Natural Gas Overview
The Natural Gas Industry
The natural gas industry provides one of the cleanest burning alternative energy fuels.
Overview of Industry Structure
The structure of the natural gas industry has changed dramatically over the past 15 years. In the past, the structure of the natural gas industry was simple, with limited flexibility and few options for natural gas delivery. Exploration and production companies explored and drilled for natural gas, selling their product at the wellhead to large transportation pipelines. These pipelines transported the natural gas, selling it to local distribution utilities, which in turn distributed and sold that gas to its customers. The prices for which producers could sell natural gas to transportation pipelines was federally regulated, as was the price at which pipelines could sell to local distribution companies. State regulation monitored the price at which local distribution companies could sell natural gas to their customers.
Getting Natural Gas to Market
The natural gas industry today has changed dramatically, and is much more open to competition and choice. Wellhead prices are no longer regulated; meaning the price of natural gas is dependent on supply and demand interactions. Interstate pipelines no longer take ownership of the natural gas commodity; instead they offer only the transportation component, which is still under federal regulation. LDCs continue to offer bundled products to their customers, although retail unbundling taking place in many states allows the use of their distribution network for the transportation component alone. End users may purchase natural gas directly from producers or LDCs.
One of the primary differences in the current structure of the market is the existence of natural gas marketers. Marketers serve to facilitate the movement of natural gas from the producer to the end user. Essentially, marketers can serve as a middle-man between any two parties, and can offer either bundled or unbundled service to its customers. Thus, in the structure mentioned above, marketers may be present between any two parties to facilitate the sale or purchase of natural gas, and can also contract for transportation and storage. Marketers may own the natural gas being transferred, or may simply facilitate its transportation and storage. Essentially, a myriad of different ownership pathways exist for natural gas to proceed from producer to end user.
Simplified Structure of Industry after Pipeline Unbundling
The diagram shows a simplified representation of the structure of the natural gas industry after pipeline unbundling and wellhead price deregulation. It is important to note that the actual ownership pathway of the gas may be significantly more complicated, as the marketer or the LDC are not the final users. Either of these two entities may sell directly to the end user, or to other marketers or LDCs. The actions of the federal government and its related agencies and departments can also have a significant impact on the structure and functioning of the natural gas industry.
Below are some statistics (based on EIA data for the years 2000 and 2009) on the makeup of the natural gas industry:
Producers – There are over 8,000 producers of natural gas in the United States. These companies range from large integrated producers with worldwide operations and interests in all segments of the oil and gas industry, to small one or two person operations that may only have partial interest in a single well. The largest integrated production companies are termed ‘Majors’, of which there are 24 active in the United States.
Processing – There are over 580 natural gas processing plants in the United States, which were responsible for processing almost 17 trillion cubic feet of natural gas and extracting over 720 million barrels of natural gas liquids in 2000.
Pipelines – There are about 160 pipeline companies in the United States, operating over 305,000 miles of pipe. Of this, 217.306 miles consist of interstate pipelines. This pipeline capacity is capable of transporting over 119 Billion cubic feet (Bcf) of gas per day from producing regions to consuming regions.
Storage – There are about 114 natural gas storage operators in the United States, with control over 415 underground storage facilities. These facilities have a storage capacity of 4,313 Bcf of natural gas, and an average daily deliverability of 78 Bcf per day. The EIA maintains a weekly storage survey, monitoring the injection and withdrawal of stored natural gas..
Local Distribution Companies LDC – There are over 1,200 natural gas distribution companies in the U.S., with ownership of over 833,000 miles of distribution pipe. While many of these companies maintain monopoly status over their distribution region, many states are currently in the process of offering consumer choice options with respect to their natural gas distribution.
Natural Gas Market Overview
The nature of the natural gas market is similar to other competitive commodity markets: prices reflect the ability of supply to meet demand at any one time. The economics of producing natural gas are relatively straightforward. Like any other commodity, the price of natural gas is largely a function of demand and the supply of the product.
