Natural Gas: A Bridge or a Chasm?
Hillard G. Huntington
Energy Modeling Forum/Stanford University
Washington, DC – July 13, 2005
LNG Replaces Stagnant North American Supplies (TCF)
$4.03
35
$4.79
Label at top of bar
indicates wellhead
price (2003$/Mcf).
30
$4.98
25
20
LNG Imports
Canadian Imports
US Production
15
10
5
0
2003
2025 (AEO 2003)
2025 (AEO 2005)
Higher Prices Contract Total Market - Consumption (Tcf)
35
30
25
Electricity
Industrial
Commercial
Residential
20
15
10
5
0
2003
2025 (AEO 2003)
2025 (AEO 2005)
Wellhead Natural Gas Prices, 1989-2002 ($/Mcf)
$10.00
$9.00
Natural Gas, Texas
Natural Gas, California
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
1989
1991
1993
1995
1997
1999
2001
2003
Crude Oil and Wellhead Natural Gas Prices, 1989-2005
($/Mcf)
$10.00
$9.00
Natural Gas, Texas
Natural Gas, California
Crude Oil, US
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
1989
1991
1993
1995
1997
1999
2001
2003
2005
Why Are Oil Prices Important?
• Oil prices lead gas prices, but gas prices do
not lead oil prices – Rothwell (2005).
• Oil & gas are not interchangeable in many
sectors, but they are in certain key activities.
– Refineries use lots of both fuels.
– Gas drilling is strongly related to oil drilling.
Drilling Costs Rise with Oil Price
% p.a.
Years
Oil Prices Multi-Factor Drilling Costs
Productivity# per Foot
1970-80
21.5%
-7.0%
7.6%
1980-92
-4.2%
1.3%
-4.6%
1998-2003
12.3%
N.A.
8.9%
# Ian Parry (1999)
Natural Gas Prices Around the World ($/million Btu)
7
6
5
Japan
Europe
UK
USA
Canada
Crude Oil
4
3
2
1
Source: BP Statistics, 2005.
0
1988
1990
1992
1994
1996
1998
2000
2002
2004
Replacement of U.S. Natural Gas Production (Tcf)
30
25
New
Reserves
20
Production
15
10
5
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Observations About Natural Gas Policy
• High gas prices are primarily an oil problem.
• Opportunity to improve market efficiency
without causing long-term harm.
–
–
–
–
Allow fuel demand flexibility
Remove unnecessary supply barriers
No price ceilings or price floors
Hidden costs of subsidies (including lost jobs)
Restricted Supplies Increase Prices (2003$/Mcf)
$7.00
Restricted Supply:
- no Alaskan pipeline
- no new LNG terminals
- lower productivity (lower-48)
$6.00
$5.00
$4.00
Reference Case
$3.00
$2.00
$1.00
Source: AEO, 2005.
20
25
20
20
20
15
20
10
20
05
20
00
$0.00
Restricted Supply Raises Natural Gas Prices (%)
AEO 2005 represents a reasonable but conservative view about this effect.
(% wellhead price change scaled for each 1% restriction in gas sales.)
4.5%
4.0%
Estimates #1-#7 from Energy Modeling Forum (2003).
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
AEO2005
#1
#2
#3
#4
#5
#6
#7
Alaskan Pipeline Gas
• Alaskan pipeline economic (by 2016) and
grows to 7% in AEO Reference case.
• Guaranteed minimum prices would not be
needed under reference case prices.
• Uncertain future about energy prices
complicates the story.
• Possible painful outcome: vigorous LNG
trade undercutting Alaskan prices.
Siting LNG Terminals
•
•
•
Grows from 2% to 21% over 2003-2025 (AEO).
Perceived safety and security fears may inhibit
this revolution.
Possible approaches for citing new terminals:
–
–
–
(1) Federal control displaces state decisions;
(2) Educate local communities about benefits;
(3) Establish siting licenses
Access to Western Gas Resources
• Rocky Mountain gas grows from 20% to 28% of
lower 48 production (2003-2025).
• Conflicting economic/social interests.
• Country needs a process for comparing higher gas
prices with other costs.
• “A reasoned process that will facilitate
development of some sites, not a stream-lined
process that develops all sites.”
– Site diversity
– Valuing competing market and nonmarket uses
for these sites.
Offshore Development
• Offshore relatively stable at 25% of lower
48 production
– deep gas gains relative to shallow gas
• Resolve state rights and boundaries
Reducing Natural Gas Demand
• Allow flexibility in substituting fuels by
power sector and industry.
– immediate fuel switching
– longer term investment
• Reduce environmental damages through
market mechanisms.
– Targets are “blank checks”
• Avoid subsidies for energy efficiency and
supplies that compete with natural gas.
Shorter-Term Price Volatility
• Seasonal end-use patterns and pipeline
constraints.
• Weather will continue to test gas inventory
strategies.
• Financial markets are improving.
• Regulated electric utilities are reluctant to
use long-term contracts.
Avoiding Future Chasms
• Chasm #1: If prices stay high, we do not want a
market with restricted demand flexibility and
excessively burdensome supply barriers.
• Chasm #2: If prices move lower, we do not want
– Taxpayers to underwrite expensive projects (Alaskan
pipeline) or supply diversification strategies.
– Energy companies to have a backlog of LNG capacity.
• Bridge #1: policy that improves investment
process rather than dictates the outcome.
• Bridge #2: Reliable data, a critical investment for
monitoring how well energy markets are doing.