Right answer: Dramatic shift in gas supply gives energy options

I believe that natural gas is the right answer for our country. It’s abundant, it’s domestic, and it’s affordable.

 We talked about expanding natural gas markets five years ago, but it was going to depend on the amount of natural gas that we could import. We viewed LNG as a baseline and domestic drilling was going to be the marginal source of supply. Over the past five years, something dramatic has happened.

Abundance

The definitive source on natural gas is the Potential Gas Committee at the Colorado School of Mines. Their study estimates that the U.S. natural gas resource increased by nearly 60 percent between 2004 and 2008 for a total of more than 2,000 Tcf of gas. It would show a bigger number today.

 The amount of gas that we have in place in the U.S. is stunning and the abundance issue has become important. It’s allowed the mainstream of our industry to speak with conviction to policy makers and industrial users and say, “We have the gas. It’s abundant and it’s affordable with known technology.”

We have to speak to price to expand natural gas markets and we have a good story to tell. The reason why renewables fail is that they’re neither scalable or affordable. Natural gas has both going for it. Independent studies show that with the shale resource and technology that we have now, we can fulfill a growing market over the next seven years at $5 to $8 per dekatherm, which equates to $30 to $48 per barrel oil equivalent. We can produce a lot of natural gas and serve new markets at an affordable price.

The Frac Issue

 One issue we’re all familiar with is trying to convey a feeling of comfort for our country on why natural gas is the answer. This paradigm shift in supply was caused in part by hydraulic fracturing improvements over the past five to ten years. Lately, there has been a lot of fiction thrown around about what fracing does to water zones.

Those of us close to it know that there is not a single instance of actual contamination of water zones. There have been instances of intrusion due to bad casing in conjunction with water flowing up and down a tubing string, but it hasn’t been because fracing has migrated several thousand feet into the water zone. The water zones are safe.

The broader issue is one of transparency. We’re working hard to be the driver of disclosure for the chemicals and ingredients of frac fluids, and many service companies are joining us. We need to avoid federalization, keep it in the states, and create an industry standard disclosure model and we’ll be in good shape. 

Jobs

 Another great story is that natural gas makes a real impact on the economy and jobs. We added 400,000 jobs to the U.S. economy between 2004 to 2008. We create 2.8 million total jobs and contribute $385 billion to the economy and that’s just the natural gas part.

People don’t have a sense of how big the industry is—it’s the largest industry in America by a huge amount. I remember sitting at a luncheon with the U.S. President about a year ago talking about job figures and it took everyone aback because they had never heard that before. We made a lot of progress pre-Macondo getting natural gas to have a higher profile due to job creation. We’re seeing that many politicians who thought they were coal state politicians are discovering that they’re natural gas politicians. It’s a much bigger issue for America than coal jobs, as this industry dwarfs the coal industry.

Opening Markets

We have this affordable and abundant supply, but what markets can we develop? It doesn’t do us much good if gas is trading at $1 per dekatherm as that means less drilling, less equipment used, and less services. We need to find a way to keep it in a sweet spot, which I think is $5 to $8 per dekatherm for industrial users and utilities.

Most electric generation—about 45 percent— is coal. Providers will choose coal if it’s cheaper, and natural gas has been lucky to keep 23 percent of the market. A lot of electricity demand is forecast for the future and it’s going to come from natural gas. If you want cleaner air you burn natural gas—it emits half of the CO2 emissions and a fraction of others such as nitrogen oxides and particulates. 

I think it will come down to individual state initiatives, such as Colorado’s recent move. They passed a clean air bill to replace 900 megawatts of coal fired electricity with natural gas and renewables, with gas making up most of the mix. Texas, I think, won’t be far behind. 

Transportation is much less of an immediate issue for natural gas demand, but it’s at the heart of psychology for America. I believe with all my heart that we should be driving natural gas heavy duty fleet vehicles. Every fleet with centralized fueling in our country should be on natural gas.

When you’re trading over $80 a barrel for oil, what does that mean for the future? I suspect it means we’ll probably think $3 gasoline is a pretty good deal. That’s not where we should be as a country if we can do something about it, and we can. If you look at heavy duty vehicles, they average 25,254 miles driven per year with a fuel economy of 6.2 miles per gallon and consume 4,075 gallons of fuel. These trucks need to be converted from diesel to natural gas—every converted heavy truck is an emissions reduction worth 325 cars. It’s a no brainer. The trouble is that the trucking industry runs on a razor thin margin, so it’s going to take something like we had in this country with seatbelts in cars and say, “we want this for America.”

As a country, through direct funding or tax credits, we should provide conversion for heavy trucks to natural gas. We should put up natural gas stations every 100 miles in the highway system and refueling stations at the central dock as well. For this, I suspect the trucking industry could pay back the government via a percentage of savings between diesel and natural gas.

Consider that at the high side of where natural gas might trade in the next 7 years—$48 oil equivalent—is less than $2.50 a gallon. We’re pretty sure that diesel will be over $4 in the near future so there’s a lot of savings with that kind of fuel intensity.

Editor’s note: This essay was compiled from Jim Hackett’s presentation at the 2010 PESA Membership Lunch. He is Chairman and CEO for Anadarko Petroleum Corporation and Chairman of the American Natural Gas Alliance.