The Future of Natural Gas-mit

8/9/2019 The Future of Natural Gas-mit

1/104

An InterdIscIplInAry MIt study

F f

naaGa

th

InterIM report


2/104

ii MIT STudy on The FuTure oF naTural GaS

Copyright 2010 Massachusetts Institute o Technology.

All rights reserved.

ISBN (978-0-9828008-0-5)


3/104

MIT St t Ft f nt Gs iii

Study Co-ChairS

ErnESt J. Moniz Chair

Cecil and Ida Green Proessor o Physics

and Engineering Systems, MIT

Director, MIT Energy Initiative (MITEI)

hEnry d. JaCoby Co-Chair

Proessor o Management, MIT

Co-director, Joint Program on the Science

and Policy o Global Change (JP)

anthony J. M. MEggS Co-Chair

Visiting Engineer, MITEI

Study group

robErt C. arMStrong

Chevron Proessor, Department o Chemical

Engineering, MIT

Deputy Director, MITEI

daniEl r. Cohn

Senior Research Scientist, Plasma Science

and Fusion Center, MIT

Executive Director, Natural Gas Study

John M. dEutCh

Institute Proessor,

Department o Chemistry, MIT

gordon M. KaufMan

Morris A. Adelman Proessor o Management

(Emeritus), MIT

St Pticipts

MElaniE a. KEndErdinE

Executive Director, MITEI

franCiS oSullivan

Research Engineer, MITEI

SErgEy paltSEv

Principal Research Scientist, MITEI and JP

John E. parSonS

Senior Lecturer, Sloan School o Management, MIT

Executive Director, JP and Center or Energy

and Environmental Policy Research

ignaCio pErEz-arriaga

Proessor o Electrical Engineering,

Comillas University, Spain

Visiting Proessor, Engineering Systems Division, MIT

John M. rEilly

Senior Lecturer, Sloan School o Management, MIT

Associate Director or Research, JP

Mort d. WEbStEr

Assistant Proessor, Engineering Systems Division, MIT


4/104

iv MIT STudy on The FuTure oF naTural GaS

Contributing authorS

StEphEn r. ConnorS

Research Scientist, MITEI

JoSEph S. hEzir

Visiting Engineer, MITEI

grEgory S. MCraE

Proessor o Chemical Engineering (Emeritus), MIT

harvEy MiChaElS

Research Scientist, Department o Urban Studies

and Planning, MIT

Carolyn ruppEl

Visiting Scientist, Department o Earth, Atmospheric

and Planetary Sciences, MIT

poStdoCtoral rESEarCh aSSoCiatES

QudSia J. EJaz

MITEI

Carolyn SEto

Clare Boothe Luce Postdoctoral Fellow,

Department o Chemical Engineering, MIT

yingxia yang

MITEI

graduatE rESEarCh aSSiStantS

orghEnEruME Kragha

EriC MaCKrES

paul Murphy

Total MIT Energy Fellow

anil raChoKonda

StEphEn SaMouhoS

ibrahiM touKan

Constellation MIT Energy Fellow

dogan uCoK

yuan yao


5/104

MIT St t Ft f nt Gs v

avis Cmmitt Mmbs

thoMaS f. (MaCK) MClarty, iii ChairMan

President & CEO, McLarty Associates

dEniSE bodE

CEO, American Wind Energy Association

ralph Cavanagh

Senior Attorney and Co-Director o Energy Program,

Natural Resource Deense Council

Sunil dEShMuKh

Founding Member, Sierra Club India Advisory Council

nEil Elliott

Associate Director or Research, American Council

or an Energy-Ecient Economy

John hESS

Chairman and CEO, Hess Corporation

JaMES t. JEnSEn

President, Jensen Associates

SEnator (e.) J. bEnnEtt JohnSton

Chairman, Johnston Associates

vEllo a. KuuSKraa

President, Advance Resources International, Inc.

MiKE Ming

President, Research Partnership to Secure Energy

to America

thEodorE rooSEvElt iv

Managing Director & Chairman, Barclays Capital

Clean Tech Initiative

oCtavio SiMoES

Vice President o Commercial Development,

Sempra Energy

grEg StaplE

CEO, American Clean Skies Foundation

pEtEr tErtzaKian

Chie Energy Economist and Managing Director,

ARC Financial

david viCtor

Director, Laboratory on International Law

and Regulation, University o Caliornia, San Diego

arMando zaMora

Director, ANH-Agencia Nacional De Hidrocarburos

While the members o the advisory committee provided invaluable perspective and advice to the study group,

individual members may have dierent views on one or more matters addressed in the report. They are not asked

to individually or collectively endorse the report ndings and recommendations.


6/104

vi MIT STudy on The FuTure oF naTural GaS

Ix f Figs Tbs

Figure 2.1 Modied McKelvey Diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Figure 2.2 Global Remaining Recoverable Gas Resource (RRR) by EPPA Region, with Uncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Figure 2.3 Global Gas Supply Cost Curve, with Uncertainty; 2007 Cost Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Figure 2.4a Volumetric Uncertainty o U.S. Gas Supply Curves; 2007 Cost Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Figure 2.4b Breakdown o Mean U.S. Gas Supply Curve by Type; 2007 Cost Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Figure 2.5a Variation in Production Rates between Shale Plays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Figure 2.5b Variation in IP Rates o 2009 Vintage Barnett Wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Figure 2.6 Potential Production Rate that Could Be Delivered by the Major U.S. Shale Plays up to 2030

Given Current Drilling Rates and Mean Resource Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Figure 2.7 The Methane Hydrate Resource Pyramid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Figure 3.1 U.S. Gas Use, Production and Imports & Exports (Tc ) and U.S. Gas Prices above Bars ($/1000 c) or Low (L),

Mean (M) and High (H) U.S. Resources. No climate policy and regional international gas markets. . . . . . . . . . . . . . . . . . . . . 23

Figure 3.2 U.S. Gas Use, Production and Imports & Exports (Tc) and U.S. Gas Prices ($/1000 c) or Low (L),

Mean (M) and High (H) U.S. Resources, Price-Based Climate Policy and Regional International

Gas Markets. Prices are shown without and with the emissions charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Figure 3.3 Energy Mix under Climate Policy, Mean Natural Gas Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Figure 3.4 U.S. Natural Gas and Electricity Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Figure 3.5 Natural Gas Production and Consumption by Region in the U.S., 2006 and 2030, Price-Based Climate Policy Scenario . . . . . . 29

Figure 3.6 Results or a Regulatory Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Figure 3.7 U.S. Gas Use, Production and Imports & Exports (Tc) and U.S. Gas Prices ($/1000 c) or Low (L),

Mean (M) and High (H) U.S. Resources, Price-Based Climate Policy and Global Gas Markets. Prices

are shown without and with the emissions charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Figure 3.8 Major Trade Flows o Natural Gas among the EPPA Regions in 2030, No New Policy (Tc) . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Figure 3.9 Energy Mix in Electric Generation under a Price-Based Climate Policy, Mean Natural Gas Resources

and Regional Natural Gas Markets (TkWh) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Figure 4.1 2009 Natural Gas Consumption by Sector (Tc ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Figure 4.2 Load duration curve or the (a) no policy and (b) 50% carbon reduction policy scenarios in 2030. . . . . . . . . . . . . . . . . . . . . 42

Figure 4.3 Impact o Wind on a One-Day Dispatch Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Figure 4.4 Scale and Location o Fully Dispatched NGCC Potential and Coal Generation (MWh, 2008). . . . . . . . . . . . . . . . . . . . . . . . . . 47

Figure 4.5 Changes in Dispatch Order to Meet ERCOTs 2008 Demand Prole with and without Carbon Constraint. . . . . . . . . . . . . . . 49

Figure 5.1 The U.S. Natural Gas Inrastructure, Including Gas Consuming Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Figure 5.2 NGL Production, 20002008 (million barrels per year) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Figure 5.3 Impacts o Pipeline Capacity on Price/Average Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Figure 7.1 CBM RD&D Spending and Supporting Policy Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Table 2.1 U.S. Resource Estimates by Type, rom Dierent Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Table 2.2 Vertical Separation o Shale Formations rom Freshwater Aquiers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Table 3.1 Levelized Cost o Electricity (2005 cents/kWh) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Table 4.1 Short-term sensitivity o the annual production o various generating technologies to an increment o +1 GWh

in the production o wind or concentrated solar power (CSP) or the ERCOT example. Only technologies that

change are listed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Table 4.2 Payback times in years or CNG light-duty vehicle or low- and high-incremental costs and U.S. uel price

spreads over the last 10 years.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51


7/104

MIT St t Ft f nt Gs vii

ix Foreword and Acknowledgements

xi Executive Summary

1 Section 1: Context

5 Section 2: Supply

21 Section 3: U.S. Gas Production, Use and Trade:

Potential Futures

39 Section 4: Demand

59 Section 5: Inrastructure

67 Section 6: Markets and Geopolitics

73 Section 7: Research, Development and Demonstration

Appendices

79 Appendix A: Units

81 Appendix B: Seminar Series Dates and Speakers

83 Appendix C: List o Acronyms

Tb f Ctts


8/104


9/104

MIT St t Ft f nt Gs ix

Fw ackwgmts

The Future o Natural Gas is the third in a series o MIT multidisciplinary reports

examining the role o various energy sources that may be important or meeting

uture demand under carbon dioxide emissions constraints. In each case, we explore

the steps needed to enable competitiveness in a uture marketplace conditioned by

a CO2

emissions price.

