The Future Role of Natural Gas in the US
Oct. 5th, 2011 03:52 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
stormsewerSo I went to another talk at the UT Energy Symposium, this one on "The Future Role of Natural Gas in the US," given by Marianne Kah, the chief economist at ConocoPhillips. My notes follow; the slides are available here.
First up was a text-intensive disclaimer slide basically making the point that everything that follows is "off the record" and they have no legal responsibility for its content. As for the actual content...
DOE's forecast of natural gas reserves has gone way up in recent years, and most of this has been due to increased known reserves of shale gas (though I noticed "proven reserves" haven't gone up that much). They always knew that shale gas was there, but only in the last five years or so has it been shown to be recoverable (and cheaply). Production of natural gas has also gone way up recently, and there is one hundred years of reserves still in the ground in the US. The majority of the "plays" are recoverable at $6/MMBtu or less, and current prices are around $4/MMBtu (because there is plenty to go around at the moment that is recoverable at $3/MMBtu).
Until a few years ago, natural gas production in the US was considered to be in permanent decline, but it looks to be increasing for the forseeable future. We are forecast to need very little in the way of liquefied natural gas (LNG- basically the transport form of natural gas) exported from abroad. We've also been seeing more and more electricity production from natural gas instead of coal. The price of oil relative to gas decreased from 1990 to about 2003, when crude oil and natural gas were at about price parity, but since then it has been going up again. Demand for natural gas is expected to grow at 1.2% a year in the near future, though shale production has been growing at 5% a year recently, which is why the price of natural gas is so low at the moment.
It's predicted that power production from coal, and, to a lesser extent, nuclear, will decrease in the near future, and the slack will be taken up by natural gas and renewables (mostly wind). One of the reasons we have so many coal-fired plants today is because of the Fuel Use Act of 1978. At the time oil and natural gas were considered scarce, so this law mandated that they were not to be used for power plants. Coal and nuclear were the only real alternatives. There was a big push for natural gas plants in the 1990s, but the supply and price of natural gas from then through the early 2000s were insufficient to make that a reality, meaning that many companies have been hesitant to get on board now that the price has dropped. Most of the growth in energy production in the next ten years will come from renewables (mostly wind) as mandated by (state) law.
The average age of coal-fired plants is 36 years. An open question in the industry is what to do with them as they continue to age. Should they spend the money to update them according to the Clean Air Act, or just scrap them and build new natural gas plants? If there is a carbon tax or something similar, that will accelerate these kinds of transitions.
Why natural gas in the United States? One reason is that it's abundant here. (As it turns out, it's fairly abundant throughout the world. For instance, Australia is expected to become the world's largest producer of LNG in the next ten years.) We also have a good pipeline infrastructure. (A lot of companies built big LNG import terminals ten years ago when the price was higher. That seems like a bad investment now, but LNG imports can serve to smooth out price fluctuations, so they still serve a purpose. We can get gas from anywhere in the world within two weeks if necessary.) Natural gas is also very affordable. Shale gas is low-cost, and gas-fired powerplants are now very attractive financially. Natural gas is also relatively environmentally friendly, releasing 50% less emissions than coal per energy unit produced, and it contains less toxins, such as mercury, as well. It has relatively small land-use and water requirements, and works well in backing up renewables (discussed in more detail later).
The United States produced more natural gas than other country in the world in 2010, just edging out Russia. If we include Canada, North America is far and away the world's #1 producer of natural gas.
DOE has been lowering its gas price forecasts in recent years. The price can be volatile, and generally speaking the role of natural gas has been dealing with volatility. Natural-gas fired plants are brought on line for demand surges. Volatility is here to stay, but we should have less in the future. We have much better storage and pipeline capacity than before. Additionally, there is now a lot of on-shore production that is regionally distributed, which lessens the impact of hurricanes or other local disasters. There is much less uncertainty about future prices as well. There is a lot of gas in the US and Canada, and more untapped reserves in the arctic. The rest of the world is also getting into unconventional gas sources.
