The U.S. Gas Rebound

Kennedy Maize and Dr. Robert Peltier, PE

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"It’s déjà vu all over again," said Yogi Berra. The Hall of Fame catcher could easily have been predicting the coming resurgence of natural gas – fired generation. Yes, a few more coal plants will be completed this year, but don’t expect any new plant announcements. A couple of nuclear plants may actually break ground, but don’t hold your breath. Many more wind turbines will dot the landscape as renewable portfolio standards dictate resource planning, but their peak generation contribution will be small. The dash for gas in the U.S. has begun, again.

"Holy cow, there’s a lot of gas."

That was the reaction of Penn State geologist Terry Engelder, as reported in the Massachusetts Institute of Technology’s Technology Review last October. Three years ago, Engelder was asked to assess the natural gas potential of Marcellus shale deposits in the U.S. Midwest and Mid-Atlantic regions. It now appears that deep shale beds — the Carboniferous (350 million years ago) Barnett shale deposits in the Texas and the enormous Devonian (400 million years ago) Marcellus shale deposits in the East — could be game-changers in the U.S. energy and power generation markets for years to come.

Shale formed in those deposits contained methane bound so tightly into the rock formations that conventional drilling technology could not get at it, according to the geologists. That’s changed. Deep drilling, horizontal drilling, and hydraulic fracturing (pumping water down the borehole at great pressures to shatter the shale strata, releasing the methane from the rock) make the gas accessible. Both shale finds are providing drillers with gas bonanzas.

Record Gas Reserves Discovered

Last June, the U.S. Potential Gas Committee (PGC) issued a report (links to this and other resources are provided in the sidebar at the end of this article) that estimated total U.S. natural gas reserves at over 1,800 trillion cubic feet, the highest in the committee’s 44-year history, and 40% above its 2006 estimate. John Curtis of the Colorado School of Mines, head of the PGC, said that the estimate "reaffirms the committee’s conviction that abundant, recoverable natural gas resources exist within our borders, both onshore and offshore, in all types of reservoirs." Prices fell, reflecting the optimistic supply predictions. Exploration in shale deposits continued growing.

The PGC is an independent, industry-funded technical group that examines natural gas reserves in the U.S. Said Curtis, "Our knowledge of the geological endowment of technically recoverable gas continues to improve with each assessment. Furthermore, new and advanced exploration, well drilling, and completion technologies are allowing us increasingly better access to domestic gas resources — especially ‘unconventional’ gas — which, not all that long ago, were considered impractical or uneconomical to pursue." That’s a reference to shale gas, as well as gas in deep deposits.

Significantly, the shale gas deposits are close to, and in some cases, directly underneath, natural gas pipelines and gathering hubs and near large markets. Bringing the gas to market could be easy and cheap (see the sidebar, "Say Goodbye, LNG?").

In a press release, the PGC noted, "When the PGC’s results are combined with the U.S. Department of Energy’s latest available determination of proved gas reserves, 238 Tcf [trillion cubic feet] as of year-end 2007, the United States has a total available future supply of 2,074 Tcf, an increase of 542 Tcf over the previous evaluation."

That’s a stunning figure — an increase of over 25% above previous estimates. The Energy Information Administration (EIA) defines "proved reserves" as "those volumes of oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions." In other words, they are real.

The supply optimism is good news for existing and potential electric generators, as the projections, bolstered by successful drilling in shale, have resulted in dramatically lower natural gas prices. The most recent reports from the EIA found natural gas prices at the Henry Hub at $2.76 per million Btu (mmBtu). Futures prices at the New York Mercantile Exchange for September 2009 contracts were at $2.91 per mmBtu. A couple of years ago, the NYMEX price was in the $9 range for short forward contracts (Figure 1).

1. Gas prices expected to stabilize in 2010. The U.S. Energy Information Administration (EIA) predicts natural gas prices will fluctuate less and be more predictable in the future given the significant increase in gas reserves. Source: EIA November 2009 Short-Term Energy Outlook

Say Goodbye, LNG?

Among the implications of the optimism about shale gas recovery in the U.S. is a crash landing for plans to build imported liquefied natural gas (LNG) terminals in the U.S. Three years ago, LNG was all the rage, with predictions of terminals across the coastal U.S. Daniel Yergin’s Cambridge Energy Research Associates (CERA) was bullish on LNG, predicting a worldwide LNG boom.

No longer. No recent publicly available material on LNG has shown up on the CERA web site, although there was reporting available to paying customers (the price tag is very high). Could the consultancy’s enthusiasm for LNG have cooled considerably on current and projected natural gas prices? The guess here is that it has.

On the other hand, CERA’s web site now touts shale gas, saying, "Some call it a revolution," adding that shale gas "could change the global natural gas balance."

To date, according to the Federal Energy Regulatory Commission (FERC), four new LNG terminals are under construction in the U.S., with just under 4 billion cubic feet of gas capacity. Three of the four are in the Southeast or Southwest, where they serve petrochemical plants. FERC has approved another 14 LNG projects for the U.S., but analysts expect few of those will actually see the light of day.

Summarizing its most recent data, the Energy Information Administration (EIA) said, "In 2008, increased U.S. natural gas production led to reduced demand for natural gas imports. The drop in total imports occurred despite a 2007-to-2008 increase in domestic consumption — a factor that typically requires higher levels of imports to meet consumer demand. Total exports to Mexico and Canada via pipeline and Japan via LNG tanker were higher in 2008. Consequently, net imports to the United States fell more than 20 percent from 2007 totals to the lowest level since 1997. The decline in U.S. natural gas imports had a larger impact on LNG imports than Canadian pipeline imports. Given the ease of transporting gas to alternative markets, some LNG that historically landed in the United States went elsewhere in 2008."

The EIA went on to say that "The increased supply of LNG brought about by the start-up of several large LNG supply projects in late-2009 and in 2010 contributes to an increase in the outlook for U.S. LNG imports next year. However, the timing of these new liquefaction additions is extremely difficult to judge."

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