The rst two reports dealt with nuclear power (2003) and coal (2007). A study

o natural gas is more complex because gas is a major uel or multiple end uses

electricity, industry, heating and is increasingly discussed as a potential pathway

to reduced oil dependence or transportation. In addition, the realization over the last

ew years that the producible unconventional gas resource in the U.S. is very large

has intensied the discussion about natural gas as a bridge to a low-carbon uture.

We have carried out the integrated analysis reported here as a contribution to the

energy, security and climate debate.

Our judgment is that an interim report on our ndings and recommendations is a

timely contribution to that debate. A ull report with additional analysis addressing

a broader set o issues will ollow later this year.

Our primary audience is U.S. government, industry and academic leaders and

decision makers. However, the study is carried out with an international perspective.

This study is better as a result o comments and suggestions rom our distinguished

external Advisory Committee, each o whom brought important perspective and

experience to our discussions. We are grateul or the time they invested in advising

us. However, the study is the responsibility o the MIT study group and the advisory

committee members do not necessarily endorse all o its ndings and recommenda-

tions, either individually or collectively.

Finally, we are very appreciative o the support rom several sources. First and oremost,

we thank the American Clean Skies Foundation. Discussions with the Foundation led

to the conclusion that an integrative study on the uture o natural gas in a carbon-

constrained world could contribute to the energy debate in an important way, and

the Foundation stepped orward as the major sponsor. MIT Energy Initiative (MITEI)

members Hess Corporation and Agencia Naional de Hidrocarburos (Colombia)

provided additional support. The Energy Futures Coalition supported dissemination

o the study results, and MITEI employed internal unds and ellowship sponsorship

to support the study as well. As with the advisory committee, the sponsors are not

responsible or and do not necessarily endorse the ndings and recommendations.

That responsibility lies solely with the MIT study group.

We thank Victoria Preston or editorial support and Megan Nimura or

administrative support.


10/104


11/104

exctiv Smm xi

Natural gas has moved to the center o the current debate on energy, security and

climate. This study examines the role o natural gas in a carbon-constrained world,

with a time horizon out to mid-century.

The overarching conclusions are that:

Abundant global natural gas resources imply greatly expanded natural gas use,

with especially large growth in electricity generation.

Natural gas will assume an increasing share o the U.S. energy mix over the next

several decades, with the large unconventional resource playing a key role.

The share o natural gas in the energy mix is likely to be even larger in the near

to intermediate term in response to CO2

emissions constraints. In the longer term,

however, very stringent emissions constraints would limit the role o all ossil uels,

including natural gas, unless capture and sequestration are competitive with other

very low-carbon alternatives.

The character o the global gas market could change dramatically over the time horizon

o this study.

The physical properties o natural gas, the high degree o concentration o the global

resource and the history o U.S. energy policy have prooundly infuenced the use o

natural gas and the market structure governing its trade:

thesubstantiallylowercarbonfootprintofnaturalgasrelativetootherfossilfuels,

combined with the development o North American unconventional natural gas

supply and the high cost and slow pace o lower carbon alternatives, has ocused

attention on natural gas as a bridge to a low-carbon uture;

thereareregionalizedmarketsinNorthAmerica,EuropeandindustrializedAsia,

each with a dierent market structure; and

feastorfamineexpectationsforU.S.naturalgassupply,associatedwithprice

swings and policy changes, have oten led to costly investment decisions.

Executive Summary


12/104

xii MIT STudy on The FuTure oF naTural GaS

The confuence o these actors is central to todays energy and climate change policy

debate. The primary motivation or this study is to provide integrated, technically

grounded analysis that will inorm this debate. The analysis must deal with multiple

uncertainties that can prooundly infuence the uture o natural gas:

theextentandnatureofgreenhousegasmitigation(GHG)measuresthatwillbe

adopted in the U.S. and abroad;

theultimatesizeandproductioncostofthenaturalgasresourcebaseintheU.S.

and in other major supplier countries;

thetechnologymix,asdeterminedbyrelativecostsofdifferenttechnologiesover

time and by emissions policy; and

theevolutionofinternationalgasmarkets,asdictatedbyeconomics,geology

and geopolitics.

This study analyzes various possibilities or the last three o these, principally

by application o a well-tested global economic model, or dierent GHG policy

scenarios.

Our audience is principally U.S. government, industry and academic leaders and

decision-makers interested in the interrelated set o technical, economic, environ-

mental and political issues that must be addressed in seeking to limit GHG emissions

materially. However, the study is carried out with an international perspective.

findingS

Supply

Globally, there are abundant supplies o natural gas, much o which can be developed

at relatively low cost. The current mean projection o remaining recoverable resource is

16,200 Trillion cubic eet (Tc), 150 times current annual global gas consumption,

with low and high projections o 12,400 Tc and 20,800 Tc, respectively. O the mean

projection, approximately 9,000 Tc could be economically developed with a gas price

at or below $4/Million British thermal units (MMBtu) at the export point.

Unconventional gas, and particularly shale gas, will make an important contribution

to uture U.S. energy supply and carbon dioxide (CO2) emission reduction eorts.

Assessments o the recoverable volumes o shale gas in the U.S. have increased

dramatically over the last ve years. The current mean projection o the recoverable

shale gas resource is approximately 650 Tc, with low and high projections o 420 Tc

and 870 Tc, respectively. O the mean projection, approximately 400 Tc could be

economically developed with a gas price at or below $6/MMBtu at the well-head.


13/104

exctiv Smm xiii

The environmental impacts o shale development are manageable but challenging.

The largest challenges lie in the area o water management, particularly the eective

disposal o racture fuids. Concerns with this issue are particularly acute in those

regions that have not previously experienced large-scale oil and gas development.

It is essential that both large and small companies ollow industry best practices, that

water supply and disposal are coordinated on a regional basis, and that improved

methods are developed or recycling o returned racture fuids.

Policy Eects

In a carbon-constrained world, a level playing eld a CO2

emissions price or all

uels without subsidies or other preerential policy treatment maximizes the value

to society o the large U.S. natural gas resource.

Even under the pressure o an assumed CO2

emissions policy, total U.S. natural gas

use is projected to increase in magnitude up to 2050.

Under a scenario with 50% CO2

reductions to 2050, using an established model o the

global economy and natural gas cost curves that include uncertainty, the principal

eects o the associated CO2

emissions price are to lower energy demand and displace

coal with natural gas in the electricity sector. In eect, gas-red power sets a competitive

benchmark against which other technologies must compete in a lower carbon environment.

A major uncertainty that could impact this picture in the longer term is technology

development that lowers the costs o alternatives, in particular, renewables, nuclear

and carbon capture and sequestration (CCS).

A more stringent CO2

reduction o, or example, 80%, would probably require the

complete de-carbonization o the power sector. This makes it imperative that the

development o competing low-carbon technology continues apace, including CCS

or both coal and gas. It would be a signicant error o policy to crowd out the

development o other, currently more costly, technologies because o the new assess-

ment o gas supply. Conversely, it would also be a mistake to encourage, via policy

and long-term subsidy, more costly technologies to crowd out natural gas in the short

to medium term, as this could signicantly increase the cost o CO2

reduction.

Some U.S. regions that have not traditionally been gas producers do have signicant

shale gas resources and the development o these resources could change patterns

o production and distribution o gas in the U.S.

To the degree that economics is allowed to determine the global gas market, trade

in this uel is set to increase over coming decades, with major implications or

investment and or possible U.S. gas imports in a couple o decades and beyond.


