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5 Summary and Overarching Issues It is not feasible, in a one-day workshop, to cover all of the important supply and demand aspects of natural gas. By design, the workshop focused on natural gas demand forecasts and factors that cause uncer- tainty in demand, North American supply estimates and significant vari- ability in those estimates, and ways to meet future U.S. natural gas de- mand with a focus on technology and LNG transportation. Several additional issues were featured by speakers and/or during open discussion sessions. These included (1) the impact of tax incentives and royalties on the natural gas supply, (2) the growing need for re- search and technology as the natural gas resource base becomes increas- ingly unconventional, (3) the significant decrease in private-sector re- search and development funding, (4) the need for new federal-private research and technology models, and (5) the significant decline in the number of graduate students enrolled in the geosciences and petroleum engineering who will be available to replace retiring workers over the next decade as the oil and gas industry faces the loss of well over half its technical workforce. Several important issues related to natural gas were not treated in a significant way during the workshop. These include but are not limited to (1) factors that influence private-sector investment in natural gas, (2) natu- ral gas transportation infrastructure and pipeline capacity, (3) natural gas storage, (4) significant environmental benefits of natural gas over other fossil fuel energy sources, (5) the impact that U.S. policy has on perturb- ing the global trends of decarbonization of energy sources, (6) the impact on the U.S. and global economies of a transition to a natural gas economy, 77

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78 U.S. NATURAL GAS DEMAND, SUPPLY, AND TECHNOLOGY (7) carbon sequestration, (8) the national security effects of a U.S. transi- tion to natural gas, and (9) a review of the EIA models. The primary workshop topics of natural gas demand, supply, and meeting the demand, reported in detail in Chapters 2 through 4, are sum- marized briefly here, followed by a discussion of overarching issues and a look ahead. DEMAND Even with the history of price volatility, some speakers and partici- pants projected an overall increase in U.S. natural gas demand in the next 2 to 5 years, owing largely to an anticipated rebound in industrial produc- tion and continued growth in new natural gas-fired electric power. The longer-term outlook for natural gas was considered less certain by some workshop participants and will depend on its affordability in the indus- trial sector, its competitive position for new power facilities, its reliability as a fuel supply, its price volatility, and the creation of a global transpor- tation and storage network. In addition, some workshop participants be- lieve that proposed and pending energy policies, such as the Bush Administration's Clear Skies Initiative, and international pressures for addressing carbon emissions and global climate change will further influ- ence the demand for and price of natural gas. Demand for natural gas is projected by the EIA (2003a) to grow from 22.4 Tcf in 2002, to 27.1 Tcf in 2010, and to 34.9 Tcf in 2025. This trend equates to an average annual increase in demand of nearly 2 percent per year and is faster than the expected growth in overall primary energy consumption. The great bulk of the increase is from electricity generation, as the share of natural gas in this market is expected to increase from 17 percent in 2001 to 29 percent in 2025. SUPPLY Assessments of the future supply of natural gas in North America send somewhat mixed signals. Workshop participants laid out the follow- ing issues: (1) the United States will most likely continue to require in- creasing amounts of imported natural gas to meet projected demand; (2) Canada will increase its domestic consumption, with little excess export capacity beyond the present-day level; and (3) Mexico will most likely remain a net importer of natural gas. Some workshop participants believe that LNG imports and perhaps hydrates in the longer term will most likely be required to augment the North American supply. The accuracy of the supply assessments is limited by (1) perception and understanding of the origin and occurrence of the resource, (2) the quality and distribu-

