Baker Institute: Increased Domestic Production Won't Make U.S. Self-Sufficient in Natural Gas

November 28, 2007 // Published as a news service by IHS

In the U.S., natural gas represented 22% of total primary energy use in 2006. About 20% of that gas was imported, mostly from Canada.

Liquefied natural gas (LNG) imports rose from virtually zero in 1986 to more than 0.5 trillion cubic feet (tcf), or 2.9% of total U.S. natural gas consumption in 2006.

The U.S. imports LNG from a variety of countries, including Trinidad and Tobago, Egypt, Nigeria and Algeria.

According to the study, under a business-as-usual scenario, where U.S. lands are not opened up for drilling, by 2030, U.S. consumers could be relying on LNG imports for as much as 30% of total supply.

This has implications for the security of the natural gas supply, as the U.S. becomes more reliant on LNG from the Middle East and Africa, the study said.

U.S. end-use natural gas demand is expected to climb to 23.9 tcf in 2015 and 26.9 tcf by 2025, up from 20.0 tcf in 2006, according to study forecasts. This represents a gain of about 1.3% per year.

"Studies of the market outlook show that our high-cost domestic production will increasingly have to compete against a swath of more competitively priced imports," said Kenneth Medlock, an author of the study.

"In the short term, the net impacts on U.S. supply security are not all that worrisome. But long term, as our demand grows, we will have to worry more about security of supply," he said.

In recent years, environmental and land-use considerations have prompted the U.S. to remove from energy development significant acreage that was once available for exploration.

Twenty years ago, nearly 75% of federal lands were available for private lease to oil and gas exploration companies. Since then, the share has fallen to 17%.

The Baker Institute embarked on a two-year study, titled Natural Gas in North America: Markets and Security, to investigate the development of the North American natural gas market and the factors that will influence security of supply and pricing.

The Baker Institute World Gas Trade Model (BIWGTM) simulates future development of North American natural gas trade based on the economics of resource supply, demand and commodity transportation, and it determines a market-clearing price in the process.

To determine whether the U.S. and its allies will become vulnerable to increasing market power of major international natural gas suppliers, like Russia and countries of the Middle East, and the role that existing drilling restrictions in the U.S. play in this question, scenario analysis is used to determine the possible effects of a complete lifting of restrictions on drilling in the Rocky Mountains and Outer Continental Shelf (OCS).

These scenarios aim to examine whether the impact of the increase in natural gas production from these now blocked U.S. regions would reduce the monopoly power of any potential large supplier or group of large suppliers and, similarly, would ameliorate the impact of a major accidental disruption of natural gas supply.

The Baker Institute's scenario analysis shows that opening restricted areas in the OCS and Rocky Mountains to drilling and natural gas resource development will not render the U.S. energy independent nor will it lower U.S. dependence on LNG imports in 2015 by a significant volume.

Price impacts are also limited, with U.S. prices registering only marginal reductions.

But longer term, the study concludes, an opening of restricted areas to drilling and the contribution of expanded OCS and Rockies natural gas production could be geopolitically important in combating the rise of a cartel in the international natural gas market.

The study said, "Reducing U.S. demand for LNG helps lower global natural gas prices and enhances available supplies for other major buyers in Europe and Northeast Asia. The wider swath of alternative supplies for Europe and Northeast Asia translates into significantly reduced market power of producers in Russia and the Middle East.

"Furthermore, the higher elasticity of supply from alternative sources as a result of allowing greater access to resources in the [U.S.] also reduces market power in the sense that a larger reduction in cartel supply would be needed to achieve any given increase in price."

According to the study, development of alternative energy could play a similar role. Another finding is that an opening of restricted areas for drilling for natural gas could affect the flow of natural gas from Alaska to the lower 48 states.

Under a business-as-usual scenario, where there is greater access to resources in the lower 48, the study found that there would be delays in the development of the Alaska gas pipeline, reducing Alaskan production by as much as 0.95 tcf in 2025 (or a 40% reduction) relative to the case where access restrictions remain in place.

Source: EurekAlert!.