Introduction

This analysis of four scenarios that restrict future natural gas supply responds to a request by Representative Barbara Cubin, Chairman of the Subcommittee on Energy and Mineral Resources of the U.S. House Committee on Resources, on February 3, 2004. A copy of the request letter is included in Appendix A.

The four restricted natural gas supply cases are compared to the Annual Energy Outlook 2004 (AEO2004)¹ reference case to determine the impact of these supply restrictions on natural gas production, consumption, imports, and prices. The four restricted supply cases are defined as follows:

1) the no Alaska gas pipeline case,

2) the limited new liquefied natural gas (LNG) terminal capacity case,

3) the lower ultimate unconventional gas recovery (UGR) per well case, and

4) the combined case, which incorporates the assumptions of the three other cases.

The no Alaska pipeline case assumes that the Alaska natural gas pipeline, which would transport North Slope Alaska gas to the lower 48 States, will not be built. The National Energy Modeling System (NEMS)² evaluates the economic attractiveness of constructing a natural gas pipeline from the Alaska North Slope to the lower 48 States. In the AEO2004 reference case, natural gas prices are projected to be sufficiently high after 2009 to begin construction of the pipeline, with gas deliveries beginning in 2018. In the no Alaska pipeline case, however, NEMS is precluded from constructing this pipeline.

The low LNG case constrains proposed U.S. LNG import capacity to approximately 2.1 trillion cubic feet (tcf) of annual capacity. This case assumes that the following LNG terminals are built: two new LNG import facilities of 1 billion cubic feet per day each on the Gulf Coast and one 500-million-cubic-feet-per-day facility in the Bahamas into Florida. This case does not limit the construction of LNG facilities in Baja California, Mexico, whose gas can be piped into the western United States.

In the low UGR case, future unconventional gas³ production remains at approximately current levels under reference case prices by assuming that:

• there is no future technological improvement in the development and production of unconventional gas resources;
• less unconventional gas is produced over the life of each well; and
• unconventional gas production has a higher reserve-to-production requirement than in the reference case.

These assumptions take effect immediately after the 2002 base year.

Unlike the other two cases, the low UGR case allows future unconventional gas production to increase in higher price scenarios. At higher wellhead prices, new unconventional gas wells can be completed, as long as they are subject to the three assumptions noted above. Consequently, in the combined case, when wellhead gas prices are significantly higher than those projected in the low UGR case, unconventional gas production is higher than in the low UGR case and higher than current production levels.

The combined case is a severely restricted gas supply scenario that goes beyond what might be plausibly expected in the future. Model projections for this case are especially uncertain. In addition to the possibility of significant shutdowns in gas-intensive industries, the high sustained gas prices that are projected might lead to considerably more energy conservation, to more extensive fuel switching, or to the construction of additional LNG facilities in Canada or Mexico.

Sources