Supply and Demand
Despite rising costs, natural gas will remain an important source of energy worldwide
Technology Today talks with Dr. Robert L. Bass, vice president of the Mechanical and Materials Engineering Division, as he sheds light on the challenges surrounding the natural gas industry and the future of this vital energy source.
During the past year, domestic natural gas prices rose steadily, reaching an all-time high of $16.60 per 1,000 cubic feet (1,000 ft3) in September 2005 for residential consumption, and averaging a little over $12 for 2005. To what do you attribute these rising prices?
There are several factors. The price has increased in recent years in the U.S. because we no longer are producing enough natural gas to meet our needs. We currently bring in about 13 percent of our gas from Canada, and we import liquefied natural gas (LNG), representing about 3 percent of our needs, from Trinidad and other places around the world. In the future we will continue to obtain natural gas from external sources, in greater quantities and percentages than we have traditionally. A complicating factor last year was the natural gas taken out of production because of the hurricanes. When one considers the consequence of decreased supply and increased demand, further strained by the hurricanes, you can see why there was a big run-up in natural gas prices last year.
We still produce about 85 percent of the natural gas used in this country. It used to be close to 100 percent. If you go back 50 to 75 years ago, natural gas was a nuisance commodity that was produced along with oil and usually flared, or sold very cheaply. As recently as 25 to 30 years ago, the cost of natural gas was 25 to 50 cents per 1,000 ft3. Five to 10 years ago, it was about $2. Most experts are predicting that during the next decade natural gas will sell around $5 to $8. As the world’s population grows and the need for energy increases, natural gas is going to be an attractive source, keeping the price higher than traditional levels even when adjusted for inflation.
Do you expect the cost to level off or perhaps drop, or will the price continue to grow?
It will drop from the 2005 levels, but it is highly unlikely to go back to $2 or $3. For the short term, in 2006-2007, prices are predicted to be in the $7 to $8 range.
Are natural gas prices tied to the price of oil? The two seem to go up and down together.
Natural gas used to be tied to the price of oil, but not as much now as it was historically. It has become more of an independent energy source worldwide. Gas fields are being produced primarily because of the value of natural gas. So natural gas is beginning to have its own factors that affect its price, independent of oil.
We’ve seen how these prices are affecting residential consumers. Could you shed some light on how commercial consumers are coping?
It’s interesting. A few years ago when natural gas was $2 to $3, it was a very popular fuel for electric power plants. The fuel cost was somewhat more than the cost of coal, but a natural gas plant can be built much more cheaply and faster than a coal-fired plant, so the capital costs are less. Maintenance costs are also less. Natural gas also burns cleaner, so it is easier to meet environmental requirements. Now that gas has gone up to the $5 to $10 range, the competitive advantage is no longer as great. Some utilities with multiple fuel options have turned away from natural gas and are building new power plants that are coal-fired. It’s all driven by cost.
For example, our local utility in San Antonio, CPS Energy, can produce electricity using nuclear power, gas-fired power or coal-fired power. When the price of natural gas goes up, CPS Energy tends to burn more coal and use more nuclear power to provide the citizens of San Antonio with the best possible price break. CPS Energy has decided its next new power plant to meet San Antonio’s growing energy demands will be a coal-fired plant. If you look at the tradeoffs of capital and maintenance costs, projected fuel costs and other concerns, you can appreciate why coal won out locally. However, the fuel choice for producing electric power depends on many factors, and much of the future growth in natural gas usage will be for electricity generation.
What challenges do these increased prices bring to the gas industry?
When gas prices become less attractive compared to other fuels, that creates situations like I just described, in which the electric utility industry will not build as many gas-fired plants. Rather, they’ll consider alternative types of fuels for electric power production. A number of domestic gas-fired electric power plants were built or initiated during the past five or six years, many of which never went into use when gas prices increased. When natural gas’ capital cost and its advantage as a clean fuel get offset by the price of gas being much higher than alternative fuels, then pressure will be placed on the gas industry to maintain lower prices to expand the use of gas. Even gas industry organizations such as the American Gas Association are acknowledging the development of clean coal technologies such as integrated gasification combined cycle plants to provide for some of our future domestic electric power needs. Expanded use of gas, coal and nuclear fuels will allow for more competitive gas cost as affected by the available future gas supply.
