Natural Gas, the Great Equalizer in America’s Energy Portfolio

Natural gas is the great equalizer in America’s energy future.  For a while America was at risk of becoming dependent on imported natural gas in the form of LNG to meet its energy demand.  Today that story is changed for the better because of technology and American ingenuity in applying that technology here on shore to unlock the tremendous potential from unconventional sources of natural gas.

Natural gas prices still have plenty of price volatility—but today America’s got gas and long term that will make all the difference.  From a peak of $13.68 in July 2008 natural gas prices at the Henry Hub fell to $5.87 per MMBtu in December 2008.  As I write this July 20, 2009 natural gas prices are hovering at a low $3.36. The WTI crude oil contract also fell 52 percent from the closing price of $129.43 per barrel a year ago but today it is $63.57.

The falling economy is the biggest factor in falling energy prices bringing reduced demand and suddenly excess inventories. Gas producers responded as prices fell by backing off drilling and the current Baker Hughes rig counts are at their lowest level since May 2002 down 58 percent from a high of 1,606 in mid-2008, but the decline appears to be flattening.

2008 Natural Gas Consumption of 23.3 Tcf at Near-Record Level

According to the US Energy information Administration, natural gas consumption in the US totaled 23.2 Tcf in 2008 and would certainly have beaten the 23.3 Tcf record for consumption set in 2000 if gas price spikes had not tamped down demand. Consumption increased year-over-year by 0.1 percent in 2008 over 2007 level due to 5.6 percent more heating degree-days. Winter temps in 2008 were colder than 2007 levels, but warmer than the 30-year average.

Fuel Demand for Power Generation Displaced Industrial Growth

Gas consumption for power generation, a key bellwether, ranged from a 19-percent year-over-year increase in January to a 24-percent year-over-year decrease in August 2008. For more than a decade growth in gas demand for power generation has largely displaced industrial demand growth.  Gas has been the fuel of choice in many regional power markets and is well positioned to play an even more dominant role in the future. Sustained lower natural gas prices undermine the economics of coal and nuclear generation as markets adjust but they savage renewable energy as we have heard recently from both wind and solar players.  Higher natural gas prices conversely make renewable energy more competitive but open the door for more costly baseload generation. And there is no substitute for natural gas for dispatchable mid-merit or peaking power generation.

America Needs More Natural Gas for All the Right Reasons

Natural gas is the marginal fuel of choice for power generation in almost every regional market in North America.  While coal and nuclear still dominate baseload installed capacity, natural gas is the fuel of choice for dispatchable mid-merit or peaking resources.  Renewable energy may be hot right now and have broad public and political support, but America’s electric power reliability depends upon natural gas.

After the Gulf of Mexico hurricanes gas prices shot up with fears that America’s offshore oil and gas infrastructure was damaged. While there certainly was some damage, the industry demonstrated clearly the engineering integrity of its rigs and pipelines and confidence has come back along with infrastructure after repairs. Nonetheless, the Gulf of Mexico hub for energy infrastructure remains in harms way every hurricane season.

The other factor shaping natural gas supply concerns has been the accelerated depletion rates for Gulf of Mexico gas fields.  Some of this is the happy result of better technology that enables more cost effective finding and extraction.  But the downside is that major producers must double down E&P to boost reserves.  There is good news here too since better technology has enabled deepwater and horizontal drilling, 3D seismic exploration and other techniques for gas access to reserve once unreachable.  And America’s super major oil and gas companies remain the world leaders in advanced E&P technology.

The biggest problem with expanding energy production at home was that much of the country was off-limits to such exploration. In July 2008, the Bush Administration lifted the Executive Order banning drilling in large swaths of the Outer Continental Shelf (OCS) in place since since 1990.[1] The Congressional ban on drilling in certain offshore areas also was allowed to expire in October 2008 under pressure to improve self-sufficiency.  There is still plenty of risk in offshore oil and gas development, but the U.S. Minerals Management Service estimates that about 76 Tcf of natural gas and 18 billion barrels of oil are recoverable in the lower 48 Federal OCS. Lifting the moratoria in the federal portion of the OCS does not preempt state controls or open some sensitive area to exploration. Drilling is still prohibited until 2022 on tracts in the Eastern and Central Gulf of Mexico near Florida under the Gulf of Mexico Energy Security Act of 2006. EIA’s Annual Energy Outlook 2009 (AEO) notes that the key issue affecting exploration are new leases will require a lead time of at least 4 years before initial production. [2]

Unconventional Gas: America’s Game Changing Energy Surprise

America has a secret energy weapon.  T Boone Pickens was right about one thing.  America can run on natural gas.  The good news story in natural gas, however, is the rapidly expanding supply from unconventional sources.  Some gas experts expect that unconventional gas will provide more than 67% of US domestic gas production by 2018 compared to less than 10 %  in 1990. In 2008 more than half of US domestic natural gas production came from these unconventional sources.  So much unconventional gas that it is having a profoundly negative impact on the long term economic potential for liquefied natural gas (LNG) imports into the US.

