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The New Gas Wisdom

Unconventional gas sources put a ceiling on future prices.

Fortnightly Magazine - December 2008

out, natural gas will capture a significant share of new generation capacity additions, leading to a belated need for LNG to meet demand.

“Ahh,” objects the gas bull out there. In a world of abundant, low-priced domestic natural gas, won’t demand from the power sector take off, particularly in the form of building relatively low GHG-emitting natural gas combined-cycle generation capacity? In the United States, the combination of increased utilization of the current fleet, plus the choice of combined-cycle units as the preferred option for new base load (assuming the threat or reality of carbon constraints) could result in an incremental annual gas demand of 2 to 3 TCF or more within the next several years. At the very least, wouldn’t this unprecedented level of gas demand require tapping some of the higher-cost unconventional resources? At that point, LNG imports pretty well may look compelling, especially given the scenario painted above in which the price of LNG settles near long-term marginal cost through one mechanism or another. And thus once again we’re back to a global gas market, albeit delayed by several years and at a lower gas price than recently forecasted.

Or are we? The continued growth of wind and other renewables has the potential to significantly mitigate the impact of this gas generation-friendly environment on gas demand. For argument’s sake, take a fairly aggressive scenario around renewables penetration of 20 percent in 2015 or 2020 (versus under 5 percent, excluding conventional hydropower, today). This is estimated to displace up to 3 TCF or so of gas per year. While this reduction likely would be offset partially by increased gas consumption for simple-cycle turbines for firming capacity, a substantial share of this could in turn be offset by non-gas capacity from various types of storage and demand-response programs.

Nonetheless, even this rather green scenario merely would postpone a re-bound of gas-demand growth from the generation sector by a few years. The bigger question is how steep the supply curve of unconventional natural gas really will be, especially in light of issues around water disposal in sensitive regions, as well as the still rather limited visibility into the real nature of the resource base’s economics. Some leading oil and gas independents’ recent statements about backing off earlier production growth commitments in light of gas prices falling under $8/MMBtu leads one to wonder.

For example, Chesapeake Energy has stated regularly that the industry requires $9-$10 gas to support the number of current rigs, with a credit crunch accelerating a reduction in rigs. While the quantities and affordability of domestic unconventional gas appear impressive, only time will tell.

The other key question is how the global LNG market actually will look at this point. Will it remain tied to high-priced oil, or will part of that equation—either high-priced oil or LNG’s ties to oil—sufficiently be altered to bring LNG prices significantly lower than today’s, and thus a viable competitor for U.S. gas demand? As seen of late, the price and structure of the global LNG market also will be tied to broader global macroeconomic