14/104

xiv MIT STudy on The FuTure oF naTural GaS

Demand & Inrastructure

There is a degree o resilience in overall gas use in that less use in one o the three

major sectors (power, heating, industry) will lead to lower gas prices and more use

in another sector.

The electricity sector is the principal growth area or natural gas under CO2

emission

constraints.

The scale-up o intermittent electricity sources, wind and solar, signicantly aects

natural gas capacity and use in the electricity sector because o variability and uncer-

tainty. The impacts are quite dierent in the short term, during which the response is

through the dispatch pattern, and in the long term, during which capacity additions

and retirements will be responsive to large-scale introduction o intermittent sources.

Intheshortterm,theprincipalimpactofincreasedintermittentgenerationis

displacement o generation with highest variable cost, which is natural gas in most

U.S. markets.

Inthelongterm,increasedintermittentgenerationwillhavetwolikelyoutcomes:

more installed capacity o fexible plants, mostly natural gas, but typically with

low utilization; and displacement o capacity o and production rom baseload

generation technologies. There will be regional variation as to how such eects

are maniested.

In the U.S., there are opportunities or more ecient use o natural gas (and other

uels), and or coal to gas uel switching or power generation. Substitution o gas or

coal could materially impact CO2

emissions in the near term, since the U.S. coal feet

includes a signicant raction o low-eciency plants that are not credible candidates

or carbon capture retrot in response to carbon emissions prices, and since there is

signicant underutilized existing Natural Gas Combined Cycle (NGCC) capacity.

Development o the U.S. vehicular transportation market using compressed natural

gas (CNG) powered vehicles oers opportunities or expansion or natural gas use

and reduction o CO2

emissions, but it is unlikely in the near term that this will

develop into a major new market or gas or make a substantial impact in reducing

U.S. oil dependence. However, signicant penetration o the private vehicle market

beore mid-century emerges in our carbon-constrained scenario. Liqueed natural

gas (LNG) does not currently appear to be economically attractive as a uel or

long-haul trucks because o cost and operational issues related to storage at

minus 162 degrees Centigrade.

The conversion o natural gas to methanol, or which there is already large-scale

industrial use and a well-established cost basis, is an option or providing a cost-

competitive, room temperature liquid transportation uel and reducing oil depend-

ence. However, it would not materially aect carbon emissions relative to gasoline.


15/104

exctiv Smm xv

The expansion o shale gas development in areas that have not previously seen

signicant gas production will require expansion o the related pipeline, storage and

processing inrastructure. Inrastructure limitations need to be taken into account in

decisions to advance coal substitution with natural gas.

Markets & Geopolitics

There are three distinct regional gas markets North America, Europe and Asia

resulting rom the degree o market maturity, the sources o supply, the dependence on

imports and the signicant contribution o transportation to the total delivered cost.

The U.S. natural gas market unctions well and, given even-handed treatment o

energy sources, needs no special policy help to contribute materially to CO2

emissions mitigation.

International natural gas markets are in the early stages o integration, with many

impediments to urther development. I a more integrated market evolves, with

nations pursuing gas production and trade on an economic basis, there will be rising

trade among the current regional markets and the U.S. could become a substantial

net importer o LNG in uture decades.

Greater international market liquidity would be benecial to U.S. interests. U.S. prices

or natural gas would be lower than under current regional markets, leading to more

gas use in the U.S. Greater market liquidity would also contribute to security by

enhancing diversity o global supply and resilience to supply disruptions or the U.S.

and its allies. These actors moderate security concerns about import dependence.

As a result o the signicant concentration o conventional gas resources globally,

policy and geopolitics play a major role in the development o global supply and

market structures. Consequently, since natural gas is likely to play a greater role

around the world, natural gas issues will appear more requently on the U.S. energy

and security agenda. Some o the specic security concerns are:

Naturalgasdependence,includingthatofallies,couldconstrainU.S.foreign

policy options, especially because o the unique American international

security responsibilities.

Newmarketplayerscouldintroduceimpedimentstothedevelopmentoftrans-

parent markets.

Competitionforcontrolofnaturalgaspipelinesandpipelineroutesisintense

in key regions.

Longersupplychainsincreasethevulnerabilityofthenaturalgasinfrastructure.


16/104

xvi MIT STudy on The FuTure oF naTural GaS

Research, Development and Demonstration

New science and technology, particularly in the case o unconventional resources,

can signicantly contribute to the long-term economic competitiveness o domestic

supplies o natural gas with imports, by helping to optimize resource use, to lower

costs, and to reduce the environmental ootprint o natural gas.

Some government and quasi-government RD&D programs have had important

successes in the development o unconventional gas resources. These programs,

combined with short-term production tax incentives, were important enablers o

todays unconventional natural gas business.

high-lEvEl rECoMMEndationS

1. To maximize the value to society o the substantial U.S. natural gas resource base,

U.S. CO2

reduction policy should be designed to create a level playing eld,

where all energy technologies can compete against each other in an open market-

place conditioned by legislated CO2

emissions goals. A CO2

price or all uels

without long-term subsidies or other preerential policy treatment is the most

eective way to achieve this result.

2. In the absence o such policy, interim energy policies should attempt to replicate

as closely as possible the major consequences o a level-playing-eld approach to

carbon emissions reduction. At least or the near term, that would entail acilitating

energy demand reduction and displacement o some coal generation with

natural gas.

3. Notwithstanding the overall desirability o a level playing eld, and in anticipa-

tion o a carbon emissions charge, support should be provided through RD&D

and targeted subsidies o limited duration, or low-emission technologies that have

the prospect o competing in the long run. This would include renewables, carbon

capture and sequestration or both coal and gas generation, and nuclear power.

4. Coal generation displacement with NGCC generation should be pursued as a

near-term option or reducing CO2

emissions.

5. In the event o a signicant penetration o intermittent renewable electricity

production, policy and regulatory measures should be developed (e.g. ancillary

services compensation) or adapted (e.g. capacity mechanisms) to acilitate

adequate levels o investment in natural gas generation capacity.

6. Regulatory and policy barriers to the development o natural gas as a transporta-

tion uel (both CNG and natural gas conversion to liquid uels) should be

removed, so as to allow it to compete with other technologies. This would reduce

oil dependence, and CNG would reduce carbon emissions as well.


17/104

exctiv Smm xvii

7. For reasons o both economy and global security, the U.S. should pursue policies

that encourage an ecient integrated global gas market with transparency and

diversity o supply, and governed by economic considerations.

8. Since natural gas issues will appear more requently on the U.S. energy and

security agenda as global demand and international trade grow, a number o

domestic and oreign policy measures should be taken, including:

integratingenergyissuesfullyintotheconductofU.S.foreignpolicy,which

will require multiagency coordination with leadership rom the Executive

Oce o the President;

supportingtheeffortsoftheInternationalEnergyAgency(IEA)toplacemore

attention on natural gas and to incorporate the large emerging markets (such

as China, India and Brazil) into the IEA process as integral participants;

sharingknow-howforthestrategicexpansionofunconventionalresources;

advancinginfrastructurephysical-andcyber-securityastheglobalgasdelivery

system becomes more extended and interconnected; and

promotingefcientuseofnaturalgasdomesticallyandencouragingsubsidy

reduction or domestic use in producing countries.

9. There is a legitimate public interest in ensuring the optimum, environmentally

sound utilization o the unconventional gas resource. To this end:

Government-supportedresearchonthefundamentalchallengesofunconventional

gas development, particularly shale gas, should be greatly increased in scope

and scale. In particular, support should be put in place or a comprehensive and

integrated research program to build a system-wide understanding o all

subsurace aspects o the U.S. shale resource. In addition, research should be

pursued to reduce water usage in racturing and to develop cost-eective water

recycling technology.

TheUnitedStatesGeologicalSurvey(USGS)shouldaccelerateeffortstoimprove

resource assessment methodology or unconventional resources.

Aconcertedcoordinatedeffortbyindustryandgovernment,bothstateand

Federal, should be organized so as to minimize the environmental impacts o

shale gas development through both research and regulation. Transparency is key,

both or racturing operations and or water management. Better communica-

tion o oil- and gas-eld best practices should be acilitated. Integrated regional

water usage and disposal plans and disclosure o hydraulic racture fuid compo-

nents should be required.


18/104

xviii MIT STudy on The FuTure oF naTural GaS

10. The Administration and Congress should support RD&D ocused on environ-

mentally responsible, domestic natural gas supply, through both a renewed

Department o Energy (DOE) program weighted towards basic research and

a synergistic o-budget industry-led program weighted toward technology

development and demonstration and technology transer with relatively shorter-

term impact. Consideration should also be given to restoring a public-private

o-budget RD&D program or natural gas transportation and end use.


