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THE NATURAL GAS REVOLUTION

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U.S. Infrastructure Growth Means Benefits for Consumers and Economy
By Tim Brown

Domestic supply of natural gas is at an all-time high; prices are the lowest they’ve been in decades. Big oil players have heavily invested in natural gas hedging their bets on a long-term win when demand and infrastructure meet.

THE NATURAL GAS REVOLUTION

THE NATURAL
GAS REVOLUTION

The Natural Gas Revolution has begun and the global race to be first in the market and ready with supply is under way. America has the strategic advantage given its shale resources, production capabilities and current storage levels.
The revolution will benefit those players who have properly invested in it. With an overabundance in liquid natural gas, forward thinkers such as T. Boone Pickens and corporations such as Shell are vying for position with early investments.

A boom in the industry will lead to a boom for the suppliers in the market, but the benefits won’t stop there. Consumers will enjoy lower unemployment rates, thanks to the jobs created, and lower cost of goods, thanks to reduced transportation costs.

To meet the growing demand, infrastructure for transportation of the gas needs to be expanded, updated and maintained. Pipeline that was originally installed in rural areas is now located under residential areas as urban centers have continued to grow.

This article provides a background on the Natural Gas Revolution, why it is good for the consumer and the economy, and how it affects growth in infrastructure.

Recent History

According to the BP Statistical Review of World Energy, global gas demand increased 600 percent from 1965 to 2010.

Between 1990 and 2010, a major shift toward gas became evident with coal consumption declining nearly 50 percent from 460 million tons of oil equivalent (Mtoe) equivalent to 260 Mtoe.

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In that timeframe, natural gas consumption increased from 290 to 430 Mtoe.

Price volatility became an issue within that timeframe due to these factors and there were two notable price spikes: one in 2000-2001 and another in 2002-2003.
Not only had demand increased from a general standpoint but:
• Severe weather put pressure on the power grid for heating and cooling.
• The California electrical grid was over capacity, which put pressure on natural gas to fill the gap.

When supply can’t meet demand, the price spikes and demand destruction starts to occur.

By the mid-2000s, prices had increased from $2 per million British thermal units (MMBtu) in the 1990s to $3 per MMBtu. To moderate the price, drilling began and gas production started to rise. Simultaneously, demand fell off because of industries and businesses failing, relocating or switching fuel sources due to lack of supply and/or price.

The Current Situation

Today, natural gas is a critical source of energy for the United States and the world because it is a cleaner and extremely abundant fuel source.
• Natural gas supplies more than “one-half of the energy consumed by residential and commercial customers, and about 41 percent of the energy used by U.S. Industry,” according to the American Public Gas Association.
• There are more than 900 U.S. public gas systems in the country, with Philadelphia Gas Works as the largest and longest operating.
• The lifespan of existing resources has been increased from 70 to 300 years thanks to the shale gas revolution and techniques for extraction, such as hydraulic fracturing and horizontal drilling.

Demand has not yet reached anticipated levels and prices are at an all-time low, but the major players in the oil industry are showing signs they know it will happen.

Major corporations are strategically positioning themselves to take advantage of the Natural Gas Revolution. For example, Exxon is a major player investing heavily in the Natural Gas Revolution. In December 2009, they placed a big bet on the future of natural gas when they acquired XTO Energy Inc. Investors showed their displeasure and concern that Exxon overpaid and their stock price plummeted accordingly. The price of natural gas fell further, but Exxon stands by its decision waiting for the long-term payoff. The company is hedging its bets as stock increased only slightly since then, at about 17 percent, and higher oil prices have helped absorb that investment.

The United States is well-positioned to benefit significantly when the demand inevitably increases because of the abundant supply. Thanks to the low cost and economic efficiencies related to alternative fuel sources, industrial demand is forecasted to increase and overtake coal by 2025.

Simmons & Co. reports supply continues to exceed demand by 1.2 billion cubic feet per day (bcfd) thanks, in large part, to over-capitalization of organizations and increased efficiency in drilling. This will result in full storage and will slow down production to balance the market. The growth in demand, forecasted at 1.7 bcfd is driven by industrial, not consumer demand.

Economic Effects of the Natural Gas Revolution

Economy: Greater natural gas production, transportation and consumption will lead the country’s economic recovery because it will help to keep manufacturing domestic, create more jobs and reduce fuel costs which will, in turn, reduce cost of goods.

Environment: According to the U.S. Energy Information Administration, natural gas burns 50 percent cleaner than coal and about 30 percent cleaner than oil. Its lower carbon content and fewer impurities mean it produces less sulfur dioxide, a primary contributor to acid rain. It is already used widely for personal and industrial consumption.

Industry and consumers: Natural gas is used to produce cosmetics, medicine, light bulbs, home flooring, batteries and so much more. It is critical to growing food by heating dairy and poultry farms, and it can fuel transportation vehicles. Other products rely on natural gas in their manufacturing process such as sunscreen, sunglasses and bathing suits. Another benefit to consumers and industry is that it is cleaner and less expensive.

