Growth in the international LNG trade will be important in providing natural gas for future Canadian, Mexican, and US markets, but policymakers in those and other countries will actually determine gas supply security in North America, said speakers at the Natural Gas in North America: Markets and Security conference in Houston Nov. 16.
The event was sponsored by the Baker Institute Energy Forum and the Center for Energy Economics at University of Texas and was held at the James A. Baker III Institute for Public Policy at Rice University.
“The future development of the North American natural gas market will be highly influenced by US policy choices and changes in international supply alternatives,” reported the Baker Institute in its Policy Report on Natural Gas in North America: Markets and Security. Policy initiatives must include granting access to domestic resources and passing regulations to encourage importation and distribution of gas and LNG from other countries.
US gas demand, imports
US natural gas demand increased to 21.7 tcf by 2006 from16.2 tcf in 1986, representing an average growth of 1.5%/year. Demand is expected to slow, yet grow by 1.3%/year during the next 20 years, according to the Baker report. In 2006, gas represented 22% of total primary energy use in the US. About 19% of the electricity currently generated in the US is gas-fueled, and it accounts for 90% of all new Mw of electricity capacity installed since 1995, primarily because of the efficiencies gained from use of combined-cycle technology in power generation. Gas also fuels 41% of industrial use and 43% of residential use.
Its appeal continues to grow because it is thought to be more secure than oil, cleaner than coal, and competitively priced compared with oil, nuclear power, and renewables. Climate change legislation will affect how much gas is used for future power generation, said Glen Sweetnam of the Department of Energy’s Energy Information Administration. However, beyond 2015-20, he said, more coal-fired plants will come on stream as clean coal technology advances. However, he said, “If you don’t have clear legislation, but the threat of legislation, investment will be held off, and gas use will increase.”
At the same time gas is gaining in popularity, growth in domestic production in the Lower 48 is likely to slow, leading to the need for increased imports. In 2006, the US imported about 20% of the gas it used, 85.7% of that from Canada via pipelines. However Canada’s gas needs also are growing, particularly for the production of tar sands in the west, possibly limiting future volumes available for export.
Because of these conditions, imports of gas in the form of LNG are expected to increase substantially, creating supply security concerns and raising questions about appropriate national natural gas policy.
LNG imports in 2006 stood at more than 500 bcf, and three new import terminals being built on the Gulf Coast with a total send out capacity of more than 5.5 bcfd will enable imports to swell.
The US intends “continued increases in LNG imports,” said Katharine Ann Fredriksen, principal deputy assistant secretary for the Office of Policy and International Affairs at the US Department of Energy. The primary US LNG source is Trinidad and Tobago, which provides 66.7%, with Egypt 20.5%, Nigeria 9.8%, and Algeria 3% adding to the supplies.
The Baker report emphasized the importance of securing sufficient LNG in the face of burgeoning demand in other countries such as Mexico, Canada, the European Union, and Asia-Pacific, particularly India and China where demand is expected to increase by 3.5%/year.
Factors important in enabling greater LNG imports will be cooperation between countries in production and trade, Fredriksen said, along with greater interactions among governments and the private sector, and regulatory certainty.
Locked-in gas
Despite the US slowdown in gas production, the US has not run out of gas supplies. Vast unexploited gas resources in Alaska could be piped to the Lower 48, and large potential resources exist off the US Atlantic and Pacific coasts, most of the eastern Gulf of Mexico, and in many sections of the Rocky Mountains, Baker reported.
The US over the last 20 years has removed much acreage from availability to oil and gas exploration companies as leases, dropping from 75% of federal lands available in 1987 to 17% today, it said.
“These [unavailable] areas are estimated to contain more than 125 tcf of natural gas resource, the equivalent of six times US natural gas demand in 2006, reported Baker Institute. “Nearby, Mexico also is home to proven gas reserves of up to 14.6 tcf and an estimated 69.2 tcf of undiscovered gas resource that could be exploited if political barriers to increased investment could be resolved.”
The Baker report emphasizes the importance of policymakers’ granting to oil and gas producers access to currently locked-up domestic resources, saying the growth of international trade in LNG will greatly impact US energy security, especially when other sources are politically volatile and possibly unpredictable.
Kenneth Medlock, one of the authors of the report and a speaker at the conference, said geopolitics will more and more become part of the energy access issue, and granting access to locked-up domestic supplies would increase US elasticity and serve as a backstop to minimize the impact of a gas cartel, should one be created.
End-use US gas demand is expected to climb to 23.9 tcf in 2015 and 26.9 tcf by 2025, up from 20 tcf in 2006. At the same time, domestic production is projected to be about 20.8 tcf in 2015 and 21.2 tcf in 2025.