19/104

Ctxt 1

Scti 1: Ctxt

Natural gas has moved to the center o the current debate on energy, security

and climate. This study examines the potential role o natural gas in a carbon-

constrained world, with a time horizon out to mid-century.

We start by noting some basic considerations that have

shaped both the debate and our analysis.

The rst point concerns the unique characteristics o the

product. Natural gas possesses remarkable qualities. Among the ossil uels, it has

the lowest carbon intensity, emitting less carbon dioxide per unit o energy generated

than other ossil uels.1 It burns cleanly and eciently, with very ew non-carbon

emissions. Unlike oil, gas generally requires limited processing to prepare it or

end-use. These avorable characteristics have enabled natural gas to penetrate many

markets, including domestic and commercial heating, multiple industrial processes

and electrical power.

Natural gas also has avorable characteristics with respect to its development and

production. The high compressibility and low viscosity o gas allows high recoveries

rom conventional reservoirs at relatively low cost, and also enables gas to be eco-

nomically recovered rom even the most unavorable subsurace environments,

as recent developments in shale ormations have demonstrated.

These physical characteristics underpin the current expansion o the unconventional

resource base in North America, and the potential or natural gas to displace more

carbon-intensive ossil uels in a carbon-constrained world.

On the other hand, because o its gaseous orm and low energy density, natural gas

is uniquely disadvantaged in terms o transmission and storage. As a liquid, oil can

be readily transported over any distance by a variety o means and oil transportation

costs are generally a small raction o the overall cost o developing oil elds and

delivering oil products to market. This has acilitated the development o a truly

global market in oil over the past 40 years or more.

By contrast, the vast majority o gas supplies are delivered to market by pipeline, and

delivery costs typically represent a relatively large raction o the total cost in the gas

supply chain. These characteristics have contributed to the evolution o somewhat

infexible regional markets rather than a truly global market in natural gas. Outside

North America, this somewhat infexible pipeline inrastructure gives strong political

and economic power to those countries that control the pipelines. To some degree,

the evolution o the spot market in Liqueed Natural Gas (LNG) is beginning to

introduce more fexibility into global gas markets and the beginning o real global

trade. The way this trade may evolve over time is a critical uncertainty which is

explored in this work.

Natural gas has moved to the center

o the current debate on energy, securityand climate.


20/104

2 MIT STudy on The FuTure oF naTural GaS

The second point o context is to place our discussion o natural gas in its

historical setting.

The somewhat erratic history o natural gas in the U.S. over the last three decades

or so provides eloquent testimony to the diculties o orecasting energy utures,

particularly or gas, and is a reminder o the need or caution in the current period

o supply exuberance.

This history starts with a perception o supply scarcity. In 1978, convinced that the U.S.

was running out o natural gas, Congress passed the Power Plant and Industrial Fuel

Use Act (FUA) which essentially outlawed the building o new gas-red power plants.

Between 1978 and 1987 (the year the FUA was repealed) the U.S. added 172 Giga-

watts (GW) o net power generation capacity. O this, almost 81 GW was new coal

capacity, around 26% o todays entire coal feet. About hal o the remainder was

nuclear power.

There then ollowed a prolonged period o supply surplus. By the mid 1990s, whole-

sale electricity markets had been deregulated; new, highly ecient and relatively

inexpensive combined cycle gas turbines had been deployed; and new upstream

technologies had enabled the development o oshore gas resources. This all con-

tributed to the perception that natural gas was abundant, and new gas-red power

capacity was added at a rapid pace.

Since the repeal o the FUA in 1987, the U.S. has added 361 GW o power generation

capacity, o which 70% is gas red and 11% coal red. Today, the name-plate capacity

o this gas-red generation is signicantly underutilized.

By the turn o the 21st century, a new set o concerns arose about the adequacy

o domestic gas supplies. For a number o reasons, conventional supplies were in

decline, unconventional gas resources remained expensive and dicult to develop,

and overall condence in gas was low. Surplus once again gave way to a perception

o shortage and gas prices started to rise, becoming more closely linked to the oil

price, which itsel was rising. This rapid buildup in gas price, and perception o long

term shortage, created the economic incentive or the accelerated development o an

LNG import inrastructure.

Since 2000, North Americas rated LNG capacity has expanded rom approximately

2.3 Bc/day to 22.7 Bc/day, around 35% o the nations average daily requirement.

This expansion o LNG capacity coincided with the market diusion o technologies

to develop aordable unconventional gas. The game-changing potential o these tech-

nologies has become more obvious over the last three years, radically altering the U.S.

supply picture. The LNG import capacity goes largely unused at present, although it

provides valuable optionality or the uture. We have once again returned to a period

o supply surplus.


21/104

Ctxt 3

This cycle o east and amine demonstrates the genuine diculty o orecasting the

uture, and underpins the eorts o this study to account or this uncertainty in an

analytical manner.

Looking orward, we anticipate policy and geopolitics, along

with resource economics and technology developments,

will continue to play a major role in determining global

supply and market structures. Thus, any analysis

o the uture o natural gas must deal explicitly with

multiple uncertainties:

TheextentandnatureoftheGHGmitigationmeasuresthatwillbeadopted:the

U.S. legislative response to the climate threat has proved quite challenging, with

potential Environmental Protection Agency (EPA) regulation under the Clean Air

Act a possibility i Congress does not act. Moreover, reliance upon a system o

voluntary national pledges o emission reductions by 2020, as set out in the Copen-

hagen Accord, leaves great uncertainty concerning the likely structure o any uture

international agreement that may emerge to replace the Kyoto Protocol. The

absence o a clear international regime or mitigating GHG emissions also raises

questions about the likely stringency o national policies over coming decades.

Thelikelytechnologymixinacarbon-constrainedworld,particularlyinthepower

sector: the relative costs o dierent technologies may shit signicantly in response

to RD&D, and a CO2

emissions price will aect the relative costs. Moreover, the

technology mix will be aected by regulatory and subsidy measures that will skew

economic choices.

Theultimatesizeandproductioncostofthenaturalgasresourcebase,andthe

environmental acceptability o production methods: much remains to be learned

about the perormance o shale gas plays, both in the U.S. and in other parts o the

world. Indeed, even higher risk and less well-dened unconventional gas resources,

such as methane hydrates, could make a contribution to supply in the later decades

o the studys time horizon.

Theevolutionofinternationalnaturalgasmarkets:verylargenaturalgasresources

are to be ound in several areas outside the U.S., and the role o U.S. gas will be

infuenced by the evolution o this market particularly the growth and eciency

o trade in LNG. Only a ew years back, U.S. industry was investing in acilities or

substantial LNG imports. The emergence o the domestic shale resource has

depressed this business in the U.S., but in the uture the nation may again look

to international markets.

O these uncertainties, the last three can be explored by applying technically grounded

analysis, and we explore: lower cost or CCS, renewables and nuclear power; produc-

ible resources o dierent levels; and regional versus global integrated markets. In

contrast, the shape and size o GHG mitigation measures is likely to be resolved only

through complex ongoing political discussions at the national level in the major

emitting countries and through multilateral negotiations.

Policy and geopolitics, along with resource

economics and technology developments, will

continue to play a major role in determining

global supply and market structures.


22/104


The analysis in this study is based on three scenarios:

1. A business-as-usual case, with no signicant carbon constraints;

2. GHG emissions pricing, through a cap-and-trade system or emissions tax,

leads to a 50% reduction in U.S. emissions below the 2005 level, by 2050.

3. GHG reduction via U.S. regulatory measures without emissions pricing:

a renewable portolio standard and measures orcing the retirement o

coal plants.

Our analysis is long term in nature, with a 2050 time horizon. We do not attempt

to make detailed short-term projections o volumes or prices, but rather ocus on the

long-term consequences o the carbon mitigation scenarios outlined above, taking

account o the maniold uncertainties in a highly complex and interdependent

energy system.

notES

1Whereas a typical coal power plant emits about 0.9 kg-CO2/kWh-e, an NGCC power plant

emits about 0.4 kg-CO2/kWh-e.


23/104

Spp 5

introduCtion and ContExt

Natural gas supply is a complex subject. For any discussion o the topic to be rele vant

and useul it must be ramed by certain geological, technological and economic

assumptions. This section addresses the global supply o natural gas in such a manner,

paying particular attention to the U.S. supply picture and the impact o shale gas on

that supply.

