Natural Gas Supply
Natural gas is a vitally important source of energy for all sectors of the economy in the United States. Maintaining an adequate supply of this critical resource is essential to preserving and improving our quality of life. This section will discuss the supply of natural gas in the United States, as well as factors that affect the ability of producers to bring natural gas to market in a timely and efficient manner.
Meeting Natural Gas Demand
The United States has vast resources of natural gas available for extraction. The Energy Information Administration (EIA) estimates that there are 2,632 trillion cubic feet (Tcf) of technically recoverable natural gas resources in the United States in its 2011 Annual Energy Outlook. The National Petroleum Council estimates U.S. recoverable natural gas resources to be 1,451 Tcf in their 2007 report, while the Potential Gas Committee estimates the most likely level to be 1,897 Tcf as of 2010.
When combined with EIA’s latest estimate of proved gas reserves, the Potential Gas Committee says total available future supply is 2,170 Tcf, which would equal about 100 years of supply. Americans consume an average of 22 Tcf of natural gas per year. The Potential Gas Committee has estimated rising domestic supply in each of its past few reports.
The United States is a large consumer of natural gas. In 2010, the United States used 24.1 Tcf of natural gas, making it one of the worldwide leaders in natural gas consumption. According to the Energy Information Administration's (EIA's) International Energy Outlook, the United States typically accounts for 20 to 25 percent of total worldwide consumption of natural gas.
In order to meet the demand for natural gas, the United States relies on domestic production, imports of dry gas, and imports of Liquefied Natural Gas (LNG). Most of the natural gas that is consumed in the United States is produced domestically, with the balance of dry natural gas being imported mainly from Canada. Imports of LNG also serve to meet the growing demand for natural gas in the United States. In addition to domestic production and imports, natural gas in storage is also used to ensure that demand for natural gas in the United States is satisfied throughout the year.
Domestic Natural Gas Production
According to the EIA, over 21 trillion cubic feet (Tcf) of dry natural gas was produced in the United States in 2010. This represents over 90 percent of total domestic consumption. Compared to crude oil, only about one-quarter to one-third of consumption is met by domestic production. Because of its abundant natural gas resource, the United States is much less reliant on other countries for its natural gas supply than it is for its supplies of crude oil.
Domestic natural gas production comes from 32 states. The top 10 producing states in 2009 were: Alaska, Arkansas, Louisiana, Colorado, Kansas, New Mexico, Oklahoma, Texas, Utah and Wyoming. According to the EIA, these 10 states were responsible for about 80 percent of total marketed natural gas production in 2009.
Natural Gas Imports and Exports
According to EIA, net imports of natural gas account for about 17 percent of natural gas use in the United States annually. About 88 percent of U.S. natural gas imports were from Canada in 2010. According to EIA, net imports from Canada equaled 3.3 Tcf.
Under the terms of the North American Free Trade Agreement (NAFTA), producing companies operate freely across the U.S./Canada border, moving gas from Canada's major producing regions in Alberta and British Columbia, as well as offshore from Nova Scotia to U.S. markets in the West, Upper Midwest, and Northeast. The natural gas pipeline transmission systems of the United States and Canada are highly integrated. Canada's vast gas reserves, coupled with its relatively small population, provide the United States with a reliable source of natural gas imports to help meet rising demand.
The Department of Energy and the Federal Energy Regulatory Commission (FERC) are responsible for the regulation of natural gas imports and exports in the United States. The United States is also involved in the cross-border trade of natural gas with Mexico. However, the U.S. is a net exporter of natural gas to Mexico. In 2010, the U.S. exported 0.3 Tcf of natural gas to Mexico, and is expected to remain a net exporter into the future.
For more information on the imports and exports of natural gas in the United States, please visit EIA.
Liquefied Natural Gas
Liquefied natural gas (LNG) imports represent an increasingly important part of the natural gas supply picture in the United States. LNG takes up much less space than gaseous natural gas, allowing it to be shipped very efficiently.
LNG that is imported to the United States comes by ocean tanker. The U.S. gets a majority of its LNG from Trinidad and Tobago, Qatar, and Algeria, and also receives shipments from Nigeria, Oman, Australia, Indonesia, and the United Arab Emirates.
According to EIA, the U.S. will import 0.36 Tcf of LNG in 2011.
Factors Affecting the Supply of Natural Gas
The production of natural gas in the United States is based on competitive market forces: inadequate supply at any one time leads to price increases, which signal to production companies the need to increase the supply of natural gas to the market. Supplying natural gas in the United States in order to meet this demand, however, is dependent on a number of factors. These factors may be broken down into two segments: general barriers to increasing supply, and those factors that affect the short term supply scenario.
Short Term Supply Barriers
In a perfect world, price signals would be recognized and acted upon immediately, and there would be little lag time between increased demand for natural gas, and an increase in supplies reaching the market. However, in reality, this lag time does exist. There are several factors that affect this lag time and the short term availability of natural gas supply. They include:
Availability of Skilled Workers - The need to train and hire skilled workers results in lagtimes between times of increased demand and an increase in production. For example, from 1991 to 1999, a prolonged period of relatively low prices indicated adequate supplies of natural gas existed, and the exploration and production industry contracted in response. During this period, the U.S. Bureau of Labor Statistics recorded a 26 percent average decrease in employment in the oil and gas extraction industry. Some of these workers left the industry altogether rather than remain unemployed. When production companies began to react to higher prices in late 1999, the need to find and train skilled workers contributed to a slower increase in activity than would have been the case if skilled workers were plentiful. To counter this problem, many production companies offer increasingly high wages, as well as scholarships and educational contributions to attract professionals to the industry. Since the middle 2000s the oil and natural gas industry has steadily increased the number of people it employs. Indirect jobs make up for additional employment that the natural gas industry helps support.
