In the summer of 2002, the National Petroleum Council (NPC) gathered together some of the smartest minds from the oil and gas industry, academia and in the environmental community to study the potential for natural gas in North America. The study lasted for the better part of a year, after which a report titled “Balancing Natural Gas Policy – Fueling the Demands of a Growing Economy” was released.
As we sit here 16 years later, reviewing the findings of this study in light of the current situation where natural gas in North America and globally is concerned is a fascinating exercise — one that demonstrates the challenges presented to even the most informed and intelligent people when it comes to making accurate projections about how the oil and gas industry will evolve in years to come.
I personally chaired one of several subcommittees that were established to conduct various aspects of this study, led by ExxonMobil and Burlington Resources, which was my employer at the time. When the study was issued, those of us who had worked on it were quite proud of it and were firm in our belief that it would stand the test of time, providing an accurate roadmap for the public and policymakers to use as a guidepost for years to come.
Providing such guidance is, after all, the role of the NPC, a federal advisory committee that reports directly to the U.S. Secretary of Energy. The NPC’s own website describes its role, in part, as follows:
The National Petroleum Council (NPC), a federally chartered and privately funded advisory committee, was established by the Secretary of the Interior in 1946 at the request of President Harry S Truman. In 1977, the U.S. Department of Energy was established and the NPC’s functions were transferred to the new Department. The purpose of the NPC is solely to advise, inform, and make recommendations to the Secretary of Energy with respect to any matter relating to oil and natural gas or to the oil and gas industries submitted to it or approved by the Secretary. The NPC does not concern itself with trade practices, nor does it engage in any of the usual trade association activities.
Even though the NPC had conducted a natural gas-related study in 1999, incoming Bush Administration Energy Secretary Spencer Abraham felt that the situation had shifted significantly enough by 2002 to warrant another look. It is important to keep in mind that, when the request came down from Secretary Abraham, natural gas was a commodity in short supply and subject to huge price swings. Because a large percentage of our country’s production came out of the Gulf of Mexico, it was also subject to being significantly interrupted by major hurricane events.
In 2002, the Barnett Shale was the only major natural gas-bearing shale formation that had been discovered. The Barnett was in the early stages of its development, and the industry had little understanding of its ultimate potential. Nor did any of the experts assembled by the NPC for its new study have any inkling of the magnitude of domestic natural gas resource that would be discovered in massive reserves trapped inside formations with names like Marcellus, Haynesville, Bakken, Eagle Ford, Spraberry, Woodford and Wolfcamp.
One of the most popular bits of conventional wisdom said about any economic study is “garbage in, garbage out.” Our base of information for the 2002 NPC study wasn’t “garbage” — the information we had was high-quality, but it was also very limited. The study by its very nature had to be based on available data, and the data available at the time indicated that North American natural gas production through the year 2025 would be characterized by limited domestic output, rising imports of liquefied natural gas (LNG) coming into the country on huge tanker ships, and high commodity prices as a result.
It should come as no surprise that the study’s findings, some of which we will review here as examples, reflected this general outlook.
Every study based on economic analyses will include multiple cases that produce differing outcomes. Typically, these are described as a “base case” which assumes a status quo of outside-influencing factors going forward, an aggressive case that assumes some set of positive changes, and possibly even a non-aggressive case that assumes a set of negative changes.
One of the big decisions the NPC study committee had to make revolved around how many cases to include and how to structure them. In the end, the decision was made to include:
• “Balanced Future” case in which U.S. energy policy would evolve in ways that would encourage the development of new natural gas resources and the building-out of adequate midstream infrastructure and LNG import facilities; and
• “Reactive Path” case in which energy policy evolves, but mainly in reaction to various negative events such as shortages of supply or crises caused by lack of adequate infrastructure.
Given that background and knowledge about how the study was structured, the fact that most of the findings produced in our report have turned out be quite inaccurate should come as no surprise. Here are a few of them taken from the study’s Executive Summary:
• From page 32-33: “Given the relatively low production rates from non-conventional wells, the analysis further suggests that even in a robust future price environment, industry will be challenged to maintain overall production at its current level. This conclusion is reached even though new discoveries in mature North American basins represent the largest contribution to future supplies of any component of this supply outlook.”
• From page 33: “The NPC estimates that production from the lower 48 states and non-Arctic Canada can meet 75 percent of U.S. demand through 2025. However, these indigenous supplies will be unable to meet the projected natural gas demand.”
• From page 52: Price Projections: The NPC “Balanced Future” case projected a 2019 average price of between $3.20 and $5.00 per mmbtu. Its “Reactive Path” case projected a price range of $5.00 to about $6.90.
• From page 63: “To meet future demand, the NPC is projecting LNG imports will grow to become 14-17 percent of the U.S. natural gas supply by 2025. This will require the construction of seven to nine new regasification terminals and expansions of three of the four existing terminals.”
Of course, with the benefit of 16 years of hindsight, we now know that none of these key projections have come to fruition. For example, where prices are concerned, today’s natural gas producers can only long for a price per mmbtu of even $3.20, much less long-forgotten levels of $5.00 or $6.90.
Far from being challenged to maintain overall current production levels, today’s natural gas industry struggles with finding adequate areas of demand to which to move their product, even as the number of active drilling rigs exploring for natural gas resources has fallen from 1,600 as recently as 2012 to around 130 at the first of 2019. In a way, producers are victims of their own expertise, having become so adept at maximizing volumes from each new well, that they threaten to oversupply the market―even with a dramatically-reduced rig count.
The nature of the shale plays discovered since 2003 has also played a large role in creating this new reality for gas producers. It’s not just the massive resource contained in natural gas plays like the Haynesville and Marcellus keeping the gas rig count low — it’s also the amazing volumes of methane flowing out of what are classified as oil wells being drilled in the Bakken, Eagle Ford and the Permian Basin. A little-recognized fact of life in today’s U.S. oil patch is that the oil-heavy Permian Basin is now the second-largest producer of natural gas in North America, behind only the Marcellus/Utica Basin.
Simply put: Today’s biggest problem for natural gas producers is not a lack of supply, but lack of demand.
It’s important to recognize that this sea-change in the supply/demand equation for domestic natural gas has taken place during a period of time when demand for natural gas has increased significantly. In 2003, Americans and American businesses consumed about 22.7 trillion cubic feet (tcf) of natural gas, according to the U.S. Energy Information Administration (EIA). By 2017, overall U.S. consumption had grown to 27.1 tcf, an increase of 20 percent.
More to the point, demand for natural gas over that period of time rose in all of its key demand sectors: It was up in power generation, up in home heating use, up in chemicals and plastics and all other key manufacturing uses. Indeed, the phenomenal new abundance of natural gas supply and the chronic low prices that abundance has produced has played a significant role in the ongoing renaissance of manufacturing in the U.S., making the country globally competitive in that space for the first time in several decades.
This newly-found abundance may be a curse to natural gas producers and their bottom lines, but it has been a true blessing to the country.