The complex cross-dependencies between geology, technology and economics mean

that the use o unambiguous terminology is critical when discussing natural gas

supply. In this study the term resource will reer to the sum o all gas volumes

expected to be recoverable in the uture, given specic technological and economic

conditions. The resource can be disaggregated into a number o sub-categories;

specically, proved reserves, reserve growth (via urther development o known

elds), and undiscovered resources, which represents gas volumes that will be

discovered in the uture via the exploration process.

The diagram shown in Figure 2.1 illustrates how proved reserves, reserve growth

and undiscovered resources combine to orm the technically recoverable resource,

i.e., the total volume o natural gas that could be recovered in the uture, using todays

technology, ignoring any economic constraints.

Scti 2: Spp

Figure 2.1 Modied McKelvey Diagram Remaining Technically Recoverable

Resources are Outlined in Red

IncreasingEconomicViability

Sub-economic

Economic

Technically

Recoverable

Technically

Unrecoverable

Unconrmed

Discovered/IdentiedUndiscovered

Increasing Geologic Uncertainty

Conrmed

Reserves

CumulativeProduction

InferredReserves/ReserveGrowth

UndiscoveredTechnically

RecoverableResources


24/104


In addition to the sub-categorization o the gas resource described on the previous

page, it can also be urther partitioned into either conventional or unconventional

resources. This categorization is geologically dependent.

Conventional resources generally exist in discrete, well-dened subsurace accumula-

tions (reservoirs), with permeability1 values greater than a specied lower limit. Such

conventional gas resources can usually be developed using vertical wells, and oten

yield economic recovery rates o more than 80% o the Gas Initially in Place (GIIP).

By contrast, unconventional resources are ound in accumulations where

permeability is low. Such accumulations include tight sandstone ormations,

coal-beds, and shale ormations. Unconventional resource accumulations

tend to be distributed over a much larger area than conventional accumula-

tions and usually require well stimulation in order to be economically

productive; recovery actors are much lower typically o the order o

15% to 30% o GIIP.

The methodology used in analyzing natural gas supply or this study places particular

emphasis in two areas:

1. Treating gas resources as an economic concept recoverable resources are a

unction o many variables, particularly the ultimate price that the market will

pay or them. A set o supply curves has been developed, which describes how the

volume o gas that is economically recoverable varies with gas price. The widely

used ICF Hydrocarbon Supply Model and the ICF World Assessment Unit Model

were used to generate the curves, based on volumetric and scal input data

supplied by ICF and MIT. These curves orm a primary input to the integrated

economic modelling described later in this report.

2. Recognizing and embracing uncertainty uncertainty exists around all resource

estimates due to the inherent uncertainty associated with the underlying geologic,

technological and other inputs. The analysis o natural gas supply in this study

has been carried out in a manner that rames any single point resource estimate

within an associated uncertainty envelope, in order to illustrate the potentially

large impact this ever-present uncertainty can have.

The volumetric data used as the basis o the analysis or both the supply curve

development and the volumetric uncertainty analysis was compiled rom a range

o sources. In particular, use has been made o data rom work at the USGS, the

Potential Gas Committee (PGC), the Energy Inormation Agency (EIA), the National

Petroleum Council (NPC) and the consultancy, ICF International.

Gas resources are an economic

concept a unction o manyvariables, particularly the price

that the market will ultimately

pay or them.


25/104

Spp 7

global Supply

Global supplies o natural gas are abundant. There is an estimated remaining resource

base o 16,200 Tc, this being the mean projection o a range between 12,400 Tc

(with a 90% probability o being exceeded) and 20,800 Tc (with a 10% probability

o being exceeded). The mean projection is 150 times the annual consumption o

108 Tc in 2009. Except or Canada and the U.S., this estimate does not contain any

unconventional supplies. The global gas supply base is relatively immature; outside

North America only 11% o the estimated ultimate recovery o conventional

resources has been produced to date.

As illustrated in Figure 2.2, although resources are large, the supply base is concen-

trated, with an estimated 70% in only three regions: Russia, the Middle East (primarilyQatar and Iran) and North America. Political considerations and individual country

depletion policies play at least as big a role in global gas resource development as

geology and economics, and will dominate the evolution o the global gas market.

Figure 2.2 Global Remaining Recoverable Gas Resource (RRR) by EPPA Region,

with Uncertainty2 (excludes unconventional gas outside North America)

Tcf of gas

0 1,000 2,000 3,000 4,000 5,000 6,000

.

.

.

.

.

.

Middle East

Russia

United States

Africa

Central Asia andRest of Europe

Canada

Rest of Americas

EU and Norway

Dynamic Asia

Brazil

Rest of East Asia

Australia & Oceania

China

Mexico

India

Reserve Growth (Mean)

Proved Reserves

Yet-to-find Resources (Mean)

Unconventional Resources (Mean)

P90RRR

P10RRR


26/104


Figure 2.3 is a set o global supply curves, which describe the resources o gas that can

be developed economically at given prices at the point o export. The higher the price,

the more gas will ultimately be developed. Much o the global supply can be developed

at relatively low cost at the well-head or the point o export.3 However, the cost o

delivering this gas to market is generally considerably higher.

In contrast to oil, the total cost to deliver gas to international markets

is strongly infuenced by transportation costs, either via long distance

pipeline or as LNG. Transportation costs will obviously be a unction o

distance, but by way o illustration, resources which can be economically

developed at a gas price o $1 or $2/Mc may well require an additional

$3 to $5/Mc to get to their ultimate destination. These high transportation

costs are also a signicant actor in the evolution o the global gas market.

Outside o Canada and the U.S., there has been very little development o the uncon-ventional gas supply base. This is largely a unction o supply maturity there has

been little need to develop unconventional supplies when conventional resources are

abundant. Due to this lack o development, unconventional resource estimates are

sparse and unreliable.

In contrast to oil, the total cost

to deliver gas to international

markets is strongly infuenced

by transportation costs; coststhat are also a signicant actor

in the evolution o the global

gas market.

Figure 2.3 Global Gas Supply Cost Curve, with Uncertainty; 2007 Cost Base(excludes unconventional gas outside North America)

20.00

18.00

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0

Breakeven gas price:$/MMBtu

Tcf of gas

0 4,000 8,000 12,000 16,000 20,000

P90

Mean

P10

Example LNG value chaincosts incurred duringgas delivery

$/MMBtu

Liquefaction $2.15

Shipping $1.25

Regasification $0.70

Total $4.10

.

.

.

.

.

P90

12,400

P10

20,800

Volumetric uncertainty aroundmean of 16,200 Tcf


27/104

Spp 9

Based on an original estimate by Rogner4, there may be o the order o 24,000 Tc

o unconventional GIIP outside North America. Applying a nominal 25% recovery

actor, this would imply around 6,000 Tc o unconventional recoverable resources.

However, these global estimates are highly speculative, almost completely untested

and subject to very wide bands o uncertainty. There is a long-term need or basin-

by-basin resource evaluation to provide credibility to the GIIP estimates and, most

importantly, to establish estimates o recoverable resource volumes and costs.

Given the concentrated nature o conventional supplies and the high costs o long-

distance transportation, there may be considerable strategic and economic value in

the development o unconventional resources in those regions that are currently gas

importers, such as Europe and China. It would be in the U.S. strategic interest to see

these indigenous supplies developed, and as a market leader in this technology, the

U.S. could play a signicant role in acilitating this development.

R e c o mme n d a t i o n

U.S. py shu urg h srg vp uv gs

supps us nrh ar, wh prur us eurp ch.

unitEd StatES

Table 2.1 illustrates mean U.S. resource estimates rom a variety o resource assessment

experts. These numbers have tended to grow over time, particularly as the true potential

o the unconventional resource base has started to emerge over the past ew years.

For this study, we have assumed a mean remaining resource base o around 2,100 Tc about 92 times the annual U.S. consumption o 22.8 Tc in 2009. We estimate the low

case at 1,500 Tc, and the high case at 2,850 Tc.

Around 15% o the U.S. resource is in Alaska; ull development o this resource will

require major pipeline construction to bring the gas to market in the lower 48 states

(L48). Given the current abundance o L48 supplies, development o the pipeline

is likely to be deerred yet again, but this gas represents an important resource or

the uture.

In the L48, some 55% to 60% o the resource base is conventional gas, both onshore

and oshore. Although mature, the conventional resource base still has considerablepotential. Around 60% o this resource is comprised o proved reserves and reserve

growth, with the remainder o the order o 450 to 500 Tc rom uture discoveries.


