Natural gas, bring it on! That captures the current outlook of California’s energy planners, who are counting on gas supplies to continue to be plentiful and low-priced in North America.

However, the chief gas-power strategist at the California Energy Commission (CEC) has developed some cautionary scenarios where supplies tighten and prices increase over the next decade.

“As of right now we see no reason to assume that the increases in domestic production from shale gas are going to drop off,” said CEC’s Ivin Rhyne, head of the electricity and natural gas team. “We think shale is going to last in general terms.” Long-term supply and price trends are likely to be driven by the long-term shale trends, he said.

However, the way things now stand, the impact of shale gas development on California energy planning is “quite small,” Rhyne told NGI’s Shale Daily Tuesday. For him, the more relevant question is how the shale boom poses challenges to existing energy policies.

“We’re looking at that question right now, and we don’t really have a solid answer,” Rhyne said. For example, he questions how natural gas supplies and price might be affected by a big shift to electric vehicles in transportation, given California’s current energy infrastructure.

“There is a pretty close relationship among natural gas and electricity prices and electric-related policies, although it is not always a simple relationship for many reasons. We don’t have any clear answers, but we think those are interesting questions.”

Rhyne said there have not been any significant changes “in the numbers” during the past year, but there has been a further verification of the domestic gas supply growth profile. “What looked more speculative last year has become perhaps a little more certain this year,” he said.

This trend is found is tracking the future strips on a week-by-week basis for natural gas prices, said Rhyne, noting that is one of the indicators tracked by his CEC colleagues. The futures strip has been on a “steady decline” every week for almost all of 2011. “That means there is a stronger industry consensus among those who have a financial interest in the industry on relatively cheap or low-cost natural gas production, so we believe that is to some extent tied directly to shale gas, although that is not the only part of the story.

“Anyone who says that ‘it’s all about shale’ is probably missing a little bit in terms of the slowdown in natural gas demand that was associated with the recession and the concomitant slowdown in electricity demand.”

This year the key unknown regarding gas supplies and prices is the national economy and how much of a recovery actually develops. Rhyne and his CEC colleagues think if the economy would rebound strongly, there would be a push toward raising gas prices closer to “the real marginal cost of shale production.” If it doesn’t happen this year, it could be the next one to three years. At some point, he said gas prices are going to “re-stabilize” closer to the marginal shale price.

“We’re predicting there will be a price adjustment in the next three years that brings the gas price in line with the shale gas marginal price, and the long-term trend for pricing is likely to be driven by the long-term trend in shale gas prices.”

Even with the shale boom, Rhyne doesn’t think the fundamental nature of the natural gas market has changed. There are still regional variations, and he thinks those will continue. In addition, gas prices will always become more volatile when supplies and/or transportation capacity gets tight. The move away from depending on the Gulf of Mexico to other inland sources of supply will help reduce price volatility, however, he said.

“The remainder of the market has not changed, so we think there will be some increases in stability, but that doesn’t mean the seasonal nature of natural gas prices will be removed, and it will not remove regional volatility or all of the basis differentials in 2012,” said Rhyne.

He cautioned that his projections are based on certain fundamental assumptions, such as shale gas production continuing at a robust pace, no fundamental shifts occur in the demand profile and other aspects, such as the rate and timing for coal-fired generation plant retirements.

One of the big national policy questions over the next five years is in states that rely heavily on coal-fired generation and to what extent they embrace the idea of moving their baseload power generation to natural gas, Rhyne said. “I think it is going to be a mixed bag with some states embracing gas more than others. Some may try to make the direct leap over to renewables, but that’s not a certain bet, either way,” he said. “We’ll see at least an increased amount of discussion around this topic; 2011 saw some of that discussion start.

“To the extent that discussion can begin to affect market dynamics, I think the increased discussion will begin to have some impact, but exactly what that is going to look like, I don’t really know. If you were a policymaker asking me this question, however, I would say, pay attention to the discussion and the tenor of the discussion in states that are coal-dependent that don’t have a lot of hydroelectric power.”