Oceans of Gas

NATURAL GAS IS ON A ROLL. Recoverable resources, together with reserves of gas, are at their highest level since 1971, according to the U.S. Energy Information Administration. The nearly 237 gigawatts of gas-fired generation capacity added in the United States between 2000 and 2010 represented 81 percent of total generation-capacity additions in that period. Power-sector gas consumption grew 38 percent from summer 2001 to summer 2010, but gas-fired generation increased faster - 44 percent - thanks to increased efficiency in the generation units. Peaking and intermediateload units fueled by gas have steadily contributed more significantly to baseload needs since 2005 as their capacity factors have increased.

Gas prices and supply rose after the restrictive provisions of the Fuel Use Act were repealed in 1987, and more efficient combined-cycle technology encouraged greater use of gas for power generation, according to the EIA. But gas prices became highly volatile during the last decade, choking off a boom in gas-fired power plant construction.

Since summer 2008, however, gas has competed consistently with coal on price, prompting an unprecedented run of fuel-switching that analysts expect to last until at least 2015. The Interstate Natural Gas Association of America forecasts that natural gas demand for power generation will grow at a 4.8 percent annual rate between 2010 and 2025, but it will start fast, averaging 5.9 percent until 2015. INGAA projects that gas demand for power will grow from 26 to 40 percent of total gas demand by 2025.

The Electric Power Research Institute recently released a report on generation technology options that cites "the profound impact of the shale gas boom on present and future natural gas prices" as one of five trends affecting planning for new power generation. Researchers modeled scenarios to determine the effects of climate policy, environmental regulations that apply to coal plants, and advances in other technologies to determine the economically most-attractive fuel, said John Hutchinson, senior energy strategist. He said what he found was that "there's more certainty around gas, associated with capital cost." Lack of policies on climate change and coal generation make modeling difficult, he said.

Technological advances have greatly improved production of shale gas, inflating gas reserves. From 2000 to 2006, shale gas production growth averaged 17 percent per year. Since then, it has averaged 48 percent growth, and it has been "recognized as a `game-changer' for the U.S. natural gas market" in an EIA report. At year-end 2009, about 21 percent of all U.S. natural gas reserves consisted of wet shale gas.

But the report also cautions, "There is considerable uncertainty regarding the ultimate size of technically recoverable shale gas and shale oil resources." The wells, for one thing, are so new that their long-term productivity is untested. Furthermore, in the newer shale plays, production has been confined largely to recognized sweet spots with the highest known production records. Subsequent drilling might reveal that shale gas is not uniformly as productive as it is now thought to be. Two late-June articles in the New York Times questioned the claims of reserves and the commercial feasibility of large-scale production of shale gas, but the EIA and industry leaders responded vigorously.

Competing with Coal

Fuel-switching began in August 2008 and it has continued to occur almost every month since then. "I would be surprised if it didn't continue until 2015," said Skip Horvath, president and CEO of the Natural Gas Supply Association, Washington, D.C. That's when proposed Environmental Protection Agency rules will come into force and increase gas demand. Gas prices in recent months have fluctuated in a band centered on $4 per million Btu. Supply and prices both are stable for now, and that gives power planners the confidence they require to invest in new capacity, Horvath said.

New U.S. gas-fired generation capacity is growing far faster than coal capacity, while older coal plants are being retired at an increasing rate. The NGSA anticipates that this trend will continue, driven by the combination of pending EPA regulations and "very competitive new gas-fired generation."

The NGSA's projections for 2011 and 2012 show large quantities of new coal capacity, but those may well be the last for a while. There will be no coal new-builds beyond what is now under construction or permitted, said Stephen L. Thumb, principal with Energy Ventures Analysis, Rosslyn, Va. "The economics are just hands-down," he said. "It's not even a contest anymore." The financial community won't put up money for new coal capacity until questions of carbon regulation have been answered, Thumb added. The eventual result of these trends is startling. Coal, which has long fueled half of the power generation in the United States, will slip to 38 percent by 2020 while gas-fired generation rises to 28 percent from 19 percent.

Gas supply and demand both are higher, and the transportation infrastructure is largely in place. Shale gas resources are all located in traditional oil provinces, which are well served by pipelines, said Philip Budzik, EIA gas industry analyst. "Building pipelines has not been a significant constraint in this country to date."

In the gas plant construction boom a decade ago, turbine demand outstripped manufacturing capacity, resulting in order backlogs of as much as two years. "Customer inquiries are up dramatically," said Jim Donohue, GE's manager of heavy-duty gas turbine marketing, but he said there is no need yet for adding capacity to meet a surge in demand. Siemens Energy is seeing rising demand for gas turbines, and now is expanding a manufacturing plant in Charlotte, N.C. The company will be able to supply 36 to 48 gas turbines per year, said a spokesman.