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Restricted Natural Gas Supply Case |
The restricted natural gas supply case provides an analysis of the energy-economic implications of a scenario in which future gas supply is significantly more constrained than assumed in the reference case. Future natural gas supply conditions could be constrained because of problems with the construction and operation of large new energy projects, and because the future rate of technological progress could be significantly lower than the historical rate. Although the restricted natural gas supply case represents a plausible set of constraints on future natural gas supply, it is not intended to represent what is likely to happen in the future. The restricted natural gas supply case assumes the following constraints on natural gas supply:
The restricted supply case assumes that the Alaska natural gas pipeline is not built during the forecast period either because of public opposition to this project and/or a perception by potential project sponsors that there are significant risks associated with such a project that more than outweigh the potential rewards. Potential risks include the possibilities that pipeline construction costs could be significantly higher than currently estimated, and that future lower 48 natural gas prices could be considerably lower than either current prices or expected future prices. The restricted supply case assumes that public opposition to the construction of new U.S. LNG regasification terminals would preclude their construction. Existing terminals are assumed to proceed with their expansion plans, based on the assumption that LNG operations at existing terminals have lower financial risk and are more acceptable to the public. Any new LNG terminals already under construction are assumed to be completed in the restricted supply case. In particular, Excelerate’s EnergyBridge project in the Gulf of Mexico is under construction, in the sense that the LNG tankers are under construction, along with the docking buoy, which attaches the tanker to the pipeline. The Excelerate EnergyBridge project, the only new terminal represented in the restricted supply case, is assumed to become operational in 2006. The volume of LNG imported into Canada and Mexico is assumed to be identical in the restricted supply and reference cases. The restricted supply case assumes limits on the degree to which technology could enhance the productivity of future oil and natural gas supply operations. For example, current technology permits producers to recover between 75 and 85 percent of the in-place gas in conventional expansion gas reservoirs. Clearly, the highest theoretical recovery is 100 percent. Similarly, while seismic technology to access underground geologic formations can still be improved, there could be diminishing economic returns to such advances, because it is unlikely that, even with such advances, seismic technology would be able to determine, for example, whether an adequate reservoir seal existed at the appropriate point in geologic time to permit the capture and retention of hydrocarbons. Although the future rate of oil and gas technological progress might be considerably less than the historical rate, it is unlikely that there would be no technological progress in the future, given the competitive nature of the oil and gas business and continued private and public investment in research and development. Consequently, the restricted supply case assumes a rate of technological progress that is 50 percent lower than the historical rate. It is also assumed that the oil and gas industry in Canada would operate in the same technology environment as U.S. oil and gas producers. Consequently, the lower rate of technological improvement has the same impact on oil and gas exploration and development in Canada as in the United States. Wellhead Natural Gas Prices. The assumptions used in the restricted natural gas supply case result in significantly higher projections of lower 48 wellhead natural gas prices. In 2015 and 2025, projected wellhead gas prices are 23 percent and 31 percent higher, respectively, in the restricted supply case than in the reference case (Figure 29). In 2015, the restricted supply case projects a wellhead price of $5.13 per thousand cubic feet (2003 dollars), compared with the reference case price of $4.16 per thousand cubic feet. Similarly, in 2025, the restricted supply case projects a wellhead price of $6.29 per thousand cubic feet, compared with the reference case price of $4.79 per thousand cubic feet. Natural Gas Consumption. The high wellhead prices projected in the restricted supply case significantly reduce projected natural gas consumption (Figure 30). In the reference case, total U.S. natural gas consumption increases throughout the forecast, from 22.0 trillion cubic feet in 2003 to 30.7 trillion cubic feet in 2025. In the restricted supply case, total U.S. gas consumption grows from 2003 levels to a peak of 26.0 trillion cubic feet in 2014, then declines in the remainder of the forecast, to 24.5 trillion cubic feet in 2025. All end-use sectors are