When demand for gas is rising, and prices rise accordingly, producers will respond by increasing their exploration and production capabilities. As a consequence, production will over time tend to increase to match the stronger demand. However, unlike many products, where production can be increased and sustained in a matter of hours or days, increases in natural gas production involve much longer lead times. Due to the timing it takes to acquire leases, secure required government permits, do exploratory seismic work, drill wells and connect wells to pipelines; this can take anywhere from six months to ten years. There can be some uncertainty about the geologic productivity of existing wells and planned new wells. Existing wells will naturally decline at some point of their productive life and the production profile over time is not known with certainty. Thus, it takes time to adjust supplies in the face of increasing demand and rising prices.
In an environment of falling gas prices, producers will respond to lower natural gas prices over time by reducing their expenditures for new exploration and production. Production decline in existing wells will decrease productive capacity. At the same time, the lower prices will increase the demand for natural gas. This, in turn, will ultimately result in upward pressure on gas prices. This relationship between changes in the price of natural gas and variations in the supply of and demand for natural gas is sometimes referred to as the “natural gas market cycle.”
In the short term, and in relation to existing producing wells, the supply of natural gas is relatively inelastic in response to changes in the price of natural gas. Contrary to some views, producers do not routinely shut in wells when natural gas prices are low. There are several economic drivers that provide an incentive for producers to continue producing even in the face of lower prices:
- If production is halted from a natural gas well it may not be possible to restore the well’s production due to reservoir and well bore characteristics.
- The net present value of recapturing production in the future may be negative relative to producing the gas today — i.e., it may be better to produce gas today than to wait until the future to produce the gas. If a producer chooses not to operate a well, the lost production cannot be recovered the next month but is instead is deferred potentially years in the future. There are no guarantees that the prices for gas in the future are going to be higher than prices today.
- Some gas is produced in association with oil, and in order to stop the flow of natural gas, the oil production must be stopped as well, which may not be economic.
- Finally, a producer may be financially or contractually bound to produce specific volumes of natural gas. Producers and consumers react rationally to changes in prices. Fluctuations in gas prices and production levels are a normal response of the competitive and liquid North America gas market. While the price of the natural gas commodity fluctuates, it is this inherent volatility that provides the signals (and incentives) to both suppliers and consumers to ensure a constant move towards supply and demand equality.
Natural Gas Demand
The Energy Information Administration, in its Annual Energy Outlook 2009, estimates that natural gas demand in the United States could be 23.54 Tcf by the year 2025. That is an increase of 2.6 per cent over 2007 demand levels of 22.94 Tcf. That is compared to an expected total energy consumption increase (from all sources) of 6.5 per cent (from 101.65 quadrillion British thermal units to 108.26 by 2025).
Source: EIA – Annual Energy Outlook 2010 with Projections to 2035
The EIA predicts a .1 per cent annual increase in demand over the next 25 years. While forecasts made by different Federal agencies may differ in their exact expectations for the increased demand for natural gas, one thing is common across studies: demand for natural gas will continue to increase steadily for the foreseeable future. The analysis of natural gas demand below relies primarily on the forecasts made in EIA’s Annual Energy Outlook 2009.
Factors Affecting Short Term Demand for Natural Gas
Demand for natural gas has traditionally been highly cyclical. Demand for natural gas depends highly on the time of year, and changes from season to season. In the past, the cyclical nature of natural gas demand has been relatively straightforward: demand was highest during the coldest months of winter and lowest during the warmest months of summer. The primary driver for this primary cycle of natural gas demand is the need for residential and commercial heating. As expected, heating requirements are highest during the coldest months and lowest during the warmest months. This has resulted in demand for natural gas spiking in January and February, and dipping during the months of July and August. Base-load storage capacity is designed to meet this cyclical demand: base-load storage withdrawals typically take place in the winter months (to meet increased demand), while storage injection typically takes place in the summer months (to store excess gas in preparation for the next up cycle).
The relatively recent shift towards use of natural gas for the generation of electricity has resulted in an anomaly in this traditional cyclical behaviour. While requirements for natural gas heating decrease during the summer months, demand for space cooling increases during this warmer season. Electricity provides the primary source of energy for residential and commercial cooling requirements, leading to an increase in demand for electricity. Because natural gas is used to generate a large portion of electricity in the United States, increased electrical demand often means increased natural gas demand. This results in a smaller spike in natural gas demand during the warmest months of the year. Thus, natural gas demand experiences its most pronounced increase in the coldest months, but as the use of natural gas for the generation of electricity increases, the magnitude of the smaller summer peak in demand for natural gas is expected to become more pronounced.
