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Gas Demand to Rise in Carbon-Constrained World, Supply to Fall

FERC Commissioner Suedeen Kelly last Thursday said demand for natural gas in a carbon-constrained world is likely to rise significantly due to the high costs and long lead times associated with alternative energy resources, while a producer group-commissioned study concluded that climate change legislation pending in Congress could force a reduction in gas supplies and drive up consumer prices.

"All indications are that in a carbon-constrained world demand for gas would increase. And the more forcefully America and our world partners push the carbon agenda successfully...the more the demand for gas is likely to grow," she said during the Natural Gas Roundtable in Washington, DC.

The reason for the expected hike in natural gas demand is simple, Kelly noted. "There's nothing else that can do the job any better to get us to fewer carbon emissions than gas today, at least not for the next decade or so. "

Meanwhile, a new study published by Wood Mackenzie found that as much as 32% of expected natural gas supply in the year 2012, rising to more than 45% in 2017, could be put at risk if gas exploration and production companies are forced to bear the emission allowance costs of those ultimately burning the gas. Even if 50% of the costs are somehow passed to consumers, expected supply would be reduced by 5% to 14%, at a time when most studies find that expanded gas supply will be needed, said the study commissioned by American Exploration & Production Council (AXPC), which represents 25 of the largest independent producers in the United States.

"Gas is not automatically going to be a smooth winner in this whole carbon movement," said Bill Whitsitt, president of the AXPC, formerly the Domestic Petroleum Council, at the roundtable.

The study came less than a week before the Senate is expected to take up climate change legislation (S. 3036) that is based on the cap-and-trade bill sponsored by Sens. Joseph Lieberman (I-CT) and John Warner (R-VA).

The growing demand for natural gas in a carbon-constrained environment will primarily come from the electric power sector, Kelly said. The power sector currently consumes 28% of the gas in the nation. A study by the Cambridge Energy Research Associates sees power's demand for gas increasing to a minimum of 34% (without a significant carbon policy) and up to 44% by 2017, she noted.

On the price front, "if we continue along as today [with no carbon policy], experts see prices actually a bit lower than the past few years and declining somewhat for six or more years before rising again," Kelly said. However, "if power demand climbs more rapidly than today because of a strong carbon policy, there are no other fully [satisfactory] carbon neutral alternatives, at least not available for us to deploy in the next 10 years or so, and so we see the demand for gas [rising] and we will have higher prices."

She noted that the power sector is eyeing several alternative energy sources -- wind, nuclear, solar and carbon sequestration -- to help fuel their plants in a carbon-neutral environment. While wind is enjoying the fastest growth, it accounts for only 0.7% of total power generation now, according to Kelly. The anticipated growth in wind power under a strong carbon policy will benefit natural gas, she said.

Because wind typically "blows harder and more consistent when demand is low, rather than on peak, power systems using wind will need additional capacity to ensure the reliability of the grid, and that means gas or hydro," Kelly noted.

The three-decade hiatus on nuclear plant construction has ended. Over the past few months four power companies have filed for construction and operating licenses for seven new reactors, she said. But Kelly cited the long lead times needed for nuclear plant development as a negative. "In the meantime, gas is the viable fuel."

Solar power is currently expensive but it has several characteristics that make it promising over the long term, according to Kelly. Policies and government subsidies could help to drive down the expense later, but "in the meantime, gas is the viable option."

Carbon sequestration (CCS) removes and compresses carbon dioxide before or after combustion of fossil fuels in power plants, and then transports and stores the compressed gas in geological reserves underground, Kelly said. "Many CCS demonstration projects are under way around the world. But it will take a long time to work out key technical, political, regulatory and legal issues." She estimated that commercial applications are likely two decades away. "In the meantime, gas is an available option."

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