Natural Gas Central To World's Future Energy Mix

Margaret M. Carson
Enron Corp.
Houston

Partly because of falling costs, wind energy is growing rapidly as a renewable source of electrical energy. Among all energy sources, natural gas and renewables are expected to show the strongest relative growth in the next 2 decades. This is a Z-46 wind turbine developed by Zond Corp., recently acquired by Enron Renewable Energy Corp. Enron Corp.'s outlook for the energy mix leads this special report, followed by OGJ staff reports covering: 1) a forecast for renewables by the U.S. Energy Information Administration and 2) how one major oil exporting-country is tilting its supply mix toward gas. Photo courtesy of Enron Corp.

Continued growth in demand for natural gas is one of three pillars around which the energy mix of the future will take shape and upon which energy strategies should be based. The others are consumption efficiency and growth of renewable energy sources.

These pillars emerge from the following familiar but very important trends:

Concern for the environment. People take much greater notice now than they did 20 years ago of the effects of their activity on social, commercial, and natural aspects of the environment. Special attention focuses on a build-up of carbon dioxide in the atmosphere and climate changes that may result.
Economic growth. According to the International Monetary Fund, the worldwide economy has grown at an average rate of 3.4%/year during the past decade. A continuation of the trend will create extraordinary opportunities.
Rising energy demand. Energy experts predict that global demand for energy in the next 2 decades will increase by 50% or more, largely as a result of economic growth. Global demand for clean energy-natural gas, renewables, and electricity-will grow faster than overall demand for energy, including oil and coal.
Deregulation of the gas and electricity markets. Deregulation in North America, already well under way, will open a $300 billion/year market for gas, electricity, and new energy technologies. Similar changes will occur soon in Europe, opening a $250 billion/year market.
Privatization. In other western industrial nations, a trend related to deregulation is in progress: State-owned and private monopolies are being replaced by private competition. In the developing world, markets are emerging as governments turn toward privatization and liberalization, especially in the areas of telecommunications, transportation, and energy-particularly gas and electricity.

Deregulation in North America and Europe and privatization elsewhere will help energy consumers improve their standards of living. As energy demand grows, however, concern about CO2 emissions will continue to rise. The volume of carbon emissions in the atmosphere has increased by as much as 30% since the 1970s, raising fears that human activity may be causing harmful changes in the climate.

What is most certain about climate change is the concern of people and their governments about it. Corporations and citizens who want to succeed in business and in society must respond to those concerns and take full account of environmental and development issues. For them, the way forward is ecological and economic efficiency, or eco-efficiency.

Eco-efficiency describes the process of producing goods and services while reducing resource consumption, waste, and pollution. It links sound business practices, the environment, and the needs of current and future generations.

Enron Corp., in its fifth natural gas resource and market outlook for energy, assumes that business excellence and environmental stewardship progress together through the growing practice of eco-efficiency.

Outlook scope, methods

This outlook has been broadened in scope to evaluate world energy supply and demand and includes an analysis of world pipeline gas, electricity, and LNG trends.

Preparation followed these steps:

Analyzing gross domestic product (GDP) growth rate trends for key countries and markets.
Applying GDP growth rates to actual gross domestic products.
Assessing country energy intensity, which is measured in millions of British thermal units (BTUs) of energy consumed per dollar of GDP generated.
Recognizing the indigenous fuel preferences and public policy parameters of the countries and markets analyzed: oil, natural gas, coal, nuclear, hydropower, solar, wind, and other renewables. Each country has a unique pattern of energy use driven by supply availability, resources, transportation, economics, investment, and government energy and environmental policy.
Allocating the total primary energy demand by fuel types, taking into account infrastructure additions, economics, government policies, and supply availability.
Reconciling resource availability and cost of recovery with energy demand by country and market to ensure the feasibility of sufficient production or import supply sources.

Natural gas resource

Enron estimates the world's recoverable natural gas resource base is 15,457 tcf (437 trillion cu m) as of Jan. 1, 1996. This includes 5,011 tcf (142 trillion cu m) of proved reserves. At the current worldwide production rate of 77 tcf (or 2.18 trillion cu m), recoverable resources have a 200-year life and proved reserves a 65-year life. The recoverable gas resource estimate is consistent with those of the World Energy Council, the consultants Cedigaz, and other sources.