In general, in addition to this cyclical demand cycle, there are two primary drivers that determine the demand for natural gas in the short term. These include:
Weather – as mentioned, natural gas demand typically peaks during the coldest months and tapers off during the warmest months, with a slight increase during the summer to meet the demands of electric generators. The weather during any particular season can affect this cyclical demand for natural gas. The colder the weather during the winter, the more pronounced will be the winter peak. Conversely, a warm winter may result in a less noticeable winter peak. An extremely hot winter can result in even greater cooling demands, which in turn can result in increased summer demand for natural gas.
Fuel Switching – supply and demand in the marketplace determine the short term price for natural gas. However, this can work in reverse as well. The price of natural gas can, for certain consumers, affect its demand. This is particularly true for those consumers who have the capacity to switch the fuel upon which they rely. While most residential and commercial customers rely solely on natural gas to meet many of their energy requirements, some industrial and electric generation consumers have the capacity to switch between fuels. For instance, during a period of extremely high natural gas prices, many electric generators may switch from using natural gas to using cheaper coal, thus decreasing the demand for natural gas. U.S. Economy – the state of the U.S. economy in general can have a considerable effect on the demand for natural gas in the short term, particularly for industrial consumers. When the economy is expanding, output from industrial sectors is generally increasing at a similar rate. When the economy is in recession, output from industrial sectors drops. These fluctuations in industrial output accompanying economic upswings and downturns affects the amount of natural gas needed by these industrial users. For instance, as a result of the recent economic downturn, industrial natural gas consumption fell by 8 per cent from 2008 to 2009. Thus the short term status of the economy has an effect on the amount of natural gas consumed in the United States.
Factors Affecting Long Term Demand for Natural Gas
While short term factors can significantly affect the demand for natural gas, it is the long term demand factors that reflect the basic trends for natural gas use into the future. In order to analyze those factors that affect the long term demand for natural gas, it is most beneficial to examine natural gas demand by sector.
The analyses of factors that affect long term demand across all sectors are complicated. The actual demand for any source of energy relies on a variety of interrelated factors, and it is very difficult to predict how these factors will combine to shape overall demand.
• Residential and Commercial Demand
• Industrial Demand
• Electric Generation Demand
• Transportation Sector Demand
Residential and Commercial Deman
The EIA expects residential energy demand to increase .9 per cent between 2007 and 2025. Residential use of natural gas is expected to increase by .2 per cent per year from 2007 to per cent2025, increasing 4.1 per cent from 2007 to 2025. Residential natural gas consumption accounts for 22 per cent of all consumption in the U.S.
Probably the most important long term driver of natural gas demand in the residential sector is future residential heating applications. Between 1991 and 1999, 66 per cent of new homes, and 57 per cent of multifamily buildings constructed used natural gas heating. In 2003, 70 per cent of new single family homes constructed used natural gas. While these new homes being built are generally increasing in size, the increasing efficiency of natural gas furnaces used to heat them compensates for the increased square footage to be heated. In general, however, the increase in the number of new homes using natural gas for heat over the next 20 years is expected to provide a strong driver for residential natural gas demand.
The EIA expects energy demand in the commercial sector to increase at an average annual rate of 20.3 per cent between 2007 and 2025. Commercial floor space is expected to increase at a rate of 1.5 per cent per year over the same period, so the energy demand per area of commercial floor space is expected to increase 0.2 per cent per year. Natural gas currently supplies 16.9 per cent of the energy consumed in the commercial sector, but it will supply 16.1 per cent in 2025.
Several other factors are expected to drive residential and commercial natural gas demand, according to a report published by Washington Policy Analysis Inc. (WPA) entitled Fueling the Future: Natural Gas and New Technologies for a Cleaner 21st Century. As the uses for natural gas in the commercial sector are quite similar to residential uses, their expected demand drivers are also expected to be similar.
These drivers include:
Electric Industry Restructuring – as electricity offers the greatest competition to natural gas use in the residential and commercial sector, the availability and price of electricity for retail consumers will affect the demand for natural gas. As the electric industry is restructured and deregulated, it is expected that electricity prices will remain stable or decline slightly over the next 20 years. However, it is expected that those states with low current electricity prices may see rate increases with the introduction of competition. In these states, residential alternatives to electricity, including natural gas appliances and distributed generation, are expected to become more attractive, which will increase the demand for natural gas in these states. In those areas where electricity prices decrease, however, residential natural gas demand may decline slightly, as lower priced electricity offers comparative value. However, the entrance of distributed generation technologies may offset the more competitive prices of electricity, particularly for the commercial sector.
