Abundant American Natural Gas, Improved Price, Supply Outlook

by David Trice, America’s Natural Gas Alliance

There is a hazard in relying on the past decade of U.S. natural gas supply and pricing to forecast the future. Most likely, your estimates would be dead wrong.

We have moved into a new era of natural gas abundance in North America that is unlike anything we have ever experienced. Most of the industry’s leaders and experts did not see a boom of this magnitude even five years ago.

With new ideas and technology, we have unlocked huge, new supplies from unconventional natural gas plays—including shale and tight gas sands—that can power the United States for generations. While we have always known that gas was trapped in shale formations, only recently have we developed the ability to efficiently, effectively and economically unlock these vast supplies.

The timing of this new natural gas abundance could not be more opportune for the United States. As the nation and world wrestle with the need to reduce our carbon footprint, clean natural gas is available in abundance as a low-carbon option for electric power generation.

Natural gas reduces greenhouse gas emissions by 30 and 50 percent, respectively, in electric power generation compared with oil and coal, according to the U.S. Energy Information Administration (EIA).

New Pricing Outlook

Natural gas, like any commodity, trades in an open marketplace influenced by factors from weather to emotions. While it is challenging to forecast natural gas prices, experts who track the markets are seeing a clear moderation in historic prices and volatility.

In a late 2009 report, the EIA forecast a modest natural gas price increase with the improving economy to $4.62 per million cubic feet (Mcf) in 2010. That is 45 percent lower than the average high in 2008. Industry sources including Raymond James & Associates and Barclays Capital have suggested 2010 prices at $5.50 or less.

A study by engineering firm Black & Veatch expects natural gas prices ranging from about $6-$9 per million cubic feet through 2030.

“I can’t remember the last time we looked at price curves that went that far out and they looked that stable,” said Rodger E. Smith, president of the firm’s enterprise management solutions group.

EIA recently projected natural gas prices would remain below $7 per million British thermal units through 2025.

There is more flexibility in the system today allowing producers to quickly increase supply as demand and prices shift, which has a moderating effect on price volatility.

Huge shale gas reserves often are located close to existing pipeline infrastructure.

“I think there’s a stock of wells out there that could come online in relatively short order if prices run back up,” said Kevin Petak, vice president of gas market modeling at consulting firm ICF International.

New Natural Gas

A review by America’s Natural Gas Alliance reported on seven factors likely to moderate natural gas prices in the future.

First, the boom in shale and unconventional gas production has created a 100-year supply of natural gas that continues to grow with new technology and as additional plays are assessed and developed. That’s a greater supply of natural gas than the United States has ever reported and, according to Deloitte Center for Energy Solutions, helps give the nation the third-largest gas reserves in the world (see sidebar).

Second, shale gas wells generally have high initial production rates, meaning significant quantities of natural gas from new drilling can access the market quickly.

Third, shale gas wells have much longer production lives, and current shale wells are expected to have a 40- to 50-year producing life. Although the wells decline to lower rates, thousands of wells will produce shale gas for a long time.

Fourth, until recently, hurricane season substantially could increase price volatility because 25-30 percent of U.S. natural gas production came from offshore wells in the Gulf of Mexico. With huge supplies of onshore unconventional natural gas, only 10 percent of the nation’s natural gas comes from the Gulf of Mexico, and the U.S. is less vulnerable to pricing peaks from weather-related events.

Fifth, natural gas production is more geographically dispersed throughout the nation. Thirty-two states produce natural gas, putting this abundant U.S. resource close to most user markets.

Sixth, the pipeline infrastructure continues to expand, providing greater flexibility and responsiveness to market demand and increasing the reliability of supply delivery. The EIA reported some 84 pipeline projects in 2008 that added 4,000 miles, plus another 78 projects in various stages in 2009. There are 220,000 miles of natural gas pipeline in North America.

Seventh, while 98 percent of U.S. natural gas is produced in North America, there also are growing world supplies to back up the market, if necessary. U.S. liquefied natural gas (LNG) terminal capacity has been increased to more than 10 billion cubic feet (Bcf) per day to provide a significant, on-call supply reserve.

Geographic supply diversity, coupled with robust pipeline infrastructure development, has improved the ability to quickly move natural gas where it is needed, but it also has mitigated regional price disparities and offers end users a more reliable, transparent and competitive gas supply and trading market.

It’s All About Supply

The key to understanding the pricing outlook is an understanding of how much unconventional natural gas plays have changed the game.

In mid-2009, global research firm Wood Mackenzie reported, “After struggling for years to grow supplies quickly enough to meet burgeoning demand from the power sector, the North American upstream sector has finally achieved a massive surge in supply.”

The EIA reported a 35 percent increase in shale gas resources in the U.S. from 2007 to 2009. It forecasts that unconventional natural gas will make up 56 percent of the total U.S. supply by 2030. The shale boom is transforming the supply outlook and creating a new and unprecedented era in U.S. natural gas.

