September 2010 Vol. 237 No. 9

From the Burner Tip

Natural Gas Industry Outlook Hinges On Economic, Political Factors

Natural gas – the second-largest source of fuel in the U.S., stands at a strategic crossroad! At the turn of the century, it was enthusiastically ballyhooed as the “bridge fuel” of the century – it would be the major source of cleaner fuel until economic, efficient forms of “green” energy were developed!

Still true in concept, but success is in the future. And, the disbelievers, the environmentalists and regulatory people want to curtail its use even before there is an alternative! With the consequences of green energy – high costs, scarcity, environmental, etc. – fossil fuel consumption is a must but maybe a little dirty business.

Windmills and solar panels, while potentially additional sources of fuel for the country, have a long way to go to match fossil fuel efficiency, economics, and supply. Biofuels, now mostly ethanol which is a politically motivated substitute and a poor one at that, have even a longer road before being economically feasible.

The future for natural gas looks good, dependent on two major elements: the economy getting stronger and gas being the bridge fuel and negating the influence of the anti-fossil fuel advocates, especially the natural gas opponents, in political and environmental action. The outlook for gas is even better in some ways than at the beginning of the century as one major obstacle at the time was supply itself. To get a better feel for the future, a review of current natural gas market conditions is important.

Supply outlook has changed the most in recent years. The major influence is the production of natural gas from shale deposits. First, the Barnett in Texas and surrounding areas, and now major finds in other parts of the country like the Marcellus in the Northeast. At the turn of the century, the major emphasis for increased supply was looking to imports of liquefied natural gas (LNG). Now, with the potential additional gas reserves from the shale production, supply is not a problem. The concern is that shale production has caused some problems and the strong environmental, anti-fossil fuel advocates could dampen this supply. This is covered later in discussing the future outlook.

While the need for imported LNG has modified, it still plays a role in U.S. gas supply. LNG has become somewhat of a world commodity with its pricing being set in the three basins of its use – Asia, Europe and North America. Total U.S. gas imports for the first five months of 2010 are running about 1.8% above 2009 but slightly less than in 2008. At the same time, LNG imports for the first five months are 12% ahead of 2009 at 218 Bcf.

U.S. gas consumption has stayed relatively flat during the last decade in the low 20 Tcf range. The U.S. Energy Information Agency (EIA) is forecasting 2010 natural gas consumption to increase 3.8% over 2009 to 23.7 Tcf and to be flat in 2011. The big growth predicted several years ago has not materialized.

The earlier forecast looked at a slow growth for gas demand in residential and industrial markets with a strong increase in demand for electric generation. Many saw natural gas as an ideal replacement for the more environmentally offensive use of coal. When natural gas prices skyrocketed a few years ago, the low price for coal kept it in its position as the lead fuel for electric generation.

Further, with price hurting the desire to change, and somewhat a question about supply at the time, it was easy for the “green fuel” advocates to want to jump to renewable energy sources like solar and wind to replace coal. Natural gas was a fossil fuel and replacing coal with it, though much more efficient, cleaner and less carbon dioxide emitting, did not satisfy the green energy community. Wind and solar have not filled the promise because of costs and wind has its own environmental issues.

Prices for natural gas are relatively low. After the big run-up in crude oil and natural gas prices in 2008 and then the major drop to roughly a third of their highs, gas prices have increased moderately but not like the increases in crude oil. Crude oil from a high of over $140/bbl is now in the $80 range. Natural gas that came close to $14/MMBtu (Henry Hub spot price) in 2008 before falling is just under $5/MMBtu. The EIA is forecasting crude prices of $81/bbl in 2010 and $84 in 2011. It is forecasting gas at $4.69/MMBtu in 2010 and $4.98 in 2011.

On a Btu basis, this makes crude oil nearly three times more expensive than gas. More importantly, a finished oil product like distillate is over 3.5 times more expensive. Even if the EIA forecast prices are low – based on current supply and demand parameters (steady production and high gas storage quantities) – the price forecast for expanded demand of a moderately increased gas supply is not much higher.

The last area influencing the energy picture and outlook for natural gas is the political aspect. Somewhat a moving target, depending on the current political trends, the much-discussed move to a carbon tax whether as a “cap and trade” or outright tax on carbon emissions seems destined to be on hold for this year! While climate change advocates continue to predict dire consequences, other information has cast some doubt and has caused many to take a second look at man’s impact on climate change.

With this picture of the status quo, an outlook for the natural gas future hinges on two important areas: Will natural gas actually become the bridge fuel and play a role in replacing old, poorly operating and “dirty” coal-burning generating plants? Will this be the factor to move gas consumption from its flat mid-20 Tcf range to the 30 Tcf forecast in early 2000?

Secondly, will the political/environmental advocates impact natural gas exploration and production? The anti-fossil fuel group has built a somewhat strong and vocal influence that could have an impact on future offshore drilling as well as on shale reservoir development and production.

Today natural gas is the best alternative to older, less efficient coal plants. It could be the bridge fuel while nuclear is further developed and vast changes in wind and solar generation are made for more efficient and cheaper sources than now available. In a study conducted over two years by Massachusetts Institute of Technology, the study’s director said, “natural gas truly is a bridge to a low-carbon future.”

No question – this is the growth market for natural gas. Whether it is used for older coal plants shutting down or to replace even operating ones because of economic or environmental concerns, this is the growth market needed by natural gas to move to higher levels of consumption.

The environmental/political impact is difficult to evaluate because of the complexity, lack of good data, and the emotional side of the argument. The major arguments fall into two main categories – natural gas is a fossil fuel and all fossil fuels are dirty and polluting – and secondly, the development of gas from shale deposits brings additional pollution problems because of the potential claim of fracturing – fracing – used in gas production could affect water table supplies.

A big part of the argument against using fossil fuels is that carbon coming from the fuel combustion is adding a new source of carbon dioxide to the atmosphere. Even burning biofuels is better because the carbon released was the same “current” carbon taken up in growing the plant or biosource. This analysis fails to include the total cost of producing the biosource including land clearing, farming, fertilizing, etc.

The question on fracing dangers has opened considerable dissent to gas production from shale. Even in Texas where shale production originated, some communities have resented the drilling and transportation problems as well as the groundwater question.

The most vocal objections have come in New York, Pennsylvania and Ohio. In addition to the states starting to look at fracing’s impact on groundwater, the Environmental Protection Agency (EPA), which previously gave a green light to the operation, has started an investigation.

It is difficult to assess the political/environmental aspects including the strong emotional feelings. The need for the U.S. to gain energy independence while using good environmental and safety practices and including sound economic parameters will be the most important factors. Natural gas definitely plays a major role in reaching this objective!