Shale Gas, Drilling Access Restrictions, and the Future of US LNG Imports

Transcription

1 Shale Gas, Drilling Access Restrictions, and the Future of US LNG Imports Peter Hartley George & Cynthia Mitchell Professor, Economics Department Academic Director, Shell Center for Sustainability Rice Scholar in Energy Studies, James A Baker III Institute for Public Policy Kenneth B. Medlock III Research Fellow in Energy Studies, James A Baker III Institute for Public Policy Lecturer and Adjunct Assistant Professor, Economics Department James A. Baker III Institute of Public Policy RICE UNIVERSITY

2 Shale Gas, Drilling Access Restrictions, and the Future of US LNG Imports! Looming restrictions on CO2 emissions are likely to stimulate the demand for natural gas as an input to power generation! Simultaneously, continuing access restrictions to prospective resources offshore and onshore in the Lower-48 and in Alaska could constrain domestic supply! Substantial regasification capacity has been added in recent years, and the LNG market has become more world-wide, liquid and competitive! But a large increase in US LNG imports may raise energy security concerns! Growth in supply from unconventional sources in recent years, especially shale gas, has been stronger than anticipated and may provide an alternative source! Could supply growth from these sources even be large enough to leave additional LNG import capacity idle despite substantial growth in domestic demand?

3 Likely effects of CO2 restrictions

4 World primary energy supply ( ) Source: EIA

5 CO 2 intensity of fossil fuels Source: EIA! CO 2 emission controls will favor the least CO 2 -intensive fossil fuel, natural gas

6 US electricity generation Generation by source 2006 Generating capacity 2005 Average annual net capacity growth in the EIA Annual Energy Outlook, 2008 reference case

7 Concern about future CO 2 regulation already is delaying new coal plants! Amount of coal capacity cancelled in 2007 is nearly the amount cancelled between 2004 and 2007! Some cancellations are also the result of rising construction costs! But these also tend to favor less capitalintensive CCGT and also disadvantage nuclear in addition to coal! Despite the cancellations, some coal projects are still proposed! 2,800 of the 6,700 MW still proposed at the beginning of 2008 was IGCC Source: Wood Mackenzie

8 Other countries! CO2 emission constraints elsewhere in the OECD also will stimulate the demand for natural gas! Simultaneously with imposing CO2 constraints, many European countries apart from France have moved away from nuclear power! UK has recently back-tracked somewhat on opposition to nuclear, but it remains to be seen how strong the change in policy will be! Eastern European members of the EU have also baulked at replacing domestic coal with imported Russian natural gas! Japan had been focusing on nuclear power as a key alternative to fossil fuel, but several accidents have turned public opinion somewhat against nuclear! If China and India respond to pressure to moderate their increased demand for coal, natural gas is a likely alternative

9 Access restrictions in the US

10 Political battle over access restrictions! Relaxing restrictions on drilling in the US has become a political issue! Specifically, some Federal lands and offshore areas known to contain significant natural gas reserves are effectively off-limits! Some restrictions are via legislation, executive order, regulation or administrative decisions! Other resources have been rendered uneconomic by Federal and State regulatory requirements that increase costs and create delays! Major resources affected include interior Western States, some US offshore areas and the Alaska National Wildlife Refuge and some other areas in Alaska! Ultimately, the amount restricted will depend on gas prices and other costs! Although some restrictions have temporarily been lifted, the expectation is that they will be re-imposed in 2009

11 Outline of restricted areas Planning Region/Basin Resource Offlimits (Tcf) Rocky Mountains OCS Total Lower 48 Alaska Total Montana Wyoming Thrust Belt Green River Powder River Uinta-Piceance San Juan Eastern Gulf of Mexico North Atlantic Middle Atlantic South Atlantic Washington/Oregon North/Central California Southern California ANWR North Aleutian Basin Sources: NPC Supply Task Group Report, MMS

