Arkansas, U.S. nuke plants under scrutiny; natgas benefit?

The operator of the nuclear power plant in Russellville (Arkansas) says its plants are safe, but the utility company may run into trouble relicensing nuclear power plants in the Northeast U.S. because of the nuclear plant crisis in Japan.

Also, the damage to and uncertainty about the Fukushima nuclear plant in Japan is likely to curtail or end what was a renewed effort in the U.S. to build new nuclear power plants. According to the Nuclear Energy Institute, 104 nuclear power plants provide 20% of U.S. electricity. (Link here to Fukushima updates from the NEI.)

Furthermore, energy industry analysts believe the reaction by governments to what is happening in Japan could benefit the natural gas industry — potentially a plus for operator’s in Arkansas’ Fayetteville Shale Play.

A 9.0-magnitude earthquake and subsequent tsunami that hit Japan on Mar. 11 has resulted in significant damage to two reactors at the Fukushima Daiichi facility. Experts differ on the amount of radiation released and the potential harm from the radiation.

ARKANSAS NUCLEAR
New Orleans-based Entergy Corp. provides much of the electricity used in Arkansas, and operates two reactors in Russellville that employ about 960. Entergy, the second-largest nuclear power plant operator in the U.S., has annual revenues of more than $11 billion and employs about 15,000. The company owns 11 nuclear power plants and is a third-party operator for one nuclear power plant.

“Entergy’s nuclear plants were designed and built to withstand the effects of natural disasters, including earthquakes and catastrophic flooding. The NRC requires that safety-significant structures, systems and components be designed to take into account the most severe natural phenomena historically reported for each site and surrounding area,” noted a statement Entergy released Monday (Mar. 14) in response to the nuclear power plant damage in Japan.

Entergy said it works close with the federal Nuclear Regulatory Commission on safety standards and responses in the event of an emergency. Entergy provided the following points about its safety regimen:
• Ongoing risk analysis and design enhancements to address natural and man-made risks;
• Extensive operator training in preparation for extreme conditions, along with drills and evaluations by the NRC; and,
• The development and implementation of emergency response plans aimed at protecting public health and safety (such as those put in place following Hurricane Katrina); these plans are regularly exercised in cooperation with local, state and federal agencies.

“There will be lessons learned from this tragic event. Incorporating those lessons into operating experience is a hallmark of the global nuclear industry. It is worth noting that the natural environment surrounding the nuclear plants in Japan is very different from the environment surrounding Entergy’s nuclear plants,” noted the Entergy statement. “While it is still early, it appears that the nuclear units’ safety systems functioned properly after the initial effects of the earthquake in Japan. Reports suggest it was the overwhelming tsunami that severely damaged the plant’s cooling capabilities and recovery efforts.”

ENTERGY HIT?
Brian Chin, an energy industry analyst with Citi, said Entergy has the most to lose if governments overreact to what is happening in Japan. He said U.S. nuclear plants on the “relicensing bubble” will probably attract increased political and regulatory scrutiny.

“In our view, Entergy is the most at-risk name under this scenario, as their two merchant plants at Vermont Yankee and Indian Point were undergoing significant political/regulatory relicensing risk prior to the Japanese disaster,” Chin noted.

The scrutiny may not impact Entergy’s Arkansas nuclear operation. Michael Bowling, with Entergy, said Arkansas Nuclear One is licensed through May 20, 2034. That reactor was relicensed by the NRC in 2001. The unit 2 reactor is licensed through July 18, 2038, with the NRC granting the extension in 2005.

NATURAL GAS, COAL CONVERSION
However, even the Arkansas plants are not immune if the problems in Japan become catastrophic. Chin suggests government and public pressure could close older nuclear plants or cause them to convert to natural gas.

“Longer term, this could accelerate retirement of older nuclear plants and continue to shift towards natural gas based generation,” Chin advised.

That shift could help boost slowed natural gas exploration and production in many central and northern Arkansas counties within the Fayetteville Shale Play. Between 2008-2009 and 2009-2010, the growth in number of wells drilled declined to below 25% over the previous years, owing to low natural gas prices. The number of wells drilled in the shale play during January to October 2010 stood at 731.

In recent months, Southwestern Energy, Chesapeake Energy, XTO Energy (ExxonMobil) and other drillers in the Arkansas play have already announced short-term pullbacks due to low natural gas prices. For example, Fayetteville Shale leader Southwestern announced in December it was cutting its capital budget $1.9 billion, down from nearly $2.1 billion in 2010.

A 10-year forecast released Feb. 2 by Research and Markets says low natural gas prices will constrain production in the Fayetteville Shale in the short-term, but production and wellhead prices are expected to gradually increase after 2012 and beyond.

A report from UBS suggests coal and natural gas may benefit from the Fukushima backlash.

Specifically, UBS noted: “Longer term implications could materialize for pricing as regulatory bodies around the globe will discuss/review nuclear fleets. Furthermore, objections to new nuclear build will likely increase as NIMBY (not in my back yard) objections will increase. In the US, long-term generation build will be directed toward NatGas generation; however, the discussions may help to push out some coal plant retirements as US generation needs are evaluated.”