Natural Gas Industry Restructuring – The restructuring of the natural gas wholesale and retail markets may affect the residential and commercial demand for natural gas. Most forecasts of residential natural gas prices over the next 20 years, including the EIA’s analysis, show natural gas prices increasing slightly over this time frame (due to factors other than increased marketplace competition). However, the deregulation of the natural gas market, and the resulting competition in the industry for retail customers, may in fact reduce natural gas prices over the long term. It is also predicted that natural gas prices for electric generation utilities may increase faster than for residential and commercial consumers – which may drive retail electricity prices higher, and serve to make natural gas (particularly for distributed generation) more desirable for residential consumers.
Demographics and Population Centres – The changing demographics of the U.S. population also affect the demand for natural gas. Most significantly, according to WPA, recent demographic trends have seen an increased population movement to the Southern and Western states. As these areas are generally warmer climates, there will be an increase in demand for cooling, and less of a demand for heating. As electricity currently supplies most of the nation’s space cooling energy requirements, and natural gas supplies most of the energy used for space heating, population movement may decrease natural gas demand in these sectors. However, as distributed generation and residential natural gas cooling technologies advance, and residential consumers can use natural gas to supply their electricity needs, natural gas demand could in fact increase. Another demographic trend is the aging of the large ‘baby boomer’ generation. It is expected that as this generation ages, their requirements for cooling in warm weather and heating in cooler weather will increase, thus driving demand for both electricity and natural gas.
Energy Efficiency Regulations – The concept of energy efficiency is continually being addressed in government, by environmental concerns, and by consumer advocacy groups. While the basic advantages to investing in energy efficient appliances are well known in both residential and commercial settings, current regulations do not take into account total energy efficiency (TEE) measured directly from the source. Natural gas is extremely efficient, losing very little of its energy value as it reaches its point of end use. Electricity, on the other hand, measured from the point of generation to the wall socket, is much less efficient. In fact, only about 27 per cent of the energy put into generating electricity is available by the time it reaches your home. Thus, while an electric appliance may be extremely efficient in using the electricity it takes from the wall socket; this does not take into account the energy that is lost in generation and transmission. Increasingly strict regulations regarding total energy efficiency may thus make natural gas the more desirable efficient energy source for residential and commercial appliances.
Technological Advancements – Currently, the majority of energy used by the commercial sector is in the form of electricity. Similarly, many common household appliances can only run on electricity. The advancement of natural gas technology in the form of offering natural gas powered applications that may compete with these electric operated appliances may provide a huge increase in demand for natural gas. Natural gas cooling, combined heat and power, and distributed generation are expected to make inroads into those applications that have traditionally been served solely by electricity.
The EIA estimates that industrial delivered energy consumption will grow by 8 per cent from 2008 to 2035 in the Reference case, declines by 9 per cent in the Low Economic Growth case, and increases by 25 per cent in the High Economic Growth case This may seem like a low level of growth, however it represents energy requirements for both energy-intensive manufacturing industries (which are expected to decline), and non energy-intensive manufacturing industries (which are expected to grow). Industrial demand accounts for 26.3 per cent of natural gas demand, which is the second highest of any sector.
The primary force shaping the demand for natural gas, and other sources of energy, in the industrial sector is the movement away from energy-intensive manufacturing processes, towards less energy-intensive processes. There are two driving forces behind this shift: the increased energy efficiency of equipment and processes used in the industrial sector, as well as a shift to the manufacture of goods that require less energy input. It is because of this trend that, while industrial shipments increased by 41 per cent from 1980 to 2002, total energy consumption only increased by 1 per cent. This trend is expected to hold into the future, and is the reason for modest increases in energy demand for the industrial sector.
