Natural Gas Limelight

A decade ago, natural gas looked like the certain winner of a shift to lower-emission energy sources, as concerns about greenhouse gas emissions grew. The path to that outcome has been much bumpier than expected, however. Rising natural gas prices and supply concerns coincided with another shift, this one among environmentalists who identified gas as a key element of a "carbon economy" they were driven to transform, rather than the least-emitting fossil fuel. These dynamics are shifting again, and the future again looks positive for the US gas industry, thanks in part to the increased visibility created by the Pickens Plan and a new industry PR campaign. Its improved supply outlook and relative pricing against oil are helping, as well.

Since 1998 demand for natural gas in the power sector has grown by 50%, and gas-fired turbines now account for 41% of US generating capacity and 21% of net generation. But by 2004 US gas production had dipped by about 5% from its recent high in 2001--a slump that was deepened in 2005 and 2006 by the lingering effects of Hurricane Katrina. As a result, natural gas prices are running at about four times their 1998 level of around $2 per million BTUs, and winter spikes to $10 or higher have become the norm. As recently as a couple of years ago, many analysts saw natural gas as the country's quiet energy crisis, with our import dependence beginning to mirror that of oil.

Today, that perspective has been dramatically altered by the success of the US gas industry in tapping unconventional sources, including coal-bed methane and the shale plays that are driving the success of companies such as Chesapeake Energy. BP is purchasing a 25% interest in Chesapeake's Fayettville Shale assets. Although it comes too late to save many of the gas-intensive industries that moved offshore in search of lower input costs, and while I'm skeptical of claims that the US might become a net natural gas exporter, the resurgence in US gas production could not come at a better time, given our intertwined concerns about energy security and climate change.

The greenhouse gas advantage of natural gas for power generation looks significant, compared to coal. In 2000 the average US gas-fired power plant emitted nearly 40% less CO2 per kilowatt-hour than the average coal-fired plant. But with wind and solar power booming, this glass was increasingly viewed by environmentalists as 60% full, rather than 40% empty. That did not stop gas from gaining market share at the expense of coal, but its green image hasn't held up as well as its supporters expected. Some of that luster is being restored by the attention generated by Mr. Pickens, who casts gas as an environmentally-friendly bulwark of US energy security. Recent remarks by Speaker Pelosi and Senator Obama suggest that this approach is working.

It also helps that the Pickens Plan focuses on increasing natural gas consumption in transportation, where its emissions benefits and cost savings align nicely. A natural gas vehicle emits about 25% less CO2 per mile, measured from "well-to-wheels", than the comparable gasoline car, and it appears to be slightly greener than a flexible-fuel vehicle running on E85. Factor in the substantial price discount for compressed natural gas, compared to gasoline, and this ought to be a winning proposition for consumers, particularly if legislation to provide incentives for buying or converting a car to run on compressed natural gas passes.

Let's put all of this in perspective. Higher US natural gas production should provide economic and environmental benefits for the entire country, even if it doesn't result in a gas glut, but it is still no panacea. At 23 trillion cubic feet (TCF) per year and growing, US gas consumption still exceeds the highest previous level of US production, 22.6 TCF in 1973. And with US electricity demand having grown by 78 million MWh last year--a multiple of the additions from wind and solar power--and with new coal-fired plants being canceled left and right, natural gas consumption in the power sector seems likely to increase, not decrease, at least for the next several years. That means that in order for gas use for transportation to grow large enough to have an impact on US greenhouse gas emissions, it must compete for its share of growing production, or rely on imports, undermining its perceived energy security benefit. Moreover, politicians tempted to nudge the market in the direction of more natural gas cars should keep in mind that much of the nation's gas is consumed in ways that would have a large and fairly direct impact on consumers' wallets, should increased competition for it drive up its price.