Availability of Equipment - Drilling rigs are very expensive pieces of equipment. Price volatility in the industry makes it difficult for producers, as well as production equipment suppliers, to plan the construction and placement of drilling rigs far in advance. Prolonged periods of low prices results in reduction of the number of available rigs. When prices respond to increase demand, and drilling activity increases, time is required to build and place an adequate number of drilling rigs. For this reason, drilling rig counts have traditionally been a good indication of the status of the oil and natural gas production industry. This has changed somewhat with the arrival of shale gas production & horizontal drilling, but still holds true. As seen in the graph, an increase in operational rigs lags behind period of high prices.
Permitting and Well Development - Before a natural gas well actually begins producing, there are several time consuming procedures and development activities that must take place. In order to begin drilling, exploration activities must take place to pinpoint the location of natural gas reserves. Once a suitable field has been located, production companies must receive the required approval from the landowner (which in many cases is the government) to install drilling equipment and begin to drill the well. The Bureau of Land Management is responsible for issuing permits for onshore development, and the Minerals Management Service, also known as Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE), is responsible for offshore development areas. Once drilling is completed, extraction and field processing equipment must be set up, as well as gathering systems. In all, the time elapsed between the location of natural gas deposits and the beginning of production can range from as little as a few months to as much as 10 years.
Weather and Delivery Disruptions - Although unrelated to natural gas prices or demand increases and decreases, weather patterns and anomalies can have a significant impact on natural gas production. For example, hurricanes can have an impact on the offshore production of natural gas, as safety measures require the temporary shutdown of offshore drilling and production platforms. In addition, while the safety record of the natural gas industry is extremely good, malfunctions and accidents may occur from time to time that disrupt the delivery of natural gas. For example, a compressor malfunction in a large pipeline serving a major hub could temporarily disrupt the flow of natural gas through that important market center. While the effects of weather and delivery disruptions are most often of short duration, they can still have an effect on the expeditious production of natural gas.
General Barriers to Increasing Supply
In addition to the short-term impediments to increasing natural gas supply, there exist other more general barriers to the increased supply of natural gas in the United States. These include:
Onshore and Offshore Access- An estimated 59 percent of the U.S. undiscovered natural gas resources is located on federal lands and offshore waters, however much of these resources are off-limits to exploration and production. According to the Bureau of Land Management, out of the 700 million acres it oversees, 0.07 percent of it, 470,000 acres are disturbed by natural gas or oil production. A reportpublished in 2010 by the Gas Technology Institute and Science Applications International Corporation estimated 231 Tcf of natural gas is under federal lands, of which 95 Tcf or 41 percent of natural gas is inaccessible, and another 49 percent is restricted beyond standard terms. In particular, the Rockies, stretching over five states: Colorado, Wyoming, Utah, Arizona, and New Mexico, contain 125 Tcf of natural gas, of which 59 Tcf or roughly 47 percent is off-limits. Access is even more significantly restricted along the U.S. coastlines. Until recently, there was a nearly 30-year federal ban that kept 75 percent of U.S. coastal waters in the lower 48 states off-limits to exploration for natural gas and oil. Congress lifted that ban in October 2008, and tasked the U.S. Department of the Interior with developing a 5-year plan for developing the natural gas and oil resources located along the Outer Continental Shelf. However Congress also designated a section of the east Gulf of Mexico, amounting to 10 percent of U.S. coastal waters, as off-limits to drilling. Access to coastal resources remains an ongoing issue for natural gas: in the wake of the tragic Deepwater Horizon accident and oil spill in spring 2010, the administration instituted a six month moratorium on deepwater drilling leases in the Gulf of Mexico. The moratorium was lifted in October of 2010 but a backlog of drilling permits continues to hamper natural gas production in the Gulf. For more information, please visit the Gulf Economic Survival Team’s website.
Pipeline Infrastructure - The ability to transport natural gas from producing regions to consumption regions also affects the availability of supplies to the marketplace. The interstate and intrastate pipeline infrastructure can only transport so much natural gas at any one time, and in essence provides a 'ceiling' for the amount of natural gas that can reach the market. Although the current pipeline infrastructure is significant, with the EIA estimating daily delivery capacity of the pipeline grid to be 148 Bcf. However, natural gas pipeline companies must continue to continually expand the pipeline infrastructure in order to meet growing demand.
The Financial Environment - Exploring for and producing natural gas is a very capital intensive endeavor. In fact, the National Petroleum Council estimated in 2007 that production companies will have to invest $4.3 trillion in capital between 2005 and 2030 in order to keep pace with demand growth. This puts significant pressures on production companies, particularly small, privately owned firms, to raise the capital necessary to increase production. While efficient and transparent financial markets in the U.S. do offer options for raising capital effectively, the rate at which production companies may do so can serve as a limiting factor in the increasing availability of supplies reaching the market.
A new uncertainty in the financial market for natural gas is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009. The legislation granted the Commodity Futures Trading Commission (CFTC) authority to create a number of rules affecting financial tools used in the trading of natural gas. Most of these are still in the rulemaking process and their impact remains to be seen. For more information, please visit the CFTC’s website.
The process by which the natural gas industry increases supplies in order to keep pace with growing demand is a complicated one. Although the factors listed above are important determinants of producers' ability to meet increased demand, they by no means offer an exhaustive list of all of the elements that come into the supply picture.