chapter 3
NATURAL GAS

Natural gas is an important source of energy in the United States. Methane, ethane, and propane are the primary constituents of natural gas, with methane making up 73 to 95% of the total.

The natural gas industry developed out of the petroleum industry. Wells drilled for oil often produced considerable amounts of natural gas, but early oilmen had no idea what to do with it. Originally considered a waste by-product of oil production, natural gas had no market, nor were transmission lines available to deliver it even if a use had been known. As a result, the gas was burned off, or flared. Pictures of southeast Texas in the early twentieth century show thousands of wooden drilling rigs topped with plumes of gas flaming like burning candles. Even today, flaring sites are sometimes the brightest areas visible in nighttime satellite images, outshining even the largest urban areas.

Nonetheless, researchers soon found ways to use natural gas. In 1925 the first natural gas pipeline, more than 200 miles long, was built from Louisiana to Texas. U.S. demand grew rapidly, especially after World War II. By the 1950s natural gas was providing one-quarter of the nation's energy needs. In the early 2000s natural gas was second only to coal in the share of U.S. energy produced. Crude oil was third. (See Table 1.1 in Chapter 1.) A vast pipeline transmission system connects production facilities in the United States, Canada, and Mexico with natural gas distributors. Figure 3.1 shows the production and consumption figures for natural gas for 2003. Figure 3.2 shows the pattern of natural gas supply and distribution in the United States in 2002.

THE PRODUCTION OF NATURAL GAS

Natural gas is produced from gas and oil wells. There is little delay between production and consumption, except for gas that is placed in storage. Changes in demand are almost immediately reflected by changes in wellhead flows, or supply.

Total U.S. natural gas production in 2003 was 19.1 trillion cubic feet, below the peak levels produced from 1969 to 1975. (See Figure 3.3.) According to the Energy Information Administration (EIA) in its Annual Energy Review 2003, Texas, Louisiana, and Oklahoma accounted for 36% of the natural gas produced in the United States in 2003. Although production levels of natural gas are being driven up by increasing demand and rising prices, production continues to be outpaced by consumption. Imported gas makes up the difference between supply and demand.

Natural Gas Wells

In 2003, 366,000 gas wells were in operation in the United States. (See Figure 3.4.) Although the number of producing wells increased steadily after 1960 and more sharply after the mid-1970s, there are slight fluctuations in the number of gas wells in operation year-to-year due to the opening of new wells and the closing of old wells, as well as the effects of weather and economics on well operations.

The average productivity of natural gas wells dropped throughout most of the 1970s and the mid-1980s after hitting peak productivity in 1971; it has remained at a relatively steady low level since then. (See Figure 3.5.)

Offshore Production

Offshore drilling for natural gas accounted for about one-fifth of the total U.S. production in 2003. (See Figure 3.6.) Almost all natural gas produced offshore comes from the Gulf of Mexico and offshore California. U.S. offshore production is expected to increase to meet the nation's growing need for energy, although this type of production could be slowed by environmental restrictions.

Offshore drilling generally occurs on the outer continental shelf, the submerged area offshore with a depth of up to 200 meters (656 feet). Figure 3.7 is a diagram of a continental margin. The continental shelf varies from one coastal area to another. The shelf is relatively narrow along the Pacific coast, wide along much of the Atlantic coast and the Gulf of Alaska, and widest in the Gulf of Mexico. The U.S.

FIGURE 3.1

Department of the Interior has leased more than 1.5 billion acres of offshore areas to oil companies for offshore drilling.

The development of offshore oil and gas resources began with the drilling of the Summerland oil field in California in 1896, where about 400 wells were drilled. In the search for oil and gas in offshore areas, the industry has continually improved drilling technology. Today, deepwater petroleum and natural gas exploration occurs from platforms and drill ships, while shallow-water explorations occur from gravel islands and mobile units.

Even though natural gas is transported mostly by pipelines instead of tankers, accidents such as the 1989 Exxon Valdez oil spill in Prince William Sound, Alaska, and the Prestige oil spill off the coast of Spain in 2002 have focused attention on all types of offshore drilling and tanker transport. Even before the Exxon Valdez oil spill, environmentalists were calling for the curtailment of offshore drilling for both oil and gas.

Natural Gas Reserves

Reserves are estimated volumes of gas in known deposits that are believed to be recoverable in the future. Proved reserves are those gas volumes that geological and engineering data show with reasonable certainty to be recoverable. Proved reserves of natural gas amounted to 195.6 trillion cubic feet in 2002. (See Table 3.1.)

Natural gas reserves in North America are generally more abundant than crude oil reserves, although historically they have been difficult to estimate accurately. At one time the U.S. Department of Energy (DOE) estimated that proven supplies of recoverable gas in the United States would last fewer than eight years. But new discoveries and technological improvements have increased the estimated recoverable supply of natural gas to fifty years or more.

The North Slope fields of Alaska are estimated to contain reserves amounting to 35 trillion cubic feet, but at the moment there is no easy way to transport those reserves to the lower forty-eight states. By late 2004 the idea of building a gas pipeline was still being debated. If built, the pipeline could deliver 4.5 billion cubic feet of natural gas per day to the lower forty-eight states—about 10% of the nation's daily gas consumption.

