RFP7 - Natural Gas Supply And Demand: Getting the Balance Right

This paper will present the findings of the natural gas industry on the current status and trends in world natural gas supply and demand, highlighting the main constraints and challenges it faces to match the balance in terms of technology, investments, transport options and regulation. Natural Gas and Alternative Technologies As Tools for a New US Gas Security Strategy For almost half a century, federal policy makers in the United States have used “oil security” as code for “energy security.” The international nature of oil markets, the decades-old global oil cartel, the rise in oil imports, instability in the Middle East and the near-total dependence of the world’s transportation systems on oil-based fuels, underscore the significant national security implications associated with US oil consumption. It is increasingly clear however, that this narrow definition is inadequate for the U.S. to effectively address the growing energy security challenges of the 21 century. Global demand for all fossil fuels is rising dramatically, competition for capital to produce and deliver energy to markets is increasing, and global energy trade is rapidly expanding. These trends could alter geopolitical relationships and strategies in very significant ways, requiring a broader energy security policy focus than the oil-centric one of the last fifty years. Natural gas is the most prominent new entrant in this broader energy security arena. Its elevated status is due to several factors. First, while global energy consumption is growing rapidly, demand for natural gas is growing faster still, outstripping the pace for all other energy sources; by 2025, the world will be consuming around 70% more gas than it does today. Much of the incremental demand growth, largely for power generation, will occur in the developing world. In the U.S. and Europe, where absolute demand is the largest, incremental gas demand growth will mirror that of the developing world, although it will not be as large on a percentage basis. In the US, natural gas represents 24% of total US energy consumption; it is critical to both the economic and environmental health of the nation. Second, natural gas is a relatively abundant energy resource. The world has roughly 6000 trillion cubic feet (tcf) of proved natural gas reserves and currently consumes around 100 tcf of gas per year. While gas reserves are substantial and more widely distributed than oil, they are still concentrated in just a few key regions of the world. Moving these narrowly-distributed resources to increasingly-dispersed and growing demand centers will require expanded or new distribution networks and new technologies to reduce costs. Technically recoverable reserves are much larger and even more widely distributed than proved reserves but will also require new technologies – along with significant investment and a suite of policies to encourage their development and deployment -to economically find, produce, process and transport them. Third – and related to the previous point – over 30% percent of the world’s gas reserves are “stranded” by virtue of the transportation limitations associated with natural gas. Stranded resources can only be “monetized” by developing access to markets through the availability and expansion of production and transportation infrastructures. This will require significant capital investment, additional security for the entire supply chain, relative political stability in producing and transit nations, international and regional cooperation, and, again, new technologies. Also, the characteristics of stranded reserves – whether associated with oil production, from large or smaller fields – suggest different mixes of technology and infrastructure investments. Successful monetization of stranded resources and movement of product to demand centers also suggests the development of regional and global gas markets Copyright © World Petroleum Congress – all rights reserved RFP7 Natural Gas Supply and Demand: Getting the Balance Right RFP – the commoditization of gas, new pricing mechanisms, associated risk management tools, and arbitrage opportunities. Finally, over the next decade, worldwide environmental concerns and associated national, regional and local regulatory drivers will place additional demand pressures on natural gas, as the cleanest of the fossil fuels. These include: the Kyoto Protocol, the implementation of which will affect different regions in different ways, possibly creating gas demand “sinks” as signatory nations seek to meet pending emissions target deadlines; the contributions of gas combustion to climate change and air pollution; requirements for low sulfur diesel fuel which, by reducing the fungibility of oil-based fuel, will strain global refining capacity and provide new impetus for the development of gas (and coal) based alternatives; and local efforts to mitigate energy-related pollution and associated health impacts, particularly in the emerging megacities of Asia and Latin America. This convergence of issues – both energy-specific and others that might impact energy requirements -highlights the critical need for a new US strategic energy security framework specific to natural gas, along with a suite of enabling policies that will support the effective investment of financial, human and technology resources. The focus of this discussion – and its conclusion -will be the contribution that natural gas and energy technologies can make as policy tools to address the world’s energy needs in the next two decades. To support this conclusion, this paper will review: • energy, environmental, and natural gas drivers and trends; • technology pathways that could help meet the fundamental US policy principles and challenges specific to energy and natural gas, and; • US policies and technologies supported in recently passed comprehensive energy legislation. I. Drivers for a Natural Gas Security Policy A strategy for natural gas security will be defined, in part, by energy demand growth, geology, and geography. It is important to review where energy and natural gas demand is now and where it will be in the future, production in those countries with reserves sufficient for significant natural gas exports, the environmental benefits and costs of natural gas consumption, the nature of the growth in interregional transport of gas, and investment requirements. Growth in Global Energy Demand A review of overall global energy demand growth – including natural gas -over the next 20 years will provide context for this discussion and is important because of growing competition for energy supplies, changing patterns of supply and demand, and the related geopolitical concerns and implications. Total world energy consumption will rise 57% between 2002 and 2025 and developing nations will lead the way with a 104% increase. This compares to a 27% increase for industrialized nations, and a 45% increase for Eastern Europe/ FSU. In 2025, fossil fuels will represent around 87% of world primary energy consumption; on a percentage basis alternative fuels will make little headway in the next two decades. Demand Growth by Fuel Source Between 2002 and 2025, world oil demand will increase by 56%; natural gas by 70%; and coal by 46%.ii By region, fossil fuel consumption as a percent of total energy consumption will remain virtually unchanged in 2025. There are however some notable differences in fuel consumption patterns within regions. In Western Europe, coal consumption will decline by 2025 and gas consumption will increase, both on a percentage and absolute basis. In the EE/FSU, gas consumption will increase fairly substantially and coal as a percentage of total consumption will decrease. Gas also makes gains on a percentage basis in developing Asia and the Middle East, although these increases are not as pronounced as in Europe of the Copyright © World Petroleum Congress – all rights reserved RFP7 Natural Gas Supply and Demand: Getting the Balance Right RFP C./S. America Asia & Oceania 36 36 Middle East 57 57 North America W. Europe Eastern Europe