Amid projections of continued growth in natural gas demand and tighter supplies, a two-year delay in the construction of gas pipelines, storage facilities and liquefied natural gas (LNG) terminals will cost U.S. gas consumers more than $200 billion by 2020, according to a new study released by The INGAA Foundation Monday.
“Using the Henry Hub price as a proxy, a two-year delay in pipeline and LNG import terminal construction will increase U.S. natural gas prices by an average of $0.78 per MMBtu from 2005 [through] 2020,” said the study, which was conducted by Energy and Environmental Analysis Inc. (EEA) of Arlington, VA at the direction of The INGAA Foundation.
The study forecasted that its base-case natural gas price of $5.65/MMBtu for the 2005-2020 period would rise to $6.43/MMBtu if construction projects were postponed by two or more years.
States that would feel the biggest impact from project construction delays would be Texas ($32.57 billion), California ($29.79 billion), New York ($11.4 billion), Michigan ($9.27 billion), Illinois ($9.21 billion) and Florida ($8.29 billion), according to the report.
“Price effects will be immediate and lasting throughout the forecast period [2005-2020]…Higher gas costs [would] be seen in all parts of the country. Only in the Northern Rockies (Colorado, Wyoming and Utah) will there be a temporary [2005-2010] initial decline in natural gas prices and thus lower consumer costs. This is due to supplies being trapped in the region by capacity ‘bottlenecks’ to moving gas out of the region. However, the reduction in prices before 2010 are more than offset by increases” from 2011 through 2020, it said.
In addition to higher gas costs for consumers, “U.S. industrial competitiveness in world markets will suffer due to increased costs. There will be job losses in gas-consuming industries. There will also be direct job losses in the pipeline construction business. [And] with relatively higher gas prices, more coal will be dispatched to meet electric generation needs,” which would affect air quality, the study noted.
The 91-page study, which is an update of The INGAA Foundation’s 2001 report, takes a close look at the pipeline, storage and LNG infrastructure requirements to meet a projected 30 Tcf market by 2020, as well as evolving gas supply and demand trends.
In order to meet demand by 2020, about $61 billion would need to be invested in significant pipeline and storage infrastructure in both the U.S. and Canada, according to the report. Approximately $19 billion of that investment would be required simply to replace current pipe to maintain existing pipeline capacity, while about $42 billion would be earmarked for new pipeline and storage projects. Of the $42 billion, the study estimated that $18 billion would be associated with the proposed Alaskan and MacKenzie Delta projects to bring Arctic supplies to market.
Specifically, the gas industry must build more than 45,000 miles of pipeline to meet market demand for gas in North America, the report noted. Approximately 35,000 miles would be new pipe (including 7,000 miles to bring Alaskan and MacKenzie Delta gas to the Lower 48), and 10,000 miles would be required to replace existing pipe, it said.
“From 2003 to 2020, approximately 4.6 Bcf/d of additional pipeline capacity will be needed out of Western Canada,” according to The INGAA Foundation. “The capacity volumes are less than the forecasted 7 Bcf/d of additional Arctic supplies entering Alberta and British Columbia from the north. This is due to existing current spare pipeline capacity, declining Western Canadian Sedimentary basin production, and increased demand in Western Canada.”
Other notable areas where interregional capacity will be required include: 0.8 Bcf/d from eastern Canada, 5.5 Bcf/d out of the Rockies, and 8.4 Bcf/d out of the deeper waters of the Gulf of Mexico, the study said. In addition, it estimated more than 11 Bcf/d of additional LNG terminal receipt capacity and associated pipe infrastructure to bring it to market will be required.
The study said that at least 10 additional LNG terminals must be constructed to meet domestic gas demand by 2020. It projects that U.S. LNG imports could be over 6,600 Bcf per year by 2020, nearly a thirty-fold hike from imports in 2002 (229 Bcf).
“There is a significant value in siting LNG terminal facilities in ‘market area’ locations that are downstream of pipeline constraints such as the Northeast U.S. However, such locations may have limited pipeline access or face additional hurdles in permitting. Terminals along the Gulf of Mexico will have access to a more extensive pipeline network but may receive a lower prices for their natural gas supplies. In the end, a mix of supply area and market area terminals will most likely be built.”
The study’s base-case scenario assumes that two additional East Coast terminals, seven Gulf Coast Terminals and 1 terminal on the West Coast will be built by the end of the next decade.
The study sees gas demand growing to approximately 30 Tcf by 2020 “or very shortly thereafter,” an increase of 38% or 1.9% a year over the 2003 demand levels. “All sectors of the economy, residential, commercial, industrial and power generation contribute to this growth. However, the power generation sector contributes well over half of the total increment,” it said.
The study estimates the power generator sector, which consumed 4,107 Bcf in 2003, will use 9,610 Bcf of gas by 2020. In contrast the U.S. industrial sector, which currently is the largest consumer of gas at 7.2 Tcf per year, is expected to experience only “modest growth” of 0.5% annually, rising to 7.9 Tcf by 2020, it noted.
The warmer parts of the nation are expected to see higher proportional growth rates for gas over the period. Of the 8,161 Bcf annual increase in demand that’s anticipated by 2020, the Southeast and Florida will account for 28% of the growth; Mountain and West, 27%; Northeast, 20%; Gulf Coast, 14%; and the Midwest and Plains, 11%, the study said.
Key to meeting this demand will be the development of gas from “frontier regions,” including the deepwater offshore in the Gulf of Mexico, unconventional gas in the U.S. and Canadian Rockies, Arctic gas, Eastern Canadian gas and large volumes of LNG, it noted.
Currently, production from Western Canada, West Texas and Oklahoma, the onshore Gulf of Mexico, the Gulf of Mexico Shelf and the San Juan Basin account for approximately 19.3 Tcf, or 80% of the production in the United States and Canada. By 2020, volumes from traditional basins are anticipated to decline over 3 Tcf per year to 16.2 Tcf annually, accounting for only 61% of North American production, the report said.
“Much of the growth of the gas market over the next 20 years must be sustained by development of currently untapped supplies from areas that are generally more remote from the consuming markets in North America,” which will require the construction of additional pipeline infrastructure.
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