Despite this shift from energy-intensive processes to less energy-intensive processes, the demand for energy is expected to increase in the industrial sector. According to WPA, there are several factors which could affect the demand for natural gas over other sources of energy to meet the long term energy requirements of the industrial sector. These include:
Economics of the Industrial Sector – The industrial sector has been experiencing a period of consolidation that is expected to last into the future. Industrial companies have been merging at a relatively fast pace; a market scenario in which cutting costs and increasing efficiency becomes paramount. This could lead to increased demand for efficient natural gas powered applications in the sector to replace those processes which are extremely energy inefficient. An example of this is the popularity of natural gas in the generation of steam. Natural gas fired combined heat and power systems, as well as natural gas fired boilers, can be much more efficient and cost effective than older boilers running on coal and petroleum. This is especially true if evaluated on a total energy efficiency basis. However, the replacement of this older industrial equipment with newer natural gas fired equipment requires an up-front capital investment, which may be prohibitive in some situations.
Electricity Restructuring – The price and availability of electricity in the industrial sector will play a role in determining the demand for natural gas. Many electric generation utilities have been cutting prices for industrial consumers in the hopes of gaining increased market share in preparation for the complete deregulation of the electric industry. However, natural gas powered distributed generation technologies, as well as combined heat and power applications, offer industrial energy users with attractive alternatives to purchased electricity. Some industrial energy consumers, fearful of the effects of deregulation on the reliability and flexibility of electricity supply, may choose instead to generate their own electricity on-site, powered by natural gas.
Environment Emissions Regulations – It is expected that the restrictions on industrial air emissions will be tightened significantly over the foreseeable future. Government regulators in California and New York have already begun to impose very strict regulations on the harmful emissions of many industrial processes. Natural gas represents a cleaner burning alternative to coal and petroleum use in the industrial sector and the imposition of stringent regulations may serve to increase the demand for natural gas in the industrial sector. Additionally, should an emissions trading market develop (in which, basically, industrial companies are allowed a certain level of emissions ‘credits’, which may be sold if they emit fewer harmful products than they are allowed), the cost of financing new, clean natural gas equipment may be offset by the revenue that may be brought in through the trading of surplus emissions credits.
Technological Advancements – As with the residential and commercial sectors, the advancement of new and existing natural gas technologies will play a role in the demand for natural gas from the industrial sector. Distributed generation offers great promise in the industrial sector. The reliability and flexibility offered by the on-site generation of electricity is particularly important for the industrial sector, where loss of electricity could have disastrous consequences, including spoiled products for a manufacturer dependent on electricity. Thus, the expansion of distributed generation, and combined heat and power units, could be the next frontier for increased natural gas demand in the industrial sector.
Electric Generation Demand
Because of the relatively low capital requirements for building natural gas fired combined cycle generation plants, as well as the reduction of emissions that can be earned from using natural gas as opposed to other dirtier hydrocarbons like coal, the EIA expects 57 per cent of new electric generation capacity built by 2025 will be natural gas combined-cycle or combustion turbine generation. While natural gas fired electricity generation accounted for 18 per cent of all generation in 2007, the EIA predicts it will account for 15 per cent of all generation in 2025. In addition to increased demand for natural gas powered central station generation, distributed electricity generation (as discussed for residential, commercial, and industrial sectors) may serve to increase the demand for natural gas for electricity generation purposes in the future.
There are two primary forces at work that serve to increase the demand for natural gas in electric generation. The increased demand for electricity in general, combined with the retirement of old nuclear, petroleum, and coal powered generation plants, leaves a significant requirement for electric generation that is to be filled by natural gas use. Natural gas is expected to fulfill the requirements for electric generation for a variety of reasons, including:
Flexibility and Capital Investment – Natural gas electric generation plants can range in size from large-scale generation plants down to very small-scale micro turbines. Most nuclear and coal fired power plants, however, are limited to larger-scale generation, and must produce larger quantities of electricity in order to be economic. Because the demand for electricity is expected to increase modestly over the next 20 years, many electricity suppliers are wary of making the large capital investments necessary to build a coal or nuclear powered generating facility. Natural gas fired plants, with lower capital investment costs and greater flexibility (including shorter construction and lead times) are much more readily available and practical to add incremental generation capacity as it is required.
Environmental Concerns – Most generation of electricity in the United States comes from coal, mostly due to its extremely competitive price and domestic abundance. However, burning coal for the generation of electricity is extremely polluting. Natural gas, however, is the cleanest burning fossil fuel, and emits very few pollutants into the atmosphere. As public concern over air quality increases, and more stringent emissions regulations are adopted, natural gas is the primary clean burning, environmentally friendly alternative to coal generation.
