Industry Market Trends
Energy Outlook: Natural Gas Plentiful, Inexpensive
January 7, 2014
The current and ongoing surge in natural gas drilling in North America could be remembered as one of the great success stories of the American economic recovery. It is an industry that has added millions of new jobs. It is an abundant fossil fuel whose demand growth eclipses any other. And it is seen as a cornerstone of energy independence. The darkest days of domestic energy production weren't that long ago. But key shifts in energy policy in recent years paved the way for entrepreneurial drilling companies to begin tapping into vast underground reserves of oil and gas from coast to coast. Today, natural gas is the world's fastest growing fossil fuel, opening huge supplies of tight gas, coalbed methane, and -- led by advances in horizontal drilling and hydraulic fracturing -- shale gas, according to the Energy Information Administration (EIA), the statistics arm of the U.S. Department of Energy. Natural gas production also has benefited from a ready-made infrastructure from long-established pipeline transportation networks, gas treatment facilities, refineries, and supply chains, according to research firm IHS. It's difficult not to overstate the significance of the shale gas boon in this country. At his keynote address during a national IHS forum earlier this year, Daniel Poneman, U.S. Deputy Secretary of Energy, called it "the most innovative development of the new millennium." In fact, the EIA predicts shale gas will lead the growth in total gas production through 2040. The so-called OECD Americas are eclipsed only by non-OECD Europe and Eurasia for current natural gas production in the world, according to the EIA. OECD stands for the Organization for Economic Cooperation and Development, formed in the 1960s to promote global economic prosperity. By 2012, domestic drilling companies were cranking out nearly 80 billion cubic feet (bcf) of natural gas per day, according to IHS; shale production alone represented nearly half (44 percent) of U.S. gas production in 2013. By the early 2020s, the U.S. is expected to become a net exporter of natural gas, the agency has noted. Current Conditions During an address before commercial trucking executives last August, T. Boone Pickens, founder and CEO of BP Capital and founder of Clean Energy, estimated the U.S. had recoverable shale gas reserves of 4,000 trillion cu-ft or more. "Now, people are saying we may get twice that much," Commercial Carrier Journal reported. "The point is, we have plenty of natural gas," more than any other country in the world. We're going to go down as the biggest saps that ever came to town if we don't use the natural gas we have." If current trends persist, Americans may end up looking pretty un-sappy. Scores of industries are tapping into natural gas as a cheap and clean energy source. Close to half of all households currently use gas for heating, according to the EIA. Not long from now, natural gas will overtake coal as the most popular fuel behind oil. Few American industries are doing better right now than energy, particularly natural gas. (Another is the automobile sector.) And the impact on the U.S. economy is significant, adding $283 billion to the GDP last year alone, IHS has reported. By 2025, it will add about $533 billion. According to a recent IHS study, unconventional oil and gas production trends have led to higher household incomes, as well as boosted trade and U.S. competitiveness in the world economy. In 2012 alone, more than 2 million jobs were supported by the unconventional oil and gas production industry. By 2020, more than 3 million American jobs will be supported by the industry. In 2025, IHS predicts that nearly 515,000 manufacturing jobs will be supported in some way by unconventional oil and natural gas. Thanks to lower energy bills, disposable income in U.S. households rose by an average of $1,200 per year in 2012; that figure is expected to nearly triple by 2025, according to IHS. Stable energy prices, thanks in large part to cheap and plentiful natural gas, could also have far-reaching positive trade implications, according to the research firm, which attributes up to 3.2 percent added value to domestically produced goods and services. The natural gas boon also has had a positive ripple effect on a host of other industries, particularly subsectors such as basic organic chemical, resins, and synthetics; agri-chemicals; and iron and steel products, according to IHS. One has to look no further than the plastics industry, which has reaped a host of benefits from shale gas production, as My Purchasing Center recently reported. According to IHS, the $198 billion chemical export business accounted for 13 percent of all U.S. exports in 2012 because of lower production costs and feedstock pricing. According to the EIA, the oil-to-gas price ratio grew to an average of more than 35:1 in 2012, with a Btu of crude oil selling for more than five times the price for a Btu of natural gas. And vast shale oil and shale gas resources represent as much as one-third of the planet's "technically recoverable" natural gas resources, reports the EIA. Natural gas prices had been declining since April 2013, but began climbing slightly when December 2013 delivery figures were announced - about $3.87 per million British thermal units (MMBtu). Unusually cold temperatures across the country, in fact, hiked that number even higher to $4.337 per MMBtu for January deliveries (a seven-month high), according to Bloomberg News. Soft Prices, Plentiful Supply, Slow Demand We live in an energy-hungry world, and the planet has a growing demand for it that's nearly insatiable. The EIA's International Energy Outlook 2013, in fact, projects world energy consumption will grow by 56 percent between now and 2040. Natural gas (along with electricity) will account for more than 60 percent of the world's residential/commercial energy demand by then, the agency reports. Natural gas is looked upon favorably because it has a lower carbon footprint and relatively low attendant capital costs. By far the biggest consumer of natural gas in the coming years will be the industrial sector, followed by the electric power, building, and transportation sectors, according to the EIA. (According to a recent ExxonMobil report, natural gas is not expected to turn many heads in the transportation industry. By 2040, the company predicts, only about 4 percent of that industry (most heavy duty and marine) will rely on it as a fuel source.) EIA expects U.S. natural gas consumption will average 69.3 billion cubic feet of gas per day (bcf/d) in 2014. Much of the increase is attributed to the expected colder winter temperatures across the country. Meanwhile, many analysts have their eyes fixed on the electric power industry, whose future is closely tied to that of natural gas. According to IHS, a substantial portion of the expected natural gas demand growth in the U.S. from 2010 to 2020 will come from that industry. By 2020, gas consumption from electric power will have grown by 11.3 bcf/d - 52 percent of the total demand growth during the period. But demand from that sector could begin sagging in the coming years because of year-over-year increases in natural gas prices, according to the EIA. IHS expects a period of soft prices even as demand slowly ramps up. The Henry Hub spot price for natural gas, which hit a noticeable low of around $2 per thousand cubic feet near the end of first-quarter 2012, will hover near $4 in January 2014, according to the EIA. Natural gas inventories are projected to drop by more than half by March 2014, at the end of the winter heating season. What Could Change In the short term, many observers see very little threat to the status quo with natural gas supplies, demand, and pricing. Even calamities such as hurricanes have done very little to disrupt supply lines. Ironically, the biggest disruptive force to the industry may come from environmental pressures. While natural gas is seen as a much cleaner alternative to coal, the focus could be on so-called "life-cycle emissions" that come across the supply chain in the form of transporting, producing, and storage. Because its primary component is methane, natural gas has a global warming potential roughly 25 times that of carbon dioxide over a 100-year period, according to IHS. Another possible disruptive force could come from state and federal government regulations that are pressuring utility companies to decrease consumer energy demand in the name of energy efficiency, IHS reports. Consequently, natural-gas-powered plants could be among the hardest hit if those mandates get stiffer or more widespread. This article was originally published at My Purchasing Center and has been republished with permission. For more stories, visit MyPurchasingCenter.com. John Hall is a freelance writer who reports on commodities markets and procurement and supply management topics for My Purchasing Center. His website is jhallmedia.com.