In a supply report, Wood Mackenzie identified Marcellus and Haynesville shales as the two largest unconventional gas plays with huge reserve potential. Besides the top-ranked U.S. shale and tight gas sand resources, Wood MacKenzie has tracked some 31 global unconventional gas plays, each with a resource potential that exceeds 10 trillion cubic feet (Tcf).

In mid-2009, the Potential Gas Committee reported a 35 percent increase in natural gas resources, the highest in the 44-year history of the report. Shale gas accounted for one-third of the total.

Various industry forecasts from Navigant, ICF and the U.S. Department of Energy point to the vast, long-term abundance of natural gas in the United States. This offers the nation the added assurance of a substantial, stable and long-term domestic energy source—a reassuring case for increasing the use of clean, abundant, U.S. natural gas in the generation of electric power.

Time to Power up on Clean Natural Gas

Concerns about reducing carbon emissions, plus abundant supplies and lower price forecasts, are fueling increased interest in natural gas by leading U.S. electric power generators.

Recently, Progress Energy announced that it will retire several coal-fired power plants in North Carolina and replace them with natural gas-fired combined-cycle plants.

The EIA forecasts that 53 percent of electric power capacity additions are likely to use natural gas, vs. 22 percent for renewable, 18 percent for coal and 5 percent for nuclear.

Natural gas long has been relied upon for peaking power, given its flexibility and fast start-up times. But now it is getting a new look as a cleaner, baseload fuel option because fuel-switching to natural gas can reduce carbon emissions 50 percent.

Given its flexibility, natural gas is an optimal partner for intermittent wind and solar power and is likely to be increasingly used as a backup to assure system reliability for customers.

Large-scale, natural gas electric power generating plants have distinct advantages:

  • They are faster to permit and have less local community opposition.
  • They are quicker to build.
  • Construction costs are well below those for coal, renewables and nuclear.
  • They are flexible, versatile and easy to operate.
  • They deliver immediate greenhouse gas-emission reductions compared with coal.

New combined-cycle natural gas generators are lowering operating costs, reducing emissions and achieving higher efficiencies for electric utilities.

In other cases, distributed natural gas generators can be tucked into high-demand urban areas to deliver reliable power without the necessity of permitting and building transmission lines to distant generating plants.

We are into a new generation of natural gas production that is ready and available now and beyond to help electric power generators provide clean, efficient, economical and reliable power to consumers.

It is a new era for natural gas, and that creates new options and opportunities for electric power generators as they retire aging coal plants and prepare for a new cycle of demand growth.

Author

David Trice is nonexecutive chairman of Newfield Exploration Co. and chairman of America’s Natural Gas Alliance.


 

Deloitte Survey: Age of Plenty Predicted for Natural Gas

Majority of Oil and Gas Professionals Expect Climate Change Legislation to Pass Within Two Years

The United States is entering an age of plenty for natural gas, according to a survey of oil and gas professionals conducted by the Deloitte Center for Energy Solutions.

Deloitte conducted 200 quantitative interviews among oil and gas professionals from Oct. 30 to Nov. 5, 2009. All respondents were energy sector employees who have worked in the industry for at least five years, are college-educated and earned at least $100,000 per year.

“The survey numbers are striking,” said Gary Adams, vice chairman and leader of Deloitte’s oil and gas practice. “The overwhelming majority of survey respondents, 84 percent, say the best days for the natural gas industry are still ahead of us, despite today’s low prices.”

Current industry thinking would attribute this enthusiasm about natural gas to a surge in production from unconventional formations, such as shale and coal bed methane, and to the expectation that climate change legislation will increase the demand for gas-powered electricity generation.

The survey confirms the increasingly common perception among many energy pundits that America’s energy future will become more closely aligned with natural gas than we thought just a few years ago, Adams said.

In contrast, oil will continue to be a dominant fuel source for transportation for many years, but difficulties are expected to continue when it comes to finding and producing the fuel in the future, mainly because oil is increasingly found in challenging environments such as deep water and arctic regions, or in reserves controlled by national oil interests.

“While most analysts agree that oil will remain vital for transportation, the current belief in a vibrant future for domestic natural gas—driven by significant technological advances in the production of gases from unconventional fuel sources—stands in contrast to the industry’s thinking just a few years ago, which indicated that natural gas supplies in the United States would not grow dramatically,” Adams said.