Underground Storage

Because of seasonal, daily, and even hourly changes in gas demand, substantial natural gas storage facilities have

FIGURE 3.2

FIGURE 3.3

FIGURE 3.4

been created to meet supply needs. Many of these storage centers are depleted gas reservoirs located near transmission lines and marketing areas. Gas is injected into storage when market needs are lower than the available gas flow,

FIGURE 3.5

FIGURE 3.6

and gas is withdrawn from storage when supplies from producing fields and/or the capacity of transmission lines are not adequate to meet peak demands. At the end of 2003, gas in underground storage totaled approximately 6.9 trillion cubic feet. (See Figure 3.8.)

TRANSMISSION OF NATURAL GAS

A vast network of natural gas pipelines crisscrosses the United States, connecting every state except Alaska, Hawaii, and Vermont. (Vermont receives its gas directly from Canada and is not connected to the U.S. pipeline.)

FIGURE 3.7

The natural gas in this quarter-million-mile system generally flows northeastward, primarily from Texas and Louisiana, the two major gas-producing states, and to a lesser extent from Oklahoma and New Mexico. (See Figure 3.9.) It also flows west to California.

Imports enter the United States via pipeline from Canada in Idaho, Maine, Michigan, Montana, New Hampshire, New York, North Dakota, Washington, and Vermont. It also enters via pipeline in Texas from Mexico. According to Natural Gas Annual 2002, published by the EIA in 2004, these pipeline imports made up 94% of total U.S. imports of natural gas in 2002. The remainder is shipped to the United States from Algeria, Australia, Indonesia, Nigeria, Oman, Qatar, Trinidad, and the United Arab Emirates as liquefied natural gas.

The largest users of natural gas in the residential sector in 2002 were, from highest to lowest, Texas, California, Louisiana, New York, and Illinois.

DOMESTIC NATURAL GAS CONSUMPTION

Nationally, natural gas consumption rose from 1949 through 1973, then declined through 1986. Since 1986 natural gas consumption has been generally rising, hitting an all-time high of 23.3 trillion cubic feet in 2000, then declining to 21.9 trillion cubic feet by 2003. (See Table 3.2.) In 2003, 32% of the natural gas was used by industry, 23% by residences, 22% by electric utilities, and 14% by commercial customers; 3% was used as pipeline fuel in the gas transporting process.

Natural gas fills an important part of the country's energy needs. It is an attractive fuel not only because its price is relatively low but also because it is clean and efficient and can help the country meet both its environmental goals and its energy needs.

The residential sector used 5.1 trillion cubic feet of natural gas in 2003. (See Table 3.2.) Energy consumption by residences depends heavily on weather-related home-heating demands. Conservation practices and efficiency of gas appliances such as water heaters and stoves also affect residential consumption patterns. The U.S. Census Bureau reported in its American Community Survey that 57% of all residential energy consumers in the United States used gas to heat their homes in 2003.

The use of natural gas in the commercial sector was 3.1 trillion cubic feet in 2003. (See Table 3.2.) Like residential consumption, use in the commercial sector depends heavily on seasonal requirements, as well as the

TABLE 3.1

number of users and conservation measures taken by commercial establishments.

The industrial sector has historically been the largest consumer of natural gas. Consumption in this sector in 2003 was 8.1 trillion cubic feet, down from 8.6 trillion cubic feet in 2002. The all-time high of 10.2 trillion cubic feet occurred in 1973. (See Table 3.2.) After 1973 natural gas consumption declined through 1986, steadily increased through 2000, and then declined somewhat through 2003. Substitution of natural gas for petroleum for some industrial purposes caused much of the increase in natural gas consumption from 1986 through 2000.

NATURAL GAS PRICES

Natural gas prices can vary because of differing federal and state rate structures. Region also plays a role—for example, prices are lower in major natural gas-producing areas where transmission costs are lower. From the mid-twentieth century through the early 1970s, natural gas prices were relatively stable. (See Figure 3.10.) Thereafter, deregulation and industry restructuring brought about a period of sharply rising prices, with wellhead prices (the value of natural gas at the mouth of the well) reaching a high in 1983, declining until 1991, and then generally increasing through 2003. The average price of all categories of natural gas at the wellhead in 2003 was $4.71 per 1,000 cubic feet, sharply rising from $2.84 in 2002.

At the retail price level in real dollars, residential customers paid $8.99 per thousand cubic feet of natural gas in 2003 and $7.61 in 2002. (See Table 3.3.) Commercial consumers paid $7.82 per thousand cubic feet in 2003, while industrial consumers paid $5.47 per thousand cubic feet.

Much of the variation in natural gas prices through the years can be attributed to changes in the natural gas industry. The passage of the Natural Gas Policy Act of

FIGURE 3.8

FIGURE 3.9

1978 (NGPA; PL 95–621) triggered a dramatic transformation in the natural gas industry. The NGPA allowed gas prices at the wellhead to rise gradually. (See Figure 3.10.) On January 1, 1985, new gas prices were deregulated, and additional volumes of onshore production were deregulated on July 1, 1987. In 1988 President Ronald Reagan

TABLE 3.2

FIGURE 3.10

signed legislation removing all remaining natural gas wellhead price controls by 1993.