Although deliverability and reserves adequacy are the primary concern for meeting current demand for natural gas, it is the resource base that is the proper focus for long-range energy-supply planning purposes.

Cedigaz recently estimated that world gas resources may actually be as much as 17,000 tcf (481 trillion cu m) or greater, taking into account additions to conventional gas deposits, especially offshore, and including some nonconventional resources.

Proved reserves

The 5,011 tcf (142 trillion cu m) of proved natural gas reserves is spread throughout the world (Table 1) [73,758 bytes].

North America, with about 17% of the world's potential gas resources, holds only about 6% of proved gas reserves, or 299 tcf (8,465 billion cu m). U.S. and Canadian companies are conservative in accounting for oil and gas reserves and typically account for proved reserves that are available to economically access markets within a 10-year time frame.

Central and South America hold 214 tcf of proved gas reserves, which represents over 70 years of supply at current production levels. In line with its gas, power, and pipeline operations in Central and South America, Enron has assembled a large amount of data on the status of natural gas reserves in the region.

Russia has the world's greatest abundance of proved natural gas reserves (1,895 tcf). Uzbekistan (where Enron Oil & Gas is exploring) and Kazakhstan hold another 20 tcf and 16 tcf, respectively.

The Middle East has vast proved natural gas reserves, particularly in Iran, Qatar, the United Arab Emirates, and Saudi Arabia. Plans for new LNG plants in Qatar and Oman and additions to existing Abu Dhabi LNG facilities are directed toward fueling growth in demand for cleaner fuels. Oman, Abu Dhabi, and Qatar have recently revised upward their proved natural gas reserves holdings.

The Netherlands, Norway, and the U.K. combined hold the majority of Western Europe's proved natural gas reserves. The U.K. and Italy both have increased their reserves since the 1995 Enron Outlook was published. Norway had a downward revision to its proved gas reserves base since 1995 based on economic market access issues.

Asia's natural gas reserves are up slightly since 1995, despite strong Asian gas production growth. Indonesia, Philippines, Malaysia, Pakistan, and Myanmar have all increased their proved natural gas reserves since the 1995 Enron Outlook was released.

Algeria and Nigeria have the largest proved natural gas reserves in Africa, each with over 120 tcf (3,400 billion cu m). Egypt and Mozambique have both increased their proved natural gas reserves since 1995.

Resources, reserves growth

Enron is optimistic that additions to the world's gas reserves and resources will continue. Exploratory trends toward deeper horizons onshore and deeper water offshore favor a growing proportion of gas among future amounts added to total hydrocarbon reserves.

Areas with the largest potential gas resources are the FSU (5,181 tcf), the Middle East (4,807 tcf), and North America (2,597 tcf). Proved reserves behind these resources have more than doubled over the last 20 years, a strong sign that gas resources are far from depletion.

The world's proved natural gas reserves doubled in size between 1976 and 1996

(Table 2) [12,895 bytes]. The 2,540 tcf of reserves estimated in 1976 represented 53 years of supply, compared with the 65-year supply indicated by 1996 data.

This is a compelling fact behind the strength of today's global natural gas demand growth: Demand is greater, reserves are twice as large, and reserves life has been extended at the same time.

The estimate for worldwide gas reserves in the 1997 Enron Outlook is down about 1% from 5,040 tcf reported in 1995. The decline results mainly from adjustments reflecting short-term market-access issues, such as in Canada and Norway. Volumes eliminated from reserves for market reasons do not disappear but return to the potential-resource pool. Major gas reserves gains have occurred in the Middle East, the Pacific Rim, and Venezuela since the 1995 Enron Outlook.

The world potential gas resource base has increased by about 10% since 1995 (Table 3) [9,234 bytes].

Gas prices, demand

The world netback price for natural gas in 2015 averages $2.58/MMBTU in the 1997 Enron Outlook in base-case nominal dollars. This compares with the average North American gas price of $3.31/MMBTU in 2015 in nominal dollars (or $1.89/MMBTU real), or about 28% higher than the world average based on a $20/bbl oil price base case. The world rate of GDP growth is assumed to be 3.3%/year in the base case (Table 4 )[32,368 bytes] and (Table 5) [27,814 bytes] In the case of high economic growth by 2015, the world average gas netback price increases to $2.98/MMBTU. The world rate of GDP growth in this case is assumed to be 3.8%/year during 1996-2015.