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The survey further supports the optimism about a natural gas future by looking at several perceptions:

  • While oil is expected to remain the single most widely used U.S. energy source for some time, its usage is expected to decline. The number of respondents that expect oil to remain the most widely used overall energy source in the United States drops 16 points during the next five years, sinking to 41 percent who believe oil will dominate in 2015 from 57 percent who currently think oil is the most widely used overall energy source.
  • Expectations that natural gas will be the most widely used fuel source by 2015 double in the next five years, rising to almost one-quarter (24 percent) who think it will dominate in 2015 from one in 10 respondents who see natural gas as the currently dominant fuel source. Current industry thinking would indicate that much of the rising demand for natural gas will be for power generation.
  • Almost one in 10 respondents expects unconventional natural gas to be the main source of energy in five years, as well as an additional 4 percent who think it will be liquid natural gas (LNG)— further elevating the status of natural gas in respondents’ views as a critical energy source.
  • When it comes to fossil fuel production, 85 percent of respondents think the domestic production of natural gas will increase in the next five years, compared with only 45 percent who think American oil production will increase during the same time.
  • A higher percentage of survey respondents think oil prices will increase vs. respondents who think natural gas prices will increase. More than half (51 percent) think the price of oil will increase greatly in the next five years. In contrast, only 32 percent of respondents foresee the price of natural gas greatly increasing in the same time, probably because of the abundant supply of natural gas vs. increasingly constrained oil supplies.

Climate Change Legislation Expected to Pass; Industry, Consumers to Feel Impact

Survey respondents also were in accord regarding climate change legislation, anticipating some form of the legislation would pass within two years but that it would penalize oil and gas companies and increase fuel prices for consumers.

“According to our survey, a solid majority of respondents, 60 percent, think that some form of the climate change legislation currently under discussion in Congress will be finalized and passed within the next two years,” Adams said. “A mere 14 percent think Congress will never pass such legislation.”

While oil and gas professionals are split on whether or not climate change legislation will reduce greenhouse gas emissions, they are united in their opinions that it will push consumer prices higher and penalize oil and gas companies:

  • More than 90 percent of respondents think climate change legislation will lead to higher gasoline and natural gas prices for consumers.
  • Three-quarters (75 percent) of respondents expect climate change legislation will lead to significantly lower profits for oil and gas companies, and 68 percent say it will lead to more layoffs in the industry.
  • Most oil and gas professionals (76 percent) think that climate change legislation is not likely to create more jobs for Americans.

“All of this speaks to a general concern about the effectiveness of governmental energy policies among oil and gas professionals,” Adams said. “The survey reveals that most oil and gas professionals, 76 percent, think the energy industry is heading in the wrong direction, and a similar amount, 63 percent, say it is in worse shape now than it was even a year ago.”

Despite Concerns About Layoffs, Expense Cutting, Respondents Optimistic About Exploration, Production Revenues

When the survey looked at recession-related business issues, it found that concerns about layoffs and expense cutting persisted among oil and gas professionals:

  • Almost one in two oil and gas professionals expects that layoffs in the industry will increase during the next year.
  • Most oil and gas professionals say their companies are reducing operating expenses (75 percent), and many say their companies are reducing overall capital expenditures (56 percent) in response to the recession.

Despite these concerns, respondents do not expect revenues to shrink in the various oil and gas industry sectors in the next year, with the exception of the refining sector:

  • 76 percent expect revenues to grow at national oil companies.
  • 76 percent expect revenues to grow at international oil companies.
  • 67 percent expect revenues to grow at independent exploration and production companies.
  • 61 percent expect revenues to grow at supply and service companies.
  • 58 percent expect revenues to grow at outside energy consultancies.
  • 35 percent expect revenues to grow at refining companies.

The survey also shows that, contrary to speculation by many analysts about mergers and acquisitions in the energy sector, most oil and gas professionals do not see such activity at their own companies.

When asked how their individual companies respond to current oil and gas prices, only 14 percent say their company is pursuing a merger or acquisition.

“What we are seeing here is an underlying confidence in the sustainability of the oil and gas industry,” Adams said.

“Oil and gas companies have survived severe volatility over the past decades, and despite the current recession, these companies have sophisticated, adaptable business models and believe they can post healthy revenues well into the future.”

Energy Independence Will be Hard to Achieve in Near Term

A final area of interest in the survey concerned energy independence. Oil and gas professionals are more or less evenly split on whether or not the United States can achieve energy independence with 53 percent saying the United States can achieve independence while 46 percent say it cannot. Among the half that believes it is possible, most do not expect it for at least 15 years.

Concerns about independence from foreign oil are further complicated by climate change legislation. The majority of oil and gas professionals, 62 percent, think climate change legislation will worsen the United States’ dependence on foreign nations for oil. Adams said the survey responses reinforce the idea that oil and gas professionals are looking to the future and that they see their industry as a vital part of the bridge to alternative energy and renewables.

“Oil and gas will continue to be critical to meeting energy demand for many years to come, with natural gas playing an increasingly important role in our energy future,” he said. “The oil and gas industry is healthy, innovative and enthusiastic about the opportunities before it.”

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