Advances in the United States in drilling technology promise to be a “game changer.” Vast resources of natural gas and oil, previously inaccessible, are now being tapped through new horizontal drilling and hydraulic fracturing. These techniques have opened up shale gas reservoirs. Rigs can now reach further by drilling horizontally along the shale. High performance rigs can drill multiple wells from one location. The abundance of natural gas has reduced its price to approximately $2/Mcf (thousand cubic feet).
Furthermore, even with the recent drop in oil prices into the low 80s, there remains a significant disparity between the price of gas and the price of oil. Measured in British Thermal Units (Btus), natural gas at $2/mmBtus is the equivalent of $20 for a barrel of oil, well below current market prices. This phenomenon has led many, including us, to speculate that the United States may enjoy a competitive advantage, and may see a revival of energy intensive industries, such as metal smelting and fabrication, pulp and paper processing, and chemical production. The US Department of Energy estimates that about one third of current natural gas consumption is used for industrial purposes. Already, chemical producers like Dow and DuPont have benefitted by having a low cost feedstock.
Broader and more transformative uses of natural gas will take time. There is very little infrastructure in the United States to use natural gas as a transportation fuel, which comes in either a compressed natural gas (CNG) or liquid natural gas (LNG) form. While LNG requires less space than CNG for an equivalent amount of Btus, it is more expensive to produce and store. Because CNG is burned the same way as gasoline is in a car, it requires little technology to implement. The most likely choice for consumers would be “flex fuel” cars where they can switch between CNG and gasoline depending on cost or convenience. Flex-fuel vehicles are already popular in Argentina, Australian, Brazil, and Italy. Despite the favorable economics of CNG, the lack of infrastructure and awareness will impede its implementation in the US. Gasoline stations are, however, planning to introduce CNG pumps, much as they did for diesel in the 1980s. FuelMaker also sells a home unit that will compress natural gas for overnight refueling. For those who have natural gas at home, they can refuel their car cheaper than at a commercial pump. GM, Ford and Chrysler have announced that gasoline/CNG hybrids will be available in 2013 on some pickup trucks. The transition to flex fuel will take time, dependent upon the replacement cycle for retiring vehicles and the price disparity between CNG and gasoline.
The EPA informs that natural gas produces half as much carbon dioxide as coal-fired electrical generation. Despite the extensive investment in “scrubbers” to filter and capture toxic emissions, additional regulations such as the Cross State Air Pollution Rule (CSAPR) enacted earlier this year and the Mercury and Air Toxics Standards (MATS) proposal will make coal even less competitive. However, much like flex-fuel vehicles, many utility plants can switch between gas and coal depending on the price differential.
The US is now considering exporting LNG due to low domestic prices and high international demand. Germany and Japan are moving away from nuclear power, increasing the demand for seaborne LNG, which is priced to compete with oil. Most countries will pursue a pragmatic approach to securing energy resources for power generation. LNG, coal and oil will all be used. There is currently plenty of room for natural gas prices to rise, encouraging the export of LNG.
It is clear that abundant, cheap natural gas will provide a boost industry and manufacturing, reduce the consumption of gasoline through a slow transition to flex-fuel technology, possibly reduce the cost of power generation, and improve the US balance of payments picture through exports of LNG. All of these changes are important on the margin, meaning that they complement fundamental regulatory reform and tax policy, as well as improvements in labor productivity. To realize the multiple benefits of these new technologies to access natural gas, there has to be confidence in its future supply. Despite recent studies showing little risk of water contamination from hydraulic fracturing (fracking), there remains some uncertainty over its environmental impact. With such numerous potential benefits, there is an incentive for the government to institute clear regulations for an effective outcome for the environment and the economy.