Efficiency – Natural gas powered combined cycle generation units are extremely energy efficient. Modern natural gas fired combined cycle generation units can approach 60 per cent efficiency, whereas traditional boiler units are usually only around 34 per cent efficient, regardless of fuel source. This means that using natural gas powered combined cycle technology allows for more electricity produced per unit of natural gas used. This can both increase the cost-effectiveness of the generation plant, as well as reduce the plants emissions (because less fuel is being burned).
Operational Flexibility – Natural gas fired electric generation systems used to meet short term peak electricity demands have the advantage of being very operationally flexible. These natural gas fired generators can be quickly and easily turned on and off, allowing for the timely generation of electricity to meet short term requirements on a moment’s notice. Neither coal nor nuclear generation plants have the ability to operate in this manner. Offering such flexibility in the generation of peak electricity makes natural gas an extremely attractive option for meeting these electricity requirements.
Transportation Sector Demand
Natural gas use in the transportation sector is still in its infancy; although natural gas powered vehicles present an enormous opportunity for cleaning up the emissions from this sector. Demand from the transportation sector accounts for .2 per cent of total U.S. natural gas demand, and most of this demand is for natural gas to fuel the pipeline transportation of hydrocarbons. Natural gas supplies barely a fraction of the total energy used in the transportation sector, and the demand for natural gas to supply natural gas vehicle operation is almost negligible compared to the energy requirements of traditionally fuelled vehicles.
The demand for alternative fuel vehicles (including natural gas vehicles) is expected to increase in the foreseeable future primarily due to new legislation and regulation surrounding emissions from the transportation sector. As more stringent emissions standards are adopted, both at the federal and state level, the automotive industry will have no choice but to devote significantly more resources into the development of feasible production line natural gas vehicles; vehicles that are environmentally sound and meet consumer preferences. However, the technology required to do so, including the need for a natural gas refuelling infrastructure, are current barriers to the widespread proliferation of natural gas vehicles in the United States.
Natural Gas Supply
Maintaining an adequate supply of natural gas is extremely important to preserving and improving the quality of life. The supply of natural gas in the United States, as well as factors that affect the ability of producers to bring natural gas to market in a timely and efficient manner is explained in the following manner:
Meeting Natural Gas Demand
The United States has vast resources of natural gas available for extraction. The Energy Information Administration (EIA) estimates that there are 2,119 Trillion cubic feet (Tcf) of technically recoverable natural gas resources in the United States. The Colorado School of Mines Potential Gas Committee (PGC) in a biennial report in June 2009 estimated the technically recoverable natural gas resource base was 2,074 Tcf as of the end of 2008. Where Are These Reserves?
Most of the natural gas that is found in North America is concentrated in relatively distinct geographical areas, or basins. Given this distribution of natural gas deposits, those states which are located on top of a major basin have the highest level of natural gas reserves. As can be seen from the map below, U.S. natural gas reserves are very concentrated around Texas and the Gulf of Mexico.
Given U.S. production levels in 2002 and the National Petroleum Council’s estimate for available domestic resources, there is enough natural gas in the United States to meet over 75 years of domestic production. This estimate, although not taking into account expected increasing levels of domestic production, or the potential opening up of access to currently restricted land, offers a good idea of how much domestic natural gas to which the United States currently has access.
The United States is a large consumer of natural gas. In 2008, the United States used about 23.25 Tcf of natural gas, making it one of the worldwide leaders in natural gas consumption. According to the Energy Information Administration’s (EIA’s) International Energy Outlook 2007, the United States accounted for over 20 per cent of total worldwide consumption in 2006.
In order to meet the demand for natural gas, the United States relies on domestic production, imports of dry gas, and imports of Liquefied Natural Gas (LNG). Most of the natural gas that is consumed in the United States is produced domestically, with the balance of dry natural gas being imported mainly from Canada. Imports of LNG also serve to meet the growing demand for natural gas in the United States. In addition to domestic production and imports, natural gas in storage is also used to ensure that demand for natural gas in the United States is satisfied throughout the year.
