Natural gas is the fastest growing energy source worldwide, and its share of total energy consumption, according to the EIA, is projected to increase from 23% in 1999 to 28% in 2020. For the United States, the gas share is predicted to increase from 23.6% in 2000 to 26.5% in 2020. Gas is the cleanest of the fossil fuels, and it is the preferred choice for new electric power plants driven by gas turbines. Coal is likely to remain the lead fuel for power generation, but natural gas will expand its share considerably.
Gas is more difficult to transport than oil and requires pipelines or special liquefied natural gas (LNG) tankers. For this reason, natural gas tends to be traded in regional markets (e.g., North America, Europe, and Asia). However, although the amount of gas traded internationally (20%) is much less than the amount of oil (50%), international gas trade is also growing via international pipelines and expanded LNG trade.
There is no shortage of natural gas in the world. The USGS reports in its 2000 ‘‘World Petroleum Assessment’’ that only 10% of worldwide gas resources have been produced (compared to 25% for oil). Considerable volumes of gas remain to be discovered and developed. A major problem has been that much of the world’s gas is located far from demand centers. More than half of the world’s remaining reserves are in the former Soviet Union, Middle East, and North Africa. Two countries, Russia and Iran, hold approximately 45% of the world’s reserves. Thus, there is some concentration of reserves.
Western Europe, which holds only approximately 2% of world gas reserves (mostly in the North Sea), imports approximately 40% of its requirements, mainly from Russia and Algeria. European natural gas demand is likely to expand rapidly during the next 20 years, which will require increased imports. The European gas industry is also in the process of deregulation following an EU directive in 1998 that set forth a staged plan of achieving more competitive gas markets.
In 1995, the IEA study on gas security concluded that most European countries could withstand gas supply interruptions, but it also noted that gas infrastructure is less flexible than that of oil. Could natural gas supply and demand security become an issue in the future? If so, it might be desirable to establish a framework for gas security with obligations to hold strategic stocks and develop natural gas demand restraint programs. Since the power industry will be using increasingly more gas, reliable natural gas supply and demand is crucial to the functioning of the electricity industry.
The United States has considerable gas supplies, but it imports approximately 15% of its gas needs from Canada. It also receives other gas imports via LNG. Although LNG shipments are currently small, they are projected to increase.
The U.S. gas industry has been deregulated and functions mostly on short-term contracts and spot sales. On the whole, the liberalized U.S. gas market has worked well. However, there have been some problems. In 2000, natural gas prices increased dramatically and were pushed even higher by very cold weather in November and December. Prices remained high through the first half of 2001. The mean price range during the period was $2.53–7.85 per million Btu, up from $1.98 per million Btu during 1995–1999. The spot price reached more than $10 per million Btu at the Henry Hub at the end of December 2000. What was troubling was the length of time that prices stayed at high levels. High-demand growth and cold weather, plus inadequate gas reserves in storage, explain part of the problem. So does the inelastic short-term supply response to natural gas price volatility. Later in 2001, gas prices declined because of the slowdown in the economy and milder temperatures.
Although gas pipelines were used to capacity during the crisis period, there were apparently few infrastructure constraints except in and near California, where transmission capacity was not adequate to transport all the gas needed and natural gas prices spiked higher than elsewhere in the U.S. market (and contributed to the California electricity crisis).
In 2003, at the request of the Secretary of Energy, the National Petroleum Council published an industry study, ‘‘Balancing Natural Gas Policy: Fueling the Demands of a Growing Economy.’’ The study notes that traditional North American gas producing areas can only meet 75% of projected U.S. natural gas demand in 2025. This includes Canadian production which is reaching a plateau. The gap could be filled by encouraging increased production in the Rocky Mountains, by Arctic gas (which requires a new pipeline), and by expanded LNG imports. At the same time there will be a need to expand gas infrastructure and to deploy new technologies to increase the efficiency of gas use. The study notes that gas price volatility will likely continue, reflecting the variable nature of natural gas supply and demand in a free market.
