Musings: NPC Is Extremely Optimistic About Natural Gas, If...

The National Petroleum Council (NPC) produced a draft report in mid September about the potential of North America's energy markets. The report titled: 'Prudent Development: Realizing the Potential of North America's Abundant Natural Gas and Oil Resources' highlights the prolific oil and gas resources available that may dramatically change the trend in domestic energy markets. Although the report has not been officially reviewed by the NPC, which reserves the right to make significant changes to the draft report's conclusions (something we are not aware the NPC has ever done with previous reports), the message is that North America could become energy self-sufficient, and possibly even an exporter of natural gas. 

The message is that North America could become energy self-sufficient, and possibly even an exporter of natural gas

The report contained four conclusions about natural gas and oil and their impact on America's energy future. The conclusions were: 1) "the potential supply of North American natural gas is far bigger than was thought even a few years ago;" 2) "perhaps surprising to many – America's oil resources are also proving to be much larger than previously thought;" 3) "we need these natural gas and oil resources even as efficiency reduces energy demand and alternatives become more economically available on a large scale;" and 4) "realizing the benefits of natural gas and oil depends on environmentally responsible development." It is this latter conclusion that becomes the big "IF" in how America's and North America's energy market evolves. 

The NPC study's conclusions are based on an analysis of a number of market outlooks and forecasts prepared by others. The NPC did not actually do its own analysis of the market. Based on the assimilation of all these prior studies, the report takes an extremely optimistic stand about the future for the North American natural gas market. The report begins with a review of the growth in estimates of the technically recoverable natural gas resources in the United States over the past 12 years. As shown by a chart of the estimates of the gas resource potential since 1999, it is clear that the estimates have increased since the gas shale revolution began. 

Exhibit 1.  Gas Shale Revolution Drives Estimates Up

After going through extensive discussion and analysis of the gas shale potential, the NPC looks at future production scenarios for conventional and unconventional gas both in the United States and Canada. We have only shown the charts for the U.S. gas production outlooks. We did, however, produce the chart the NPC study prepared of the range of production outlooks for North America based on three different production scenarios in each country.

Exhibit 2.  Conventional Gas Output Expected To Shrink


Exhibit 3.  Unconventional Gas Production To Grow

When one looks at Exhibit 4, which contains all the forecasts, there is a clear upward trend for the nearly 25-year outlook period.  More

Exhibit 4.  Gas Supply To Outgrow Demand Soon

importantly, forecasted demand for natural gas is plotted against supply growth. The plot shows that sometime within the next several years North American natural gas production is likely to outpace demand, a scenario that is projected to continue to the end of the forecast period in 2035. This suggests a limit on how high natural gas prices can rise.

Sometime within the next several years North American natural gas production is likely to outpace demand

The NPC examined estimates of recoverable gas resources versus the cost of supply at the wellhead. The three scenarios show that there is little additional resource potential added when the cost goes above $20 per million British thermal units. As a result, the study concludes that ultimate recoverable onshore gas resources, including cumulative production to date, range from 3,000 trillion cubic feet (Tcf) up to 4,700 Tcf.    

With a very optimistic outlook for supply, the NPC turns its attention to how long this ultimate recoverable gas supply can meet demand.  In order to do that, the study developed three scenarios: flat supply, supply growth and restricted supply and compared each demand scenario against the three potential supply forecasts. In the flat supply, a constant 24 Tcf/year consumption equal to existing production is assumed. Based on that production there will be a plateau extending from five to nine decades. 

Exhibit 5.  $20 Per Unit Cost Is Point Supply Stops Growing

In the supply growth scenario, production is assumed to increase by 50% from 24 Tcf/year to 36.5 Tcf/year. The increase takes place over a one decade period. The study projects that after 2020 the supply plateau can be maintained for from two to four decades. The NPC says that should market needs be greater, other supply sources such as offshore gas, Arctic gas or imported LNG would be added to the supply mix to meet the increased demand.

The restricted supply scenario highlights the "IF" issue. The scenario attempts to analyze the impact of supply restrictions such as limitations on hydraulic fracturing and resource access. In one of the scenarios, extreme limitations such as totally banning the use of hydraulic fracturing, the potential supply plateau would be eliminated entirely. In the moderate limitation scenario where the restrictions cut unconventional supply by one-third, the plateau would be cut from 80-90 years in duration to approximately 40-50 years. All three scenarios were combined into one chart showing how the North American gas market might develop.

Exhibit 6.  Boom Or Bust Can Be Predicted For Gas

While we have yet to study the report and its appendix in depth, there is little doubt but the draft NPC report is extremely bullish about the long-term outlook for North American gas and oil markets. In effect, the report sees a game-changing outlook for these markets due to the huge shale resource base and the technology to tap it. We will be interested to see whether the final report of the NPC alters any of these conclusions. We also are awaiting critical studies of the report from skeptics of the economics of oil and gas shale developments. In reality, costs and prices for oil and gas will ultimately determine how these markets develop, although further drilling and completion technological improvements could offset any negative impact on the long-term potential for the markets.