28/104


Figure 2.4a represents the supply cost curves or all U.S. resources, depicting the mean

estimate and the considerable range o uncertainty in these estimates. Figure 2.4b

illustrates the mean supply curves, broken down by resource type. It clearly shows the

large remaining conventional resource base, although it is mature and some o it will

require high gas prices to become economical to develop. These curves assume current

technology; in practice, uture technology development will enable these costs to be

driven down over time.

Figure 2.4b also demonstrates the considerable potential o shale supplies. Usinga 2007 cost base, a substantial portion o the estimated shale resource base is eco-

nomic at prices between $4/Mc and $8/Mc. As we see at present, some o the shale

resources will displace higher cost conventional gas in the short to medium term,

exerting downward pressure on gas prices.

NPC USGS/MMS PGC ICF

(2003) (Various Years) (2006) (2008) (2009)

Lower 48

Conventional 691 928

966869

693

Tight 175 190 174

Shale 35 85 616 631

CBM 58 71 108 99 65

Total Lower 48 959 1,274 1,074 1,584 1,563

Alaska

Conventional 237 357

194194 237

Tight

Shale CBM 57 18 57 57 57

Total Alaska 294 375 251 251 294

Total U.S.

Conventional 929 1,284

1,1601,063

930

Tight 175 190 174

Shale 35 85 616 631

CBM 115 89 165 156 122

Total U.S. 1,253 1,648 1,325 1,835 1,857

Proved Reserves 184 245 204 245 245

Grand Total 1,437 1,893 1,529 2,080 2,102

Table 2.1 U.S. Resource Estimates by Type, rom Diferent Sources5

Gas Volumes (Tc)


29/104

Spp 11

Despite the relative maturity o the U.S. gas supply, estimates o remaining resources

have continued to grow over time with an accelerating trend in recent years. As the

conventional resource base matures, much o the resource growth has occurred in

unconventional gas, especially in the shales.

The PGC, which evaluates the U.S. gas resource on a biannual cycle, provides per haps

the best historical basis or looking at resource growth over time. According to this

data, resources have grown by 77% since 1990, despite a cumulative production

volume (i.e., resource depletion) during that time o 355 Tc.

As a subset o this, the application o horizontal drilling and hydraulic racturing

technology to the shales has caused resource estimates to grow over a ve-year period

rom a relatively minor 35 Tc (NPC, 2003), to a current estimate o 615 Tc (PGC,

2008), with a range o 420870 Tc. This resource growth is a testament to the power

o technology application in the development o resources, and also provides an

illustration o the large uncertainty inherent in all resource estimates.

Figure 2.4a Volumetric Uncertainty o U.S. Gas

Supply Curves; 2007 Cost Base

40.00

36.00

32.00

28.00

24.00

20.00

16.00

12.00

8.00

4.00

0

Breakeven Gas Price$/MMBtu

Tcf of gas

0 500 1,000 1,500 2,000 2,500 3,000

Low

Mean

High

.

.

.

.

.

.

Figure 2.4b Breakdown o Mean U.S. Gas Supply

Curve by Type; 2007 Cost Base

40.00

36.00

32.00

28.00

24.00

20.00

16.00

12.00

8.00

4.00

0

Breakeven Gas Price$/MMBtu

Tcf of gas

0 100 200 300 400 500 600 700 800 900 1,000

Conventional

Tight

ShaleCBM

.

.

.

.

.

.


30/104


The new shale plays represent a major contribution to the resource base o the U.S.

However, it is important to note that there is considerable variability in the quality o

the resources, both within and between shale plays. This variability in perormance is

illustrated in the supply curves on the previous page, as well as in Figure 2.5.

Figure 2.5a shows initial production and decline data rom three major

U.S. shale plays, illustrating the substantial dierences in average well peror-

mance between the plays. Figure 2.5b shows a probability distribution o

initial fow rates rom the Barnett ormation. While many reer to shale

development as more o a manuacturing process than the conventional

exploration, development and production process, this manuacturing still

occurs within the context o a highly variable subsurace environment.

In this section we do not attempt to make independent orecasts o uture gasproduction such orecasts are generated by the Emissions Prediction and Policy

Analyses (EPPA) modelling eorts described later. However, in addition to under-

standing the resource volumes, it is important to understand the contribution that

the new shale resources can make to the overall production capacity within the U.S.

According to PGC data,

U.S. natural gas resources

have grown by 77% since

1990, illustrating the largeuncertainty inherent in all

resource estimates.

Figure 2.5a Variation in Production Rates between

Shale Plays6

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Production RateMcf/day

Year

HaynesvilleMarcellus

Barnett

0 1 2 3 4 5

.

.

.

.

.

.

Figure 2.5b Variation in IP Rates o 2009 Vintage

Barnett Wells7

0.12

0.10

0.08

0.06

0.04

0.02

0

IP Rate Probability

IP RateMcf/day

(30-day avg)

0 1,000 2,000 3,000 4,000 5,000 9,000

.

.

.

.

.

.

1,000 Mcf/day

250 Mcf/day


31/104

Spp 13

Figure 2.6 indicates how production rom the top ve shale plays might grow, i

drilling were to continue at 2010 levels or the next 20 years. This illustrates the very

signicant production potential o the shale resource. The current rapid growth in

shale production can continue or some time but in the longer run production

growth tapers o as high initial production rates are oset by high initial decline rates.

The large inventory o undrilled shale acreage, together with the relatively high initial

productivity o many shale wells, allow a rapid production response to any particular

drilling eort. However, this responsiveness will change over time as the plays mature,

and signicant drilling eort is required just to maintain stable production against

relatively high inherent production decline rates.

unConvEntional gaS SCiEnCE and tEChnology

In terms o undamental reservoir fow characteristics, and the consequent pro-

duction perormance, the unconventional gas resource types tight gas, coal-bed

methane and shale are dierent rom each other, and dierent rom conventional

gas resources. Each resource type presents it own production challenges.

Figure 2.6 Potential Production Rate that Could Be Delivered by the

Major U.S. Shale Plays Up To 2030 Given Current Drilling Rates and Mean

Resource Estimates8

30

25

20

15

10

5

0

Bcf/day

2000 2005 2010 2015 2020 2025 2030

Marcellus

Haynesville

Woodford

BarnettFayetteville


32/104


Shale resources represent a particular challenge, because o their complexity, variety

and lack o long-term perormance data. In conventional reservoirs, there is a long

history o production rom a wide variety o depositional, mineralogical, and

geo-mechanical environments, such that analogues can be developed and

statistical predictions about uture perormance can be made. This is not

yet the case in the shale plays.

In order to ensure the optimum development o these important national

assets, it is necessary to build a comprehensive understanding o geochem-

istry, geological history, multiphase fow characteristics, racture properties

and production behavior across a variety o shale plays. It is also important

to develop tools which can enable the upscaling o pore-level physics to

reservoir-scale perormance prediction, and to improve core analysis

techniques to allow accurate determination o reservoir properties.


doe shu spsr Rsrh dvp (R&d), br-

wh usry , rss s h u hgs

sh gs s hgy, wh h g surg h hs

rsur s p h pu r.

It is in the national interest to have the best possible understanding o the size o the

U.S. natural gas resource. For conventional reservoirs, statistically based resource

assessment methodologies have been developed and tested over many years. In

contrast, the assessment methodology or the continuous unconventional resources

is less well developed. There would be real benet in improving the methodology or

unconventional resource assessments.


th USGS shu u, v r, s rs vp prv

ssss hgs r uv rsurs.

ShalE gaS EnvironMEntal ConCErnS

The production, transport and consumption o natural gas are accompanied bya range o environmental and saety risks.9 In this interim report, we will ocus on

production, particularly rom shale ormations.

Eective mitigation o these risks is necessary in order or the industry to operate.

Historically, government regulation, along with the application o industry-developed

best practice, has served to minimize environmental impact rom gas production or

It is in the national interest

to have the best possible under-standing o the size o the U.S.

natural gas resource. The

assessment methodology or the

continuous unconventional

resources is less well developedthan is that or conventional

resources.


33/104

Spp 15

the most part. The recent rapid expansion o activity in unconventional gas plays,

particularly shale plays, has understandably led to increased concern regarding the

environmental impacts o such activity. This is particularly so in those areas that have

not previously witnessed large-scale oil and gas development. The primary concerns

are to do with potential risks posed to dierent aspects o water resources:

1. Risk o shallow reshwater aquier contamination, with racture fuids;

2. Risk o surace water contamination, rom inadequate

disposal o fuids returned to the surace rom ractur-

ing operations;

3. Risk o excessive demand on local water supply,

rom high-volume racturing operations;

4. Risk o surace and local community disturbance,

due to drilling and racturing activities.

