Natural Gas: Secure Supply for Today and the Future

Ten years ago, I could not have written this column. The natural gas industry was different—limited domestic supply resulted in unstable prices. However, recent advancements in drilling technology have enabled the industry to discover, access, and produce abundant sources of natural gas in America. Because the industry has changed, the country’s energy future is now more secure. In the electric utility sector this increase in natural gas supply means less price volatility, and producers are now able and willing to enter into longer-term contracts, which minimize risk to utilities and, ultimately, ratepayers.

Overview of Today’s U.S. Gas Reserves

Secure supply should be at the core of any conversation about fuel switching. With a dramatic supply shift in the past decade, it is important to understand the natural gas reserves picture as it stands today. At year-end 2010, the Potential Gas Committee estimated the current available natural gas resource base as 1,898 trillion cubic feet (Tcf), with a future supply of 2,170 Tcf. This is an almost 70% increase from the committee’s 2000 forecast and the highest resource evaluation reported in the organization’s 46-year history. According to a North American Resource Development Study, the U.S. has enough natural gas supply to fuel our country for 100 years, even anticipating the highest potential demand. Due to this supply discovery, some industry experts call the U.S. the “Saudi Arabia of natural gas.”

Hydraulic fracturing, combined with horizontal drilling, has enabled the production of this abundant resource directly from “the kitchen” where natural gas is “cooked.” This technology contributes to an efficient drilling and completion process, allowing for targeted recoveries, controlled capital expenditures, and consistent well performance. Comparing the production of two recent shale discoveries provides a telling example of this efficiency. The Barnett Shale was discovered in the late 1990s, and its production spans 12 years. After eight years of production in the Fort Worth, Texas, area, the shale achieved its full production capacity, and production stabilized. Compare that with the Marcellus Shale, located in West Virginia, Pennsylvania, and New York, and discovered in late 2007. The Marcellus Shale reached the same degree of production growth in just four years, or half the time of the Barnett Shale. This efficiency, coupled with state-of-the-art technology utilized by Chesapeake Energy Corp. and others to pinpoint resource basins, allows for reliable production for the power generation sector.

The Benefits of Supply and Price Stability

Efficient production and proven supply work in tandem to stabilize prices. In early 2012, natural gas hovered at $2.50/MMBtu, a 10-year low. This low price is consistent with the industry’s history since the advancements in drilling technology, as is modest price fluctuation. From January 2009 to January 2012, the Henry Hub price ranged between $3 and $6/MMBtu despite extreme weather conditions. This three-year time period included the summer of 2011, which had the highest demand for cooling needs on a power-generated basis, and last winter, which was the second-coldest in 10 years. This combination of hot summers and cold winters created one of the most robust energy demand periods ever recorded, yet natural gas prices remain consistently low. In fact, the U.S. Energy Information Administration (EIA) projects natural gas prices will remain below $7/MMBtu until 2025.

While supply and price stability are benefits across all sectors, long-term contracts provide certainty for electric utilities. Today, natural gas companies are willing to enter into longer-term contracts. As an example, Chesapeake Energy Marketing Inc. has contracts with terms up to 10 years covering the sales of natural gas under a variety of pricing structures.

Environmental and Efficiency Advantages

From an operational standpoint, natural gas offers environmental and efficiency advantages. Because it is a cleaner-burning fuel, natural gas allows electric generation facilities another option for long-term environmental compliance. The fuel emits no mercury and fewer pollutants than other sources. Also, natural gas–fired generation is load-following and flexible, making it a natural choice for baseload power to accommodate the aggressive build-out of renewable generation across the country.

In 2010, the natural gas power plant fleet ran only about 28% of the time. Given the increased reserves of natural gas, the U.S. could systematically ramp up its natural gas fleet to a load factor of at least 50% over time. Using the average emissions characteristics of the coal fleet and gas fleet, and the most recent EIA data, this conversion would eliminate: more than 450 million tons of carbon dioxide (implicated in climate change concerns); more than 530,000 tons of nitrogen oxide (which exacerbates respiratory and heart diseases); more than 2.5 million tons of sulfur dioxide (the main ingredient of acid rain); thousands of tons of mercury (a toxic substance, and nonexistent in natural gas); and millions of tons of particulates.

As our population grows, technology expands, and power needs increase, the utility industry can meet demand with a resource better for the bottom line and the environment. Electric power producers can have confidence in natural gas for baseload and peaking power as a source that can provide ancillary services to accommodate renewable generation, and as a resource with a stable price and enough supply to fuel America’s future.

— Jim Johnson ([email protected]) is president of Chesapeake Energy Marketing Inc., which provides natural gas marketing services including commodity price structuring, contract administration, and nomination services for Chesapeake Energy and its partners.