Domestic Natural Gas Production
Source: IN – Geological Study, USGS
According to the EIA, 21.9 Trillion cubic feet (Tcf) of dry natural gas was produced in the United States in 2009. This represents over 84 per cent of total domestic consumption. This compares to crude oil, where only about 39 per cent of consumption is met by domestic production. The United States is much less reliant on other countries for its natural gas supply than it is for its supplies of crude oil. Many believe that natural gas is a much more reliable source of energy, considering such a high proportion of domestic demand is met by domestic production. Domestic natural gas production comes primarily from 5 states: Louisiana, New Mexico, Oklahoma, Texas, and Wyoming. In fact, according to the EIA, these 5 states were responsible for just under 80 per cent of total marketed natural gas production in 2001.
Source: International Energy Annual, 2009
World Natural Gas Reserves
The EIA, in conjunction with the Oil and Gas Journal and World Oil publications, estimates world proved natural gas reserves to be around 6,254 Tcf. As can be seen from the graph, most of these reserves are located in the Middle East with 2,549 Tcf, or 41 per cent of the world total, and Europe and the Former U.S.S.R. with 2,020, or 32 per cent of total world reserves. The United States, by this calculation, possesses 3 per cent of the world total natural gas reserves.
Dry Natural Gas Imports and Exports
According to the Energy Information Administration (EIA), net imports to the United States reached an all time low of 2,677 Bcf in 2009, a 10.1 per cent decrease from 2008. About 87 per cent of U.S. natural gas imports are from Canada..
Under the terms of the North American Free Trade Agreement (NAFTA), producing companies operate freely across the U.S./Canada border, moving gas from Canada’s major producing regions in Alberta and British Columbia as well as offshore from Nova Scotia to U.S. markets in the West, Upper Midwest, and Northeast. The natural gas pipeline transmission systems of the United States and Canada are highly integrated. Canada’s vast gas reserves, coupled with its relatively small population, provide the United States with a reliable source of natural gas imports to help meet rising demand.
The Department of Energy and the Federal Energy Regulatory Commission (FERC) are responsible for the regulation of natural gas imports and exports in the United States.
The United States is also involved in the cross-border trade of natural gas with Mexico. However, the U.S. is a net exporter of natural gas to Mexico. In 2009, total natural gas exports out of the U.S. increased by 7 per cent from 2008 to 2009 to a historical high of 1.1 Tcf, despite decreases in volumes to Mexico and Japan. Exports to Canada increased by 19 per cent from 2008 to 2009 as a result of pipeline capacity expansions in the Upper Midwest.
Liquefied Natural Gas
Liquefied natural gas (LNG) imports represent an increasingly important part of the natural gas supply picture in the United States. LNG takes up much less space than gaseous natural gas, allowing it to be shipped much more efficiently. LNG that is imported to the United States comes via ocean tanker. The U.S. gets a majority of its LNG from Trinidad and Tobago, Qatar, and Algeria, and also receives shipments from Nigeria, Oman, Australia, Indonesia, and the United Arab Emirates.
In 2009, imports of LNG to the continental United States in 2009 rose 29 percent, or 100 Bcf, to a total of 452 Bcf but were still the second-lowest annual level in 8 years. Total LNG volumes in 2009 were still below record highs in 2007 despite the overall increase in LNG imports from 2008 to 2009 as a result of higher natural gas prices outside of the United States.
Factors Affecting the Supply of Natural Gas
The production of natural gas in the United States is based on competitive market forces: inadequate supply at any one time leads to price increases, which signal to production companies the need to increase the supply of natural gas to the market. Supplying natural gas in the United States in order to meet this demand, however, is dependent on a number of factors. These factors may be broken down into two segments: general barriers to increasing supply, and those factors that affect the short term supply scenario.
Short Term Supply Barriers
In a perfect world, price signals would be recognized and acted upon immediately, and there would be little lag time between increased demand for natural gas, and an increase in supplies reaching the market. However, in reality, this lag time does exist. There are several barriers to immediate supply increases which affect the short term availability of natural gas supply. They include:
Availability of Skilled Workers – The need to train and hire skilled workers results in lag times between times of increased demand and an increase in production. For example, from 1991 to 1999, a prolonged period of relatively low prices indicated adequate supplies of natural gas existed, and the exploration and production industry contracted in response. During this period, the U.S. Bureau of Labor Statistics recorded a 26 per cent average decrease in employment in the oil and gas extraction industry. Some of these workers left the industry altogether rather than remain unemployed. When production companies began to react to higher prices in late 1999, the need to find and train skilled workers contributed to a slower increase in activity than would have been the case if skilled workers were plentiful. To counter this problem, many production companies offer increasingly high wages, as well as scholarships and educational contributions to attract professionals to the industry.
