Future US energy supply has a sore thumb—the colloquial symbol of something that stands out from everything else. Energy supply's sore thumb is undrillable federal land.
It's a big thumb. It includes most of the Outer Continental Shelf off the West Coast and in the eastern Gulf of Mexico and all OCS acreage off the East Coast. It also includes vast onshore acreage in the US West and, of course, the Arctic National Wildlife Refuge of Alaska.
Priority attention
Energy supply's sore thumb deserves priority attention of the interagency working group announced this month by Energy Sec. Spencer Abraham to seek ways of expanding supply of natural gas. It's a welcome initiative involving the departments of Energy, Agriculture, Commerce, Homeland Security, and Interior plus the Federal Energy Regulatory Commission and Environmental Protection Agency. According to a Department of Energy statement, the group "will focus on identifying specific near- and long-term actions that could expand domestic natural gas supplies." The statement seemed to foreclose the urge to study the subject into oblivion by referring directly to the National Petroleum Council's September 2003 report on natural gas. Findings of the NPC report are all anyone needs to know about a problem already raising energy costs and constricting gas-dependent manufacturing.
The NPC report documented a "fundamental shift in the supply and demand balance," with which the natural gas industry has been familiar for several years. "Natural gas production capacity from accessible basins in North America has reached a plateau," NPC said. "Recent experience shows steeper decline rates in existing production and a lower average production response to higher prices from new wells in these areas."
Meanwhile, the market has changed. Consumption of gas for power generation has grown, while demand in industrial markets has slumped. Since 1997, total consumption has flattened at 22-23 tcf/year. "Today, it is production capacity, including established import capacity, that drives the tight supply-demand balance," the NPC study said. "The resulting higher prices are limiting the ability of natural gas demand to grow."
The gas market, in other words, needs more gas. If it doesn't get more gas soon it will extinguish more consumption with prices substantially higher than they are now. A question for the government's working group is how much pain US consumers must endure before politicians come to their senses on access to federal land.
Other steps are necessary, of course. The government can promote consumption efficiency, accelerate construction of LNG terminals and a pipeline or two from the Arctic, and facilitate improvements to the pipeline network. The NPC report covers all of them.
The most urgent call on attention of the new working group, however, is the market's sore thumb. Undrillable federal land represents potential gas supply that the US, as a matter of political will, refuses to develop. The country needs that supply now.
The NPC study estimated the gas resource off-limits to drilling at as much as 200 tcf. The total includes 80 tcf of "technically recoverable re- sources" in OCS areas subject to leasing moratoriums: 21 tcf off the West Coast, 33 tcf off the East Coast, and 25 tcf in the eastern Gulf of Mexico. The remaining 125 tcf is in the Rocky Mountains, where access issues relate less to leasing than to restrictions on activities after leasing occurs. The study said 69 tcf of the technical resource base in the Rockies is "effectively off-limits," and a further 56 tcf is subject to added costs and development delays because of access-related regulations.
Cost reductions
Removing the OCS leasing moratoriums and easing the access restrictions in the Rockies might add 3 bcfd to production by 2020, NPC said. That's 6% of current production, not the type of supply gain that the US can afford to deny itself.
The assumed increase lowers average price projections in the NPC study by 60¢/MMbtu and average costs to consumers during 2001-20 by $300 billion. Taking these steps in conjunction with other measures to increase supply, improve consumption efficiency, and enhance fuel-choice flexibility, NPC estimated, would reduce US gas costs over 20 years by $1 trillion.
So the sore thumb isn't just big. It's expensive. The study is done. It's time for the government to act.
