Under pressure

By Rebecca Goozee

Uncertain oil prices, growing concern about greenhouse gas emissions, stalled R&D investment and foreign oil dependence are all heaping pressure on the government to decide on the long-term energy future for the US. Can natural gas fulfil its promise and bring long-desired stability and direction to a volatile industry?

In the summer of 2008, the US - along with the rest of the world - was consumed by fears that soaring oil prices would plunge the country into an energy crisis. Then the credit crunch struck, sinking almost every major economy into a deep recession and sending oil and gas prices plummeting. With a new US government in place just a few months later, the industry was evaluated as part of the country's new energy future. Focusing on the power of clean, renewable energy, Obama's administration embraced alternative technologies, concentrated on a cap and trade system to control carbon emissions and worked to strike a concrete deal to limit global warming. However, the potential of natural gas to solve Obama's energy woes by curbing emissions, reducing import dependence and improving the country's energy prospects had, undoubtedly, been glossed over. 

Interior Secretary Ken Salazar has recently said that natural gas should play a more prominent role in America's energy future and former Vice President Al Gore, Senate Majority Leader Harry Reid and Energy Secretary Steven Chu have all voiced similar thoughts. However, the Obama administration is remaining tight-lipped over the role of natural gas in the country's future plans.

Indeed, it seems that natural gas has run out of steam in Washington, where the industry is facing a brick wall in terms of getting written into President Obama's energy bill. Influential lawmakers are backing carbon capture technologies believing them to be a better long-term bet than gas for solutions to climate change. However, it is not just a battle over the environment: industry profits depend on the important policy outcomes. A climate change proposal approved in June by the House of Representatives, the Waxman-Markey Bill, focused on capping greenhouse gas emissions and as such renewable fuels like wind and solar won out, while the cost of emitting carbon dioxide emissions remained at levels that would continue to provide a price advantage for coal. While natural gas did see benefits including a cap-and-trade system that sets limits on emissions of greenhouse gases and pollution credits to be sold on the carbon-trading market, utilities that burn coal will receive tens of billion of dollars worth of free credits as opposed to the $30 billion over 10 years that natural gas has been allocated.

So why has gas been largely ignored in Obama's new energy bill? Phil Flynn, Senior Energy Analyst at PFGBest believes that the administration simply do not want to acknowledge the potential of natural gas. "Natural gas is going to play a major role in the future of the US," he claims, "Even though the Obama administration doesn't want to admit it. From their ideological viewpoint oil companies and anything to do with oil or gas is inherently bad whereas any alternative fuels are inherently good. They are doing themselves a disservice by not making natural gas a much bigger part of their energy platform."

He goes on to explain that he amazed that the administration are not jumping for joy after hearing about the Potential Gas Committee's report earlier this year. When the Colorado School of Mines PGC report, released back in June 2009, announced the results of its latest biennial assessment of the nation's natural gas resources, it was the highest evaluation in the committee's 44-year history. It indicated that the US possesses a total technically recoverable resource base of 1836 trillion cubic feet (Tcf) of natural gas. This amount of natural gas is equivalent to around 320 billion barrels of oil - more than Saudi Arabia's 264 billion barrels by quite some margin.

 "Our knowledge of the geological endowment of technically recoverable gas continues to improve with each assessment," explains Dr John B. Curtis, Professor of Geology and Geological Engineering at the Colorado School of Mines and Director of the Potential Gas Agency there, which provides guidance and technical assistance to the PGC. "Furthermore, new and advanced exploration, well drilling and completion technologies are allowing us increasingly better access to domestic gas resources - especially 'unconventional' gas - which, not all that long ago, were considered impractical or uneconomical to pursue."

Gas rush

While gas has up until now has played a supporting role to oil in terms of America's energy policy, it may be the time for natural gas to step out of the shadows and emerge as the major player. Firstly, it is the cleanest burning fossil fuel, delivering 60 percent less CO2 than coal per kilowatt. It is also the most versatile of all fossil fuels and can be used for transportation, generating light and heat and combined with turbines to create a more renewable source of energy. Finally, natural gas generators are more easily switched on and off than coal-fired plants and can also be expanded and permitted with far fewer NIMBY issues.

Lamar McKay, Chairman and President of BP America Inc, believes that natural gas has huge potential as part of a more diverse energy supply. "Natural gas has been described before as a 'bridge fuel' to a lower-carbon future. It is that, certainly. But I believe it can be much more. Rather than merely a bridge fuel, it can be a destination fuel for a lower-carbon future. The potential of natural gas is not a vision founded on conjecture or hope. It is founded on existing reality. Increased use of natural gas provides us with the best, most realistic path for achieving the greatest emission reductions, at the lowest cost, using technology that is available today."