In the last decade, we’ve seen a number of oil companies consolidate to where there are now just a few large ones. Has this trend spilled into the natural gas industry as well?
Yes. There are fewer major gas pipeline and local distribution companies today than there were 10 or 15 years ago. As an example, El Paso Energy Company, a long-term client of SwRI, is really a combination of five pipeline companies. There’s been consolidation of this sort throughout the gas industry.
How does the regulatory environment affect how the gas industry conducts its business?
When you use gas to fire engines or turbines, or burn gas for any purpose, you have to meet environmental requirements. Gas does have an advantage over many other fuels in that it burns cleaner, but there are still requirements that must be met; for example, for emissions such as nitrous oxides from gas-fired turbines or engines. On the other side, getting permits to build gas pipelines can slow the process and add cost, so as long as those regulations exist there will be some concerns about building new pipelines expeditiously to serve growing market needs.
Imported LNG, which is an attractive alternative for our domestic gas needs, requires storage terminals to be built along the coast. There is a lot of public outcry, as well as regulatory requirements that have to be addressed. Such issues can cause delays in getting these terminals built quickly enough to meet our country’s energy demands. As a matter of fact, 20 or more new LNG terminals are proposed for the U.S., but in reality, probably only four or five will be built in the next five years. They’ll be built in areas where local and state governments are more receptive to having those kinds of facilities. I doubt there will be any in California, or in the Northeast; they’ll all be along the Gulf Coast or Southeast.
Another regulatory-driven issue is the Alaska gas pipeline that has been talked about and planned for decades. Although it will be tremendously expensive, more than $20 billion, the pipeline will provide a major source of gas for the lower 48 states. There are all kinds of regulatory issues, not only from the U.S., but also from Canada, that have to be sorted out, and permitting that has to be accomplished for those pipelines to come from Alaska, down through Canada, and into the upper part of the U.S. At present, many of these issues still exist and the earliest the pipeline can be completed is 2012.
You mentioned earlier that natural gas is a clean-burning fuel. However, with so many plants in operation, do you see any challenges for industry in the area of emissions control?
Natural gas is the cleanest of the fossil fuels; that is why it has an advantage for electric power production as well as burning it for other energy applications. It does produce some contaminants — NOx, carbon oxides (CO, CO2) and VOCs (volatile organic compounds) — so there will continue to be environmental issues from the use of natural gas that will have to be addressed, but it has a clear advantage over the other traditional fossil fuels.
What is SwRI doing to help industry in the emissions area?
We’re involved in emissions research, primarily on gas engines for gas pipeline applications, to make those engines operate more efficiently and within environmental regulatory compliance. We also have programs that address emissions from gas turbines. These programs are centered primarily in our Mechanical and Materials Engineering Division and our Engine, Emissions and Vehicle Research Division.
Many of the pipelines that transport and distribute natural gas across the U.S. have been in existence for some time now. Does industry recognize this as a problem?
Aging infrastructure is a concern to both industry and the government. In 2005, the U.S. Department of Energy (DOE) had a program to address gas pipeline infrastructure issues. About 60 percent of the gas transmission pipelines in this country are 40 to 50 years old and in many cases have already surpassed their design life. Industry is looking at ways to inspect those systems, to predict remaining life and to do maintenance where it’s appropriate. Industry is addressing issues of improving the efficiency of those aging systems, so less fuel is used and more capacity is generated by making better use of available horsepower to push the gas through the system.
The reality is that industry is not going to replace hundreds of thousands of miles of gas transmission pipelines with new systems. It would be cost-prohibitive and the time it would take to do it would be impractical and disruptive to supplying our country’s growing energy needs. The aging infrastructure of U.S. gas pipelines is a major concern that industry is faced with, has been dealing with for several years now, and will continue to deal with in the future.
Is SwRI helping industry with this problem?
Yes, and it’s been a significant program for us. We’ve been working with the DOE, the U.S. Department of Transportation (DOT), the Gas Machinery Research Council (GMRC), and the Pipeline Research Council International (PRCI) to develop technologies to maintain the operational safety and integrity of those systems, to make them more efficient and to help provide increased capacity. We recently had a program funded by GMRC and DOE that addressed infrastructure issues, and industry continues to support programs concerned with pipeline integrity and efficiency.