In the high growth case, demand for natural gas, renewables, and coal increase, and energy use is 13% higher than in the base case, or 639 quadrillion BTU in the high growth case, compared with 564 quadrillion BTU in the base case.

By the year 2015, world demand for natural gas grows at a rate of 3.4%/year from 70 tcf to 147 tcf (or 4.2 trillion cu m) in the Enron Outlook (Table 6) [8,158 bytes].

By 2015, Western Europe, Asia/Pacific Rim, Russia/FSU, and North American markets increase natural gas demand in excess of 10 tcf (283 billion cu m) each, at annual growth rates of 3.5%, 5.5%, 2.1%, and 2.6%, respectively.

Country demand trends

(Table 7) [48,982bytes] shows regional and country trends in natural gas demand growth. In North America, gas demand grows from 26 tcf in 1996 to 42 tcf in 2015, led by increased gas use in industrial boilers and in electric power generation, at a 2.6%/year rate.

Latin America more than triples its natural gas consumption over the 1996-2015 time frame. Gas use grows from 3 tcf to 11 tcf (or 0.31 trillion cu m) by 2015, at a rate averaging 7%/year, as the region's vast resources are more fully developed and utilized.

In Western Europe, by the year 2015 gas use more than doubles. This growth is led by gains in gas use in Northwest Europe and Mediterranean markets, due to greater gas use for power generation across the continent, displacing coal and fuel oil for reasons of efficiency and environmental protection. West European gas use grows to 23 tcf (0.65 trillion cu m) by 2015 at the rate of 3.5%/year. Gas and electricity convergence will accelerate gas use in power generation in new markets.

As the gas industry in the FSU and Eastern Europe undergoes major economic and structural changes, the demand for gas will grow to 32 tcf (0.91 trillion cu m) by 2015, at the rate of 2.1%/year.

Natural gas growth potential is emerging in Africa, where gas consumption has long been slight. Current gas demand of 2 tcf increases to 5 tcf (0.14 trillion cu m) by 2015 in the Enron Outlook, at a 5%/year rate.

Natural gas use in the Middle East is expected to triple over the next 20 years from about 4 tcf in 1996 to 12 tcf (0.34 trillion cu m) by 2015. Area use grows at 6%/year.

By 2015, gas demand in the Asia/Pacific Rim region is forecast to grow from 8 tcf to 22 tcf, an increase of 14 tcf (0.39 trillion cu m). This 5.5%/year increase is driven by a convergence of three factors:

The rapid increase in the need for energy in all forms, but especially for industrial and power plant fuel use.
The need for clean energy, especially in large, congested urban areas for residential and commercial growth.
The increase in plans for cross-border gas and LNG infrastructure and trade to serve the region with clean fuels.

Of the 70 tcf (2.0 trillion cu m) of new natural gas demand worldwide by 2015, 14 tcf (or 20%) of the growth is in the Asia/Pacific Rim region, and 11 tcf is in Western Europe, led by new supply sources and 10 tcf of growth in Russia/FSU gas use.

U.S. gas and energy

Natural gas continues to increase its market share in the U.S., growing from 21.6 tcf in 1996 to 33.1 tcf by 2015, an increase of 11.5 tcf (Table 8) [22,333 bytes]. Gas use grows in the U.S. by 54%. This growth is led by increases in electric power generation and industrial gas use (Table 9) [6,843 bytes]. The average growth rate for U.S. gas consumption through 2015 is 2.3%/year. This compares to the average annual GDP growth rate in the U.S. forecast at 2.6% in the 1997 Enron Out look over the 1996-2015 time frame.

World energy use

By the year 2015, natural gas overtakes coal use as the second most widely used fuel worldwide (Fig. 1) [22,874 bytes], (Table 10) [7,126 bytes].

World gas use in power plants is the fastest growing segment, and industrial use the next largest (Table 11) [6,389 bytes]. Enron sees over 50 million new gas users in all segments worldwide by the year 2015.

Enron forecasts LNG production and sales will nearly double by the year 2015. LNG production today represents 74.7 million tons/year traded, or 3.8 tcf of natural gas equivalent. This is about 5% of all world gas production. By 2015, the world trade in LNG is forecast to increase to 140 million tons, or 7.2 tcf of natural gas equivalent (Table 12) [34,170 bytes].

Gas pipeline construction

There are over 780,000 miles of natural gas transmission pipelines worldwide. By 2015, gas pipeline additions will increase the world gas grid by 45%, or 335,000 miles (Table 13) [10,368 bytes].

