gas- and coal-fired generation in the province and neighboring states. American power generators have made hundreds of millions of dollars in the past 12 months by selling power at peak prices to Ontario, while provincial hydroelectric players in Manitoba and Quebec have also profited handsomely.

Uncertainty about power supply is one reason why Ontario has implemented an emergency generator program. It is seeking up to 400 megawatts of new, short-term generation to come from natural gas or diesel. Existing independent power producers are also being encouraged to maximize output under the program.

Ontario's power crunch could become even more intense down the road as a result of a lawsuit launched by several states and dozens of environmental groups. They want Ontario Power Generation, the provincial utility, to shut down three large coal-fired plants, including North America's biggest, located about 40 miles north of Buffalo, because of environmental concerns.

The lawsuit, initiated under a provision of the North American Free Trade Agreement, is years away from any resolution and won't have any short-term influence on gas demand and prices.

But the troubles afflicting U.S. and Canadian nuclear units could certainly alter supply-demand fundamentals this summer and for years to follow. This means the forward strip for the next three years, recently priced at C$6 per gigajoule at the AECO (Alberta Energy Company), a natural gas trading hub in southern Alberta, is going to stay higher than President George W. Bush's approval rating from voters.

As a consequence, expect to see more demand destruction as industrial customers, such as petrochemical and fertilizer manufacturers, exit North America to locate plants in the Caribbean and other producing basins with lower costs. Consumers will also feel the pinch on their wallets, while gas producers and service firms that cater to them will continue to enjoy robust earnings.