The federal Energy Information Administration predicts demand for natural gas in the US will rise to nearly 35 tcf in 2025 from 22 tcf last year. Skeptics in the oil and gas industry, citing limits on supply, don't believe the market can grow as much as EIA projects in its Annual Energy Outlook 2003. The future of energy in the US depends on the extent to which the skeptics are right.
Already, events are sabotaging EIA's outlook, which envisions a demand recovery this year after 2 years of decline and continuation of the increase through the forecast period. As noted here last week, this year's extremely high gas prices might linger into 2004, making a demand rebound improbable (OGJ, Mar. 10, 2003, p. 19).
What's important about EIA's projection, though, is not how likely it is to turn out exactly right. What's important is the challenge it poses to the gas industry, to lawmakers, and to regulators. EIA has stated that under a reasonable set of assumptions about economic growth, regulation, and fuel choice, the US will need much more gas than it uses now in the next 2 decades. How will an industry and regulatory system straining to meet current demand satisfy such greatly enlarged need?
Changes necessary
Business as usual won't do the job. EIA's projection hints at the many changes that will be necessary if the industry is to come close to supplying a 35 tcf market.
Production, EIA notes, won't grow as rapidly as consumption. Imports, therefore, must grow. That's no surprise. But EIA's assumption of meaningful production growth conflicts with some views. Many industry observers, mindful of the increasing levels of drilling needed just to sustain production, think US production won't grow at all.
EIA's forecast of production growth to 26.8 tcf in 2025 from 19.5 tcf in 2001 assumes important shifts in both type and area of output. Most of the new output will be from unconventional onshore sources—tight sandstones, gas shales, and coalbed methane. EIA says production in this category will climb to nearly 10 tcf in 2025 from less than 6 tcf/year at present, the share of total rising to 36% from 28%. The share of conventional, onshore, nonassociated production, EIA predicts, will slip to 29% from 34%. Those changes imply major reorientation of industry operations.
What's more, the biggest production increase will occur in the Rocky Mountain region, mainly from unconventional sources. The next biggest production gain will be from Alaska. For production to rise as much as EIA projects in either area requires major and probably controversial pipeline construction. In Alaska's case, EIA assumes that gas begins moving through a new pipeline to the Lower 48 in 2021. Construction of the pipeline, costing $11.6 billion and lasting 4 years, isn't assumed to begin until the price of gas remains at $3.48/Mcf or more for at least 3 years.
EIA foresees a pipeline from Canada's MacKenzie Delta, too. That $3.6 billion line, which needs a gas price of at least $3.37/Mcf, starts up in 2016 in the EIA reference case at 1.5 bcfd and undergoes expansion 7 years later. The pipeline is central to EIA's projection that net US imports of Canadian gas rise to 7.8 tcf in 2025 from 3.7 tcf in 2001. Other assumptions are development of untapped unconventional resources in Canada, especially coalbed methane.
Also boosting imports are the assumed expansions of all four liquefied natural gas facilities in the US and construction of three additional plants. In EIA's projection, LNG imports reach 2 tcf in 2025, 6% of total supply.
EIA expects gas flow between primary regions in the Lower 48 to increase by 40% during 2001-25. To accommodate the growth, pipeline capacity has to expand by 26%, and capacity utilization has to rise to 70% in 2025 from 63% in 2001.
The work
To satisfy a market of the size implied by recent trends, therefore, the gas industry must make unconventional sources a growing share of the domestic supply portfolio, expand operations in the Rocky Mountains, build two challenging pipelines from the Arctic, and build and expand LNG terminals. And lawmakers and regulators have to allow—even encourage—it all to happen.
One more thing: The work needs to start now.