Indeed estimates predict that almost all the newfound resources are in shale deposits, which are now thought to contain 616 Tcf of recoverable gas. Supplies in the Appalachian basin alone are calculated at 227 Tcf, with the Marcellus accounting for the bulk of that. The Marcellus is the most recently discovered layer of shale in the Appalachian basin as well as the oldest, deepest and most possibly largest shale gas deposit. There are also a number of other deposits scattered throughout the country including the 'big four', which are several potentially mammoth shale deposits. Alongside the Marcellus, these are the Barnett of north-central Texas, Haynesville of East Texas and northwestern Louisiana, and Fayetteville of central Arkansas. The first target for companies was the Barnett site in Texas, which was first explored in the 1990s.

Shale gas has become increasingly more important as a source of natural gas over the past decade and the shale gas boom of recent years has been due to modern technology advancement in hydraulic fracturing to create extensive artificial fractures around well bores. The breakthrough has opened a new frontier for the energy industry, turned long-held assumptions on their head and revealed an America that is awash with gas. The Department of Energy now predicts that shale gas could meet half America's demand within two decades and turn the country into a net exporter and the shale boom is only in its infancy.

According to the Department of Energy's Energy Information Agency (EIA) the US consumes about 23 Tcf of natural gas a year, which translates into a 90-year supply at current consumption rates and if natural gas totally replaced coal in generating electricity, domestic supplies would last for 50 years. Some geologists believe that gas supplies in the Marcellus and other shale deposits could potentially be even more plentiful that the PGC estimates.

Energy diversification

While natural gas is not interchangeable with oil and will therefore not single-handedly solve the country's energy needs, it may reduce dependence on foreign oil and ultimately encourage energy diversification. Indeed, with vast supply estimates and a plunge in prices, leaders are quickly re-evaluating long-term energy decisions. Tampa Electric for example has converted one of its power stations from coal to natural gas, representing a fundamental change in the company's energy mix. Located near Tampa Bay, the H. L. Culbreath Bayside Power Station has been re-powered with natural gas to reduce nitrogen oxides and sulfur dioxide emissions by approximately 99 percent to date, plus particulate matter emissions by more than 93 percent from 1998 levels. The project integrates seven new combustion turbines and seven heat recovery steam generators and two of the plants' steam turbines to effectively produce 1800 megawatts of power.

Natural gas is even finding support among utilities that embrace renewable energy, with firms building facilities for both solar or wind power alongside natural gas as a way to transition away from fossil fuels entirely. That said, the majority of utilities remain unconvinced by the potential of natural gas, mainly because prices have been so volatile over the years. And while natural gas producers believe they are sitting on the greatest volumes to date, there are also a number of obstacles in getting the commodity to market. One such challenge revolves around infrastructure. "Right here in the Rockies we see this exact problem," reveals Curtis. "We have a great deal of production and we have a very small population compared to the rest of the country so we have to export our gas by pipeline out of these Rocky Mountain basins - we need more pipelines to be able to do that and transport to the California markets, mid-continent and the Eastern coast."

While continuing pipeline capacities are being put into place it is not an overnight process. And it is not just pipelines that are needed; land access is a key challenge as much of the future supply is underneath federally owned land, which requires a drawn out permitting process. "We have to be stewards of this natural gas endowment," advises Curtis, "We have to use it wisely. At one extreme, we don't just want to open up the taps and drill everywhere, but on the other hand we don't want to restrict drilling to nowhere."

Infrastructure and land access are not the only factors that are causing headaches for natural gas. The administration's continued lack of recognition for the positive aspects of natural gas has led the industry leaders to fight back. In March, Chesapeake, Noble Energy and Apache Corp were among 28 companies that formed America's Natural Gas Alliance, a Washington-based group aimed at increasing 'appreciation' for natural gas. Its aim is to try and generate more natural gas demand and it is currently looking to re-educate the Senate in relation to the Waxman-Markey plan and improve the sector's outlook. While the legislation was approved by the House of Representatives in June the Senate has yet to vote on it, and the alliance are hoping for a positive result.

Flynn also believes that it is of vital importance that the government continue to look to the future and understand the significant impact of the economic downturn on energy demand. "This country's in a very delicate situation: we're trying to have an economic comeback and bad energy legislation could prolong our economic slowdown for years to come and could put a lot of people out of work. For every green job created, five jobs in the private sector could be lost if they're not very careful in how they write this legislation. So it's a delicate balance and I think natural gas has to be a major part of any energy policy. If it isn't, there's not going to be a good policy in place," says Flynn.

