American Gas - October 2012 - (Page 14)

INDUSTRY INSIGHTS IN THE KNOW LNG Surplus: Supply Side Economics While waiting for Congress to act, stakeholders need to understand the key issues F ive years ago, the United States produced only 2 percent of the natural gas it used. In fact, every application before the Federal Energy Regulatory Commission for a liquefied natural gas terminal was for an import facility. What a difference a few years makes. Today we’re producing more gas than we can use. And virtually all the LNG applications waiting on FERC are for exports. What happened? A global financial crisis briefly curbed demand. But the primary change agent was the technological advances of horizontal drilling and hydraulic fracturing, which boosted production dramatically. Lots of natural gas would seem to be a good thing. But the gas glut has depressed prices. And that means more and more gas producers may choose to leave their product in the ground. Meanwhile, decisions about whether to open up LNG exports have been put off until after the presidential election. What’s necessary, then, is for all stakeholders to arm themselves with knowledge of the relevant issues. That will serve them well when the Department of Energy seeks input on LNG exports. time frame in order to maintain the lease. The good news is that demand for natural gas is increasing, especially for electric power generation. There are several reasons for this trend. First, newer gas-turbine power plants are far more efficient and clean than traditional coal plants. Second, new regulations from the Environmental Protection Agency are driving the sector to replace coal-powered generation with cleaner natural gas. And third, emerging wind and solar sources require backup generation to sustain constant loads, and gas is well suited to that need. The electric service industry is now the largest consumer of natural gas, according to the North American Electric Reliability Corp. Gas consumption by electric utilities will more than double in the next 23 years, reaching 17 trillion cubic feet by 2035, according to the industry research firm ICF International. Still, that growing demand hasn’t been enough to match the current oversupply. The Storage Problem One challenge for natural gas producers is what to do with the excess supply. The high inventories have effectively maxed out the available storage space. Natural gas storage has always been a challenge. For dense fuels such as oil, storage is comparatively straightforward. Gas, being significantly more voluminous, isn’t so easy. The storage problem is part of the reason natural gas traditionally was flared off during oil production. Today excess natural gas is held in repositories such as caves, abandoned mines, and previously used oil and gas fields. There’s also an implicit storage capacity in the miles of interstate gas-transport lines. But space is limited, and capacities are essentially full. Supply, Meet Demand MICHAEL CUDA is an attorney with Patton Boggs LLP. His practice focuses on domestic and international oil and gas industry financing and development transactions, including upstream through downstream operations, offshore production, and related infrastructure development. New production approaches have been boosting natural gas production for about five years now. Due to the mild winter of 2011-12, natural gas stockpiles remained close to capacity this past spring. Yet producers continued to produce gas at about the same pace, resulting in a buildup of natural gas inventories. There are good reasons producers kept cranking out gas. These companies typically lease the land on which they drill, and those leases often stipulate that they must drill within a certain 14 AMERICAN GAS OCTOBER 2012

Table of Contents for the Digital Edition of American Gas - October 2012

American Gas - October 2012
Contents
President’s Message
Industry News
In the Know
Safety First
Tech Talk
Keep the Lights On
Buyer’s Guide 2012
Places to Be
Jobline
Advertisers’ Index
Noteworthies
Marketplace
Facts on Gas

American Gas - October 2012