Road Less Traveled? New Study Sees 2 Futures for Natural Gas

Abstract: Economic growth projections for the next two decades are available in two flavors. The first includes greater volatility in natural gas prices and a reactive economy. The other offers balance, predictability, and consumer choice.

Analysis: Like a pensive Robert Frost standing in a yellow wood, the natural gas committee at the National Petroleum Council sees the energy industry facing two divergent paths. Both lead to economic growth, though the path more heavily traveled—current trends in natural gas supply and demand—results in additional price volatility, continued tension between supply and demand, higher natural gas prices over time, and a negative impact on gas-intensive industries.

The path less traveled offers reduced natural gas price volatility and balanced economic growth.

Such are the conclusions in a draft natural gas study presented to the National Petroleum Council in late September. The study is a reassessment of natural gas supply and demand in North America. An executive summary of the draft, Balancing Natural Gas Policy - Fueling the Demands of a Growing Economy, is available at National Petroleum Council.

It is the first update on the natural gas situation since 1999 when a similar NPC study addressed how supply and demand would interact to reach public forecasts of a 30 Tcf economy by 2010. For perspective, the 30 Tcf economy represented a 30 percent increase in gas consumption over about a decade. The growth in demand was projected to come from expansion in industrial natural gas consumption, coupled with a 50 percent increase in gas used for electrical generation.

In 1999, it was a matter of extrapolating trend lines. In the U.S., natural gas consumption rose 40 percent in the decade ending in 1997. Moving the lines forward produced a 30 Tcf economy sometime between 2010 and 2020. In retrospect, those rosy projections were spiritually intertwined with the pervasive optimism prevalent in the late 1990s. That optimism culminated in the general bubble economy impacting the stock market, telecommunications, energy trading, and electrical power generation.

Higher energy prices since then, including gas price spikes in 2001 and early 2003, have significantly altered those views of the future. Basically, industrial gas demand has fallen at about the same rate that gas demand for power generation has risen since 1997. It amounts to a tradeoff of about 1.3 or 1.4 Tcf. The bottom line is that—with but one exception—U.S. gas consumption has remained essentially flat in the 22 Tcf range for the last six years.

Now come two new views of the future. Down one path is the evolution of current trends extrapolated forward. These involve national governmental policies promoting natural gas as an efficient and environmentally friendly fuel while other agencies at the federal, state, or local level continue policies that decrease fuel competition, restrict resource access, and impede the efficient interaction of the marketplace. Price volatility increases, driving gas intensive demand from the market and the economy lurches forward in erratic response to short-term influences. Under this scenario, gas prices range from $5 to $8 per Mcf, always edging higher the further into time the trendline goes.

The second path removes barriers to efficient resource allocation and provides for resource access and development. It encourages conservation and alternative fuel use, expanding consumer choice. Under this scenario, gas prices range from $3 to $5 per Mcf, with less volatility and short-term economic disruption.

The big winner, besides the consumer, seems to be the coal industry, which is predicted to return to 1970s era growth rates.

The newest study is an intriguing document. While it argues for greater industry access to natural resources, it also acknowledges that increased conservation and alternative energy sources are vital in providing balance to future natural gas markets.

Without those contributions, price volatility will add further cost to consumers, estimated at $1.5 billion a year, for the foreseeable future.

The 2003 study draws upon improved econometric models and updated assessments of resource capability in North America. It offers the first detailed look on the part of the National Petroleum Council at the potential for Liquid Natural Gas (LNG) and Arctic gas.

The report acknowledges significant changes from the 1999 outlook. For one, it recognizes the erosion in gas demand from industrial users. On the supply side, the new report postulates that LNG and Arctic gas will be necessary to meet future demand growth. Non-Arctic North American gas production is seen as remaining essentially flat for the next decade and a half. Within that parameter, the character of production changes because of aging resources in both the U.S. and Canada. Essentially, gas production will decline in most areas, but will be offset by production growth in the Rockies and the deepwater Gulf of Mexico. The net result is a zero sum game with LNG and Arctic gas as the major avenues to meet future demand growth.

Another significant departure is acknowledgment that conservation and increased efficiency, coupled with alternative fuels, will be necessary going forward. Conservation, in this case, is more than just a virtue. It moderates prices and reduces volatility.

Finally the report outlines a need to invest an average $8 billion a year in gas pipelines and local distribution networks, much of it on maintenance of existing infrastructure.

"A balanced future that includes increased energy efficiency, immediate development of new resources, and flexibility in fuel choice could save $1 trillion in U.S. natural gas costs over the next 20 years," the report concludes. "Public policy must support these objectives."

Specific recommendations include the following:

  • Improving demand flexibility through market-oriented initiatives that encourage increased efficiency, conservation, and expanding the ability for industrial and power generation sectors to utilize alternate fuels.

  • Enhancing infrastructure through regulatory certainty, including removing regulatory barriers to long-term capacity contracting and cost recovery while speeding up the permit process to a one-year time turnaround.

  • Increasing supply diversity by expanding access and reducing permitting impediments to natural gas resources in the U.S., enacting legislation this year for the Alaska gas pipeline, and processing LNG permits within a year.

  • Promoting market efficiency by improving transparency in price reporting and expanding natural gas market data collection and reporting.

  • The choice is not certain. In truth, there is inertia in continuing down the same well-traveled road. In poet Robert Frost's case, we know he took the path less traveled. And that made all the difference.