Many utilities engage in hedging to protect customers from price spikes. But unless regulators are involved in crafting and monitoring these programs, they can turn into speculative ventures that...
Betting on Shale
Will unconventional gas assure plentiful supplies?
Over the past two years, expectations for U.S. domestic natural gas production have changed radically. A range of industry and government studies now are projecting that U.S. natural gas resources are far larger than previously realized, thanks to advances in unconventional gas production; particularly for natural gas production from shale rock formations using advanced drilling techniques. At the moment, the United States is experiencing a glut of natural gas with record underground gas storage inventories and prices around $4/MMBtu, which serves to underscore the new thinking about U.S. natural gas supply— i.e., future gas supplies might be less constrained than earlier studies suggested they would.
Given the speed with which the expectations for U.S. natural gas have changed, it’s reasonable to ask how solid is this new thinking about U.S. natural gas supply and what should the role of natural gas be in meeting our long-term energy needs in a carbon-constrained economy?
Natural Gas Bridge
The concept of natural gas as a bridge fuel to a low-carbon, sustainable energy future is nothing new. All through the 1990s natural gas was expected to play an increasing role in U.S. energy supply as environmental concerns became more prevalent and uncertainty grew regarding the cost or timing of such alternatives as nuclear power. The environmental benefits of natural gas compared to coal and oil were compelling, and at the time natural gas was seen as abundant and low cost.
However, price spikes and supply concerns raised fundamental questions about the role of natural gas starting in the 2000 and 2001 time frame. By 2005, the DOE’s Energy Information Administration (EIA) was forecasting that imported natural gas brought in by ocean tanker in the form of liquified natural gas (LNG) would comprise 20 percent of U.S. gas supply by 2020, and developers had advanced plans for more than 40 LNG regasification terminals. The U.S. natural gas resource base was seen as old and in decline. If not entirely broken, the concept of a natural gas bridge was in serious trouble. Heavy reliance on LNG imports raised security questions, and the poor domestic supply outlook suggested high and volatile prices were coming.
Then, starting in 2006, the industry became aware of the tremendous strides that had been made in development of the Barnett Shale near Dallas-Fort Worth. For the past decade, producers had been refining approaches to combine hydraulic fracturing of shale rock formations with horizontal drilling techniques to recover increasing amounts of natural gas. The success of those early shale producers led to a drilling boom during 2007 and 2008, both in the Barnett and other promising shale regions ( see Figure 1 ).
As oil and gas prices skyrocketed during the first half of 2008, drilling escalated. The most active unconventional natural gas producers began discussing the need to convert the U.S. transportation sector over to natural gas to absorb the massive increases in