What is unconventional gas?  It is the natural gas found is places that are tough to get to and marginal in supply relative to the large, easy to drill gas basins.  Unconventional gas comes from coalbed methane (CBM), and oil shales or what are referred to as tight sands. We’ve always had these natural gas deposits but they were not always economic to recover.  Sometimes pockets of natural gas were left behind from oil drilling.  Other times the geologic formations simply were not suitable for older technologies to drill and recover the gas as a profit.  Low natural gas prices and a long extended “gas bubble” that ended about 2000 further kept these unconventional sources off the radar screen.

What really changed the potential for unconventional gas was “good old fashioned” ingenuity that produced a revolution in drilling technology.  There were not enough drilling rigs.  The ones we did have were all spoken for.  Some locations had so many wells in close together locations it was difficult to install new rigs even if you had them.  Traditional drilling methods largely consisted of drilling straight down and “sticking a straw” in the hole to suck out the gas.  This did not work in many unconventional formations or the geology of the gas formations meant you had to break a lot of rock to get the gas out. The result was entirely new technologies designed to get at these energy resources such as horizontal drilling enabling a directed movement of the drill other than straight down to follow seams and get as small pockets of gas.  A technique called ‘hydro fraccing’ was used to pump water and sand into rocks to fracture them enough to extract the gas.

A twist of fate helped speed the growth of unconventional gas.  Some rig operators had already begun to look beyond the Gulf of Mexico because of the rapid depletion rates that better, more traditional drilling technology was bringing to the near shore well.  Meanwhile, deep water drilling required for the newer Gulf platforms was beyond the capabilities of some players.  Adapting the horizontal drilling and other techniques they started looking at the unconventional sources onshore to keep their rigs busy and their revenues flowing.  Drilling in the Barnett Shale in nearby northern Texas served as a testing ground of sorts for some of this technology but by 2005 or so we started to see production in surprising places like North Dakota, and not so surprising places like the Rockies as E&P companies pulled out their maps of tight sands, shales and left behind pockets and went to work.

By 2007 unconventional gas represented about 40% of US domestic gas production with the majority of the growth coming from those tight sands formations. The best estimates by oil & gas experts today is that unconventional gas will provide perhaps two-thirds of total gas production by 2018 with the relative share of production split between tight sands and faster growing shales production as advances in shale technology continues to improve.

America’s Secure Domestic Natural Gas Supply Base

As our dependence on oil imports grew we still supplied much of our own natural gas requirements.  But America was at substantial risk of that changing with our domestic gas supply absorbed into a global gas market with the rise of a global market for liquefied natural gas (LNG).  Plans were announced for scores of LNG terminals on America’s coast lines to received LNG imports often from the same dangerous places in the world that send us oil or the same players in the world who do not always wish us well.

Look at Europe today with its growing dependence on Russia for delivery of natural gas, and you can easily understand the security risk this poses for any country.  Every time there is a dispute along the pipeline or the Russians want to get the EU’s attention they can turn off the gas and send Brussels or Warsaw or Paris or Prague scrambling for alternative supplies.  America was heading the same direction with a global market for LNG and three big competitors: Asia, EU and North America all competing for supply at the highest price.  North America had become the dumping ground for excess LNG not contracted by Asian or EU customers. Unconventional gas has rescued America from such a fate.

Natural Gas is Key to America’s Emissions Reduction Strategy

Natural gas is cleaner than coal.  It is cheaper, faster and easier to build a natural gas-fired combined cycle power plant than anything else including renewable energy projects.  You can build a fleet of gas fired power plants for the cost of one nuclear plant and in a fraction of the time.  Every MW of renewable energy that is not dispatchable must be backed up by a MW of dispatchable power which almost always is natural gas fired.

Today the threat of a possible global LNG cartel just like OPEC is fantasy because of unconventional gas.  With domestic natural gas production growing from conventional sources America has choices—and with choice in energy supply America has energy security.

Got gas?  Yes We Can!!!