Printer Friendly

The prospects for natural gas substitution, revisited.

Technological changes in the finding and recovery of oil and natural gas, along with the introduction of new legislation that encourages use of alternate fuels, have improved the prospects for natural gas as a substitute for other fossil fuels. In an earlier article,(1) we evaluated the outlook for substitution under the Bush Administration's "National Energy Strategy" (NES)(2) and concluded that, even if fully implemented, the NES would "do little to encourage substitution of natural gas for other fossil fuels and even less to encourage the domestic production of natural gas" because projected imports would exceed projected substitution.

But in the three years since the assumptions underlying those projections were made, a number of the relevant circumstances have changed dramatically. This article reappraises the prospects for natural gas substitution in light of these changes.

The New Circumstances

Although technological progress in the finding and recovery of oil and natural gas has been continuous in recent decades, the implications of some major advances have been fully appreciated only in the last few years. These advances include: three-dimensional seismography and associated computerized analysis and imaging; new drill bits that sharply reduce the time and cost of drilling to a given depth; perfected horizontal drilling techniques; and designs for offshore platforms that enable economical drilling in waters of 1,000 meters (0.63 of a mile) or more in depth.(3) The result is greater discovery efficiency (more discoveries for a given number of exploratory wells), lower development and extraction costs, and a greatly expanded economic oil and gas resource base for the nation.

The NES projections, based on 1990 data, assumed a "low cost" U.S. resource base of 80 million barrels of oil and 770 trillion cubic feet of natural gas.(4) (The oil resource base is relevant to future gas supplies because a substantial fraction of gas is discovered in association with oil.) These figures now seem far too conservative. The latest authoritative estimates, assuming the use of advanced technology, are at least 142 billion barrels of oil (at $20/bbl in 1992 purchasing power)(5) and 875 trillion cubic feet of natural gas (at $3.5/mcf in 1990 purchasing power).(6) Some estimates of the natural gas economic resource base go as high as 1,400 trillion cubic feet, about 70 years' supply at current rates of consumption.(7) A larger effective resource base implies a lower real price of gas at any given level of production in the future, hence a greater potential for long-term substitution for other fossil fuels.

Other relevant developments include new legislation and regulations, at both federal and state levels, that will increase the prospective demand for natural gas as a substitute fuel. These laws and regulations encourage adoption of alternative fuels, including compressed natural gas, in auto and fleet vehicles; promote integrated resource planning in electricity resource regulation, which opens new opportunities for both energy conservation and fuels substitution; increase participation in electric power markets by small cogenerators; and facilitate the competitive transportation and marketing of natural gas.

Projections in the Annual Energy Outlook 1992

In Annual Energy Outlook 1992,(8) the Energy Information Administration, which prepared the projections underlying NES, takes the above new circumstances into account both in its "reference case" and in four hypothetical cases involving high and low economic growth rates and high and low oil prices. Because the reference case makes intermediate assumptions about future economic growth and oil prices, we will use it as the most reasonable predictor of future demand for natural gas and alternative sources of energy in light of developments since the publication of NES. We will compare its projections for the year 2010 with those of the NES for the same year, so as to gain some sense of the expected effects of recent changes in the perceived resource base and regulatory environment. The relevant data are summarized in tables 1 and 2.

TABULAR DATA OMITTED

Table 1 shows the quantities of primary energy consumed in the United States in 1990, as well as the amounts projected by the NES for the year 2010 (a "base case" and the NES "scenario") and in the Outlook 1992 reference case. It also provides the percentage changes from actual 1990 consumption. Consider first the projected totals. In 1990 the United States consumed 85.1 quadrillion Btus ("quads") of primary energy. In the NES base case, the projected total for 2010 was 118.1 quads, an increase of 38.8 percent. The NES policy scenario projection was lower, 110.8 quads, but still a 30.4 percent increase. The Outlook 1992 projection for 2010 is lower still: 106.1 quads, an increase from 1990 of 24.8 percent. So the latest projection implies even greater conservation of energy than the NES policy scenario.