There is no doubt that times are tough in the natural gas business. With technology costs rising in relation to reaching unconventional sources plus the long lasting effects of the recession it looks pretty bleak. Only one thing is for certain - natural gas faces a highly unpredictable future. If the challenges can be overcome there is a real chance that natural gas has the potential to change energy policy in the US. That said, a change in energy policy needs happen now and only more money, more drilling and more time will tell if natural gas will revolutionize the industry, provide a much needed boost to the industry and prove its potential.

What they say

"Our energy future isn't predetermined, we can and we need to shape it. What we badly need is a roadmap for this transition; we need to take carbon out of the energy mix today and be realistic about how we're going to do that. Until renewables gain a sizeable share of the power sector and cleaner coal is available through carbon capture and storage, I can see only one way of doing it - by increasing the use of natural gas. Gas is the fuel that offers the greatest potential to provide the largest reductions at the lowest cost - and all that by using technology that's available today. If we get it right, gas can transform the global energy outlook in the decades to come."

Tony Hayward, CEO, BP

"We have a tremendous resource base of natural gas in this country, between 1200 and 1600 trillion cubic feet. But some 213 trillion cubic feet of reserves - a 10-year supply at the current rate of demand - is off limits in the lower 48 states and offshore due to government moratoria or restrictions. The government must unshackle the industry so it can meet the growing demand for natural gas. The long-term gas supply challenges we face in this country cannot be solved without giving producers greater access to these energy-rich areas. Without greater access, we're forced to go after energy supplies in smaller, higher-cost fields. That ultimately means less supply and higher prices for consumers."

Robert Allison, CEO, Anadarko Petroleum Corp.

"Shell is increasingly focusing on natural gas, the cleanest-burning fossil fuel. By 2012, natural gas will likely make up around half of our production. This is not merely a shift in our portfolio. Increasing natural gas production - and transportation by liquefying it and shipping the LNG to global markets - means that more natural gas will be available to displace coal as the fuel for power plants. A natural gas-fired power plant emits on average half the CO2 of a coal-burning plant to produce the same amount of electricity. It also generates significantly less local pollution. In fact, coal-fired electricity is responsible for the fastest growth in greenhouse gas emissions worldwide, so it's urgent that we address that. Supplying more natural gas is one way of doing that. In the United States, new technology has opened up abundant gas resources contained in dense rock formations, increasing supplies dramatically. So you can see why I'm sometimes tempted to say: nothing beats natural gas."

Peter Voser, CEO, Royal Dutch Shell

The skeptic

Gas concerns

Dr Frank Clemente is a Professor at Penn State University where he specializes in research on the socioeconomic aspects of energy policy.

The price of natural gas over the next decade is one of the most important energy questions facing the United States. Our steadily increasing dependence on gas is worrisome - especially since gas supply is projected to decline through 2020.

Despite this supply decrease we continue to build out an ever more extensive natural gas infrastructure - verifying Santayana's warning that: "Those who cannot learn from history are doomed to repeat it." Our 'dash to gas' over the past decade led to higher electricity rates and increased home heating prices and it raised the cost of manufacturing. Why should the next decade be any different?

Is this prudent with decreasing gas supply? Almost 90 percent of power plants built since 2000 depend on gas. Eight million gas homes have been built since 2000. Almost 10,000MW of new wind power capacity was built in 2008, but gas is the primary backup when the wind is not producing electricity (75 percent of the time). And over 55,000MW of new gas power plants will be built between 2008-2012 alone.

EIA's analysis of the American Clean Energy and Security Act of 2009 - the Waxman-Markey climate bill - came to this conclusion: "Our results suggest that this legislation would likely increase the use of natural gas for generation over the next decade in all of the scenarios we analyzed."

You don't have to be a PhD in economics to understand that when supply goes down and demand goes up (or even stays the same), prices are going to increase. And that is exactly what happened the first half of this decade when a mere four percent decline in supply led to an almost doubling of wellhead natural gas prices. Imagine what a nine percent drop in supply will do.

Of course, we had a hurricane in 2005. But that is exactly the point. Our supply/demand balance for gas is so fragile that a problem in the Gulf, a hot summer in the South or a cold winter in the Midwest will lead to price spikes with dire socioeconomic impacts. In 2005, for example, businesses in Illinois paid 101 percent more for gas than they paid in 2002 - leading Andrew Liveris, Chair of Dow Chemical, to state bluntly: "Some of the best manufacturing jobs in the world are right here in the American chemical industry - and they depend on globally competitive natural gas prices."

Gas glut

There is also a pdf of some stats in the pictures/gas stuff folder in Ben's shares. Would it be possible to reproduce the map of America showing where the shale gas is?