U.S. Natural Gas Markets
Mid-Term Prospects for Natural Gas Supply


The Energy Information Administration recently released the second of two studies of the U.S. natural gas market requested by the Secretary of Energy to address public concerns about last winter's natural gas supply and price issues. U.S. Natural Gas Markets: Mid-Term Prospects for Natural Gas Supply updates the first study using more recent data and examines future market prospects in more detail.

Recent trends:

Natural gas prices rose sharply in 2000 and remained high well into 2001. Increased consumption, a drop in productive capacity, subnormal storage levels, and harsh winter weather all contributed to the price rise. The high prices encouraged more drilling, and the number of rotary rigs in operation nearly tripled between April 1999 and July 2001, peaking at 1,068 on July 13. As a result, proved natural gas reserves increased 6 percent between 1999 and 2000, the largest yearly increase on record.

Despite an aggressive storage refill effort, prices have since been driven down by greater productive capacity and slower demand growth due to mild weather and a weaker economy. The near-term outlook is for a continued decline in natural gas prices through next year, from an average monthly wellhead price of $3.98 per million British thermal units (Btu) in 2001 to $1.91 per million Btu in 2002. The potential for low prices would be enhanced if the economy remains in recession and suppresses demand in the industrial and electric power sectors.

Mid-Term Supply Prospects:

The report's analysis begins with the reference-case forecast for natural gas from the Annual Energy Outlook 2002. It also develops a case with the same assumptions plus a limit on carbon dioxide emissions in the electric power sector, which drives up demand for natural gas. The report then analyzes the projected effect on supplies and prices of lifting Federal access restrictions on natural gas resources in the Rocky Mountains (RM) and the outer continental shelf (OCS). Eliminating these restrictions was assumed to free up as much as 29 trillion cubic feet of RM natural gas and 58 trillion cubic feet of OCS gas.

Four analytic cases were developed:

  1. reduced restrictions in the RM region only;
  2. reduced restrictions in the OCS only;
  3. reduced restrictions in both regions; and
  4. reduced restrictions in both regions under the carbon dioxide cap (see table).
Production rises under all scenarios, but the greatest impact is seen in the fourth case, when the carbon dioxide emissions limit leads to both higher demand and higher prices.

Projected Dry Natural Gas Production and Prices, 2020

Analysis Case

Total Production
(Trillion Cubic Feet per Year)

Average Wellhead Price
(Dollars per Thousand Cubic Feet)

Reference

28.5

3.26
CO2 Emissions Limit

30.2

3.72
Rocky Mountain Access

28.7

3.20
OCS Access

28.7

3.22
Rocky Mountain and OCS Access

29.1

3.15
Rocky Mountain and OCS Access with CO2 Emissions Limit

31.2

3.57
CO2 = Carbon dioxide. OCS = Outer continental shelf.
Note: Prices are in 2000 dollars and are for the lower 48 States.
Source: Energy Information Administration.

Liquefied natural gas (LNG) imports are projected in the reference case to expand from 160 billion cubic feet per year in 2000 to 830 billion cubic feet in 2020. If assumptions are varied to incorporate the carbon dioxide emissions limits described above as well as lower production and other costs than assumed in the reference case, LNG imports are projected to reach 1,740 billion cubic feet per year.

Long-Term Trends:

The natural gas industry will probably continue to be inclined toward cycles in prices and supply investments. These can be amplified or damped by random external events, resulting in unpredictable price swings. Such swings impose major risks on large, costly supply projects that require long lead times, such as LNG terminals or a pipeline from Alaska to the lower 48 States, and thus can favor investments in conventional onshore natural gas supplies. Price swings can also obscure the value of high-efficiency consumer appliances and alter the financial viability of large industrial projects where fuel costs dominate operating costs. To an extent, the cyclical price effects can be mitigated by such measures as fixed-price contracts and level-payment programs.


U.S. Natural Gas Markets: Mid-Term Prospects for Natural Gas Supply, SR/OIAF/2001-06; 103 pages, 16 tables, 20 figures.

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File last modified: December 21, 2001