Availability of Equipment – Drilling rigs are very expensive pieces of equipment. Price volatility in the industry makes it very difficult for producers, as well as production equipment suppliers, to plan the construction and placement of drilling rigs far in advance. Prolonged periods of low prices results in reduction of the number of available rigs. When prices respond to increase demand, and drilling activity increases, time is required to build and place an adequate number of drilling rigs. For this reason, drilling rig counts are a good indication of the status of the oil and natural gas production industry.
Permitting and Well Development – Before a natural gas well actually begins producing, there are several time consuming procedures and development activities that must take place. In order to begin drilling, exploration activities must take place to pinpoint the location of natural gas reserves. Once a suitable field has been located, production companies must receive the required approval from the landowner (which in many cases is the government) to install drilling equipment and begin to drill the well. The Bureau of Land Management is responsible for issuing permits for onshore development, and the Minerals Management Service is responsible for offshore development areas. Once drilling is completed, extraction and field processing equipment must be set up, as well as gathering systems. In all, the between the location of natural gas deposits and the beginning of production can range from as little as a few months to as much as ten years.
Weather and Delivery Disruptions – Although unrelated to natural gas prices or demand increases and decreases, weather patterns and anomalies can have a significant impact on natural gas production. For example, hurricanes can have an impact on the offshore production of natural gas, as safety measures require the temporary shutdown of offshore drilling and production platforms. In addition, while the safety record of the natural gas industry is extremely good, malfunctions and accidents may occur from time to time that disrupt the delivery of natural gas. For example, a compressor malfunction in a large pipeline serving a major hub could temporarily disrupt the flow of natural gas through that important market centre. While the effects of weather and delivery disruptions are most often of short duration, they can still have an effect on the expeditious production of natural gas.
General Barriers to Increasing Supply
In addition to the short term impediments to increasing natural gas supply, there exist other more general barriers to the increased supply of natural gas in the United States. These include:
Land Access – The U.S. government owns more than 29 per cent of all the land in the country and an estimated 40 per cent of undiscovered natural gas exists on this land. In several areas, the government has restricted access to federal lands. 59 per cent of undiscovered gas resources are on federal lands and offshore waters. Outside of the western Gulf of Mexico, production companies are prohibited access to virtually all federal lands offshore the Lower 48 states. About 9 per cent of resource-bearing land in the Rockies is also off limits, and access to another 32 per cent is significantly restricted. The National Petroleum Council in 1999 estimated that 213 Tcf of natural gas exists in areas under federal access restrictions. This restriction is the result of presidential and congressional leasing moratoria, and affects the amount of natural gas resources that may be extracted to increase supply.
Pipeline Infrastructure – The ability to transport natural gas from producing regions to consumption regions also affects the availability of supplies to the marketplace. The interstate and intrastate pipeline infrastructure can only transport so much natural gas at any one time, and in essence provides a ‘ceiling’ for the amount of natural gas that can reach the market. Although the current pipeline infrastructure is significant, with the EIA estimating daily delivery capacity of the pipeline grid to be 119 Bcf. However, natural gas pipeline companies must continue to continually expand the pipeline infrastructure in order to meet growing demand.
The Financial Environment – Exploring for and producing natural gas is a very capital intensive endeavour. In fact, the National Petroleum Council estimated in 1999 that production companies will have to invest $1.44 trillion in capital between 1999 and 2015 in order to keep pace with demand growth. This puts significant pressures on production companies, particularly small, privately owned firms, to raise the capital necessary to increase production. While efficient and transparent financial markets in the U.S. do offer options for raising capital effectively, the rate at which production companies may do so can serve as a limiting factor in the increasing availability of supplies reaching the market.
The process by which the natural gas industry increases supplies in order to keep pace with growing demand is a complicated one. Although the factors listed above are important determinants of producers’ ability to meet increased demand, they by no means offer an exhaustive list of all of the elements that come into the supply picture.
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