12 Importing LNG to fill the gap?! Gas markets are no longer isolated! Economic growth in countries such as China and India, and expansion of demand for gas as a fuel for generating power, have increased worldwide demand for natural gas! CO2 constraints will exacerbate the shift to natural gas! Falling costs of LNG trade have connected international gas markets! Expected increases in market liquidity affect new investments in ways that reinforce the initial tendency toward flexible arrangements, short-term and multilateral trades! International linkages reduce the local consequences of any single change in supply or demand, but spread the effects over a wider geographical area! The developing world-wide gas markets makes national, and energy, security salient to policies affecting the gas market

13 Meeting the dash to gas : Natural gas resources and demand! According to the USGS, global gas supply potential is large, but the areas with the largest resources are remote from markets and require substantial new infrastructure! Perhaps more importantly, sourcing supply from some of these regions raises energy security concerns

14 Growth in unconventional supply sources

15 Unconventional natural gas production Source: EIA

16 Shale gas! Recent assessments of technically recoverable resources in 29 identified plays in the lower 48 amount to 274 Tcf! We have developed an inventory of these resources and their likely costs of exploitation! They are included in the model, but there is some uncertainty about both the magnitude of the potential resources and their exploitation costs

17 Reserves and undiscovered resources Reserve s Technically recoverable (2006) p 9 5 p 5 Mean Total Unconventional Total Shale Total Tight Ga s Total CBM Total Conventional Total Offshore L L48 Offshore Accessib l e L48 Offshore No Acce s s Total Source: NCI, EIA, MMS, PGC

18 Understanding the combined influences

19 Modeling a global natural gas market! The Rice World Gas Trade Model (RWGTM) allows possible future developments of the global natural gas market to be examined! Uses MarketBuilder software from Altos Management Partners! Spatial equilibrium linked through time by dynamic optimization of resource extraction! Supply is based on geological assessments of resources with costs estimated econometrically! Demand is based on population growth forecasts and econometric models of economic growth and sectoral level and composition of energy demand, with exogenous backstop! Greenfield and brownfield capacity expansion (of mines, LNG facilities, pipelines) is based on capital, operating and maintenance costs, and anticipated revenues with required returns varying by region and project! The model predicts! Regional (country and sub-country level) prices, supplies and demands, inter-regional flows and associated capital investments! For detail see:! Hartley, Peter and Kenneth B Medlock III, The Baker Institute World Gas Trade Model in Natural Gas and Geopolitics From 1970 to 2040, ed. Jaffe, Amy, David Victor and Mark Hayes, Cambridge University Press (2006), available online at

20 Base case results: Demand

21 Base case results: Supply

22 Base case results: North America wellhead supply

23 Base case results: Trade

24 Base case results: LNG exports

25 Base case results: LNG imports

26 Base case results: Selected price forecasts

27 CO 2 restrictions: Demand changes

28 CO 2 restrictions: Supply changes

29 CO 2 restrictions: Changes in Nth. America wellhead supply

30 CO 2 restrictions: Changes in imports

31 CO 2 restrictions: Changes in LNG imports

32 CO 2 restrictions: Changes in exports

33 CO 2 restrictions: Changes in LNG exports

34 CO 2 restrictions: Changes in selected prices

35 Additional effect of opened access: Changes in Nth. America wellhead supply

36 Additional effect of opened access: Supply changes

37 Additional effect of opened access: Demand changes

38 Additional effect of opened access: Changes in imports

39 Additional effect of opened access: Changes in LNG imports

40 Additional effect of opened access: Changes in exports

41 Additional effect of opened access: Changes in LNG exports

42 Concluding Remarks! CO 2 constraints will likely greatly expand the demand for natural gas for power generation! This will raise energy security and possibly national security issues as exports from the Middle East and Russia expand! Allowing access to prospective areas in the US that are currently restricted could lessen the increased demand for Middle Eastern and Russian gas exports, but would not offset the effects of CO 2 constraints! Likely development of US and Canadian shale gas resources, especially beyond 2015, will limit the growth of LNG imports into the US, but declines in production from other sources eventually stimulate substantial growth in US LNG imports beyond 2025! At some future time (around 2035 in our simulations), other non-fossil fuel sources of electricity supply will likely lead to an overall decline in natural gas demand