In the Pulitzer Prize-winning book, , Cambridge Energy Research Associates Chairman Daniel Yergin writes of the oil industry, "This is a story of individual people, of powerful economic forces, of technological change, of political struggles, of international conflict and, indeed, of epic change."
Yergin captures in a few words oil's extraordinary past. Might those words one day describe the next 100 years of natural gas development? Talking with Yergin in early November, I found a man convinced that the forces that shaped a global oil market are at work in shaping a global market for natural gas. I'll be sharing some of his words with you.
But first, aren't we hearing just the opposite from a chorus of naysayers-that natural gas could prove more of a problem than a solution?
On the whole, energy experts have touted LNG as a useful tool to diversify America's energy mix. But after this year's run-up in natural gas prices, and forecasts for more of the same, many policymakers now see our growing dependence on natural gas as a liability:
"Over-reliance on natural gas could also have serious economic consequences-including higher prices, greater price volatility, and outright shortages," EPRI conlcuded in a report on energy security and fuel choices released in August.
"Americans had a first taste of this in the winter of 2000-2001 when wholesale natural gas prices quadrupled in a matter of months," the study continues. "This price spike disrupted regional economies, hurt energy intensive businesses and their employees, and made it costlier for people to heat their homes. Such events awaken us to the limits on gas supply and the impacts of high prices and scarcity on all gas users."
EPRI says the key to maintaining a diverse fuel mix in the power sector includes "stepped-up research and development for clean coal, renewable energy, advanced nuclear technologies, and more efficient consumer products." A reading of proposed energy legislation that had yet to be passed at press time echoes these recommendations, in addition to natural gas development.
Yergin told me he does not dispute the need to diversify the energy mix, but he says many of these technologies-nuclear and coal, for example-may not develop soon enough or in the scale required to meet the demands of America's now-growing economy. In fact, he believes that a global market for natural gas would ease gas supply shortages and temper price spikes.
Yergin and Michael Stoppard, head of CERA's LNG advisory service, wrote in the November/December 2003 issue of : "The United States enthusiastically embraced the new gas-fired technology to generate power. Altogether its use of natural gas in electric power production has increased almost 40 percent since 1990-with much more growth to come. Over 200,000 megawatts of new power-plant capacity has been recently constructed or will soon start production. This is a huge amount of power capacity, equivalent to more than a quarter of the country's entire installed capacity in the year 2000-and larger than the entire electric power industries of the United Kingdom and France combined. Well over 90 percent of the new capacity is fueled with natural gas.
"But rising demand for gas has collided with what is now emerging as a natural gas shortage in the United States. Traditional sources of supply can no longer keep up with electricity-driven rising consumption. Very disappointing results from the drilling boom of 2000-2001 were the first indicator of this disparity. Since 2001, supply has declined by four percent. New wells will be drilled in the years ahead, and new supplies added. (Owing to the depletion of existing wells, in 10 years more than half of domestic supply will have to come from wells that have not yet been drilled.) There may be a modest rebound in supply over the next couple of years, which, together with a weak economy and mild weather, may temporarily mask the reality of the shortage. ...
"In response to the tightening of supply and demand in the United States, domestic gas prices have doubled, weighing the economy down. And today's supply gap is small in comparison to what it could be a few years from now, when the real North American gas production decline begins. Higher prices will hurt homeowners and such industries as fertilizer, chemical, and plastics that depend on gas. Companies in those sectors are already cutting back on production and closing plants. But the full effect of higher gas prices has not yet been felt. When it is, factories will be exported, and jobs-measured in hundreds of thousands or even millions-will be lost. In a very painful way, that will lower consumption in the industrial sector. Some of this is already happening."
Yergin believes that a new LNG infrastructure will have to be in place to a great extent by 2010, when demand for power will overrun the current glut of gas-fired generating capacity, and he has drawn support in this view from Fed Chairman Alan Greenspan, who pushed last June for a new global gas market system, in spite of the odds.
"If North American natural gas markets are to function with the flexibility exhibited by oil, unlimited access to the vast world reserves of gas is required," Greenspan said before the U.S. House Committee on Energy and Commerce.
"Markets need to be able to effectively adjust to unexpected shortfalls in domestic supply. Access to world natural gas supplies will require a major expansion of liquefied natural gas (LNG) terminal import capacity. Without the flexibility such facilities will impart, imbalances in supply and demand must inevitably engender price volatility."
Yergin has started to put more specificity on what will be required to reach a global market for natural gas. He says that developing the full potential of LNG could cost upward of $200 billion worldwide, and energy companies will have to choose between investments in LNG and other investments.
Yergin, like Greenspan, believes that geopolitical concerns of other countries cannot all be dismissed, but he says the best response to security concerns is to develop the global LNG business and ensure that ample supplies come from many countries. Naturally, one might be concerned that in developing an LNG market, other countries that increase their natural gas consumption, such as China, would increase world demand and push gas prices higher. But Yergin responds that demand for global resources can be met primarily through open flexible markets, and that the larger concern in the natural gas industry is the economic consequence of allowing stranded natural gas to remain stranded around the world-especially as reserves of natural gas are as plentiful as that of oil. According to CERA, proven gas reserves total what, in oil terms, would amount to over 1 trillion barrels.
It appears that answering America's upcoming natural gas shortage may become one of the quintessential issues shaping energy industry policy debates going forward. Whether it is LNG that comes to the rescue or some other technology, we promise to stay on top of the issue. Happy holidays from all of us at the .