Gas Gusher: May 2012:  | STATE LEGISLATURES MAGAZINE

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The nation is awash in natural gas, driving down prices and giving the economy a boost.

 By Glen Andersen

What a difference a few years can make.

Not long ago, high natural gas prices and tight supplies drove the construction of numerous liquefied natural gas terminals to handle imported fuel. Now, these terminals are seen as a means to export a newfound wealth of natural gas.

Innovative drilling technologies are providing the nation with an astounding increase in energy resources, driving economic development and lowering energy costs for industries, businesses and consumers across the nation.

“The long-term vision for natural gas resources is extremely positive,” says Christopher McGill from the American Gas Association.

New technology has vastly expanded the amount of natural gas the industry thinks can be recovered, increasing from an estimated 1,200 trillion cubic feet in 1990 to current estimates of about 2,170 trillion cubic feet. The change is “due primarily to changes in the economics of natural gas development and extraction technologies,” McGill says.

The refinement of hydraulic fracturing as a method to extract natural gas from shale is a key reason for this boom, although it brings with it environmental concerns and challenges.

Abundant supply has driven natural gas prices to nearly $2.50 per million Btu. Just a few years ago, prices hovered above $9, even hitting a high of $14 for a short time in 2008. At that time, electricity suppliers were concerned about the volatility of gas prices. Many turned to less expensive, more predictable options, such as coal.

Now, with natural gas flooding the market, the U.S. Energy Information Administration forecasts low prices for the next few decades, with enough domestic supply to last about 90 years at current consumption levels.

The nation currently uses about 24 trillion cubic feet of natural gas a year, mainly for electric generation, and use in homes and businesses.

Shale gas—natural gas extracted from shale rock formations—now makes up nearly a quarter of all U.S. natural gas produced and is expected to contribute about half the production by 2035. That will more than compensate for the decline of natural gas produced from traditional drilling.

Hydraulic fracturing has changed the game so much that the Energy Information Administration expects supplies to grow faster than demand over the next 20 years, allowing the United States to become an overall net exporter of natural gas by 2021, though others question that estimate.

Starting in the 1970s, the nation began building liquefied natural gas terminals to import natural gas. Those now will be used to reach the international market, where natural gas commands a much higher price—$8 in Europe and $14 in Asian markets.

In addition to providing welcome relief to consumers and businesses, the change in energy outlook has many states, utilities and industries reevaluating their energy portfolios.

Electric Industry Changes

Compared with coal, natural gas power plants produce fewer emissions, cost less to build and make it much easier for states to meet EPA air regulations. In 2011, coal was used to generate 39 percent of the nation’s electricity, natural gas 26 percent, nuclear energy 22 percent and renewable sources 11 percent, according to the Energy Information Administration.

Recent rules issued by the Environmental Protection Agency are reinforcing the shift from coal to natural gas. The Cross-State Air Pollution Rule, created as a result of court action, would require 28 states in the East and Midwest to reduce power plant emissions that contribute to ozone and particulates. The rule, however, was temporarily halted late last year by a federal appeals court.

For many utilities, it’s cheaper to switch to natural gas than to bring older coal plants into compliance. The Mercury and Air Toxics Standard, which requires reduction in mercury emissions, will also add costs to burning coal. The looming possibility of greenhouse gas regulation adds uncertainty to the long-term costs of operating a coal plant as well.

McGill points out that natural gas is already replacing coal on the basis of price, as well as environmental benefits. According to Bentek Energy, natural gas to power generation is up 24 percent a year to date in 2012 compared to the same period in 2011.

Concerns about coal, combined with the low price for natural gas, have spurred a major expansion in its use to generate electricity. Sunbury Generation LP in Pennsylvania is closing five of six coal plants and replacing them with gas. The same scenario is playing out in states from Texas to Colorado to Oregon.

“Gas well drilling activity in the Barnett Shale has brought enormous economic benefit to our community—and helped provide a reliable, cleaner source of energy for Texas,” says Senator Jane Nelson (R). “If our country is going to achieve independence from foreign sources of energy, I believe our state will be leading the way.”

Low Prices a Mixed Blessing

The natural gas boom has not benefited all states equally. Some that rely on severance taxes—calculated based on the value of natural gas that is extracted—have seen huge drops in revenue. Wyoming’s severance revenues, for example, have dropped more than a $100 million a year.

In addition, the low price has natural gas companies, such as Chesapeake Energy Corporation, slowing production and decreasing investment in gas fields.

Cheaper electricity driven by rock-bottom natural gas prices have been a mixed blessing for renewable energy development. Wind and solar energy are variable and require the support of natural gas plants or other generation sources that can adjust quickly to changes in electricity demand. The abundance of natural gas makes it easier to integrate renewable energy resources into the mix in many parts of the country. The same downward pressure on electricity prices has made it more difficult for renewable energy to compete economically.

Even with all this good news about natural gas, some warn it’s not a panacea for the nation’s energy needs. Although natural gas emits 30 percent to 40 percent less carbon dioxide than coal, recent research has shown that methane, a potent greenhouse gas leaked during the drilling process, may counteract some of this benefit. Also, hydraulic fracturing’s potential contamination of drinking water is a major concern in some states.

Driving Demand

In Colorado, ranked seventh in the nation for natural gas production, growth in natural gas extraction led to legislation that promotes a shift from coal to natural gas by allowing utilities to recover the cost of the transition.

“We were the first in the nation to pass a clean air-clean jobs bill,” says Senator Judy Solano (D), who authored the bipartisan bill designed to utilize state resources while addressing air quality issues. “We will retire several coal plants and by 2018 will see an 86 percent reduction in oxides of nitrogen and more than 80 percent reduction in mercury and sulfur dioxide. For the metro area to see that reduction in pollution is great benefit to residents.”

With production outstripping demand, many are looking beyond heating and electricity to other uses for natural gas. Cleaner burning and cheaper than gasoline, natural gas is being used more and more to fuel trucks, buses and delivery vehicles. This not only takes advantage of domestic resources, but can revive local industry and improve energy security.

“Natural gas is important because it represents a significant economic engine for the state through the dollars being spent on exploration and development,” says Representative Brian Ellis (R) of Pennsylvania. “It’s also important because it offers the commonwealth a source of homegrown energy, helping us to reduce our dependency on foreign sources.”

Many industries that rely on natural gas—petrochemicals for plastics and other products, fertilizer and steel—are thriving. Examples include a new steel plant in Louisiana, chemical plants near the Gulf Coast, and a new denim plant built by a Brazilian company in Texas to take advantage of low electric rates.

Natural gas prices are expected to rebound eventually, as the economy ramps up, gas-powered electric generation and exports grow, and industries take advantage of this burgeoning resource.

“A diversified portfolio of fuel for electricity generation is critical to mitigate price swings in the energy market and to ensure security in our electricity grid,” says Nelson. “ Natural gas is a key component of that mixture, which helps keep energy prices lower for electric customers.”

Glen Andersen directs NCSL’s energy program.