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EIA Sees Massive Gas Market Shift Under Kyoto Treaty

October 19, 1998
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EIA Sees Massive Gas Market Shift Under Kyoto Treaty

The gas industry's share of the U.S. energy market is projected to soar to 35% in 2010 from just 24% in 1996 if the U.S. follows one possible scenario to meet the requirements of the Kyoto Treaty, the Energy Information Administration said in a report to Congress. In contrast, the industry will grab only two percentage points more of the energy market over that same period without the treaty.

In a report titled "Impacts of the Kyoto Protocol on U.S Energy Markets and Economic Activity," which was presented to the House Science Committee, EIA confirmed what the Clinton Administration so far has been unwilling to admit: the Kyoto Treaty will send power prices soaring and will be a serious financial burden on the national economy.

Those were among the results that prompted Sen. John Ashcroft (R-MO) to pass legislation that would block the president and the Environmental Protection Agency from attempting to carry out any terms of the treaty. The legislative language was included in the EPA's appropriations bill. Prior to EIA's report, the treaty was expected to have little luck passing the Senate. With EIA's dire conclusions, its chances are even slimmer (please see global warming report).

U.S. power prices would jump 20-85% and the prices of fossil fuels would rise by similar percentages by 2010, EIA said. The Kyoto treaty calls for a reduction of carbon dioxide emissions to 7% less than 1990 levels between 2008 and 2012. That would require the U.S. to cut carbon emissions by 542 million metric tons/year. The treaty, however, also allows for trading of emissions credits and other measures that may allow countries that signed it to meet its requirements without having to make the maximum emissions cuts.

EIA studied six different scenarios in which the U.S. might meet the Kyoto requirements. In the reference case, which does not incorporate the impact of the treaty, natural gas consumption increases more rapidly than consumption of any other major fuel from 1996 to 2010. Natural gas use increases in all sectors, but consumption by electricity generators more than doubles. By 2010 the generating capability of combined-cycle plants increases more than six-fold, and the generating capability of combustion turbines more than doubles. More than four-fifths of the new consumption is supplied by increased domestic production. The remainder comes from increased imports, primarily from Canada. Wellhead prices rise moderately in the reference case through 2010.

With the impact of the treaty, however, gas consumption, production and prices jump sharply in all scenarios studied by EIA. Although electricity generation would fall under the treaty, more gas would be used in place of relatively high-carbon coal. In 2010, with CO2 emissions cuts to 3% below 1990 levels (1990-3%), gas consumption by power generators climbs to 12.2 Tcf/year, 5 Tcf higher than in the reference case and more than four times the 1996 level.

The projections for gas use in the other sectors, however is not so good under the Kyoto proposal, EIA concludes, because with such a dramatic rise in consumption in the power sector, gas prices inevitably rise. Gas use in the residential, commercial, industrial, and transportation sectors is lower in the carbon reduction cases from the reference case because those sectors have significantly less opportunity to switch fuels and are forced to make cut backs because of higher gas prices.

In fact over a longer term, EIA finds medium reductions in CO2 emissions (1990+9%, for example) have a more positive impact on gas use because gas prices rise less. In the 1990-3% case, gas starts to feel competitive pressure from renewable generation.

The treaty, while good for gas producers because of increasing demand, will put the industry through its most rigorous test yet. In 2010, production is projected to be 26.2 Tcf in the 1990-3% case, 25.9 Tcf in the 1990+9% case, and 24.1 Tcf in the 1990+24% case. But a historic production increase is going to be required in the 1990-7% case because competing coal prices will rise faster than in any other case. The projected increase in production between 2005 and 2006 is 1.75 Tcf in the 1990-7% case, a pace never before reached. The last one-year record was set in 1983-84 at 1.37 Tcf. The reference case calls for a 0.39 Tcf rise that year.

"Increasing natural gas consumption during the initial phases of a carbon emissions reduction program may be the biggest challenge facing the oil and gas industry, and careful planning will be required," EIA said in its report. "Sufficient natural gas resources are available, however, and infrastructure can be made available, if the price is right."

The interstate pipeline industry also won't be immune from the demand tidal wave expected from the treaty. In the reference case, pipeline capacity is projected to increase to 52.5 Tcf/year of design capacity in 2010 from the 1996 capacity of 43.0 Tcf (or 0.68 Tcf on average each year). But in the relatively less stringent 1990+9% and 1990+14% carbon reduction cases, between in 2011 to 2012 pipelines will have to add 1.6 Tcf/year of capacity, which would tie the record for the largest annual increase set between 1991 and 1992 with construction of Kern River, Mojave, El Paso and Transwestern Pipeline.

Gas prices are higher in the carbon reduction cases than in the reference case, both at the wellhead and at the burner tip. In the reference case, Lower 48 wellhead prices are projected to rise from $2.24/Mcf in 1996 to $2.33 in 2010 in 1996 dollars. In the 1990-3% and 1990+9% cases, wellhead prices in 2010 are more than 40 cents (19% and 29%) higher. The highest wellhead prices in 2010 are seen in the 1990-7% case at $3.03/Mcf.

The projected end-use prices for natural gas in the carbon reduction cases are double the prices in the reference case at their peak in the most extreme cases. In 1996, gas prices for residential end users averaged $6.37/Mcf. In the 1990-3% case, residential prices are expected to peak in 2013 at $11.31/Mcf (in 1996 dollars), compared with $5.71 in the reference case. Rocco Canonica

Preparing for New Global Warming Restrictions With Early Credits

Touting the strong position of natural gas in any new initiatives to reduce global warming, former Sen. J. Bennett Johnston urged support for an early action program to give credit for companies taking early steps to reduce greenhouse gas emissions.

While the Kyoto Treaty is not likely to be ratified by the Congress, the Administration "has signed on to its goals," and there is a strong possibility there will be some further mandates to reduce emissions. That prospect encourages companies to hold back on emissions improvement projects now since that would mean they would go into any program with a lower baseline which they would have to reduce even further.

Johnston pointed out that while the Kyoto Treaty would be rejected, there was increasing evidence of global warming caused by greenhouse gases that this nation will have to address. Recently published studies show "temperatures in the 1990s have been the warmest in six centuries; five of the warmest years of the century occurred since 1990, with 1997 the warmest year on record; and August was the eighth consecutive month to set a worldwide record for average high temperatures."

Johnston emphasized two points, first that "greenhouse gases continue to accumulate at alarming rates. The skeptics can say all they want, but the greenhouse gases are there, they're measurable and we can quantify them. Secondly, there is an increasing consensus among climate scientists that the observed increase in temperatures is neither an isolated phenomena nor random variations."

Johnston said he wanted to eliminate the disincentive for companies to act now before the legislative and regulatory machinery cranks up to address the problem.

The former chairman of the Senate Energy Committee was the featured speaker at the 30th anniversary luncheon of the Natural Gas Roundtable in Washington.

The Interstate Natural Gas Assoc. of America also is supporting a bill sponsored by a bipartisan group of senators to allow emissions credits to be used later for voluntary reductions now.

Ellen Beswick

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