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Peering in the energy crystal ball EIA outlook sees US oil production climbing further, then falling; expects abundant natural gas to spur manufacturing industry Alan Bailey Petroleum News
As evidenced by those who attempted to predict the future of the U.S. oil and gas industry prior to the start of the shale oil and gas revolution a few years ago, forecasting energy production and consumption can be a dodgy business. But, in the interests of providing some comprehensively researched insights into where the country may be heading, each year the U.S. Energy Information Administration looks at the major factors likely to impact U.S. energy production and consumption and uses those factors to make energy predictions under different economic, political and technical scenarios.
The challenges posed by uncertainty in energy forecasting are reflected in this year’s recently published report, the Annual Energy Outlook 2014, with the report suggesting a wide diversity in possible future scenarios through to 2040, in particular for oil and gas production.
Oil and gas forecast In EIA’s reference case - the scenario the agency judges to be most likely to play out under current laws and regulations - the current rapid rise in U.S. oil production will continue for a while, before beginning to slow after 2021 and then going into a steady decline. Under this scenario, based on assumptions of how much oil can ultimately be extracted from “tight rocks” such as shales, oil imports to the U.S. as a percentage of total U.S. oil consumption, having declined from 41 percent in 2012, will level out at 25 percent in 2016, and then remain at that level for several years before climbing again to 32 percent in 2040.
But the report points out that these projections are highly sensitive to technology advances in oil and gas development and production. If oil well results prove disappointing, oil and gas production after 2021 could decline at a somewhat faster rate. But, conversely, technical progress in tight oil plays and the opening of new shale areas such as Alaska could have a dramatic impact: EIA’s high resource case for oil and gas shows a continuing rapid increase in oil production, albeit at a gradually slowing rate of increase, with imports as a percentage of consumption dropping to 15 percent in 2020, and with the U.S. becoming a net exporter of oil and petroleum products by the end of the forecast period.
Overall, there is much more upside uncertainty than downside uncertainty in the production forecasts, the EIA report says.
Global oil pricing But, regardless of how much oil the United States produces, oil prices will remain global in nature, with the price of oil in the United States being impacted by strategic decisions made by leading oil-producing countries, the report says. The report suggests a wide range of possible oil price scenarios, with prices remaining well below $100 per barrel in a scenario of low economic growth, steadily increasing to nearly $150 in 2040 in the reference case, and increasing rapidly, eventually reaching more than $200 per barrel in a high-demand/tight-supply scenario.
On the other hand, EIA predicts that the continuing production of abundant and relatively inexpensive natural gas will spur robust growth in U.S. manufacturing industries, with gas used to produce heat and generate electricity, and with hydrocarbon liquids associated with gas production used as a feedstock for chemicals, pharmaceuticals and plastics. Low energy prices will also drive a high demand for industrial products, thus supporting more rapid economic growth, the EIA report says.
Energy demand From the perspective of U.S. energy consumption and demand, this year’s EIA forecast uses a revised U.S. Census Bureau population projection, showing a lower rate of population growth than had previously been predicted. This anticipated slowing growth, with a corresponding slowdown in the expansion of the labor force, comes from a projected slowdown in net international migration, particularly among younger people, the report says.
But EIA anticipates that the increased industrial production driven by the ready availability of natural gas will, in turn, push up natural gas consumption, with annual consumption rising from 8.7 quadrillion British thermal units in 2012 to 10.6 quadrillion Btu in 2025, based on the agency’s reference case for its U.S. energy forecast. However, different assumptions about economic growth or oil and gas production result in large variations in predictions for industrial output, with bulk chemical production forecasts being particularly impacted by the more bullish, high-oil-and-gas-output scenario, the report comments.
Vehicle use When it comes to energy demand for transportation, the total road-vehicle miles driven within the United States will continue to grow, but at a slower rate of increase than previously anticipated, the report says. That slowing rate will reflect a higher proportion of older drivers in the population and a consequent reduction in the miles driven per capita. Improved vehicle fuel efficiency, driven by increasingly stringent regulatory standards, will more than offset the increase in road-miles driven, leading to an overall decline in total energy consumption by light vehicles, the EIA report says. However, the report also indicates uncertainty in this forecast, particularly towards possible lower demand than thought likely, with this uncertainty impacting the outlook for fuel usage, fuel imports and carbon dioxide emissions.
Gas-fired generation With natural gas being an appealing fuel for power generation, gas-fired generation is likely to capture more of the generation capacity currently provided by coal-fired and nuclear plants, the EIA report says. EIA says that in its reference case gas will surpass coal as the largest power generation energy source by 2035.
An increase in the amount of electricity produced from renewable energy sources during the first decade of the forecast will largely result from government policies, the report says. Thereafter, as the cost of natural gas rises while the cost of renewable energy decreases, renewable energy will become more competitive, perhaps accounting for 16 percent of total electricity generation in 2040.
EIA also says that it considered the possibility of a particularly rapid retirement of coal and nuclear power plants, given a recent increase in these retirements because of the low profitability of these plants in the face of low natural gas prices. Under an “accelerated retirements” scenario, gas-fired generation capacity could overtake that of coal as early as 2019, with gas accounting for 43 to 47 percent of total power generation in 2040, depending on the rate at which nuclear plants are retired.
Gas for base-load power But, barring some breakthrough in technologies such as battery storage, renewable energies cannot fully replace the stable base-load power generation provided by coal and nuclear plants, the EIA report says. Consequently, natural gas generation would fill much of the power generation void left by higher rates of coal and nuclear retirement, pushing up the capacity of gas generation by 42 to 50 percent, the report says.
The use of natural gas as a fuel for railroad freight trains is an additional possibility for future gas demand, depending on decisions made by railroad companies and factors such as infrastructure needs. The EIA report provides scenarios that assume various levels of railroad gas usage, although the report also points out that, even at fairly high rates of penetration as a railroad fuel, this particular use for natural gas would represent quite a small proportion of overall U.S. gas consumption.
Overall, EIA predicts total usage of energy in the United States, both per capita and per dollar of gross domestic product, to decrease in the coming decades.
Carbon dioxide emissions Under EIA’s reference case, as fuel demand for vehicle usage declines and the proportion of power generation from natural gas increases, total U.S. energy-related carbon dioxide emissions will remain below 2005 levels for the entire period of the EIA forecast, with industrial emissions of carbon dioxide overtaking emissions from the transportation sector in 2024 for the first time since the late 1990s. The reference case envisages transportation emissions rising again somewhat after 2033 because of an assumed rise in the need for diesel fuel at that time.
Despite the increased use of natural gas for power generation, EIS expects an increase in demand for electricity to push carbon dioxide emissions from power generation up about 11 percent between 2012 and 2040. But carbon dioxide emissions from the power sector are highly sensitive to the proportions of different fuel types in the mix of power generation facilities being used. So, if electricity demand turns out to be lower than what EIA expects, carbon dioxide emissions will drop by a disproportionately large amount, as less efficient plants tend to be removed from use while more efficient plants remain in service, the report says.
And in the event of an accelerated retirement of coal plants, carbon dioxide emissions would be 20 percent lower than in the reference case by 2040, the report says. Much larger reductions in carbon dioxide emissions would result as a consequence of dampened power demand and the increased use of renewable energy sources, if fees were imposed on carbon dioxide emissions, the report says.
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