With over 20,000 shale wells drilled in the last 10 years, the environmental record

o shale gas development is or the most part a good one. Nevertheless, one must

recognize the inherent risks o the oil and gas business and the damage that can be

caused by just one poor operation; the industry must continuously strive to mitigate

risk and address public concerns. Particular attention should be paid to those areas

o the country that are not accustomed to oil and gas development, and where all

relevant inrastructure, both physical and regulatory, may not yet be in place.

The protection o reshwater aquiers rom racture fuids has been a primary objec-

tive o oil and gas eld regulation or many years. As indicated in Table 2.2, there is

substantial vertical separation between the reshwater aquiers and the racture zones

in the major shale plays. The shallow layers are protected rom injected fuid by a

number o layers o casing and cement and as a practical matter racturing opera-

tions cannot proceed i these layers o protection are not ully unctional. Good

oil-eld practice and existing legislation should be sucient to manage this risk.

With over 20,000 shale wells drilled in the

last 10 years, the environmental record oshale gas development is or the most part

a good one one must recognize the

inherent risks and the damage that can

be caused by just one poor operation.

Basin Depth to Shale (t) Depth to Aquier (t)Barnett 6,5008,500 1,200

Fayetteville 1,0007,000 500

Marcellus 4,0008,500 850

Woodord 6,00011,000 400

Haynesville 10,50013,500 400

Table 2.2 Vertical Separation o Shale Formations rom Freshwater Aquiers9


34/104


The eective disposal o racture fuids may represent more o a challenge, particu-

larly away rom established oil and gas areas, although again it must be put into the

context o routine oil eld operations. Every year the onshore U.S. industry saely

disposes o around 18 billion barrels o produced water. By comparison, a high-

volume shale racturing operation may return around 50 thousand barrels o racture

fuid and ormation water to the surace. The challenge is that these relatively small

volumes are concentrated in time and space.

Water supply and disposal issues, where they exist, could be addressed by requiring

collaboration between operators on a regional basis to create integrated water usage

and disposal plans. In addition, complete transparency about the contents o racture

fuids, which are or the most part benign, and the replacement o any potentially

toxic components where they exist, could help to alleviate public concern.


iprv h rspry rurg prs hrugh br u-

gs- prs h r sg gs

rgu; rqur gr rg wr usg sps ps;

rqur h p ssur ps hyru rur us;

u brv R&d ru wr usg rurg vp

s-v wr ryg hgy.

MEthanE hydratES

Methane hydrates are not considered in the resource estimates and supply curvesdescribed above, as they are still at a very early stage in terms o resource denition

and understanding. Nevertheless, hydrates may represent a very signicant long-term

resource option, both in North America and in other parts o the world.

Methane hydrates are an ice-like orm o methane and water stable at the pressure-

temperature conditions common in the shallow sediments o permarost areas and

continental margins. Globally, the total amount o methane sequestered in these

deposits probably exceeds 1,000,000 Tc o which ~99% occurs in ocean sediments.

Most o this methane is trapped in highly disseminated and/or low saturation gas

hydrates that will never be commercially viable gas sources. An estimated 100,000 Tc

may be technically recoverable rom high-saturation gas hydrate deposits11

(Boswelland Collett, 2010).


35/104

Spp 17

There have been ew ormal quantitative assessments o methane sequestered in gas

hydrates. A recent assessment o in-place resources in northern Gul o Mexico

yielded 6,717 Tc (median) or sands12 (Frye, 2008). The only technically-recoverable

assessment ever completed calculated 85.4 Tc (median) or permarost-associated

gas hydrates on the Alaskan North Slope13 (Collett et al., 2008).

Providing the data necessary or assessments will require

geophysical methods (e.g., electromagnetic techniques)

that can detect concentrated gas hydrates more reliably

than seismic surveys alone and less expensively than direct

drilling and borehole logging.

Methane hydrates are unlikely to reach commercial viability or global markets or

at least 15 to 20 years. Through consortia o government, industry, and academic

experts, the U.S., Japan, Canada, Korea, India, and other countries have made sig-

nicant progress on locating resource-grade methane hydrates. Beore 2015, the rst

research-scale, long-term production tests will be carried out by the U.S. DOE on the

Alaskan North Slope and by the Japanese MH21 project or Nankai Trough deep-

water gas hydrates.


cu hyrs rsrh prgr : vp hs r r

hghy r pss; u r rsur sssss;

prv h rsur p hrugh g-r pru sg.

Methane hydrates are unlikely to reachcommercial viability or global markets

or at least 15 to 20 years.

Figure 2.7 The Methane Hydrate Resource Pyramid

e.g., 85 Tcf technically recoverableon Alaskan North Slope(Collett et al., 2008)

e.g., 6,717 Tcf in-place NorthernGulf of Mexico sands(Frye, 2008)

Arctic (permafrost-associated)sand reservoirs

Marine shales(low permeability)

Massive seafloor/shallowhydrates at seeps

Non-sand marine reservoirswith significant permeability(including fracture filling)

Marine sand reservoirs

Increasing in-place resources

Decreasing reservoir quality

Decreasing resource estimate accuracy

Increasing production challenges

Likely decreasing recovery factor


36/104


rEfErEnCES

Ahlbrandt, Thomas S., Ronald R. Charpentier, T. R. Klett, James W. Schmoker,

Christopher J. Schenk, and Gregory F. Ulmishek. Global Resource Estimates rom Total

Petroleum Systems. AAPG, 2005.

Attanasi, E. D., and T. C. Coburn. A Bootstrap Approach to Computing Uncertainty

in Inerred Oil and Gas Reserve Estimates.Natural Resources Research 13, no. 1

(2004): 4552.

Boswell, R., and T. Collett. Current Perspectives on Gas Hydrate Resources, 2010.

Collett, T., W. Agena, M. Lee, M. Zyrianova, T. Charpentier, D. Houseknecht,

T. R. Klett, R. Pollastro, and C. Schenk.Assessment o Gas Hydrate Resources on the

North Slope. U.S. Geological Survey Factsheet. United States Geological Survey, 2008.

Energy Inormation Administration. U.S. Crude Oil, Natural Gas, and Natural

Gas Liquids Reserves Report. Energy Inormation Administration, February 2009.

http://www.eia.doe.gov/oil_gas/natural_gas/data_publications/crude_oil_natural_

gas_reserves/cr.html.

Frye, M. Preliminary Evaluation o In-Place Gas Hydrate Resources: Gul o Mexico

Outer Continental Shel. Minerals and Management Services, 2008.

Minerals Management Service.Assessment o Undiscovered Technically Recoverable Oil

and Gas Resources o the Nations Outer Continental Shel, 2006 (Summary Brochure).

Minerals Management Service, February 2006.

National Petroleum Council. Balancing Natural Gas Policy Fueling the Demands

o a Growing Economy. National Petroleum Council, September 2003.

Potential Gas Committee. Potential Supply o Natural Gas in the United States

Report o the Potential Gas Committee (December 31, 2006). Potential Supply o

Natural Gas in the United States. Potential Gas Agency, Colorado School o Mines,November 2007.

Potential Gas Committee. Potential Supply o Natural Gas in the United States

Report o the Potential Gas Committee (December 31, 2008). Potential Supply o

Natural Gas in the United States. Potential Gas Agency, Colorado School o Mines,

December 2009.

Rogner, H. H. An Assessment o World Hydrocarbon Resources.Annual Review

o Energy and the Environment22, no. 1 (1997): 217262.

United States Geological Survey. National Oil and Gas Assessment, USGS-ERP,

2010. http://energy.cr.usgs.gov/oilgas/noga/index.html.

United States Geological Survey. World Petroleum Assessment-Inormation, Dataand Products, USGS-ERP, n.d. http://certmapper.cr.usgs.gov/rooms/we/index.jsp.


37/104

Spp 19

notES

1Permeability is a measure o the ability o a porous medium, such as that ound in ahydrocarbon reservoir, to transmit fuids, such as gas, oil or water, in response to a pressuredierential across the medium.

2

Resource estimates and uncertainty ranges are based on data and inormation rom:Ahlbrandt et al., Global Resource Estimates rom Total Petroleum Systems; United StatesGeological Survey, National Oil and Gas Assessment, USGS-ERP; National PetroleumCouncil, Balancing Natural Gas Policy Fueling the Demands o a Growing Economy; UnitedStates Geological Survey, World Petroleum Assessment-Inormation, Data and Products,USGS-ERP; Potential Gas Committee, Potential Supply o Natural Gas 2008; Attanasi andCoburn, A Bootstrap Approach to Computing Uncertainty in Inerred Oil and Gas ReserveEstimates; Energy Inormation Administration, U.S. Crude Oil, Natural Gas, and NaturalGas Liquids Reserves Report. Details will be provided in ull report.

