Natural Gas: Beyond All Expectations
Authors: Economides M.J. , Oligney R.E. , Demarchos A.S. 
Published: December 2007

Beyond everybody's price forecasts—including ours, which, a year earlier, was considered at $6 to $7 the most outrageous in the industry—natural gas traded at over $10 per thousand standard cubic feet during the winter of 2000–2001. On a basis of British thermal units, or BTU value, this price was equivalent to more than $60-a-barrel oil. The emergence of natural gas as the premium fuel is a process that has been both transparent and compelling. It is an important stage in the de-carbonization of fuels; starting from wood, to coal, to oil, to natural gas, and eventually hydrogen. The transformation is a historical imperative, and it is our contention that irrespective of the price of natural gas, there is no going back to oil or coal for a wide range of energy needs.

The problem is not the price; the problem is supply, and the potential for shortages.

Looking beyond the very likely shortage scenarios, where is the extra natural gas going to come from, now slated to increase over the next decade from 23 trillion cubic feet to at least 30 trillion, and perhaps 33 trillion?

There are four potential sources:Increases from existing producing areas in the United States, such as the Rocky Mountains.Massive deposits of Alaskan gas.Natural gas from the Gulf of Mexico at depths of 5,000 feet and more. There are copious amounts of gas in the area, but few companies have targeted geologic structures just for gas.Incoming gas in the form of liquefied natural gas, or LNG. With a massive influx of capital and an urgent relaxation of the government permit process, LNG may be one of the best options – in the short (three years) to intermediate future (ten years.).

Introduction

This paper is written against an extraordinary backdrop: a recent market price of $10 per thousand standard cubic feet (Mcf) for natural gas, never before seen in either nominal or real dollars at the Nymex, and over $60 per Mcf on the spot market in California.

While the energy content of one Mcf of natural gas is about 1/6 of the energy content of a barrel of oil, it has traded traditionally around 1/8 of the price of oil. The price has also been quite stable without the wild gyrations in the price of oil. This winter's run-up in natural gas prices has reversed both of these trends. A spot price for natural gas of over $60 per Mcf is equivalent to oil at almost $400 per barrel!

This situation has prompted many to suggest that the natural gas trends of the last few years may be reversed and, in fact, and the price increases may dampen the great enthusiasm that both society and the energy markets—from space heating to power generation to transportation—have shown for natural gas.

We think not.

The de-carbonization of fuels is a historical imperative, motivated not only by real or imagined environmental concerns, but also by compelling efficiencies and, especially, technological evolutions. This situation is similar to the passing of the steam engine era. There is no doubt that today's technology could build a steam engine far superior to those of the nineteenth century, but "once you go gasoline (or natural gas), there is no going back." We have addressed these issues in a recent paper.1 In that paper we also provide estimates of our forecast for future use of natural gas which we put at almost 33 Tcf by the year 2010, compared to 23 Tcf today. Other estimates are summarized in Fig. 1. In all cases the projected demand is extraordinary and it will put a very large burden on supplies.