Gas-fired power plants are pretty much the cheapest power plant you can build as far as up-front costs go (solar photovoltaic and solar thermal are the most expensive; wind and geothermal are also relatively cheap). The fuel/operating costs are higher, but on an overall cost basis it still compares very favorably at the moment to most other energy sources. There is a bias in the regulatory structure against variable-cost energy sources like natural gas, however. If you build a nuclear or solar plant, you only need permitting once. But with natural gas, the utility commission can come back at any time and say, "you shouldn't have purchased gas at that price," so in most cases natural-gas plants won't make long-term deals on gas at a given price, which serves to increase volatility. (Colorado apparently passed a law preventing the state from questioning such deals after the fact, and they can now happen there.)
Natural gas actually uses much less water than is required for power plants that involve heating water into steam, including solar thermal, coal thermal, geothermal, and nuclear. The amount of water that is used for fracking is the amount used in twelve hours in a coal thermal plant. The acreage required for a natural-gas plant is also very tiny compared to other energy sources, allowing it to be built close to where power is consumed (wind and solar take up a lot of space). Pollutant emissions are more than for nuclear power but much less than coal. The cost per ton of CO2 avoided in comparison to coal plants is also much lower for natural gas than nuclear. Using natural gas for power now gives us more runway to get the cost of renewables down and improve the power-storage technologies that are necessary for renewables to take over.
Briefly mentioned was a Cornell study (original article) that claimed that coal was less polluting than natural gas; she was running out of time and couldn't spend much time on it, but said she was very disappointed in it (she went to Cornell, herself), and that it was built on very biased assumptions.
She thinks the government can set standards for how much emissions it wants, but it shouldn't mandate how it is done. The question of whether using wind power really reduces emissions, for instance, depends on what it is backed up with. The wind is only blowing about 30% of the time, so you need some other source to come online the rest of the time. In Europe they back it with coal, which doesn't make much sense. Wind backed up with coal or single-cycle natural gas plants actually produces more CO2 emissions than combined-cycle natural-gas plants on their own. Certain energy-intensive industries like the chemical industry are resurging in the US on lower natural gas prices. We will have to move to a zero-carbon economy eventually, but in the meantime we can buy ourselves some time with natural gas.
As for what the industry wants from the government... They want less taxes (obviously) and say it has been clearly demonstrated that higher taxes lead to lower investments in developing new energy sources. In particular, they don't like taxes that single out the oil and gas industry. They don't want hydraulic fracking to be over-regulated, and they want permitting delays to be reduced. They want tech-neutral policies; the government can set efficiency standards or emission standards, but the market should decide how those standards are reached.
In the question-and-answer period she addressed some of the concerns about natural gas more directly. Concerning the documentary "Gasland," she that though of course she can't promise that everyone in the industry will be doing what they are supposed to, if standard techniques are used ("not even best-practice, but normal-practice"), there should be no contamination of ground water with extracted gas. 99% of what goes into the wells is water, and most of the rest is sand. Many of the chemicals used are found in household cleansers and the like, and many companies are now making public exactly what they are putting in there. One problem is when people try to drill a water well in a gas reservoir, they tend to get water contaminated with gas, but that is not a result of fracking. She cited with annoyance a Duke study (original article) reporting a strong correlation between the occurrence of fracking and the incidence of gas contamination of ground water. It's good example of why correlation does not imply causation, because obviously wherever there is natural gas in the ground, the chance of someone wanting to frack there and the chance of someone getting their wellwater contaminated with gas both go way up, independently.
She is not interested in promoting the potential of natural gas as a transportation fuel, as suggested by people like Boone Pickens. Industries that use natural gas for electricity don't like the idea, because it will cause the price to go up. Truckers don't like the idea, because natural gas is less energy-dense than diesel, which means bigger fuel tanks that have to be refilled more often. Plus, the fueling infrastructure doesn't exist, and converting a semi-truck to run on natural gas apparently costs $100,000. She is in favor of electric cars and plug-in hybrids, which can be powered indirectly by natural-gas-fired power plants. Wind is the main thing taking away demand from natural gas today, due to state-mandated energy-use portfolios.
Concerning the issue of some extraction operations in the west flaring off excess gas, she said this is a result of the isolated location of these operations; they pull up more than they can ship out, and have to get rid of the rest. This problem should go away as the pipeline infrastructure is improved, and is not due to the current low prices of gas (though of course if the price of gas was higher, they would get that infrastructure in place more quickly).