TABULAR DATA OMITTED

As for the individual sources of energy, we note that in comparison with the rates of growth projected in the NES base case, the rates of growth of both oil and coal in the NES policy scenario and the Outlook 1992 reference case are much lower, and the reductions are relatively greater than the rates of decline in total energy consumption. In contrast, the rates of growth of the "other" category actually increase relative to the NES base case in the other two projections, as does the growth of natural gas in the Outlook 1992 projection. Even in the NES policy scenario, the decline in the rate of growth of natural gas is less than that of total energy consumption. Both the NES policy scenario and the Outlook 1992 projections imply substitution of natural gas and "other" sources for oil and coal.

A Quantitative Estimate of Natural Gas Substitution

The data in table 2 confirm that implication, and, more precisely, they show the actual amounts of substitution by each major source of energy. (A minus sign signifies substitution for, a plus sign substitution of, the particular energy source.) In the NES policy scenario the projections imply the substitution of 6.7 quads of "other" sources and 1.3 quads of natural gas for 3.7 quads of coal and 4.3 quads of oil. In the more recent Outlook 1992 projection for the same year (2010) the implied substitution is 2.9 quads of "other" sources and 3.1 quads of natural gas for 5.2 quads of coal and 0.7 quads of oil. Thus when the Outlook 1992 projection is compared with the NES policy scenario, the substitution of natural gas for other sources of energy is larger by 1.8 quads (3.1 - 1.3). This is an increase of 138 percent in the substitution of natural gas for other energy sources. (The additional substitution is shown in the figure.) At the same time, there is more substitution for coal and less for oil, while there is less substitution for "other" sources.

All of this, including the dampened prospects for greater use of the "other" category of primary energy sources, which includes nuclear power,(9) is consistent with the larger oil and gas resource base and lower recovery costs now perceived. It is also consistent with the perceived fact that the greatest potential for natural gas distribution is to be found in the generation of electricity, where coal is the dominant fuel but with environmental liabilities and where nuclear power has its only commercial use. As a result of recent technological and institutional changes, the prospects for the substitution of natural gas for other sources of energy, especially for coal, look considerably brighter.

Notes

1. Stephen McDonald and Mina Mohammadioun, "Natural Gas Substitution Under the 'National Energy Strategy,'" Texas Business Review, February 1992.

2. National Energy Strategy: Powerful Ideas for America (Washington, D.C.: Department of Energy, 1991).

3. American Gas Association, Changes in Natural Gas Recovery Technology and Their Implications, September 1990, pp. 11-23.

4. National Energy Strategy, Technical Annex 2: Integrated Analysis Supporting the NES (Washington, D.C.: Department of Energy, 1991), pp. 8-9.

5. An Assessment of the Oil Resource Base of the United States (Austin, TX and Bartlesville, OK: Bureau of Economic Geology, University of Texas at Austin and National Institute for Petroleum and Energy Research, October 1992), p. 1.

6. The Potential for Natural Gas in the United States (Washington, D.C.: National Petroleum Council, December 1992), p. 5.

7. Robert J. Finley, "A Positive Assessment of the U.S. Natural Gas Resource Base" in The Role of Natural Gas in Environmental Policy, edited by Stephen McDonald and Mina Mohammadioun, Bureau of Business Research, forthcoming.

8. Annual Energy Outlook 1992 (Washington D.C.: Energy Information Administration, Department of Energy, 1992).

9. Within the "other" category, the substitution effect for nuclear power is +1.1 in the NES policy scenario and +1.2 in the Outlook 1992 reference case. For renewables, the corresponding figures are +5.6 and +1.6.
COPYRIGHT 1993 University of Texas at Austin, Bureau of Business Research
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:alternative fuel use
Author:McDonald, Stephen L.; Mohammadioun, Mina
Publication:Texas Business Review
Date:Jun 1, 1993
Words:1478
Previous Article:Manufacturing growth trends in Texas.
Next Article:Maquiladoras: an industry in transition.
Topics:

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters