Natural gas has become the fuel of choice in the United States, especially in the power generation sector.  Its clean burning properties, high efficiency factors and relatively low price made it the logical choice.   However, rapid demand growth through the 1980s and 1990s, coupled with declining domestic production, has led to the current situation of constrained supplies and higher prices.  

Concurrent with the demand surge in the U.S., both Europe and Asian markets also are experiencing a rapid rise in demand.  More recently, with the increased focus on meeting “pending” greenhouse gas reduction targets, there will be increased demand pressure on natural gas in the power sector.

Since 2000, the U.S. gas market can be characterized by several underlying conditions that include:

• A decline of excess natural gas productive capacity or elimination of the “gas bubble” in the U.S.;
• Increased gas demand driven by 200,000 Megawatts (MWs) of gas-fired generation investment since 1999, along with limited amounts of alternative fuel capability;
• Declining domestic gas production throughout the lower 48 states and offshore;
• Increased gas imports from Canada nearing current maximum capacity; and
• Decreased gas supply deliverability in the current transmission infrastructure.

These conditions have led to supply constraints and a steadily increasing gas price floor, well above pre-2000 historical levels. The North American natural gas industry is facing a critical period over the next 10 to 15 years. With worldwide gas demand continuing to escalate, the supply of natural gas in North America will likely tighten, leading to sustained and higher prices unless new supplies are developed and delivered to the market.

Gas Demand

According to recent EIA figures, demand in 2007 was about 23.06 trillion cubic feet (tcf) of gas, a rise of 6.5% from 21.65 tcf demand in 2006. Demand growth is expected to continue.

At the same time, the underlying drivers for gas consumption – including an increasing demand for gas-fired electricity generation – have continued. The lack of new sources of supply and infrastructure needed to meet the market’s desire for more natural gas has led directly to  extended periods of high gas prices and increases in price volatility.

Gas Supply

While gas produced in traditional basins such as the mid-continent, onshore Louisiana and the shallow waters of the Gulf of Mexico will continue to be important sources of supply, they will not be sufficient to satisfy a growing demand over the next two decades. To meet the demand, gas also will need to be developed from “frontier regions” – deepwater Gulf of Mexico, the Arctic, Eastern Canadian – and large volumes of LNG will have to be imported.

If the infrastructure required to access supplies of natural gas from frontier regions is not constructed, tremendous market pressures will push prices well above today’s prices.

The past two years have seen the development of Barnett shale in Texas and the Marcellus Shale, a geographic formation in the Appalachian Basin of Pennsylvania. Although the development of these new reserves is expected to increase domestic gas production, the gains are not expected to last for more than five years, perpetuating the reliance on imported gas.

Therefore, new supply sources will have to include both North American production and liquefied natural gas (LNG). This is an extremely important conclusion for energy policy. Coordinated efforts among industry, government, environmentalists, and consumer advocates are needed to allow new projects to be built in order to protect consumers and support the economy.

Natural gas production by source, 1990-2025 (trillion cubic feet)

Source: EIA Annual Energy Outlook, 2008

Net U.S. imports of natural gas by source, 1990-2030 (trillion cubic feet)

Source: EIA Annual Energy Outlook, 2008