Natural gas production has mushroomed over the past five years. At the same time, natural gas prices have declined.
An important question for individuals involved in natural gas exploration and production is whether demand is likely to grow enough to raise prices and stimulate drilling and production.
But consumers are asking a different question: Will demand expansion raise natural gas prices to punishing levels?
Natural gas demand for electric power has grown 60 percent in the past decade and now represents about one-quarter of natural gas consumption. However, electric power generators can rapidly switch between coal and natural gas, so this area of consumption is not the subject of debate as are other uses of natural gas, and is not discussed in this article.
In May, two different groups looked at natural gas demand:
♦ The Senate Energy and Natural Resources Committee, chaired by U.S. Sen. Ron Wyden (D-Ore.), held three forums on natural gas, looking at issues including infrastructure needs, the impact of LNG exports and environmental concerns for shale gas development. U.S. Sen. Lisa Murkowski (R-Alaska) is the committee’s ranking member.
♦ The AAPG GEO-DC office hosted an energy policy forum on May 21, at the AAPG Annual Convention and Exhibition in Pittsburgh, to look at the impact of increasing demand for natural gas in the form of LNG exports, natural gas vehicles and natural gas for manufacturing. Panelists included Howard Gruenspecht, deputy administrator, Energy Information Administration (EIA); Paul Kerkhoven, government affairs director, Natural Gas Vehicles for America (NGVAmerica); James R. Cooper, vice president-petrochemicals, American Fuel & Petrochemical Manufactures (AFPM); and David Sweet, executive director, World Alliance for Decentralized Energy.
U.S. natural gas production has grown a spectacular 20 percent in five years, from 24.4 trillion cubic feet (tcf) in 2007 to 27.2 tcf in 2012, driven by shale gas production.
At the same time, natural gas wellhead prices plummeted from an average annual price of almost $8 per thousand cubic feet (mcf) in 2008 to less than $3/mcf in 2012. The price fall was precipitated by increased supply combined with decreased demand caused by the recession.
The potential for natural gas exports is a hot topic in Washington, D.C., as the Energy Department (DOE) considers whether to allow LNG exports. Natural gas exports to non-free trade countries are allowed unless the DOE determines that the exports “will not be consistent with the public interest.”
Two non-free trade LNG export applications were approved in 2012-13, but the facilities will not be completed for several years.
In 2012, the United States imported three tcf of natural gas, primarily from Canada, and exported 1.6 tcf, primarily to Canada and Mexico. This modest export volume is a radical turnaround from 2004, when over 50 import terminals were planned for the United States as the country was expected to become a major importer of LNG. Now the EIA expects the United States to become a net exporter of natural gas by 2020.
U.S. LNG export terminals are expected to rapidly multiply – a small terminal has operated at Kenai in the Cook Inlet, Alaska, since 1969. In the past three years, 26 LNG export applications have been made to the DOE. The total export volume if all the proposed plants were approved and developed as planned would be almost 11 tcf/year.
No one expects all these export facilities to be approved or constructed, but the potential export volume is enough to worry domestic consumers.
EIA projections are relatively benign. The EIA projects that natural gas production will expand 11 percent, or almost three trillion cubic feet (tcf) per year, by 2020. EIA also projects that natural gas exports will expand from 1.6 tcf/year in 2012 to 2.2 to 2.9 tcf per year in 2020, with little impact on prices.
Senator Wyden’s concern that the actual price impacts of LNG exports could be more severe prompted his committee’s hearings. Several of the invited speakers concluded that LNG exports would have a positive economic benefit for the United States.
For example, Cal Dooley, president/CEO of the American Chemistry Council (ACC), opined that increased natural gas use for electricity generation, transportation, industrial use and LNG exports will benefit the U.S. economy and consumers. He also called for increased access to federal lands as a way to assure growth in natural gas exploration and production.
Deborah Rogers, executive director of Energy Policy Forum, offered an opposing view – that the rapid production declines seen in most shale gas wells suggests the resource is small and therefore should not be exported.
Rogers also proposed that encouraging production levels sufficient for exports would be irresponsible given the negative environmental impacts of shale gas development.
Speakers at the AAPG energy policy forum discussed the potential demand for natural gas in the vehicle, chemical and export markets.
♦ Paul Kerkhoven described the benefits of natural gas use in vehicles, which include:
Working against natural gas use in vehicles are the high initial costs of the vehicles and refueling infrastructure.
However, the infrastructure is rapidly developing for compressed natural gas and LNG refueling for vehicles such as buses that return to a base station and for long-haul trucks that operate along the interstate highways.
Kerkhoven quoted a PIRA Consulting study that projected that vehicles would use 5.1 tcf of natural gas by 2030.
♦James Cooper described a potential manufacturing renaissance built on the availability of petrochemicals such as ethylene, which is derived from natural gas liquids. Ethylene is used for the production of a myriad of products, including plastic films, detergents and food packaging.
Cooper suggested that the abundance of this natural resource coupled with a strong manufacturing and transportation infrastructure, skilled workforce and large consumer population make the United States perhaps the best-endowed country for a resurgence in manufacturing.
EIA statistics show that U.S. ethylene production has grown about 50 percent from 2005 to 2012. AFPM recently announced that an unprecedented wave of construction of ethylene-production facilities could boost production another 37 percent by 2020.
♦ David Sweet identified two additional new market opportunities for natural gas – distributed power generation and marine transport.
♦ Distributed power generation, primarily industrial combined heat and power (CHP) using natural gas, is cheaper, more efficient and less polluting.
President Obama issued an Executive Order calling for the deployment of 40 gigawatts of new, cost-effective industrial CHP capacity in the United States by 2020.
♦ Driven by recent Environmental Protection Administration emissions restrictions in the 200-mile-wide Exclusive Economic Zone along the U.S. coast, marine vessels such as ferries, cruise ships and container ships may choose to switch to natural gas engines.
Marine vessels could be a huge new market for natural gas: Sweet quoted statistics showing that a container ship uses 200 times as much fuel each year as a train locomotive.
Forum speakers clearly documented areas for significant growth in natural gas demand. However, most of these technologies have high initial capital costs that will slow their expansion should natural gas prices increase. Thus, the speakers agreed that natural gas demand and prices should not rise significantly.
However, Sen. Wyden’s concern about potential increases in natural gas prices due to LNG exports continues to have impacts.
On May 21, new Energy Secretary Ernest Moniz announced that, upholding a commitment he made to Wyden, he would not issue additional LNG export authorizations until after a new analysis of the potential impacts of exports on domestic natural gas prices.
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