September 28, 2007

The natural gas sector has lost its stride. A decade and a half ago, the industry was hot. Now, its product is considered expensive and untenable. The fix is easy, say producers. They want more access to deep waters offshore and in the Rocky Mountains.

When the Clean Air Act of 1990 passed, natural gas was labeled the "fuel of choice." As such, its prospects soared -- upwards of 50 percent over 20 years. In effect, current consumption of about 23 trillion cubic feet (tcf) a year was supposed to rise to 34 tcf by 2020. But when policymakers enacted that 1990 law, they didn't make amends for the fact that nearly one-third of all land in the United States is federally controlled and that the government owns those resources that lay beneath it.

 "The marketplace is a great way to allocate resources to their best use," says Keith Bailey, former CEO of diversified energy supplier Williams Cos. in Tulsa. "But, public policy is dampening the ability of the market in a way that it is definitely not in the public interest. If companies are unable to access resources or to site and build infrastructure, then it is not in the public interest."

The logical conclusion is that all consumers would pay ever-increasing prices. But, it could reach a point in which policymakers begin allocating a finite resource based on the ability to pay - a process that leads to dysfunctional economics and one that exacerbates the problems. That's not the role of government, says Bailey, who still sits on boards affiliated with Williams. Its job is to foster incentives to create supply levels that will match market demand. It can be done, he adds. But, the political will is lacking.

For better or worse, the current policies are creating more dependence on coal. While there are lots of promising new technologies that would scrub coal of its impurities, the reality is that such a commodity is still about twice as dirty as natural gas. At the same time, natural gas costs at least double that of coal. Utilities are therefore reluctant to build gas-fired power plants if the underlying feedstock is both expensive and hard to get.

In fact, in the 1990s, about 90 percent of all proposed generation facilities were to be fueled with natural gas. Now, most of those being proposed are coal-related.

Collectively, close to 40 percent of the natural gas resource base is out of reach, according to a study performed on federal lands in the West by the Department of Interior's Bureau of Land Management. All the while, existing wells are less productive. The Independent Petroleum Association of America says that such depletion rates once averaged 16 percent a year. Now, they average 28 percent a year.

Final Analysis

Federal law has been misappropriated, the petroleum association adds. Government is obliged to consider the environmental impacts of its decisions. Today, however, executive orders, regulations and court decisions have altered the landscape while the regulatory and permitting processes are laden with environmental reviews that can delay or derail altogether viable projects.

Offshore drilling, meanwhile, is just as onerous. Moratoria in the Eastern Gulf of Mexico, the Atlantic Ocean and the Pacific Ocean prohibit access to about 80 tcf of potential natural gas, those producers add. These restrictions -- set by both the legislative and executive branches -- are unreasonable. They rely on antiquated and inaccurate risk assessments. New techniques such as horizontal drilling, however, allow for safe development in areas with shell formations.

"I am fairly pessimistic about being able to increase our domestic supplies," says Paul Wilkinson, vice president of policy analysis for the American Gas Association.

Green groups respond that clean air and water is a public right and allowing additional drilling on federally-controlled property would assuredly leave an indelible footprint. In terms of off-shore drilling, they point out that 191,000 barrels of oil have found their way into the Gulf of Mexico by way of damaged pipelines and hurricane-torn oil facilities. Because there is only 50 to 75 years of natural gas on domestic property, such groups maintain that policymakers ought to pursue a sustainable energy strategy.

At present, the U.S. provides about 19 tcf of the 23 tcf that it consumes. Canada supplies most of the rest, although it, too, is stretched. So, what next?

Through legislative process, Congress did grant producers more drilling access in the Gulf of Mexico, although not along the Atlantic or Pacific Coastlines - moves that the industry refers to as "baby steps." Meanwhile, unconventional domestic sources such as coal bed methane and shale along with imported liquefied natural gas will help fill the void. Roughly 10 LNG receiving facilities are expected to become operational while about 2 billion cubic feet of shale is now produced each day, all in the United States. Still, opposition remains plentiful to each fuel source.

"Right now, we are stretching our abilities through technology and innovation to keep pace with demand," says Chip Minty, spokesman for Devon Energy in Oklahoma, which is a leader in shale production.

In the final analysis, the industry says that it is not locked into any form of natural gas. It will all be necessary to meet expected future demand and to address climate change. The challenge for the industry is to educate the public and continue to develop safer drilling technologies and new energy variations. Despite their best efforts, it still won't be enough to overcome all of the regulatory impediments.

More information is available from Energy Central:

Industry Faces Unprecedented Natural Gas Crisis, EnergyBiz, Jan/Feb 2006

Gas Heats Up - AGA Leader Downes Defines Big Issues, EnergyBiz, Jan/Feb 2006

Respond to the editor. Ken Silverstein EnergyBiz Insider Editor-in-Chief