If more federal lands are not opened up for drilling, the US will have to rely on imports for 20% of total gas consumption by 2025, increasing to 31.1% by 2030. Of these volumes, 20-25% would be from the Middle East. However, the report added, opening the locked-in lands would not lead to total gas independence. A strategic gas reserve might be more politically expedient as would conservation offsets or “trading” of conservation efforts to offset productive activities.
The table is the Energy Information Administration’s short-term Natural Gas Outlook 2008 forecast made prior to government policy intervention. EIA said it will revise its forecast in light of the recently passed HR 6, the Energy Independence and Security Act of 2007 signed into law on Dec. 19, 2007.
Canada
Canadian energy markets are expected to function well, with energy prices balancing energy supply and demand, said Roland George of Canada’s National Energy Board. Ample supplies are available to meet the country’s needs, and fossil fuels and other conventional fuels will continue to dominate.
Canada has 420 tcf of remaining gas resources, mostly in frontier provinces. George said conventional gas production from the Western Canada Sedimentary Basin (WCSB) will decline steeply, with mid-range prices not high enough to prevent it. Plans call for 25,000 gas wells to be drilled in WCSB.
Production will increase, however, in the northern and offshore areas and from unconventional gas sources. There will be an influx of LNG imports that will compensate for the reductions in WCSB production. He said seven import terminals are planned and that LNG will contribute to more than half of Canadian gas requirements by 2030.
The wide range of prices reflect uncertainty, he said, but: “We’re looking at $5.50-12 (US)/million btu for gas.”
Despite higher energy prices, demand is expected to increase with robust increases in population and the economyexpected to be about 1.8% over the medium-to-short term (10 years) and as coal is phased out in Ontario for electricity generation. Long term, he expects 0.3-1.4% growth as the economy slows. After 2015, with advanced technologies, clean coal is expected to meet more of the energy demand.
“Canada will continue to be part of an integrated continental energy market where the border goes each way,” George said, emphasizing that Canada will continue to play a role in continental energy security. “Competition is a good thing” in North America, he said.
Several enablers will help to successfully overcome energy challenges: technology that offers solutions to expanding the boundaries of the conventional resource supply and improve energy efficiency; governmental policy that integrates across multiple objectives of economic growth, environmental sustainability, and development of the energy sector; adequate investments to develop new sources of energy and new and replacement infrastructure to meet the growth in energy demand; public engagement; and high quality analysis to facilitate timely decision-making.
Canada’s Policy mandates a 20% reduction of greenhouse gasses by 2020, which will not take into account energy trading.
Mexico
Demand in Mexico for natural gas as an industrial feedstock and for electricity generation is soaring, reported the Baker Institute. “In 2006, Mexico imported 0.88 bcfd (or 16.2% of Mexican demand) from the US, which is up from only 5 MMcfd in 1986 and is three times higher than the volumes in 2000. Moreover, Mexican demand is expected to increase by 3.4%/year, leaving Mexico increasingly dependent on foreign imports unless it can reform its energy sector.”
Mexico’s last major energy reform opened downstream gas transport, storage, and distribution in 1995, said Francisco Salazar, president of Mexico’s Energy Regulatory Commission (CRE). More than $1.5 billion has been spent since then on facilities, including 2,700 km of pipeline, to increase distribution to areas that had no access to gas.
Gas imports were necessary during 1995-2005, Salazar said, because demand exceeded domestic production. Consumption in 2006 was 6.5 bcfd, with 35% used for electric power generation and 14.6% for industrial use. Gas consumption in Mexico is expected to increase by 4.8%/year through 2015, rising to 305 Tw-hr in 2015 from 208.3 Tw-hr in 2007.
Most gas sales will be in the form of LNG. To facilitate its use, Mexico has published its first standards for LNG plants and granted five permits for import plant construction. Unfortunately two of the projects were cancelled for lack of a local permit (Marathon) and excessive cost escalations (Chevron Texaco).
Another two, in Baja California, merged into Sempra’s Energia Costa Azul LNG, which is under construction and will have a send out capacity of 1 bcfd when it begins operations in late 2008. So there currently are only two planned LNG import terminals that have federal permits, Salazar said. The other, planned by Repsol, is on the east coast at Altamira with a 500 MMcfd capacity. Repsol has signed a long-term contract to import LNG from Peru, he said.
Salazar said Mexico is promoting private investment in LNG and will construct more pipelines to strengthen and expand the existing network and provide access to new LNG plants.
It also is pushing a “Permanent Regime” for open access, creating a National Integrated System (SNI) of open-access pipelines that will have a consistent price for usage, with a national injection charge and an extraction or user’s fee.
In addition, Mexico is sponsoring coalbed methane research and supporting regulatory measures to promote more-effective use of its gas systems. Salazar said the government intends to allow prices to reflect market conditions.
