Natural Gas: The Promise and the Potential Pitfalls

The biggest surprise story in the energy industry these days isn't the plummeting price of solar panels, the proliferation of wind farms on the prairies, or even the new transmission line proposed by Google and others off the shores of the mid-Atlantic states. 

It is shale gas a vast, relatively clean energy resource located in geographic basins in many parts of the U.S. 


Just three years ago, policy makers expressed deep concerns about diminishing supplies of oil and gas, and the effect of volatile natural gas prices on consumers' budgets. Power prices had risen significantly, as natural gas prices found their way into electricity markets. In June 2008, monthly spot prices for natural gas were $13.07 per million cubic feet (mcf). But the world looks different in early 2011. U.S. gas production is on the rise again, mostly because of steps the industry has taken to access gas from shale formations. (See the exhibit below.) At the end of 2010, natural gas prices were about a third of what they were in 2008, at $4.38 per mcf.


Trends in Gas, Oil Production: 1980 to 2009 


What happened? For starters, after the economic collapse in 2008, there was an overall drop in the demand for energy. More important was the opening up of unconventional gas resources, like shale gas. Companies are using new drilling techniques to access shale gas more economically than was possible in the past. As a result, shale gas production in the U.S. has increased 14-fold over the past 10 years.


What might this mean for energy consumers?
An abundance of relatively low-cost, low-carbon gas could be generated for consumers in industry, at power plants, and in homes and office buildings. The shift also portends relatively stable prices – something that was unheard of just five years ago, when long-term gas prices were forecast to be several dollars higher than they are envisioned today. Shale gas reserves are located close to consumers, which has implications for pipeline and storage infrastructure. Domestic and international gas and oil prices may no longer move in tandem: International gas resources may no longer be so strongly controlled by countries (like Russia) that are willing to use gas for strategic political advantage. Low gas prices are putting pressure on the industry to retire old and inefficient coal plants – with the added benefit of lowering air emissions. They are also putting pressure on new nuclear and renewable projects: When the gas alternative is so attractive, it is harder for industry decision-makers to justify technology investments that can't be supported in the near term based on market prices alone.

Every state needs to focus on the interrelated issues of public confidence, appropriate regulation, and best practices to avoid unpleasant surprises that could thwart the prudent development of a valuable domestic energy resource base.

What could go wrong? Quite a bit – we need to do this right, so that we don't all lose. Technical and policy problems may arise from shale gas extraction processes – or from insufficient public confidence in the systems that are in place. Many firms and state regulators have operated for years with drilling practices and systems designed to prevent problems or mitigate them when they occur. But there are new parts of the country that are actively getting ready for gas production, where regulators are updating regulations to keep up with the changing conditions. Every state needs to focus on the interrelated issues of public confidence, appropriate regulation, and best practices to avoid unpleasant surprises that could thwart the prudent development of a valuable domestic energy resource base. ■



Senior Advisor Susan F. Tierney chairs the policy subgroup of the National Petroleum Council’s (NPC) study of the resource base for natural gas in North America. Vice Presidents Robert Earle and Paul J. Hibbard are participants in the NPC project. Dr. Tierney is also a member of the Natural Gas Subcommittee of the U.S. Secretary of Energy's Advisory Board.


(From Analysis Group Energy Bulletin, Spring 2011)