By 2015, therefore, if this pace continues, 44 tcf of new gas supplies could come to market on new gas pipeline systems.

Enron expects the world gas market to grow 70 tcf by 2015 to 147 tcf (or 4.2 trillion cu m), which would require:

Pipelines to be added at greater than the recent pace.
Development of greater LNG transport infrastructure, possibly replacing a portion of the gas pipeline potential growth.
Some combination of these options, which is a likely case.

Of course, not all of the proposed projects will be built. Some serve duplicate markets, and others may be delayed due to financing or contracting problems and miss their timetables for completion. Shorter lines and extensions of existing pipelines are typically more economic to build.

The leading markets for large gas pipeline construction are Asia, Europe, and the Middle East/Africa regions. Over 115,000 new pipeline miles are estimated to be planned for the Asia/Pacific Rim region by 2015, more than twice the region's current capacity (Fig. 2) [30,495 bytes].

In North America, the majority of the proposed pipeline construction activity is centered around U.S. Gulf Coast and Canadian supplies targeting markets east of the Mississippi and south into nontraditional gas use markets (Table 14) [9,787 bytes].

Power generation

A leading market to serve as an "anchor" for much of this new gas pipeline construction is gas-fired power generation.

In spring 1997, the consultants ICF Kaiser prepared a study for Enron comparing the cost to build coal-fired power plants with the cost of gas combined-cycle power plants. Based on 65% baseload plant utilization, gas combined-cycle plants are the favored technology because (a) they are about half as costly to build as coal plants, and (b) they are about 30% more efficient in the use of fuel to generate electricity (i.e., a more favorable heat rate) than coal plants. And since efficient gas combined-cycle plants can (unlike coal plants) operate at 95% utilization rates, the cost savings from a gas combined-cycle plant in full operation are even greater.

A gas combined-cycle plant can yield power at 2.75¢/kilowatt-hr (kw-hr) at 65% utilization and as low as 2.36¢/kw-hr at 95% percent utilization, compared to a low cost coal plant at 4.16¢/kw-hr at 65% utilization or a high cost coal plant at 5.86¢/kw-hr at 65% utilization (Table 15) [63,809 bytes].

Since the cost of capital in some markets may be lower than shown in the capital charge assumptions, it is noted that further reductions can occur to the cost of power from these projects.

Power generation

The world requirements for new power generation capacity by the year 2015 are 1,580 gigawatts, representing a 55% increase in capacity over 1994 levels. India, China, Indonesia, and other Far East markets lead this growth trend, with Latin American markets also indicating a strong demand for new capacity (Table 16) [43,164 bytes].

Natural gas as fuel for power generation grows at a faster pace than other fuels for electricity generation: 5.7%/year compared with 3.5%/year for all fuels (Table 17) [6,721 bytes].

According to a recent Enron study, 33 countries announced requirements for clean power plants totaling 246,000 megawatts (Table 18)[7,043 bytes]. A further 55% of the gigawatts needed by 2015 remains contestable in that a fuel has not yet been designated for this capacity. If gas, LNG, or other clean fuels claim one third to one half of this contestable market, the share of clean fuels could achieve 38-48% of new capacity additions. Clean fuels include hydro power, natural gas, solar, wind, biomass, geo thermal, and other renewables and emerging technologies.

Asia/Pacific Rim nations lead the pace for clean power development with over 121,000 megawatts of clean power projects under active consideration. Europe and Latin America, each with over 40,000 megawatts of clean projects, tie for second place. There are over 26,000 megawatts of clean projects proposed in the Middle East and Africa. Planned North American clean power plants represent a further 19,000 megawatts based on recent North American Electric Reliability Council (NERC) and Enron forecasts.

Renewable energy, because it offsets air pollutants that otherwise would be released, will capture a significant share of the world energy market over the next 20 years. There are many active projects for wind energy, hydro, and solar power worldwide, including the United States, Europe, Asian, and Latin American markets, that are contributing to the 3.6%/year growth in renewable energy use.

Technologies are available and being used today that reduce the environmental impacts of energy production and use while simultaneously promoting vigorous economic growth. Such technologies can make our energy system more environmentally sustainable.

The desire to protect the environment which provides for economic growth transcends political ideology and geography. Wise energy choices provide benefits in the global marketplace today. These technologies can power a nation's economic engine while providing the improved quality of life that comes with a cleaner environment for its citizens.

