Market Trends — Natural Gas

Natural gas prices are expected to rise with the marginal cost of production

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U.S. natural gas prices are determined largely by supply and demand conditions in North American markets. At current (2012) price levels, natural gas prices are below average replacement cost. However, over time natural gas prices rise with the cost of developing incremental production capacity (Figure 103). After 2017, natural gas prices rise in the AEO2012 Reference case more rapidly than crude oil prices, but oil prices remain at least three times higher than natural gas prices through the end of the projection (Figure 104).

As of January 1, 2010, total proved and unproved natural gas resources are estimated at 2,203 trillion cubic feet. Development costs for natural gas wells are expected to grow slowly. Henry Hub spot prices for natural gas rise by 2.1 percent per year from 2010 through 2035 in the Reference case, to an annual average of $7.37 per million Btu (2010 dollars) in 2035.

Natural gas prices vary with economic growth and shale gas well recovery rates

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The rate at which natural gas prices change in the future can vary, depending on a number of factors. Two important factors are the future rate of macroeconomic growth and the expected cumulative production of shale gas wells over their lifetimes— the estimated ultimate recovery (EUR) per well. Alternative cases with different assumptions for these factors are shown in Figure 105.

Higher rates of economic growth lead to increased consumption of natural gas, causing more rapid depletion of natural gas resources and a more rapid increase in the cost of developing new incremental natural gas production. Conversely, lower rates of economic growth lead to lower levels of natural gas consumption and, ultimately, a slower increase in the cost of developing new production.

In the High and Low EUR cases, the EUR per shale gas well is increased and decreased by 50 percent, respectively. Future shale gas well recovery rates are an important determinant of future prices. Changes in well recovery rates affect the long-run marginal cost of shale gas production, which in turn affects both natural gas prices and the volumes of new shale gas production developed (further analysis and discussion are included in the "Issues in focus" section of this report). In the Low EUR case, an Alaska gas pipeline starts operating in 2031, accompanied by a dip in natural gas prices. A recent proposal to build a natural gas pipeline along the route of the Alyeska oil pipeline with an LNG export facility could speed up construction. In the High Economic Growth case, the pipeline begins operation in 2035, with a similar effect on prices.

With rising domestic production, the United States become a net exporter of natural gas

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The United States consumed more natural gas than it produced in 2010, importing 2.6 trillion cubic feet from other countries. In the AEO2012 Reference case, domestic natural gas production grows more quickly than consumption. As a result, the United States becomes a net exporter of natural gas by around 2022, and in 2035 net exports of natural gas from the United States total about 1.4 trillion cubic feet (Figure 106).

U.S. natural gas consumption grows at a rate of 0.4 percent per year from 2010 to 2035 in the Reference case, or by a total of 2.5 trillion cubic feet, to 26.6 trillion cubic feet in 2035. Growth in domestic natural gas consumption depends on many factors, including the rate of economic growth and the delivered prices of natural gas and other fuels. Natural gas consumption in the commercial and industrial sectors grows by less than 0.5 percent per year through 2035, and consumption for electric power generation grows by 0.8 percent per year. Residential natural gas consumption declines over the same period, by a total of 0.3 trillion cubic feet from 2010 to 2035.

U.S. natural gas production grows by 1.0 percent per year, to 27.9 trillion cubic feet in 2035, more than enough to meet domestic needs for consumption, which allows for exports. The prospects for future U.S. natural gas exports are highly uncertain and depend on many factors that are difficult to anticipate, such as the development of new natural gas production capacity in foreign countries, particularly from deepwater reservoirs, shale gas deposits, and the Arctic.

Shale gas provides largest source of growth in U.S. natural gas supply

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The increase in natural gas production from 2010 to 2035 in the AEO2012 Reference case results primarily from the continued development of shale gas resources (Figure 107). Shale gas is the largest contributor to production growth; there is relatively little change in production levels from tight formations, coalbed methane deposits, and offshore fields.

