Natural gas was a very hot topic at The World Energy Congress last week. To help me cut through the hype and understand the potential, I spoke with Marcela Donadio, the very articulate American Director of Oil & Gas at Ernst & Young, about the U.S. gas market and natural gas vehicles.

   At the beginning of the week, Ernst & Young published The Global Gas Challenge, which discusses important uncertainties in the gas market. Their summary reads as follows: “If the uncertain outlook for gas supply and demand dissuades companies from investing in natural gas projects, future supplies may be inadequate to meet projected growth. Discover why we believe a global gas market will not emerge until there is greater flexibility in gas supplies, increased transportation between regions and more gas-on-gas competition."

As reported in the Montreal Gazette:

   Shale gas might have already changed the overall supply-demand balance in North America, but "there are many underlying uncertainties, including growing environmental worries and technology challenges besides water availability and land issues," consulting firm Ernst & Young said...

   …On the demand side, uncertainties persist about the pace of global economic recovery and expanded use of natural gas in the long term; on the supply side, more clarity is needed on policies to reduce carbon emissions, the report said.

   Only five years ago, the gas outlook was very different, Donadio emphasized, before horizontal drilling and hydrofracking technological advances exploded the amount of natural gas we can reasonably pull out of the ground. The numbers being thrown around at WEC for U.S. natural gas supply suggest we’ll have plenty of juice to power our energy-intense society for at least 100 years, if not 300 (for another, naunced perspective about shale gas supply, see Rod Adam’s "Shale Gas is Not a Game Changer").

   As Donadio explained, although shale gas accounts for a relatively small 13% of proved U.S. natural gas reserves, there is no disagreement that yet unproved reserves are significant. How quickly exploration and production proceeds and the level of production depend critically on the level of financial investment. In turn, investment is impacted by signals about market demand and whether and how clearly the Obama Administration signals that natural gas is a top energy policy priority.

   In the meantime, the oil majors have all stepped up their focus and investment, Donadio told me, after independents did the initial heavy lifting and showed that we have much more gas available than we previously thought.

Power Generation

   On the electricity generation front, according to Michael Suess of Siemens Fossil Power Generation and others at the Congress, we should expect to see more coal-fired generation converted to natural gas and for new builds to tilt heavily away from coal and toward gas. The strongest opposing force in the U.S. will likely be our powerful coal lobby.

Natural Gas Vehicles

   Transportation is the other key component of natural gas demand. Unlike electricity generation, with multiple alternatives available, virtually all U.S. vehicles run on one fuel – oil. The energy security, national security, and financial risks that come along with our single-fuel dependence have long been clear, but there have been minimal changes to our fuel mix to date.

   With the new glut of natural gas on the market, there is potential for compressed natural gas vehicles to take off. Already we’re seeing bus fleets in major cities, such as New York City, running on natural gas (see Treehugger's recent "New York City Inks Contract for up to 475 Compressed Natural Gas Buses").

   Further investment, Donadio explained, requires clear signals that consumer demand will be strong and that natural gas supply will remain high. From the gas station to the auto manufacturer, oil-based products and infrastructure have to be traded-off to make space – literally in the case of gas station pumps – for natural gas. Companies need confidence to make that bet.

   Government incentives could help. As I mentioned to Donadio, there is a bill in Congress, the NAT GAS Act, that aims to extend and increase tax credits for natural gas vehicles and for refueling stations. Despite broad bipartisan support - cosponsors alone include Senators Hatch (R-UT), Murkowski (R-AK), Reid (D-NV), and Mark Udall (D-CO) - and inclusion by Majority Leader Harry Reid in the energy package the Senate *almost* considered prior to August recess, the NAT GAS Act may not go anywhere soon, with mid-term elections approaching and many Senators skittish about legislating.

   The extent to which the private sector is ready and willing to step in and consumers are ready to make the switch to natural gas vehicles remains to be seen, and are important developments to watch over the next few years.

   My guess is that without strong signals from Congress and President Obama and incentives for both natural gas and electric vehicles, we’re going to be drilling our oil dependency hole deeper and deeper for many years to come. That said, there are strong business interests lined up behind natural gas plays, and that could go very far. Stay tuned.

   Writer’s notes: I recently served as a Policy Fellow for Senator Robert Menendez, a lead sponsor of the NAT GAS Act.  The views expressed here are my own. 

By Rebecca Lutzy, Content and Community Manager at The Energy Collective and a PhD researcher at Princeton University focused on federal climate and clean energy policies. She is a Princeton Energy and Climate Scholar.

The Energy Collective

September 20, 2010