I wanted to ask her about recent reports in the New York Times saying that the productivity of natural gas wells may have been vastly overstated for purposes of attracting investors (including a quote from an email from a geologist at ConocoPhillips expressing doubt about the whole thing), and that it is looking suspiciously like an investment bubble. Didn't get the chance.
First up was a text-intensive disclaimer slide basically making the point that everything that follows is "off the record" and they have no legal responsibility for its content. As for the actual content...
DOE's forecast of natural gas reserves has gone way up in recent years, and most of this has been due to increased known reserves of shale gas (though I noticed "proven reserves" haven't gone up that much). They always knew that shale gas was there, but only in the last five years or so has it been shown to be recoverable (and cheaply). Production of natural gas has also gone way up recently, and there is one hundred years of reserves still in the ground in the US. The majority of the "plays" are recoverable at $6/MMBtu or less, and current prices are around $4/MMBtu (because there is plenty to go around at the moment that is recoverable at $3/MMBtu).
Until a few years ago, natural gas production in the US was considered to be in permanent decline, but it looks to be increasing for the forseeable future. We are forecast to need very little in the way of liquefied natural gas (LNG- basically the transport form of natural gas) exported from abroad. We've also been seeing more and more electricity production from natural gas instead of coal. The price of oil relative to gas decreased from 1990 to about 2003, when crude oil and natural gas were at about price parity, but since then it has been going up again. Demand for natural gas is expected to grow at 1.2% a year in the near future, though shale production has been growing at 5% a year recently, which is why the price of natural gas is so low at the moment.
It's predicted that power production from coal, and, to a lesser extent, nuclear, will decrease in the near future, and the slack will be taken up by natural gas and renewables (mostly wind). One of the reasons we have so many coal-fired plants today is because of the Fuel Use Act of 1978. At the time oil and natural gas were considered scarce, so this law mandated that they were not to be used for power plants. Coal and nuclear were the only real alternatives. There was a big push for natural gas plants in the 1990s, but the supply and price of natural gas from then through the early 2000s were insufficient to make that a reality, meaning that many companies have been hesitant to get on board now that the price has dropped. Most of the growth in energy production in the next ten years will come from renewables (mostly wind) as mandated by (state) law.
The average age of coal-fired plants is 36 years. An open question in the industry is what to do with them as they continue to age. Should they spend the money to update them according to the Clean Air Act, or just scrap them and build new natural gas plants? If there is a carbon tax or something similar, that will accelerate these kinds of transitions.
Why natural gas in the United States? One reason is that it's abundant here. (As it turns out, it's fairly abundant throughout the world. For instance, Australia is expected to become the world's largest producer of LNG in the next ten years.) We also have a good pipeline infrastructure. (A lot of companies built big LNG import terminals ten years ago when the price was higher. That seems like a bad investment now, but LNG imports can serve to smooth out price fluctuations, so they still serve a purpose. We can get gas from anywhere in the world within two weeks if necessary.) Natural gas is also very affordable. Shale gas is low-cost, and gas-fired powerplants are now very attractive financially. Natural gas is also relatively environmentally friendly, releasing 50% less emissions than coal per energy unit produced, and it contains less toxins, such as mercury, as well. It has relatively small land-use and water requirements, and works well in backing up renewables (discussed in more detail later).
The United States produced more natural gas than other country in the world in 2010, just edging out Russia. If we include Canada, North America is far and away the world's #1 producer of natural gas.
DOE has been lowering its gas price forecasts in recent years. The price can be volatile, and generally speaking the role of natural gas has been dealing with volatility. Natural-gas fired plants are brought on line for demand surges. Volatility is here to stay, but we should have less in the future. We have much better storage and pipeline capacity than before. Additionally, there is now a lot of on-shore production that is regionally distributed, which lessens the impact of hurricanes or other local disasters. There is much less uncertainty about future prices as well. There is a lot of gas in the US and Canada, and more untapped reserves in the arctic. The rest of the world is also getting into unconventional gas sources.
Gas-fired power plants are pretty much the cheapest power plant you can build as far as up-front costs go (solar photovoltaic and solar thermal are the most expensive; wind and geothermal are also relatively cheap). The fuel/operating costs are higher, but on an overall cost basis it still compares very favorably at the moment to most other energy sources. There is a bias in the regulatory structure against variable-cost energy sources like natural gas, however. If you build a nuclear or solar plant, you only need permitting once. But with natural gas, the utility commission can come back at any time and say, "you shouldn't have purchased gas at that price," so in most cases natural-gas plants won't make long-term deals on gas at a given price, which serves to increase volatility. (Colorado apparently passed a law preventing the state from questioning such deals after the fact, and they can now happen there.)