Shale gas accounts for 49 percent of total U.S. natural gas production in 2035, more than double its 23-percent share in 2010. In the Reference case, estimated proved and unproved shale gas resources amount to a combined 542 trillion cubic feet, out of a total U.S. resource of 2,203 trillion cubic feet. Estimates of shale gas resources and well productivity remain uncertain (see "Issues in focus" for discussion).

Tight gas produced from low permeability sandstone and carbonate reservoirs is the second-largest source of domestic supply in the Reference case, averaging 6.1 trillion cubic feet of production per year from 2010 to 2035. Coalbed methane production remains relatively constant throughout the projection, averaging 1.8 trillion cubic feet per year.

Offshore natural gas production declines by 0.8 trillion cubic feet from 2010 through 2014, following the 2010 moratorium on offshore drilling, as exploration and development activities in the Gulf of Mexico focus on oil-directed activity. After 2014 offshore production continues to rise throughout the remainder of the projection period.

In most U.S. regions, natural gas production growth is led by shale gas development

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Shale gas production, which more than doubles from 2010 to 2035, is the largest contributor to the projected growth in total U.S. natural gas production in the Reference case. Regional production growth largely reflects expected increases in production from shale beds. See Figure F4 in Appendix F for a map of U.S. natural gas supply regions.

In the Northeast, natural gas production grows by an average of 5.2 percent per year, or a total of 3.9 trillion cubic feet from 2010 to 2035 (Figure 108). The Marcellus shale, which accounts for 3.0 trillion cubic feet of the expected increase, is particularly attractive for development because of its large resource base, its proximity to major natural gas consumption markets, and the extensive pipeline infrastructure that already exists in the Northeast.

In the Gulf Coast region, natural gas production grows by 2.0 trillion cubic feet from 2010 to 2035, at an average rate of 1.4 percent per year. Natural gas production from the Haynesville/ Bossier and Eagle Ford formations increases by 2.8 trillion cubic feet over the period, but declines in production from other natural gas fields in the region offset some of the gains, so that the net increase in production for the region as a whole is only about 2 trillion cubic feet.

In the Rocky Mountain region, natural gas production grows by 0.9 trillion cubic feet from 2010 through 2035, with tight sandstone and carbonate production increasing by 0.8 trillion cubic feet and shale gas production by 0.4 trillion cubic feet. As in the Gulf Coast region, production growth in the Rocky Mountain region is offset in part by production declines in the region's other natural gas fields.

The U.S. becomes a net natural gas exporter

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In 2010, the United States imported 11 percent of its total natural gas supply. In the AEO2012 Reference case, U.S. natural gas production grows faster than consumption, so that early in the next decade exports exceed imports. In 2035, U.S. net natural gas exports are about 1.4 trillion cubic feet (about 4 billion cubic feet per day), half of which is exported overseas as liquefied natural gas (LNG). The other half is transported by pipelines, primarily to Mexico.

U.S. LNG exports supplied from lower 48 natural gas production are assumed to start when LNG export capacity of 1.1 billion cubic feet per day goes into operation in 2016. An additional 1.1 billion cubic feet per day of capacity is expected to come on line in 2019. At full capacity, the facilities could ship 0.8 trillion cubic feet of LNG to overseas consumers per year. Net U.S. LNG exports are somewhat lower than those figures imply, however, because LNG imports to the New England region are projected to continue. In general, future U.S. exports of LNG depend on a number of factors that are difficult to anticipate and thus are highly uncertain.

Net natural gas imports from Canada decline over the next decade in the Reference case and then stabilize at about 1.1 trillion cubic feet per year (Figure 109), when natural gas prices in the U.S. lower 48 States become high enough to motivate Canadian producers to expand their production of shale gas and tight gas. In Mexico, natural gas consumption shows robust growth through 2035, while Mexico's production grows at a slower rate. As a result, increasing volumes of imported natural gas from the United States fill the growing gap between Mexico's production and consumption.