The Evolution of Domestic and Global Natural Gas Markets

Key issues facing the U.S. gas industry include policy and investment support for LNG exports; the growing interdependencies of the natural gas and electricity industries and the associated security and gas storage issues; the implications of market design on gas generation; the environmental impacts of gas production, including methane leaks; stranded gas on the east coast; and consent based infrastructure development.

 

The U.S. is the number one producer of natural gas in the world. Abundant natural gas resources and large production increases have created significant global, regional and domestic natural gas market opportunities for U.S. producers. The production of natural gas climbed from 23.5 Tcf in 2005 to 32.7 Tcf in January 2016, a 39 percent increase over 11 years. 

This dramatic change in U.S. gas fortunes can be attributed to shale gas development; production of these resources enabled the U.S. to become a net exporter of liquefied natural in March of last year and, according to EIA, the U.S. will become a net exporter of all forms of natural gas this year. The U.S. went from zero LNG export approvals in 2013, to over 11 bcfd of export approvals in 2016. 

This level of approvals and the associated growth in actual U.S. exports is already contributing to the evolution of world gas markets. The unique structure of U.S. contracts provides greater protection for buyers from falling natural gas prices, reduces transaction costs of reselling unneeded LNG, and enables a more active spot market. In addition, U.S. LNG contracts are supplied at Henry Hub prices, the most competitive in the world.  U.S. (and Australian) movement into LNG markets has helped reduce oil-linked natural gas prices in Asia and could help constrain the non-competitive practices of Russia with its European customers. Finally, it should be noted that the widening of the Panama Canal is creating value and options for U.S. LNG exporters, reducing transportation costs to Asian markets and the west coast of South America. LNG trade through the Panama Canal also has the potential to a help increase gas utilization in Central America.

On the domestic front, natural gas production in the U.S. declined slightly in 2016. The Federal Energy Regulatory Commission noted, however, that in 2016 the U.S. saw “one of the largest increases in natural gas pipeline capacity in U.S. history.” Also, in 2016 natural gas became most used primary fuel for power generation in the U.S., surpassing coal for the first time. In addition, according to QER 1.2, “The shift towards natural gas generation resulted in 1,254 million metric tons of avoided CO2 emissions from 2005 to 2014, or about 61 percent of total avoided emissions over that time-period. On a life-cycle basis, a new NGCC plant emits roughly 50 to 60 percent less CO2 than a typical existing coal-fired power plant.”   

Natural gas generation will, however, be too carbon-intensive to meet long term climate goals; CCUS for gas will be necessary for continued large-scale gas consumption in the decades ahead. In addition, methane emissions remain an issue and their capture could provide significant, near-term gains in reducing GHG emissions.

Finally, gas storage is an essential component of vibrant gas markets and resilient natural gas supply. The leaks from the Aliso Canyon gas storage facility in California highlights the need for a comprehensive review of storage nationwide to ensure that natural gas can remain a reliable source of fuel for power generation and other uses in the years ahead.

Initial Projects for the Evolution of Domestic and Global Natural Gas Markets

EFI will write select white papers and meet with stakeholders to discuss and develop projects from several priority options:

 EFI will analyze emerging global energy security trends and needs with an initial focus on the emerging global natural gas market and the opportunities it provides for enhancing global energy security and the security of the friends and allies of the U.S., lowering natural gas prices, increasing commercial opportunities, and lowering carbon emissions.

 EFI will analyze the value of fast-ramping natural gas generation to the large-scale penetration of variable renewables, and the technical readiness of natural gas CCUS.

 EFI will analyze gas/electricity interdependencies.

 EFI will convene stakeholders to discuss options for and multiple benefits of methane emissions reductions in oil and gas production and distribution.