3Cost curves are based on oil eld costs in 2007. There has been considerable oil eld costinfation, and some recent defation, in the last 10 years. We have estimated cost curves on a2004 base (the end o a long period o stable costs) and a 2007 base (70% higher than the2004 level, and reasonably comparable to todays costs, which continue to decline).

4Rogner, An Assessment o World Hydrocarbon Resources.5National Petroleum Council, Balancing Natural Gas Policy Fueling the Demands o aGrowing Economy; United States Geological Survey, National Oil and Gas Assessment,USGS-ERP; Minerals Management Service,Assessment o Undiscovered TechnicallyRecoverable Oil and Gas Resources o the Nations Outer Continental Shel, 2006 (SummaryBrochure); Potential Gas Committee, Potential Supply o Natural Gas 2006; Potential GasCommittee, Potential Supply o Natural Gas 2008; Energy Inormation Administration,U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves Report.

6HPDI production database, various industry sources.

7IP rates o 2009 Barnett Shale well vintage as reported by HPDI production database.

8Illustration based on uture drilling rates remaining constant at January 2010 levels, with65 rigs operating in the Barnett, 35 rigs in the Fayetteville, 25 rigs in the Woodord, 110 rigsin the Haynesville and 70 rigs in the Marcellus.

9A detailed description o the nature, and scale o the environmental and saety risks inherentwith gas production, along with the regulations and procedures used to mitigate against themwill be ound in the Supply chapter o the ull MIT Future o Natural Gas report.

10Modern Shale Gas A Primer, U.S. Department o Energy Report, April 2009.

11Boswell and Collett, Current Perspectives on Gas Hydrate Resources.

12Frye, Preliminary Evaluation o In-Place Gas Hydrate Resources: Gul o Mexico OuterContinental Shel.

13Collett et al.,Assessment o Gas Hydrate Resources on the North Slope.


38/104


39/104

Sstm Stis 21

Scti 3: u.S. Gs Pcti, us T:Ptti Fts

introduCtion

As discussed in other sections o this report, many actors will

infuence the uture role o natural gas in the U.S. energy system.

Here we consider the most important o these: GHG mitigation

policy, technology development, size o gas resources and global

market developments. And we examine how they will interact

to shape uture U.S. gas use, production and trade over the next

ew decades.

We investigate the importance o these actors and their uncer-

tainties by applying established models o the U.S. and globaleconomy (see Box 3.1). Alternative assumptions about the uture

allow us to create a set o scenarios that provide bounds on the

uture prospects or gas and illustrate the relative importance

o dierent actors in driving the results.

The conditions explored include the High, Mean and Low range

o gas resource estimates described in Section 2. We show the

impacts o various policy alternatives including: no new climate

policy; a GHG emission reduction target o 50% by 2050, using

a price-based policy (such as a cap-and-trade system or emissions

tax); and an emissions policy that uses a set o non-price regula-tory measures.

Several assumptions have a particularly important eect on the

analysis. Long-term natural gas supply curves, distinguishing the

our gas types or the U.S. and Canada, are drawn rom Section 2.

U.S. economic growth is assumed to be 0.9% per year in 2005

2010, 3.1% in 20102020 (to account or recovery) and 2.4% or

20202050.

Box 3.1 GloBal and U.S. economicmodelS

Projections in this section were made using

the MIT EPPA model and the U.S. Regional

Energy Policy (USREP) model.1 Both are

multi-region, multi-sector representations

o the economy that solve or the prices and

quantities o energy and non-energy goods

and project trade among regions.

The core results or this study are simulated

using the EPPA model a global model with

the U.S. as one o its regions. The USREP modelis nearly identical in structure to EPPA, but

represents the U.S. only segmenting it into

12 single and multi-state regions. In the USREP

model, oreign trade is represented through

import supply and export demand unctions,

broadly benchmarked to the trade response

in the EPPA model. Both models account or

all Kyoto gases.

The advantage o models o this type is their

ability to explore the interaction o those

actors underlying energy supply and demandthat inuence markets. The models can

illustrate the directions and relative magni-

tudes o inuences on the role o gas, provid-

ing a basis or judgments about likely uture

developments and the eects o government

policy. However, results should be viewed in

light o model limitations. Projections, espe-

cially over the longer term, are naturally subject

to uncertainty. Also, the cost o technology

alternatives, details o market organization

and the behavior o individual industries

(e.g., various orms o gas contracts, politicalconstraints on trade and technology choice)

are beneath the level o model aggregation.

The fve-year time step o the models means

that the eects o short-term price volatility

are not represented.


40/104


Infuential cost assumptions are shown in Table 3.1 or the reerence case and

sensitivity tests. We vary the costs o competing generation technologies (nuclear,

coal and gas with carbon capture and storage and renewables). The intermittent

renewables (wind and solar) are distinguished by scale. At low penetration levels,

they enter as imperect substitutes or conventional electricity generation, and the

estimates o the levelized cost o electricity (LCOE 4) apply to early installations when

renewables are at sites with access to the best quality resources and to the grid and

storage or backup is not required. Through the elasticity o substitution the model

imposes a gradually increasing cost o production as their share increases, to be

limited by the cost with backup. These energy sector technologies, like others in the

model, are subject to cost reductions over time through improvements in labor,energy and (where applicable) land productivity.

The potential role o compressed natural gas in vehicles is considered separately,

drawing on estimates o the cost o these vehicles rom Section 4 o this report.

We also consider two possible utures or international gas markets: one where they

continue in their current pattern o regional trading blocs; and an alternative where

there develops a tightly integrated global gas market similar to that which now exists

or crude oil.

Reerence Sensitivity

Coal 5.4

Advanced Natural Gas (NGCC) 5.6

Advanced Nuclear2 8.8 7.3

Coal/Gas with CCS3 9.2/8.5 6.9/6.6

Renewables

Wind 6.0

Biomass 8.5

Solar 19.3

Substitution elasticity

(Wind, Biomass, Solar)

1.0 3.0

Wind+Gas Backup 10.0

Table 3.1 Levelized Cost o Electricity (2005 cents/kWh)


41/104

Sstm Stis 23

thE rolE of u.S. gaS poliCy thrEE altErnativE SCEnarioS

Scenario 1 With No Additional Policy Demands or GHG Mitigation

Unless gas resources are at the low end o the resource estimates in Section 2, domestic

gas use and production are projected to grow substantially between now and 2050.

This result is shown in Figure 3.1, rom EPPA model simulations, on the assumption

that global gas markets remain ragmented in regional trading blocs. Under the Mean

resource estimate, U.S. gas production rises by around 40% between 2005 and 2050,

and by a slightly higher 45% under the High estimate. It is only under the Low

resource outcome that resource availability substantially limits growth in domestic

production and use. In that case, gas production and use plateau around 2030 and

are in decline by 2050.

The availability o shale gas resources has a substantial eect on these results. I the

Mean estimate or other gas resources is assumed, and this same projection is made

omitting the shale gas component o supply, U.S. production peaks around 2030 and

declines to its 2005 level by 2050.

Given the continued existence o regional trading blocs or gas, there is little change

in the role played by imports and exports o gas. Imports (mainly rom Canada)

are roughly constant over time, though they increase when U.S. resources are Low.

Exports (principally to Mexico) also are maintained over the period and grow

somewhat i U.S. gas resources are at the High estimate.

Imports ProductionExports Exports

45

40

35

30

25

20

15

10

5

0

Tcf

2020 2030 2040 2050

L M H L M H L M H L M H

Year

7.0 6.9 6.88.6

8.0 7.9 10.9

9.2 8.7

15.5

10.49.5

Figure 3.1 U.S. Gas Use, Production and Imports & Exports (Tc), andU.S. Gas Prices above Bars ($/1000 c) or Low (L), Mean (M) and High (H)

U.S. Resources. No Climate Policy and Regional International Gas Markets


42/104


Gas prices (2005 U.S. dollars), shown at the top o the bars in the gure on the

previous page, rise gradually over time as the lower cost resources are depleted; the

lower the resource estimate the higher the prices. The dierence in prices across the

range o resource scenarios is not grea

The Future of Natural Gas-mit

Documents

Transcript of The Future of Natural Gas-mit