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EIA expects continuing U.S. gas demand Abundant natural gas supplies likely to drive increased use of the fuel, regardless of government policies to curb carbon emissions Alan Bailey Petroleum News
In these days of recession-related doldrums, the U.S. natural gas industry may be down, but it’s certainly not out. At least not according to Dr. Richard Newell, administrator of the Energy Information Administration, the U.S. Department of Energy’s independent purveyor of energy data and forecasts.
In testimony presented on Oct. 28 to the U.S. Senate Committee on Energy and Natural Resources Newell painted a picture of an industry in which future gas demand is likely to remain robust.
“Given strong technologically driven U.S. supply development, natural gas is likely to play an important role in domestic energy use for the foreseeable future, regardless of (carbon) policy,” Newell said. “Clearly, adequacy of resources and local environmental implications (for gas production) will be important considerations, but if those concerns prove manageable, it should be possible for domestic natural gas production to increase well beyond its current level, which already reflects significant growth over the last several years.”
Technology-driven supply U.S. gas production, gas reserves and estimates of technically recoverable gas resources have all increased in recent years, with the addition of new reserves more than compensating for gas drawn from existing reserves, thanks mainly to the rapid evolution of techniques for the extraction of gas from unconventional sources such as shale gas and tight gas sands, Newell said. Two key technologies are horizontal drilling, to expose large areas of gas reservoirs to production wells, and the use of hydraulic fracturing to release gas from the reservoir rocks.
“EIA has traditionally taken a relatively optimistic view of the unconventional natural gas resource, even at a time earlier this decade when many other analysts were suggesting that the lack of natural gas resources in North America would lead to a rapid and inexorable increase in our reliance on imports of LNG,” Newell said. “Recent shale gas developments suggest that even our perspective was not optimistic enough.”
In fact, imported LNG has formed quite a small component of total U.S. gas supplies, with LNG amounting to just 3 percent of those supplies in 2008; Canada accounted for about 7 percent of U.S. gas consumption in that year, with U.S. sources accounting for the remaining 90 percent of the gas used. LNG imports have run well below the import capacity of U.S. LNG terminals, with that spare LNG import capacity acting as a safety valve in the event of unanticipated U.S. demand growth or supply shortfall, Newell said.
Supply uncertainty However, there are risks and uncertainties regarding future internal U.S. gas supplies: The large-scale application of new production techniques to gas shales in some parts of the country remains as yet untested, while the need to progressively drill more and more wells to maintain shale gas production raises questions regarding future production costs.
“Continued technology improvements will tend to reduce costs, while the exploitation of more difficult resources over time will tend to increase them,” Newell said.
The other major concern with shale gas is the possible environmental impact of the shale gas industry, especially since some of the shale gas resources are under or near major population centers.
“Drilling requires heavy truck traffic, makes noise and changes the landscape,” Newell said. “Fracturing to stimulate the flow of natural gas, although it involves mainly highly pressurized water and sand, also involves a relatively small amount of chemical additives.”
And although gas shales typically lie deep underground, far below any ground water, some people have raised concerns about the amount of water likely to be consumed by the fracturing process, and about the need to handle and treat fluids returned to the surface.
23 percent of energy On the demand side of the supply-demand equation, natural gas has met about 23 percent of the total U.S. energy demand in recent years, Newell said. In 2007 electricity power generation accounted for about one-third of the total natural gas demand; one-third of the gas was consumed as an important fuel and feedstock for industry; and one-third was used in the heating of residential and commercial buildings. A small portion of the natural gas supply was used for transportation, mainly to power pipeline compressor stations: A tiny amount of gas was used to fuel vehicles.
But projections of future natural gas demand are highly sensitive to both gas prices and overall economic activity — in its “reference case” forecast EIA anticipates a slight rebound in industrial gas consumption as the U.S. comes out of recession, with industrial consumption then leveling off because of a relatively slow growth rate in energy-intensive industries.
And power generation appears to be a key factor in predicting future U.S. natural gas demand trends.
Thanks to the introduction of new high-efficiency natural-gas-fueled power plants, in 2009 the use of natural gas for power generation is likely to continue its recent upward trend, Newell said. And although the rate of growth in U.S. electricity demand has been progressively slowing for more than 50 years, electricity demand is likely to continue to increase, albeit very slowly.
But if, as forecast, natural gas prices start to climb, the displacement of coal-fired power generation by natural gas is unlikely to persist in the near term — new coal-fired plants already under construction will cut into segments of a power market that might otherwise be available to natural gas. However, further down the road, with few additional coal plants likely to be built, power generation from natural gas is likely to grow again.
The upshot of all of this is an EIA reference case forecast that natural gas demand for power generation will decline for a couple of years or so, before leveling off and then steadily growing.
Demand uncertainty But there are some significant future uncertainties that must be overlaid onto this reference case.
One uncertainty is the possibility that new electricity-intensive technologies such as plug-in hybrid electric vehicles could push up electricity demand. However, it would require perhaps tens of millions of these vehicles to hit the roads for the impact on total U.S. electricity consumption to be particularly significant, Newell said.
“EIA’s reference case does not envision plug-in hybrid electric vehicle penetration on this scale over the next two decades, given that the technology has yet to be introduced commercially, and there are significant challenges in reducing the cost and improving the performance of batteries to make this technology competitive in the marketplace without continuing subsidies,” Newell said.
On the other hand, U.S. government policies on carbon emissions could significantly impact future U.S. natural gas demand.
The American Clean Energy and Security Act, currently wending its way through Congress, has its sights set on introducing a greenhouse gas cap-and-trade system and the introduction of performance standards for coal-fired power plants. This act anticipates that 80 to 88 percent of the reductions in energy-related carbon dioxide emissions will come from electricity generation, Newell said.
And, although some of the emission reductions will be achieved through higher electricity prices dampening demand and through incentives for improved energy efficiency, achieving the desired emission reductions will impact power generation from coal, a fuel that produces especially high volumes of carbon dioxide waste.
Unknowns The overall effect of this on natural gas demand, however, depends on several unknowns, including the availability and price of international carbon emission credits for offsetting emissions within the U.S.; the availability and cost of technologies such as nuclear power, and carbon sequestration and storage; and the possible use of low-carbon-emission biomass fuels.
At the low end of the spectrum of future natural gas demand, the ready availability of international carbon emission offsets, coupled with the use of low-carbon-emission power generation technologies, would actually push gas demand a little below that of the EIA reference case, while also dampening demand growth. If, on the other hand, the cost of nuclear plants and of carbon capture and sequestration facilities proves relatively high, gas demand would rise slightly above the reference case. Finally, if international offsets prove unavailable and the use of low-emission power generation technology turns out to be very limited, natural gas demand would climb sharply.
But Newell cautioned against any assumption that the introduction of a greenhouse-gas cap-and-trade system would automatically make a switch from coal-fired powered generation to gas-fired plants financially attractive. Coal-fired power is relatively cheap at present, and the costs of coal-fueled and gas-fueled power would both increase under a cap-and-trade system — the price assigned to greenhouse gas emissions would have to be quite high before the cost of coal-fueled power would overtake that of gas-fueled power, Newell said.
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