September 14, 2009
With the prevailing emphasis on reducing carbon emissions, natural gas producers could become more instrumental in developing national energy policy. But the industry must still demonstrate that it can safely produce and deliver its product.
For starters, natural gas developers have been fighting for increased access to natural gas deposits that have long been off-limits to production. Getting newfound rights remains tough and especially in today's economy, particularly as the nation's natural gas storage limits are getting maxed out and the product is literally getting dumped onto markets at the cheapest prices in a decade.
Beyond that, the coal industry has a ton of political power, as evidenced by the waivers -- and federal dollars -- it received in the recently passed House energy bill. In the area of power plant generation, coal is still king and natural gas must compete with it.
Natural gas producers say they are ready, noting the recent industry-funded studies that say both the existing reserves and the technologies to benignly extract those resources exist. Still, the national recession has forced industrial concerns to cut back their energy consumption -- a dynamic that reduces gas producer's profit margins but which makes the fuel source more economically attractive.
While less demand has contributed to rapidly falling prices, it does position natural gas to better compete with coal to fuel utility generation. Prices a year ago were close to $14 per million BTUs but today they are around $3 for the same unit. The reality, though, is that producers have cut in half the number of exploratory rigs and as such, they have reduced their production by roughly 8 percent from a year ago.
Ultimately, that should push up prices. With winter approaching and natural gas heating requirements to increase as a result, the futures' indices show the price of gas doubling by next year. Further out, the industry will be competing much more with sustainable fuels that may have involved greater upfront fixed costs but which are considerably less volatile when it comes to maintaining operations.
The gas industry says that it can meet both the production and environmental challenges now before it. With the addition of shale-gas that can be safely drilled out of the ground, it says that country's natural gas reserves are 35 percent greater than when it last presented its findings two years ago. Reserve levels now stand at more than 2,000 trillion cubic feet, it says, which is the most they have been in 44 years.
"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," says John B. Curtis, professor of geology and geological engineering at the Colorado School of Mines and director of the Potential Gas Agency there.
Big Incentives
Long-term, natural gas looks appealing. But it could take a hit in the short-term. That's because the poor economy, in conjunction with high levels of shale-gas that have entered markets and storage facilities that are operating near capacity, have all put downward pressure on prices. Even though natural gas futures are expected to increase, they could potentially fall further than they are now.
But if prices rebound next year, natural gas producers are well-positioned to take advantage of pending energy legislation to curb carbon emissions. Natural gas, after all, releases half the greenhouse gases as coal. According to David Bloom, a regulatory attorney in the Washington, D.C., offices of Mayer Brown, the fuel source is even more viable because it is mostly domestic. Furthermore, its prices are still largely decoupled from those of the oil sector and the pipeline infrastructure is now expanding.
And, obviously, the discoveries of vast shale deposits are giving the industry a second wind. In fact, most of the increase from the Potential Gas Committee's previous assessment arose from re-evaluation of shale-gas plays in the Appalachian basin and in the Mid-Continent, Gulf Coast and Rocky Mountain areas. Shale now accounts for one-third of what the committee says are the potential resources.
American Clean Skies Foundation, which had earlier funded a study performed by Navigant Consulting and which is comprised of those in the natural gas industry, found that production from shale formations provided just 1 percent of this country's natural gas a decade ago but now supplies about 10 percent. The foundation's bottom line is that the United States has an enormous natural gas base that can support existing uses as well as provide 20 percent of all transportation needs in the future.
In the pursuit to find shale and other unconventional deposits, Navigant estimates that natural gas drilling will increase by 50 percent by 2020. Its best case scenario is that 842 trillion cubic feet of shale are present in the United States. At today's consumption rates, that is 118 years' worth of supply -- on top of the existing, traditional natural gas supplies.
"Consequently, our present assessment demonstrates an exceptionally strong and optimistic gas supply picture for the nation," says the gas committee's Curtis.
The demand for new energy resources is likely to grow and necessitate more natural gas development. But the industry must prove that its infrastructure can handle the increased supplies and that its production process can will be clean and efficient. As the nation's energy policy evolves and makes room for more carbon-friendly generation, the sector's incentives have never been greater.
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