Electricity consumption, prices

Over the 1995 to 2015 time frame, world electricity use is forecast to grow an average of 3.5%/per year, from 12.7 trillion kw-hr in 1995 to 25.27 trillion kw-hr by 2015 (Table 19) [29,378 bytes].

By 2015, the world outside the Organisation for Economic Cooperation and Development (OECD) nations overtakes the OECD countries in total share of global electricity consumption.

To forecast world electricity prices, Enron has chosen to use the large industrial user price for comparison purposes. Currently, the world is grouped into three tiers of industrial electricity users by price: (a) those with low cost and/or subsidy-priced power to industrials, (b) the quasi-market-oriented price tier, and (c) the high fixed/high variable cost tier countries representative of some OECD countries and some other countries.

The dynamics of how the price of industrial electricity will change in these three tiers over time is complex given that:

Individual federal and state governments have differing strategies and timetables as to how electricity is priced today and will be priced in the future in their markets;
Age and utilization of power generating plants differ greatly among regions and markets; and
The pace of change in liberalization, privatization, subsidies, or deregulation varies around the world.

The average price of industrial electricity calculated in the 1997 Enron Outlook worldwide is 4.5¢/kw-hr, but based on a range from 1.0¢ to 3¢/kw-hr in the developing world to a high of 9¢/kw-hr in much of the OECD (typically outside the United Kingdom, U.S., Canada, and Australia). By 2015, it is estimated industrial electricity prices will rise in the very low-price markets and decline in the high fixed cost/high variable cost markets and, as a result, decrease to average 3.5-4.0¢/kw-hr for industrial users. In the case of high economic growth, the higher relative cost of fuels may result in a world average industrial electricity price in the 4.5-5.0¢/kw-hr range.

Global carbon emissions

The global carbon emissions that may be released by the year 2015 are expected to be 9,451 million metric tons in the Enron base case, compared with 6,300 million tons estimated in 1996-a 3,151 million metric ton, 50% increase. In the Enron high growth case, global carbon emissions increase 69%.

The U.S. at the 1996 U.N. Framework Convention on Climate Change called for steps to reduce the threat of climate change consistent with economic prosperity. This was in response to the Second Assessment Report by the Intergovernmental Panel on Climate Change (IPCC), which concluded for the first time that "the balance of evidence suggests a discernible human influence on global climate." The challenge for world economies to reduce carbon emissions can be seen from (Table 20) [9,654 bytes] and (Table 21) [34,469 bytes].

The EIA projections for the year 2015 are based on the EIA Annual Energy Outlook 1996, Table A8, and the World Energy Projection System Model (1996). The Enron environmental alternate case is from the 1997 Enron Outlook analysis where global carbon emissions are up 38% compared with a 48% increase in the EIA base case by the year 2015.

If natural gas, hydro, solar, wind, and other renewables are substituted in the environmental alternate case for all incremental growth in carbon emissions from coal use shown in the Enron base case by 2015, world carbon emissions by the year 2015 are reduced by 760 million metric tons/year. The Enron environmental alternate case has 1,945 million metric tons/year less global carbon emissions than the Enron high growth case by the year 2015. Since it is widely acknowledged that carbon emissions have a 200-year residence life in the upper atmosphere, it will obviously take many decades to begin to reduce atmospheric concentrations once actions to limit their growth begin.

Conclusion

Enron believes that clean fuels and competitive energy services and markets are the solutions to the global need for plentiful, clean, and economic energy. Global gas demand grows at 3.4%/year, a pace slightly higher than the rate of world economic growth of 3.3%/year, in a market where gas supplies are ample and demand for natural gas and LNG come into balance.

World gas use achieves 147 tcf levels by the year 2015 in the 1997 Enron Outlook. Gas-fired power generation and industrial gas use are the most rapidly growing segments. World gas resources are plentiful-about 200 years of resource life.

World gas and electricity use both grow at prices which provide (a) the economic incentive to develop supplies, and (b) the cost competitiveness that allows gas to expand its use in new and existing markets on a worldwide basis.

The Author

Margaret M. Carson is director of corporate strategy and competitive analysis for Enron Corp., Houston. She joined Enron in 1987. A graduate of the University of Pittsburgh, she also holds an MS in management from Houston Baptist University.