The NGPA allowed prices to go up, but it also opened the market to the forces of supply and demand. Now that prices are deregulated and the industry is no longer constrained by federal controls, the natural gas industry has become more sensitive to market signals and is able to respond more quickly to changes in economic conditions.

NATURAL GAS IMPORTS AND EXPORTS

U.S. natural gas trading was limited to the neighboring countries of Mexico and Canada until shipping natural gas in liquefied form became a feasible alternative to pipelines. In 1969 the first shipments of liquefied natural gas (LNG) were sent from Alaska to Japan, and U.S. imports of LNG from Algeria began the following year.

In 2003 U.S. net imports of natural gas by all routes totaled 3.2 trillion cubic feet, 14.8% of domestic consumption. Natural gas imports have been increasing significantly since 1986. Historically, Canada has been by far the major supplier of U.S. natural gas imports, accounting for 87% of the natural gas imported in 2003 (see Figure 3.11.)

The EIA reported in Annual Energy Review 2003 (published in 2004) that the United States exported 692 billion cubic feet of natural gas in 2003. Of these exports, Mexico bought the largest amount (333 billion cubic feet), while Canada purchased 294 billion cubic feet, and Japan bought 64 billion cubic feet.

INTERNATIONAL NATURAL GAS USAGE

World Production

World production of dry natural gas totaled an all time high of 92.2 trillion cubic feet in 2002. (See Table 3.4.) Russia and the United States were the largest producers, with Russia accounting for 21 trillion cubic feet and the United States producing 19 trillion cubic feet.

World Consumption

World consumption of natural gas has increased steadily since 1980, from 52.9 trillion cubic feet to 92.1 trillion cubic feet in 2002. The United States consumed the largest amount of natural gas in 2002, followed by Russia. (See Figure 3.12.) Combined, they accounted for 41% of world consumption.

FUTURE TRENDS IN THE GAS INDUSTRY

In its 2004 publication Annual Energy Outlook 2004, the EIA projects energy supply, demand, and prices through 2025, predicting that natural gas production will increase steadily, as will consumption, pipeline expansion, and imports. Natural gas prices for residential customers are projected to rise by 9% from 2002 to 2025.

Domestic Production

Total domestic natural gas production is projected to increase from 2002 levels of 19.1 trillion cubic feet to 24 trillion cubic feet in 2025, with an annual growth rate of about 1%. Domestic production will be boosted by increases from onshore sources in the lower forty-eight states, slight offshore sources in the Gulf of Mexico, and significant increases resulting from the advent of North Slope gas pipeline operations in Alaska around 2018.

Figure 3.13 shows projected figures for different types of natural gas production. The letters "NA" and "AD" in Figure 3.13 stand for nonassociated (NA) and associated-dissolved (AD) natural gas. These terms refer to natural gas that is found in conjunction with crude oil (associated) or not in conjunction with crude oil (nonassociated). Associated-dissolved natural gas is found in a dissolved state with the oil, like oxygen dissolved in aquarium water. Unconventional sources of natural gas are those from which it is more difficult and less economically sound to extract natural gas because the technology to reach it has not been developed fully or is too expensive.

Domestic Consumption

The Annual Energy Outlook 2004 projects that consumption of natural gas will outpace production from 2002 to 2025. Total domestic natural gas consumption is projected to increase from 2002 levels of 22.8 trillion cubic

TABLE 3.3

FIGURE 3.11

feet to 31.4 trillion cubic feet in 2025, with an annual growth rate of 1.4%. Demand for natural gas by industrial consumers is expected to account for approximately 33% of total consumption in 2025, electricity producers 30%, residential 19%, and commercial 13%. (See Figure 3.14.) Natural gas will be called upon to replace the nation's aging nuclear electricity plants because of its efficiency and low emissions. To meet growing demand, natural gas pipeline capacity will have to be expanded, particularly along the corridors that move Canadian supplies to the Pacific Coast and the corridors that move Pacific Coast Canadian imports and Gulf of Mexico offshore natural gas to the East. A new pipeline from the North Slope in Alaska is expected to be constructed well before 2025.

Imports and Exports

Net imports of natural gas are projected to increase to meet demand, from 3.5 trillion cubic feet in 2002 to 7.2 trillion cubic feet in 2025. Most of these imports will come from Canada. (See Figure 3.15.) The rest will be shipped to the United States from Algeria, Australia, Indonesia, Nigeria, Oman, Qatar, Trinidad, and the United Arab Emirates in the form of liquefied natural gas. Natural gas exports to Mexico are expected to continue and to peak in 2006 (shown as an import minus value in Figure 3.15.) After that time exports to Mexico are expected to decline; Mexico's own natural gas infrastructure should be developed by 2015, and it is expected to begin meeting its own natural gas needs.

TABLE 3.4

FIGURE 3.12

FIGURE 3.13

FIGURE 3.14

FIGURE 3.15