Americans already know about the U.S. natural gas revolution based on shale, with production up from 58 Bcf/day in 2008 to 75 Bcf/day today. This incremental increase has been so large that, if standing as its own nation, our shale gas production surge since 2008 alone would be the world’s 3rd largest natural gas supplier in the world, behind Russia and the U.S. in supplies not from shale. This has enabled a huge shift in natural gas demand throughout the U.S. economy. Gas is an increasingly attractive fuel to help cut greenhouse gas emissions: gas is scalable, cleaner, cheaper, abundant, more flexible, and reliable.
When combusted, natural gas emits 30% less CO2 than oil and 45% less than coal and has lower levels of nitrogen oxides, sulfur dioxide, and particulate matter. As easily the projected fastest growing U.S. fossil fuel, rising 1% per year, natural gas is the key source to a more sustainable energy future. Natural gas will be essential to allowing wind and solar power to assume a more significant role in our energy mix by backing up their natural intermittency. Although this is an added cost for wind and solar that is typically not included in costs estimates by those promoting renewables. The combined cycle gas turbine (CCGT) technology makes gas an especially attractive fuel for electricity generation, able to be built in just 1-2 years, with lower initial investment and thermal efficiencies that can reach above 60%.
The EIA's projection shows that natural gas could supply 33% of U.S. electricity by as early as 2020, compared to 27% in 2014. And under the "Clean Power Plan" natural gas will become the primary fuel for electricity. The Clean Power Plan places an essentially non-retractable bet that wind and solar energy will provide 55% of our incremental power by 2030. But these two sources have never produced even 5% of America's electricity, and cheaper gas will be what compensates for shortfalls. The IEA's projection that U.S. gas power capacity will increase nearly 20% by 2030 seems conservative. The EIA's average levelized costs for plants entering service in 2020 have gas plants at just $75 per megawatt hour, far below its main competitors. Since 1995, 75% of new power capacity has been gas-fired units. Gas prices for power generation was just $3.23 per Thousand Cubic Feet, a 40% drop year-over year.
In the industrial sector, the 2nd largest demand source, more gas will be in step with the sector's overall growth, as the shale boom and low-cost natural gas feedstocks are fueling a $150 billion dollar industrial resurgence in the petrochemical industry. Importantly, manufacturing are the jobs that we want to create: manufacturing jobs are higher paying and the industry has a larger "multiplier effect" than any other major economic activity – $1 spent in manufacturing generates $1.35 in additional economic activity.
And the natural gas industry is constructing and reconfiguring infrastructure to support the changes in its rapidly expanding market. For decades, gas pipelines have run south (production centers) to north (demand centers), but the two key shale plays in Pennsylvania (Marcellus) and Ohio (Utica) have "changed the game." Since 2012,"takeaway" pipelines (that get gas out of production areas) in the Northeast region have accounted for about 55% of transmission pipeline capacity additions in the country. Per the EIA, "32% of natural gas pipeline capacity into the Northeast could be bidirectional by 2017." Fact is...public opinion strongly supports more pipeline projects (see here, here).
Rising U.S. Natural Gas Demand by Sector
Source: EIA
Contrary to other fuels, natural gas isn't "dependent” on policy, which, especially given the derisiveness of U.S. politics today, are very prone to being changed very quickly. Unmatched flexibility has natural gas thriving under a variety of policy options. For example, the IEA's World Energy Model (in its World Energy Outlook 2014) confirms that gas use in the U.S. will continue apace and stay remarkably close under three significantly different policy paths, including one that establishes a pathway that limits the increase in temperature to 2°C by limiting concentration of greenhouse gases to 450 parts per million of CO2.
In other words, whether "very liberal policies" or "very conservative policies" are enacted, natural gas will remain a crucial component of the U.S. energy economy. In fact, favored by both Democrats and Republicans, natural gas becomes the main U.S. fuel in 2040 under all three policy projection scenarios by the IEA. The White House’s 40-page Energy Strategy for America mentions “natural gas” 91 times, against 35 times for "solar" and 32 for "wind."
Projected Total U.S. Energy Demand...Natural Gas Works No Matter What
Source: IEA, WEO 2014
An emerging baseload demand source for gas in the U.S. is liquefied natural gas (LNG) for exports. Beyond booming piped exports to Mexico, the U.S. is poised to enter the LNG business, the fastest growing energy market in the world. Globally, the world is entering "a Golden Age of Gas," where demand is expected to increase nearly 2% a year through 2040. At the forefront, the LNG market value is now between $140-170 billion per year, growing by 8-12% per year. By 2035, BP has global LNG demand rising to ~85 Bcf/day, up from 35 Bcf/day in 2014. LNG now meets around 11% of global demand, compared to pipeline imports at 22% and domestic production at 67%.
The fall in global oil prices has fueled speculation that U.S. LNG export projects might not be economical, but for many that have already secured all the regulatory approvals and either are, or soon will be, under construction, oil prices are not a key factor. That's because those projects already have long-term (20 years or longer) LNG supply contracts in place, based on forecasts of oil prices. Sustained low oil prices though could pose a problem for the proposed or potential LNG export projects that don't get long-term contracts in place.
But remember, oil demand is tied to economic growth and new global demand will continue at 1-2% per year, explaining why most remain bullish on oil prices mid- to long-term. Make no mistake: lacking a significant substitute, "oil will continue to run the world," and low prices themselves encourage oil consumption. BP's most recent projection has the U.S. exporting 14 Bcf/day of LNG in 2035, but it could be much more. Helped by the Panama Canal expansion to be completed next year, U.S. LNG offers great benefits for buyers that want more options to secure supply:
- By 2020, Australia and Qatar will supply nearly 50% of the world's LNG, but new supply regions in North America and East Africa especially have a great chance to dominate after that.
- The precarious and fast growing (i.e., will be devouring more of its own production) Middle East now supplies about 45% of the world’s LNG, so natural gas from the U.S. would be welcomed to enhance energy security.
- U.S. LNG can help buffer the influence of risky Russia, which is: 1) the largest gas exporter in the world, 2) has 25% of the world's proven gas reserves, 3) seeks to be a bigger player in the rising LNG business...but 4) leverages energy as a political weapon.
- Australia has spiraling costs from labor shortages, remote locations, and a high Australian dollar, exacerbated by falling gas prices - the cost of Chevron's Gorgon Project has swelled to $55 billion, compared to an original estimate of $37 billion.
- Canada also faces higher costs because its LNG projects are "greenfield," (i.e., starting from scratch), compared to the cheaper U.S. "brownfield" projects that just have to reconfigure existing LNG import facilities to process exports.
Americans must also realize that an uptick in natural gas and oil prices is not the worst thing. That's because prices have fallen too low, and higher prices would up revenues and allow for more production. Again, when the oil and gas industry succeeds, America succeeds (see here, here, here). Higher prices make more of the massive resource economical and expands reserves, very important because oil and gas will still account for a~65% of U.S. primary energy supply for decades to come.
U.S. LNG Export Terminal Projects (as of June 18)
Source: FERC