projected to consume less natural gas in the restricted supply case. The electric power sector shows the greatest reduction in consumption because of the availability of other generating options. In 2025, projected natural gas consumption in the electric power sector is 4.3 trillion cubic feet lower in the restricted supply case than in the reference case (5.1 trillion cubic feet and 9.4 trillion cubic feet, respectively). The electric power sector accounts for almost 70 percent of the total reduction in projected gas consumption in 2025 in the restricted supply case and is largely responsible for the shape of the total gas consumption trend in that case (Figure 31). Specifically, natural gas consumption in the electric power sector is projected to peak in 2014 at 7.1 trillion cubic feet in the restricted supply case, then decline steadily to 5.1 trillion cubic feet in 2025. The high natural gas prices in the restricted supply case both reduce the projected level of gas-fired electric generation capacity and reduce the use of the gas-fired generating plants already in operation. More coal-fired and renewable energy capacity is projected to be built as a result of the higher natural gas prices: 451 gigawatts of coal-fired capacity through 2025, as compared with 394 gigawatts in the reference case, and 114 gigawatts of renewable capacity in 2025, as compared with 103 gigawatts in the reference case. The second largest decline in projected end-use natural gas consumption in the restricted supply case is in the industrial sector, with total projected consumption of 8.3 trillion cubic feet in 2025, as compared with 9.0 trillion cubic feet in the reference case. Industrial CHP production falls sharply as a result of the higher natural gas prices, from 123 billion kilowatthours in the reference case to 93 billion kilowatthours in the restricted supply case in 2025, which further reduces natural gas consumption. Projected natural gas consumption in the residential and commercial sectors is also reduced from reference case levels in the restricted supply case, again due to higher gas prices. Residential gas consumption in 2025 is projected to be 5.4 trillion cubic feet in the restricted supply case, compared with 6.0 trillion cubic feet in the reference case. Natural gas prices to residential consumers are 12 percent higher in the restricted supply case than in the reference case in 2015 and 19 percent higher in 2025, and residential electricity prices are 4 percent and 2 percent higher in 2015 and 2025, respectively. Commercial gas consumption in 2025 is projected to be 3.8 trillion cubic feet in the restricted supply case, compared with 4.1 trillion cubic feet in the reference case. The higher natural gas prices in the restricted supply case prompt commercial consumers to invest in more efficient equipment or to switch to heating oil for their space heating and water heating needs, relative to the reference case. Commercial facilities also are expected to find natural-gas-fired CHP less attractive, with projected gas-fired electricity generation in the sector 17 percent (1.7 billion kilowatthours) lower in 2025 than projected in the reference case. Even with the actions described above, projected energy expenditures in the commercial sector in the restricted supply case are 5 percent higher than in the reference case in 2025, because the higher prices more than offset the reduced consumption volumes. Natural Gas Supply. The supply of natural gas available to U.S. consumers comes from both domestic production and net imports. In the restricted natural gas supply case, the availability of future domestic gas production is constrained by the assumed absence of an Alaska natural gas pipeline and by rates of technological progress that are 50 percent lower than those observed historically. Natural gas imports are constrained by the assumption that only the currently scheduled proposed expansions of existing U.S. terminals are permitted to go into operation, along with new LNG terminals already under construction. Imports from Canada are constrained by the assumption of low rates progress in oil and gas exploration and recovery technologies. The restricted supply case significantly reduces future LNG imports in comparison with the reference case projections (Figure 32). Net LNG imports in 2025 are projected to be 2.5 trillion cubic feet in the restricted supply case, compared with 6.4 trillion cubic feet in the reference case. Currently planned expansions at the four existing LNG terminals and the construction and operation of the Excelerate EnergyBridge terminal are responsible for the increase in future LNG imports projected in the restricted supply case, relative to the 0.4 trillion cubic feet of net LNG imports in 2003. The restriction on new LNG terminals reduces LNG’s share of total U.S. gas supply in 2025 from 21 percent in the reference case to 10 percent in the restricted supply case. The higher natural gas prices projected in the restricted supply case have a mixed impact on net imports of natural gas from Canada. In the near term, the higher prices are projected to stimulate Canada’s