Job creation: The natural gas industry supports nearly 3 million jobs and adds about $385 billion to the national economy. Jobs associated with this industry pay higher than average salaries. They also contribute to state and local tax revenues. North Dakota now has the lowest unemployment rate in the nation, attributed almost exclusively to oil and gas development.

Changes the way we use energy: Natural gas can reduce our dependency on foreign oil sources and reduce imports. As well, major utilities are switching to power generated by natural gas rather than coal.

Keeps manufacturing domestic: The growth in availability of natural gas means the United States can manufacture its own fertilizer, chemicals and pharmaceuticals, creating more jobs and exporting more goods.

Opportunity for exports: Exporting supply will aid international allies such as Japan, but it would increase prices domestically for consumers. A dilemma is presented to the U.S. presidential administration: Should the United States export natural gas to countries where the price is higher and, if so, how much?

The dilemma pits the idea of free-trade against protecting the U.S. economy. It’s a political hot potato because natural gas producers and the national economy stand to benefit from exports, but at the same time it will increase prices affecting large energy-dependent manufacturers and shippers. Regardless of the outcome, the forecasted increase in demands will have major effects on the infrastructure of the natural gas transportation system.

Infrastructure Growth

To reap the benefits of the opportunities the Natural Gas Revolution offers, transportation networks need to be updated, expanded, and maintained.

The U.S. natural gas pipeline network is an integrated transmission and distribution grid that can transport natural gas to and from nearly any location in the lower 48 states.
The natural gas pipeline grid comprises:
• More than 210 natural gas pipeline systems.
• More than 300,000 miles of interstate and intrastate transmission pipelines.
• More than 1,400 compressor stations that maintain pressure on the natural gas pipeline network and assure continuous forward movement of supplies.
• More than 11,000 delivery points, 5,000 receipt points, and 1,400 interconnection points that provide for the transfer of natural gas throughout the United States.
• Twenty-four hubs or market centers that provide additional interconnections.
• Four hundred underground natural gas storage facilities.
• Forty-nine locations where natural gas can be imported and/or exported by way of pipelines.
• Eight LNG (liquefied natural gas) import facilities and 100 LNG peaking facilities.

Natural gas transportation begins at the drilling site and ends at the consumer or industrial use. Local utilities will transport natural gas from distribution points on the transmission pipelines to businesses and households.

Safety is the most important consideration throughout the transportation and distribution process. Every aspect from production to distribution has to meet strict standards set by local and national agencies. For an in-depth review of these standards, visit the U.S. Department of Transportation site.

Pipeline Expansion

The pipeline infrastructure is not only the essential link from the production field to the residential, commercial or industrial consumer, but it also serves another crucial function — that of adding storage and buffering demand spikes. This reduces, and in most cases eliminates, the need to provide for storage close to the point of consumption.
In anticipation of the forecasted increase in demand, additional pipeline will be needed for a few reasons. Production areas have changed geographically, meaning the network doesn’t serve the current demand well, and an aging infrastructure won’t have the capacity soon.

When pipelines were constructed centuries ago, they were installed far from population centers for safety reasons. By keeping the pipes away, everyone is safer.

In recent decades, as urban sprawl has continued to expand, many people are now living over pipelines. These networks need to be moved further out and modified accordingly.

By running the pipeline in rural areas and then bringing it into population centers in smaller volumes, with smaller diameter pipe, the infrastructure can be safely updated and maintained.

Lastly, aging infrastructure must be updated. Most consider 1859 to be the beginning of the natural gas industry in America. At that time, a 2-in. diameter, 5.5-mile long pipeline was built from the well to the village of Titusville, Pa.

One of the first significant pipelines, constructed in 1891, was 120 miles long and carried gas for the city of Chicago. However, it would be the 1920s before any significant pipeline infrastructure began to be put in place. Further, it wasn’t until after World War II that the “pipelining process” — i.e., welding techniques, metallurgical advancements and pipe manufacturing — would be advanced enough to allow the construction of reliable pipeline infrastructure.

Although the industry has steadily upgraded pipelines, added capacity and replaced older systems, the growth of natural gas as one of the most important, readily available energy sources has led to the need to add significant transportation infrastructure to what already exists.

Even with the steady growth in pipeline capacity, it is estimated the United States and Canada will need roughly 30,000 to 60,000 additional miles of pipeline through 2030. This added capacity will not just move natural gas long distances between regions, but will also serve growing demands.

The need for clean, dependable, cost-efficient energy sources such as natural gas is growing exponentially. Clearly, the need for natural gas pipelines, and the companies that put them in will remain strong for the future.

Conclusion

The environmental and economic benefits of natural gas and the trend away from coal all point to an explosion in demand for this abundant and inexpensive source of energy. Ideally, with U.S. support of production, balanced with moderate exports to allow the price to self-correct without drawing down heavily on reserves, demand will increase as transportation vehicles and other energy dependent manufacturers switch fuels.

Infrastructure investment and expansion will need to continue at rapid pace to meet the rising need and avoid a replay of the early 2000s and demand destruction.
If the natural gas industry is going to continue to meet demands in the future, long-range planning of this scale needs to occur. It’s not reflected on a balance sheet, but it is something that has to occur within the next century and with future generations in mind.

Tim Brown is director of business development at Snelson Companies Inc.

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