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SUMMARY AND OVERARCHING ISSUES 79 lion of available data with which to conduct estimates, and (3) the meth- ods used in the assessment. Some workshop participants believed that owing to these factors a range of assessment values can be expected as opposed to a single number. According to USGS assessments, the remaining potential global sup- ply of natural gas is more than 13,000 Tcf (Thomas Ahlbrandt, USGS, per- sonal communication, 2003; USGS, 2000~. Reserves of various categories (proven, probable, possible) account for 35 percent of the remaining po- tential supply. Outside the United States, undiscovered natural gas is con- centrated in the former Soviet Union, the Middle East, and North Africa. A total of 1,289 Tcf of technically recoverable resources is reported for the United States by the EIA (2003a), using predominantly USGS and Miner- als Management Service data, with proven reserves accounting for 14 per- cent. Unconventional natural gas comprising tight (low-permeability) sands and carbonates, fractured shale gas, and coalbed gas accounts for 34 percent of remaining U.S. resources (Mary Hutzler, EIA, personal com- munication, 2003~. As noted by several workshop participants, contro- versy exists as to the size and geological nature of the tight sands gas resource in the U.S. Rocky Mountains region, where the bulk of the as- sessed unconventional gas is thought to reside (Ben Law, Pangea Hydro- carbon Exploration, personal communication, 2003; Keith Shanley, Stone Energy, personal communication, 2003~. Total assessed gas resources for the United States have been increas- ing over the past 20 years despite production and the transfer of potential resource to proven reserves (Scott Tinker, University of Texas at Austin, personal communication, 2003~. As noted by some workshop participants, these assessments have increased as a result of (1) an improved under- standing of the phenomenon of reserve appreciation or reserve growth, whereby gas (and oil) fields ultimately produce three to nine times the amounts initially estimated by standard engineering techniques, (2) an understanding of the potential for new plays, and (3) an evaluation of the role of current and advanced technologies in gas exploration and produc- tion (Thomas Ahlbrandt, USGS, personal communication, 2003~. MEETING U.S. DEMAND In the near term, most data suggest that both U.S.- and Canadian- sourced production will remain flat. Some workshop participants sug- gested that to meet long-term U.S. demand for natural gas will require a combination of enhanced production, new production, and imports from Canada via pipeline and from the rest of the world as LNG. Although LNG transport and conversion facilities are common internationally, do- mestic facilities essential for offshore imports are limited. Furthermore,

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80 U.S. NATURAL GAS DEMAND, SUPPLY, AND TECHNOLOGY pipelines for imports and interstate transport are yet to be built. New sources of natural gas from Canada via pipelines and globally via LNG appear to be competitive in a sustained $3.25/Mcf or greater price envi- ronment and to some degree could help to stabilize price and storage vol- ume volatility. The seasonal cyclicity of demand was clearly demonstrated during the past 6 months, when record-high storage volumes in October 2002 (over 3 Tcf of gas) were drawn down to record lows (less than 700 Bcf of gas) by March 2003 (Matt Simmons, Simmons and Company Inter- national, personal communication, 2003~. This extreme storage volatility can be attributed to the interplay between price, weather, and rig activity. Workshop participants emphasized the need to secure reliable future sup- plies of natural gas. Some workshop participants thought that common keys to increasing mid- to long-term gas supplies from United States and Canadian basins include increased access to currently off-limits lands, more efficient and competitive fiscal and regulatory regimes, transportation infrastructure, and rapid technological improvements with emphasis on the develop- ment of unconventional reservoirs and conventional deepwater and fron- tier resources. Although industry research facilities formed the core of oil and gas technology development in the past, private-sector research and develop- ment funding has dropped markedly since the early 1990s, and most ma- jor oil companies and private research labs in the United States have closed (see Figure 1.4) (Scott Tinker, University of Texas at Austin, personal com- munication, 2003~. Rapid technological improvements which have served to create unconventional gas resources such as tight gas, shale gas, and coal gas have historically relied on large private-sector investments. According to some workshop participants, future creation of unconven- tional gas resources will also benefit from increased capital investments in oil- and gas-related research and development but will require both private- and public-sector involvement. The $40 million proposed for oil and gas research by the U.S. Depart- ment of Energy marks a sharp decline in federal funding. Whereas oil and natural gas account for approximately 65 percent of the nation's energy supply, only 0.2 percent of the proposed fiscal year 2004 Department of Energy budget is for oil and gas research. University enrollments for geo- science graduates and petroleum engineers the future workforce have declined by more than 50 percent since 1985, with steeper declines for engineers. Significantly declining enrollments make future sources of hu- man expertise uncertain. The challenge is to meet increasing natural gas demand and technological requirements at the same time oil and gas re- search and development funding, university science and petroleum engi- neering enrollments, and industry employment are all declining.

