Securing a supply of reasonably priced natural gas, which up to now has taken a back seat to its crude oil, will increasingly be viewed as a vital U.S. interest, according to an in-depth study by the Baker Institute Energy Forum.
The wide-ranging report analyzed various scenarios for North American gas markets over the next 20 years. The Rice University-based institute reviewed scenarios that included what might happen if restricted areas of North America were opened to gas production, how the growth of global industrialized economies may affect the North American market, and how increasing liquefied natural gas (LNG) imports may expand the power of international gas markets.
"Studies of the market outlook show that our high-cost domestic production will increasingly have to compete against a swath of more competitively priced imports," said Kenneth Medlock, fellow for energy studies at the Baker Institute and an author of the study. "In the short term, the net impacts on U.S. supply security are not all that worrisome. But long term, as our demand grows, we will have to worry more about security of supply."
According to the study, total global gas use has grown to 23.3% of all energy consumption from 19% in the past 25 years. In the United States, gas represented 22% of total primary use in 2006. However, as it has gained importance in the U.S. economy, gas also has become more important to global industrialized economies, resulting in a steady increase in the volume of gas traded in international markets and a bigger focus on the security and availability of supplies.
"In fact, an inability to increase supply in the face of rising demand in recent years in U.S. natural gas markets has prompted concern about the future of U.S. natural gas supply, both domestically and from abroad," the authors stated.
The report noted that in 2006 U.S. gas imports were about 20% of end-use demand. Most -- about 86% -- were from Canada. "However, the increasing demand for natural gas in the tar sands industry in Canada is likely to limit Canadian pipeline exports...in the future." So a rise in U.S. gas demand is "likely to substantially increase imports in the form of LNG."
Already, LNG imports have risen from virtually zero in 1986 to "just in excess of 0.5 Tcf, or 2.9% of total U.S. natural gas consumption in 2006, which is about 14% of total imports," the report stated. And with the construction of new LNG import facilities under way, North America will have ample access to more imports.
The growing LNG market may only be deterred by increased access to drilling in the United States, the report noted. "The United States has a premier energy resource base, but it is a mature province that has reached peak production in many traditional producing regions. Twenty years ago, nearly 75% of federal lands were available for private lease to oil and gas exploration companies. Since then, the share has fallen to 17%." At the same time, U.S. demand for gas has risen about 1.5% a year.
In addition, the authors said it is important to consider the link between crude oil and gas prices, particularly with oil rising to the $100/bbl area. If gas prices were to return to a 6:1 ratio to oil prices again, these rising gas prices "could put the U.S. economy at a disadvantage to other competing trading partners, such as the European Union, China and India, particularly when end-user prices are controlled, as they are in China and India."
Researchers found that over time, as gas demand grows and small producers' output declines, production shares in the global gas market would become more concentrated. A reduction in supply elasticity of the fringe producers would reduce the elasticity of demand facing the largest gas exporters -- which would increase their market power.
"So, as the potential for increasing fringe supplies over time diminishes, the result will be to give a very large producer (for example, Russia), or a group of larger producers (Middle East suppliers) greater ability to manipulate price through decisions about resource development or production."
If Congress were to reduce off-limits areas of the United States on- and offshore, the gas output increase could "be geopolitically important in combating the rise of a cartel in the international natural gas market, a so-called 'GasOPEC,'" the authors noted. "Reducing U.S. demand for LNG helps lower global natural gas prices and enhances available supplies for other major buyers in Europe and Northeast Asia," and more alternative supplies would "significantly" reduce market power of producers in Russia and the Middle East.
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