DOT is also supporting pipeline safety programs. Under funding from DOT, our Applied Physics Division has been evaluating pigging technologies used to inspect pipelines internally for flaws and to determine remaining life. We have several programs with DOE, DOT and PRCI to better detect corrosion and to assess the consequences of corrosion when it is detected, including some interesting new technology that uses miniature sensors that flow with the gas and send signals via wireless transmission when moisture is detected. Moisture in the pipeline is a precursor to pipeline corrosion.
The Institute has a long-standing relationship with the natural gas industry. Could you describe that relationship?
In 1952, SwRI started a program with what is now the GMRC to develop technology to assess the operational reliability of compressor piping systems. As part of that initial collaboration, we developed an analog computer in the mid-1950s that could better analyze the complicated compressor piping networks of these systems. That was a very successful development, and the analog computer was designated in 1990 as an ASME National Historic Mechanical Engineering Landmark. We continue today to upgrade that technology and apply it to the operational integrity of compressor piping systems. We’ve also worked since the 1950s with the PRCI and GMRC on flow measurement, piping integrity and other areas.
But it’s not just the pipeline industry. We have a long-standing relationship with the oil and gas exploration and production industry — all the majors — to develop better technology to help produce oil and gas more effectively and efficiently. We’ve also solved problems for the local distribution companies that provide residential and commercial natural gas.
We’ve had projects that date back to the 1970s concerned with ship tank integrity and sloshing in LNG transport vessels. At that time, LNG was expected to become a major source of natural gas for this country. It was brought in primarily from Algeria to the East Coast. Currently the U.S. gets about 3 percent of its natural gas through LNG imports transported to terminals along the Gulf Coast and the East Coast. That’s expected to grow by 2010 to about 8 to 10 percent of the country’s natural gas needs.
What is SwRI doing now to help support the industry’s research and development challenges?
The Institute has been, and continues to be, very active in looking at ways to improve the integrity of gas pipeline systems and the operational efficiency and emissions of engines and turbines used in gas transmission systems. We investigate measurement issues to help in the automation of measuring gas energy and to determine what is in these systems and if there are any leaks. We are also investigating energy issues associated with sources of natural gas that have a broader range of constituents, including contaminants, to ensure that energy is produced and sold accurately and safely. We are also helping the upstream industries develop better ways to find and produce oil and natural gas. These programs are concentrated in three of our divisions: Mechanical and Materials Engineering; Engine, Emissions and Vehicle Research; and Geosciences and Engineering.
What new technology do you foresee for the natural gas industry in 10 years?
I think you’ll see new technologies that can better inspect pipelines to make sure they are safe and operating effectively, and that can also predict remaining life and when to take lines out of service. You’ll have new technologies that will provide more efficient engines and compressors to provide the energy to move gas from one part of the country to another. You’ll see increased use of miniature sensors and wireless technology to monitor mechanical integrity as well as operational efficiencies and emissions from gas pipeline systems. You’ll see new technologies that will help find and produce natural gas more cost-effectively including nontraditional sources such as methane hydrates, which exist on the ocean floor throughout the world and could be a significant source of natural gas if researchers can find a way to produce them cost-effectively.
You’ll also see continued emphasis on coal seams, tight sands and shales, all of which are sources of natural gas in this country that now provide 35 percent of our gas. Twenty years ago we didn’t have these resources at all. As there is more demand for energy, and as increased prices support development of new technologies or new processes, you’re going to see more unconventional production of natural gas.
For the next 25 years it is projected that the world will require about 50 percent more energy than it needs today. More than 80 percent of that will still come from the traditional fossil fuels — coal, oil and natural gas — with oil being primarily used for transportation fuel, and natural gas and coal for electric power production and other industrial uses. Natural gas is projected to be the fastest-growing fuel within the fossil fuel category, with growth projections of about 2.3 percent or so per year. By 2030, it will account for 25 percent of the world’s energy usage, compared to 23 percent today. Oil and coal also will grow, but not as fast. Nuclear energy will also become more prevalent as will wind, solar and other renewable energies, but the majority of the world’s energy supply will still come from fossil fuels.
The future for natural gas is bright, and SwRI remains well positioned to assist this vital industry with its research, development and evaluation needs.
Comments about this article? Contact Bass at (210) 522-2326 or firstname.lastname@example.org.
Published in the Spring 2006 issue of Technology Today®, published by Southwest Research Institute. For more information, contact Joe Fohn.