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SUMMARY AND OVERARCHING ISSUES OVERARCHING ISSUES 81 Workshop presentations by several speakers, highlighted by Rich- ard Smalley, Malt Simmons, and Thomas Ahlbrandt, and subsequent open-session discussions framed a series of overarching issues related to natural gas as a viable energy source and a bridge to a hydrogen economy. 1. Are the environmental expectations for natural gas for the Clear Skies Initiative, for reduced carbon emissions, and for use as a bridge fuel to a hydrogen economy realistic? 2. Can the forecasted strong growth in natural gas demand grow- ing to 35 Tcf by 2025 be realized? 3. Given the recent history of price volatility, will natural gas be viewed as an unreliable energy source? 4. Given the now-higher expectations for gas prices, at least for the near term, will natural gas-fired electric power lose its competitive edge? 5. Will technological progress and the domestic natural gas resource base prove adequate to temper gas prices and maintain growth in con- sumption? 6. What new private-public investment model will provide adequate support to development the research and technology necessary to realize natural gas supply? 7. How might databases and reporting systems for natural gas con- sumption and fuel switching be strengthened to provide timelier, more accurate information? 8. At what pace must transportation systems pipeline and LNG- be built to meet future U.S. demand, and will economics bear such devel- opment? In the context of these overarching issues, it seems relevant to recog- nize that all investment in all sources of energy including (1) continued production and consumption of coal with positive impacts from advances in "clean coal" technology, (2) continued renewable and nuclear energy research, (3) enhanced oil recovery research and technology application, and (4) the complete spectrum of natural gas support, from incentives and access, to transportation and storage, to upstream research and tech- nology will be critical over the next 50 years as the world transitions out of a fossil fuel energy-dominated economy into a hydrogen economy. Be- cause long-term global trends are toward a natural gas economy and away from coal and oil (Richard Smalley, Rice University, personal communi- cation, 2003), the issue of meeting natural gas supply, in the face of de- creased private and federal spending on technology, decreased graduate

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82 U.S. NATURAL GAS DEMAND, SUPPLY, AND TECHNOLOGY school enrollments, decreased employment, and an aging workforce in energy companies, provides the framework for a look ahead. A LOOK AHEAD U.S. energy consumption continues to rise. As underdeveloped na- tions industrialize, global energy consumption will also continue to rise. In the context of increasing global energy demand, natural gas as a domi- nant energy source presents a paradox. On the one hand, for well over a century the world has been predictably and steadily progressing away from solid and liquid forms of energy toward cleaner, more efficient, and ostensibly more abundant natural gas, nuclear energy, and renewable energy. On the other hand, considerable uncertainty in demand and sup- ply forecasts, declining private and public investment in oil and gas re- search and technology, and slow development of a global natural gas transportation and storage network have combined with seasonal weather variations to cause significant natural gas price instability and volatility. Some question whether natural gas demand forecasts can be realized in such a way as to mitigate supply and price volatility. Addressing this dichotomy is a critical national issue. The benefits of natural gas as a bridge to a hydrogen future a more efficient fuel source, lower atmospheric emissions, less surface environmental disruption, broader global distribution, greater potential resource base when com- pared to coal and oil, are known. What is less well known, as shown by the presentations and open discussions at this workshop, are the reason- able bounds of resource estimates, the economics of the required global transportation infrastructure, the source of funding and manpower to sup- port needed research and technology, economic and technological solu- tions to the natural gas storage issue, and future volatility in price and supply. Based on evidence presented at the workshop, further study certainly seems warranted. The goal of such a study would be an in-depth scientifi- cally sound evaluation of natural gas as a viable energy bridge to a hydro- gen economy. Such an evaluation would provide a basis for future energy policy.