Natural gas benefits from shift to non-utility generation

Arlington, Va. and Houston

The Gas Research Institute (GRI) released the 2000 Edition of its Baseline Projection of U.S. Energy Supply and Demand to 2015, which describes steady growth in overall U.S. energy consumption and very strong natural gas demand growth to meet growing electricity generation requirements.

The new Baseline Projection-an independently prepared analysis of energy supply and demand-shows total primary U.S. energy consumption growing by 1.3 percent annually, from 94 quadrillion Btu (quads) in 1998 to 118 quads in 2015.

The outlook for natural gas is even more robust, with demand growing by 2.6 percent annually to 33.5 quads in 2015 compared to 21.8 quads in 1998. As a result, the natural gas share of total U.S. energy consumption will increase from 23 percent in 1998 to more than 28 percent by 2015. Increased demand for natural gas for electricity generation will account for 44 percent, or 5.2 quads, of the projected demand increase for natural gas. Growth in industrial sector gas demand will account for 27 percent, or 3.2 quads, of the projected demand increase, with residential, commercial, and transportation markets accounting for the balance of the gas-demand growth.

GRI`s Baseline Projection makes three key observations about trends in energy markets:

– Gas supply will increasingly rely on higher production from the deeper waters of the Gulf of Mexico and increased Canadian imports. These two sources will become the pillars of supply necessary to meet growing gas demand. However, they will aggressively compete with each other to provide the incremental supply and to meet demand in specific regional markets. The outcome of this competition will depend on the availability of pipeline capacity, the cost to develop the resources and, ultimately, price competition.

– The rapid transformation of the electric industry from one dominated by regulated utilities to decentralized, unregulated power generators will pose a growing risk to the gas industry. Much of this risk stems from the gas industry`s increased reliance on electric generation as the basis for growth in demand while the operation and very structure of this industry changes significantly. To reduce this risk and achieve the anticipated growth, the gas industry will need to make significant investments in storage and pipeline capacity and revise many standard gas industry operational practices.

– Natural gas producers will increasingly implement “just-in-time” development practices that will allow the gas production industry to reduce risk and quickly monetize in-ground natural gas resources. This change in production methods implies lower resource/production ratios, which could pose supply reliability issues and increase the risk of price volatility.

“While GRI`s 2000 Baseline Projection outlines a positive outlook for the natural gas industry, it sounds a call for change in the gas industry,” said Paul Holtberg, group manager, GRI Baseline Center. “As the projection indicates, the gas industry will need to undertake key investments and make significant changes in operational practices to meet the anticipated growth resulting from a fundamental shift in consumption patterns. The process will not be easy and will include an element of risk.”

Other highlights from the 2000 Baseline Projection include:

– Energy conservation will continue to play a major role in meeting energy requirements, despite generally low energy prices. A reduction in energy intensity from improved conservation is expected to offset roughly 20 quads of energy consumption by 2015.

– Fewer nuclear plant retirements are expected over the projection period than anticipated in GRI`s 1999 projection. This development will reduce requirements for new generating capacity, hold down increases in carbon emissions, and reduce the growth in gas consumption versus what would have otherwise been the case.

– Electric power generation is projected to increasingly shift to more decentralized generation, with the average size of a generating unit declining from around 95 MW in 1995 to about 75 MW by 2015. The implication is that a larger number of generating units will be needed to meet growing electricity demand.

– Gas exploration and production industry cycle time (the time from date of first discovery to the date of first production) has declined sharply since the mid-1970s. This increased productivity suggests that the gas industry can meet growing demand without having to depend on large unproduced inventory cushions, which has been typical in the past.

– The sharp growth in industrial gas consumption attributable in recent years to growth in cogeneration facilities is a thing of the past. Future growth in industrial gas consumption will largely be a result of growth in energy demand for basic industrial energy applications (e.g., process heat, process steam, machine drive, raw materials, etc.).

– New appliances and applications (i.e., hearth products and cooling) will increasingly drive growth in residential and commercial energy and gas consumption instead of traditional energy-using applications such as space heating, cooling, and water heating.

More information about the report is available by calling 703-526-7832, or by e-mail:

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