production, and from 2015 to 2020, U.S. imports of natural gas from Canada are projected to average about 340 billion cubic feet per year more in the restricted supply case than in the reference case. After 2020, a larger drop in net imports from Canada is projected in the restricted supply case than in the reference case, and projected net imports in 2025 are lower in the restricted supply case than in the reference case (2.3 trillion cubic feet and 2.5 trillion cubic, respectively). With higher U.S. wellhead prices projected in the restricted supply case, Mexico is projected to become a net exporter of natural gas to the United States after 2019, rather than being a net importer as projected in the reference case. In 2025, net exports from Mexico to the United States are projected to be about 400 billion cubic feet of natural gas per year in the restricted supply case, compared with about 250 billion cubic feet per year of net imports from the United States in the reference case. Total U.S. production of natural gas in 2025 is projected to be 19.1 trillion cubic feet in the restricted supply case, compared with 21.8 trillion cubic feet in the reference case (Figure 33). About 70 percent of the difference is directly attributable to the assumption that there would be no Alaska gas pipeline constructed in the restricted supply case. In the lower 48 States, projected natural gas production is not significantly different in the restricted supply and reference cases, because the higher prices projected in the restricted supply case largely offset the lower assumed rate of technological progress. The restricted supply case projects total lower 48 gas production of 18.8 trillion cubic feet in 2025, 4 percent less than projected in the reference case. Most of the reduction in projected lower 48 conventional gas production—about 270 billion cubic feet in 2025 in the restricted supply case relative to the reference case—occurs offshore. Unconventional gas production is sensitive to technological progress, because technological improvements could, for example, significantly improve the recovery rate of the unconventional gas in-place. Generally, there is more opportunity for technological progress to expand the economically recoverable unconventional resource base than the economically recoverable onshore conventional gas resource base. Offshore gas production is also sensitive to the future rate of technological progress, especially in the deepwater Gulf of Mexico. For example, technological improvements could reduce the development time necessary to bring oil and gas fields into operation and could make smaller oil and gas deposits profitable to produce. Although projected lower 48 natural gas production in the restricted supply case is not significantly different from that in the reference case, the absence of an Alaska gas pipeline does reduce total U.S. gas production throughout the forecast by 4 percent from 2003 through 2025. From an estimated technically recoverable natural gas resource base of 1,337 trillion cubic feet (as of January 1, 2003), 34 percent is projected to be produced in the restricted supply case, as compared with 36 percent in the reference case. Electricity Prices and Consumption. In 2003, natural-gas-fired facilities provided 16 percent of the electricity generated in the United States. The reference case projects that gas-fired facilities will provide 25 percent of the electricity generated in 2025, compared with 14 percent in the restricted natural gas supply case. Because natural gas accounts for a significant portion of total electricity generation throughout the projections, higher natural gas prices increase future delivered electricity prices above those projected in the reference case. Although gas consumption in the electricity sector peaks in 2014 in the restricted supply case, the greatest difference in projections for the delivered price of electricity between the two cases is in 2018, when the price in the restricted supply case is 6 percent (0.4 cent per kilowatthour in 2003 dollars) higher than in the reference case. Natural Gas Expenditures. The restricted natural gas supply case is projected to increase natural gas prices to a level that induces consumers to reduce their purchases of natural gas. Given the long lifetime of most gas-consuming equipment, the adjustment to higher gas prices would be relatively slow. Consequently, the negative impacts of high natural gas prices are more apparent in the nearer term than toward the end of the forecast. For example, the higher gas prices in the restricted supply case causes total projected U.S. end-use expenditures for natural gas to increase to $171 billion in 2015—equal to 1.1 percent of GDP— compared with $158 billion (1.0 percent of GDP) in the reference case (Figure 34). The greatest difference in gas consumption expenditures between the two cases, $13.4 billion, is projected in 2016. In 2025, when overall gas consumption is reduced in the restricted supply case, total end-use expenditures for natural gas are projected to be only $1.0 billion more than in the reference case. Contact: Joseph Benneche |