Natural gas actually uses much less water than is required for power plants that involve heating water into steam, including solar thermal, coal thermal, geothermal, and nuclear. The amount of water that is used for fracking is the amount used in twelve hours in a coal thermal plant. The acreage required for a natural-gas plant is also very tiny compared to other energy sources, allowing it to be built close to where power is consumed (wind and solar take up a lot of space). Pollutant emissions are more than for nuclear power but much less than coal. The cost per ton of CO2 avoided in comparison to coal plants is also much lower for natural gas than nuclear. Using natural gas for power now gives us more runway to get the cost of renewables down and improve the power-storage technologies that are necessary for renewables to take over.
Briefly mentioned was a Cornell study (original article) that claimed that coal was less polluting than natural gas; she was running out of time and couldn't spend much time on it, but said she was very disappointed in it (she went to Cornell, herself), and that it was built on very biased assumptions.
She thinks the government can set standards for how much emissions it wants, but it shouldn't mandate how it is done. The question of whether using wind power really reduces emissions, for instance, depends on what it is backed up with. The wind is only blowing about 30% of the time, so you need some other source to come online the rest of the time. In Europe they back it with coal, which doesn't make much sense. Wind backed up with coal or single-cycle natural gas plants actually produces more CO2 emissions than combined-cycle natural-gas plants on their own. Certain energy-intensive industries like the chemical industry are resurging in the US on lower natural gas prices. We will have to move to a zero-carbon economy eventually, but in the meantime we can buy ourselves some time with natural gas.
As for what the industry wants from the government... They want less taxes (obviously) and say it has been clearly demonstrated that higher taxes lead to lower investments in developing new energy sources. In particular, they don't like taxes that single out the oil and gas industry. They don't want hydraulic fracking to be over-regulated, and they want permitting delays to be reduced. They want tech-neutral policies; the government can set efficiency standards or emission standards, but the market should decide how those standards are reached.
In the question-and-answer period she addressed some of the concerns about natural gas more directly. Concerning the documentary "Gasland," she that though of course she can't promise that everyone in the industry will be doing what they are supposed to, if standard techniques are used ("not even best-practice, but normal-practice"), there should be no contamination of ground water with extracted gas. 99% of what goes into the wells is water, and most of the rest is sand. Many of the chemicals used are found in household cleansers and the like, and many companies are now making public exactly what they are putting in there. One problem is when people try to drill a water well in a gas reservoir, they tend to get water contaminated with gas, but that is not a result of fracking. She cited with annoyance a Duke study (original article) reporting a strong correlation between the occurrence of fracking and the incidence of gas contamination of ground water. It's good example of why correlation does not imply causation, because obviously wherever there is natural gas in the ground, the chance of someone wanting to frack there and the chance of someone getting their wellwater contaminated with gas both go way up, independently.
She is not interested in promoting the potential of natural gas as a transportation fuel, as suggested by people like Boone Pickens. Industries that use natural gas for electricity don't like the idea, because it will cause the price to go up. Truckers don't like the idea, because natural gas is less energy-dense than diesel, which means bigger fuel tanks that have to be refilled more often. Plus, the fueling infrastructure doesn't exist, and converting a semi-truck to run on natural gas apparently costs $100,000. She is in favor of electric cars and plug-in hybrids, which can be powered indirectly by natural-gas-fired power plants. Wind is the main thing taking away demand from natural gas today, due to state-mandated energy-use portfolios.
Concerning the issue of some extraction operations in the west flaring off excess gas, she said this is a result of the isolated location of these operations; they pull up more than they can ship out, and have to get rid of the rest. This problem should go away as the pipeline infrastructure is improved, and is not due to the current low prices of gas (though of course if the price of gas was higher, they would get that infrastructure in place more quickly).
I wanted to ask her about recent reports in the New York Times saying that the productivity of natural gas wells may have been vastly overstated for purposes of attracting investors (including a quote from an email from a geologist at ConocoPhillips expressing doubt about the whole thing), and that it is looking suspiciously like an investment bubble. Didn't get the chance.
