U.S. proven natural gas reserves continue to soar to record highs. We now have some 360 Tcf of proven gas in the ground, recoverable under current market conditions, experiencing increases of 5-8% per year. Driven by the Marcellus shale play in the Appalachian Basin, Pennsylvania and West Virginia have registered the largest gains, with both state reserve totals more than quadrupling since 2010. In fact, Pennsylvania and West Virginia have accounted for about 60% of new U.S. gas reserves since 2008, although mighty Texas continues to plug along, upping its reserves by 20% since then. These increases in U.S. gas reserves are even more remarkable because they've occurred in a low price market. Henry Hub spot gas prices have steadily declined from their average of $8.86 per MMBtu in 2008, and now stand at about $2.65. Remember: reserves are simply subsets of the overall much larger resource, illustrating what can be produced today under prevailing technologies and prices. Lower prices work to lower proven reserve totals, so, in fact, we have even more accessible gas than what can be reported. Overall, like oil, the gas reserve lifespan hovers in the 10-15 year time frame. That's because it makes no economic sense for companies that utilize short- to mid-term planning to look for resources that will not be needed for decades. Reserves though greatly affect the basic value of a company, so it's imperative that business policy centers on continuous replacement of reserves.
The U.S. natural gas resource has had a variety of estimates, including undiscovered, unproved, and unconventional gas. The EIA has concluded that we have 2,543 Tcf of technically recoverable natural gas. The U.S. Geological Survey estimates the mean gas resource stands at 1,150 Tcf, for unconventional gas: shale gas at 425 Tcf, coal-bed methane at 96 Tcf, and tight gas at 201 Tcf. But, these estimates are always changing (and usually elevating) as we learn more about the geology, prices increase, and technologies advance. For example, the Bakken shale formation in North Dakota is now yielding more oil in a single year than our best geologists even thought the play contained in total. And using shale as an example, shale gas is "unconventional" today but as time goes by and the technologies improve, the unconventional resource base evolves into conventional. For example, not long ago most offshore oil drilling was considered "unconventional," but now it's commonplace. Shale gas today is nearly 50% of U.S. gas supply, when the EIA's Annual Energy Outlook 2012 projected that this wouldn't happen until 2035. And contrary to some false claims, shale gas production has actually slightly increased the heat content of U.S. gas supply, now at at 1,030 Btu per cubic foot.
Dry Natural Gas Contained in Total Natural Gas Proved Reserves
Source: EIA; JTC
Current marketed U.S. natural gas production is 75 Bcf/day, compared to 58 Bcf/day in 2008. This is expected to steadily increase to reach a staggering 98 Bcf/day by 2040, or 80% of today's global output. New gas producing states such as surging Pennsylvania are also supplying other states with gas. Pennsylvania produced about 12 Bcf/day last year, or 16% of total U.S. output. In contrast, New York has banned hydraulic fracturing ("fracking"), the well-stimulation technique that has led to the production boom, while importing over 90% of its gas, the bulk of which comes from Pennsylvania, the 3rd largest state for fracking. New Yorkers should know that gas is the state's main source of electricity, now supplying 42% of total power generation, against 21% in 2005. The shale revolution has given us an energy security blanket that often gets forgotten: offshore, more prone to production shut-ins from storms, is now just 6% of production, compared to 15% to 2008.
From railroad to trucking to marine shipping to petrochemicals, the rise in our natural gas asset base is creating considerable opportunities for a variety of industries. Gas has been the fastest growing major fuel for use, with four key markets: commercial (e.g., buildings), residential (e.g., home heating), industrial (e.g., manufacturing), and electricity generation. Natural gas is a uniquely versatile fuel, where no single sector holds above a 35% grip on total demand. This versatility is why the International Energy Agency's World Energy Outlook 2014 has gas supplying 27-30% of U.S. energy supply through 2040 under three vastly different projection scenarios, including the low-carbon "450 Scenario" which sets "an energy pathway consistent with the goal of limiting the global increase in temperature to 2°C." According to the EIA's Annual Energy Outlook 2015, industrial sector gas consumption is expected to grow faster than all other sectors, with an annual growth of 0.8%. For industry, lower cost ethane feed from natural gas has been replacing naphtha from petroleum. Natural gas-fired power is projected to increase by 40% from 2013 to 2040, although new laws that limit carbon emissions will likely even increase that amount. Gas has also long been the dominant choice for primary heating fuel in the residential sector, now heating 56 million homes. Natural gas also has a variety of "idiosyncratic" uses that will increase both demand and the need for more production (why unfair taxes and fracking bans in large gas using states like New York and California are a national concern). Natural gas combined-cycle and combustion turbines can ramp up very rapidly, so they can better supply the peaking capacity when electricity demand is high, such as the summer months when air conditioning is widely used.
This greater operational flexibility makes natural gas the perfect complement to intermittent renewables such as wind and solar power that require more reliable backup capacity. This is why more wind and solar mean more natural gas. For the critical capacity factor, the ratio of the net electricity actually generated over a given time versus what could've been generated at continuous full-power operation, natural gas averages a very high 87%, while wind usually provides on the order of 25-35% and solar 10-20%. Natural gas transportation now uses about 35 Bcf a year of gas, a tripling since 2000, and there's greater potential as infrastructure gets laid out. And beyond just exporting piped gas to Canada and Mexico, the U.S. will soon be exporting liquefied natural gas (LNG) to Asia, which holds three-quarters of all LNG demand, and perhaps more proximate Europe. This inevitability will change entire gas markets as the world advances toward a more globalized market for gas similar to oil, with pricing based on the fundamentals of gas supply and demand. The LNG trade is now about 30% of total natural gas consumption. Cheniere Energy is nearing completion of its export terminal on the Gulf Coast, with its first shipment expected in December. Those policymakers involved in the approval of such projects should know that the LNG business is on the brink of surpassing iron ore as the 2nd most valuable commodity traded in the world, after oil. For all these reasons, the only conclusion is a fundamental reality: more states must develop the gas resources that they have and the U.S. is going to need more gas infrastructure. Just consider home heating, at one point in Winter 2014, spot natural gas for delivery into various parts of the Northeast reached over $100 per MMBtu because of a lack of pipelines.
Rising U.S. Natural Gas Use....Across all Four Sectors
Source: EIA
Rising U.S. Natural Gas Use....Not Even the Best Models Can Keep Up
Source: IEA, World Energy Outlook, 2008, 2011, 2014
