Even energy experts tend to forget the enormous impact unanticipated events can have on markets and public policy. There are two developments that have the potential to cause dramatic change: the existence of enormous reserves of natural gas and the BP spill.
As recently as two years ago, we had no idea that there were vast natural gas resources in unconventional reservoirs such as coal seams, tight sand and shales in the US and elsewhere. That’s the positive surprise. On the negative side, the severity of the oil spill in the Gulf of Mexico could well turn the global public against oil and natural gas exploration.
If the past is any guide, accidents in the energy sector profoundly affect the US’ energy outlook. Reactor incidents at the nuclear power stations at Three Mile Island in 1979 and in Chernobyl, Ukraine, in 1986 interrupted nuclear power plant construction in the US and Europe for two decades. The 1973 oil embargo by OPEC and the 1978-79 oil crisis caused by the fall of the Shah in Iran permanently changed expectations about the security of oil supply and the long-term price trend.
The BP spill will certainly lead to a review of the risks involved in offshore drilling. Re-examining operating practices and regulations will likely take at least a year, during which time new deepwater operations will be curtailed. The danger is that public attitudes and government policy will lead to an extended period of reduced investment and licensing.
Some observers will characterize the blowout as an exceptional case due to chance or negligence. Others will see it as evidence of general inattention. Few will recall that facilities in the Gulf survived Hurricane Katrina in 2006 without appreciable problems.
Yet even as we endlessly debate US energy and climate policy in the wake of the BP gusher, we aren’t spending enough time considering what’s on the horizon—particularly natural gas’ transition from a dwindling to an abundant resource. According to the Energy Information Agency (EIA), natural gas could become a much more important fuel for the US in the coming decades.
In its 2010 International Energy Outlook, EIA predicts growth in natural gas production principally from shale in Latin America, China, Australia, North Africa and the former Soviet Union. Global unconventional gas production is projected to increase to 7.9 trillion cu. ft in 2035 (one-third of total natural gas production) from its 2008 level of 3.5 trillion cu. ft (around one-sixth of total production). The 2010 EIA projection of worldwide production of unconventional gas increases at 5.2% per year between 2008 and 2035, compared with 1.4% for total gas production.
What will this mean? In the short run, natural gas will displace coal in the electricity sector. This will significantly lower carbon emissions. In terms of renewable energy, low-cost natural gas will make hybrid solar plants that use both sunlight and natural gas to make electricity more economically attractive.
As oil gets more expensive and natural gas cheaper, there will also be a huge incentive to use more natural gas in the transportation sector. Compressed natural gas (CNG) can power buses, medium-duty trucks and light-duty vehicles that operate in urban environments close to fuelling stations.
But the US is far behind the rest of the world in using this source of energy for transportation. As of 2009, Pakistan led the world with 2.4 million vehicles fuelled by CNG and over 3,000 fuelling stations. The US had around 100,000 such vehicles and 1,300 stations, consuming 0.1% of the 12 million barrels per day (mbpd) devoted to transportation.
The penetration of natural gas into the US market will be determined by the cost of kits to convert petrol-fuelled vehicles to natural gas. That cost should decline sharply with scale, new vehicle offerings, the availability of fuelling stations, and continuation of the favourable cost of natural gas compared with petrol.
Even 10% penetration in the next decade or two would displace 1.2 mbpd. This may not be decisive, but it could have as big an impact as other proposals to reduce import dependence, such as gasohol (a mixture of petrol and ethanol from corn).
Natural gas can also be transformed into liquid fuels, such as methanol, for transportation or industrial use at a production cost that I estimate to be $45-60 per barrel of product. This is expensive, but lower than the likely price of crude oil and the anticipated cost of synthetic liquids from coal or shale (plus it has less carbon emissions).
The global expansion of gas pipelines and the expanding trade of liquefied natural gas indicate a movement towards a global market for natural gas similar to oil, and ultimately a single world price. A global price implies changes in patterns of gas trade between the North American market, where gas is priced to coal, and the Asian market, where it is priced to oil. Because coal is cheaper than oil on an energy-efficient basis, this means current natural gas prices in North America are $4 per 1,000 cu. ft compared with $10 per 1,000 cu. ft in Asia.
That’s where things seem to be heading, but our thinking should remain agile. There undoubtedly will be other energy surprises that will disrupt conventional thinking.
THE WALL STREET JOURNAL
John Deutch is a professor at MIT and former under secretary of the department of energy. He currently serves on the board of directors of Cheniere Energy and was formerly on the boards of Schlumberger, CMS Energy and Citigroup.
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