The past decade has seen a tremendous transformation in the U.S. natural gas landscape. During the Administration of George W. Bush, the U.S. was expected to be on an inextricable upward trajectory of natural gas import demand, with some analysts projecting that as many as 13 liquified natural gas (LNG) import facilities would be needed to supply the country. A bit over a decade later, the “shale revolution” has unlocked a transformative new source of natural gas supply growth in the United States, leading to dramatically lower gas prices, the displacement of coal with gas, and a queue of LNG export facilities are eyeing opportunities abroad.
Natural gas production in the continental United States (excluding Alaska and Hawaii) has risen to more than 74 billion cubic feet per day (bcf/d) in 2017. More than half of this production, just under 45 bcf/d, is coming from shale formations. The buildout of new infrastructure, including a number of regional pipelines, has reduced price asymmetry across the continental U.S. and encouraged the continued growth of natural gas production as previously stranded or high-price domestic markets are unlocked. As natural gas production continues to saturate domestic needs, however, many are asking where the demand growth of tomorrow will come from. Much of this depends upon the acceptance of gas as a true “bridge fuel” in the transition to cleaner, more efficient energy systems, particularly in the parts of the world with the highest economic and energy demand growth rates.
Is natural gas indeed a bridge fuel to a greener, low-carbon energy future? The greenhouse gas (GHG) emissions of natural gas, as a general rule of thumb, have traditionally been considered to be 40% lower than those of coal and 20% lower than those of oil on a per-unit of energy basis. However, the carbon intensity of coal energy has already been recognized as differing by coal type, a fact not lost on recent carbon tax studies from entities including the U.S. Treasury. Moreover, the carbon intensity of oil, when accounted for on a full-lifecycle basis, is likely to vary significantly. Indeed, the most carbon intensive oil modeled by the Carnegie Endowment’s Oil Climate Index was found to have total lifecycle emissions more than double those of the least carbon intensive oil that was modeled.
According to a new analysis by the International Energy Agency (IEA) of the climate credentials of natural gas, the fuel’s attractiveness versus coal should also not be taken as a given. The climate profile instead depends upon responsible extraction, transportation, and utilization of the gas so as to avoid methane leakage. Methane is a potent greenhouse gas (GHG), with a short term radiative forcing (global warming) potential that is between 28 - 36 times more powerful than that of carbon dioxide over a 100 year timeframe, and around 85 times more powerful over a 20 year timeframe.
At current estimated average rates of methane leakage of gas production globally (a leakage rate of 1.7% of gas produced), the total climate impact of natural gas is still less than that of coal, but behind this average likely lies extremely wide dispersion. Recent satellite analysis of natural gas production in a number of key shale basins across the United States suggests leakage rates that can reach 6 - 10%, while others have challenged some of these assertions and have warned against over-reliance on imperfect satellite observations.
If considering 20 year global warming potentials, gas loses its climate advantage over coal at assumed methane leakage rates of around 3.5% and higher. If considering 100 year global warming potentials, it has a bit more breathing room, maintaining a climate advantage until leakage rates of around 7% and higher. It is also worth noting that the conversion of gas to electricity typically occurs at higher efficiencies than that of coal to electricity, meaning that there is a narrow band in which certain leakage rates may see gas maintain a slight climate advantage over coal for electricity production even if it has lost its advantage in other sectors.
While the IEA notes that the emissions-intensity of gas in the U.S. has been on a downward trajectory in recent years, more can be done. The IEA suggests that at least half of all methane leakage associated with U.S. oil and gas production can be stemmed at no net cost, which may lead many to wonder why this “low-hanging fruit” is not being picked. The most likely explanation is competition for the scarce attention and resources of oil and gas firms. If drilling new wells and producing from them holds a higher internal rate of return than addressing methane leakage (even if profitable), then this environmental custodianship is likely to be deferred or ignored entirely.
To address this market failure and enhance the environmental credentials of gas, the Obama Administration had put in motion a number of regulations on methane leakage from oil and gas drilling, including methane rules for new drilling that it had finalized in May 2016. The Trump Administration is now planning a two-year delay of these rules, during which time it can develop a strategy for partially replacing the rules with less stringent provisions, or scrapping them entirely.
Beyond the legal challenges from environmental interests that a total dismantling would likely invite, the Administration also faces an evolving oil and gas industry, at least some of which would prefer to see some form of methane regulation in fact stay in place so as to avoid prolonged regulatory uncertainty, and fertile ground for the “snap-back” of even more stringent rules under a new president of a different party. Additionally, more and more energy companies are endorsing pragmatic partnerships with academics and environmental advocates, or exploring new technologies such as blockchain, to increase their capacity to manage, monetize, and/or mitigate challenges such as methane that would otherwise pose reputational and regulatory risks.
What can be said with greater certainty is that gas enjoys a robust advantage over coal when considering a broader array of pollutants other than GHGs. In particular, gas combustion produces very little particulate matter (PM2.5) emissions, and almost no sulphur dioxide (SO2) emissions, as compared with the far higher local pollution generated by coal combustion. Gas combustion also involves fewer nitrogen oxide (NOx) emissions than combustion of oil products. These three emissions species together are responsible for the lion’s share of energy-related air pollution.
The contribution to alleviating local air pollution is far more salient than climate considerations when it comes to the world’s greatest sources of growing energy demand, including megacities in emerging markets throughout Africa, Asia, and South America. New Delhi, for example has been choking on smog so thick and deleterious to human health that the government has instituted emergency school cancellations so as to avoid students having to “eat the air” on the city’s worst days of pollution.
This creates a sizeable opportunity for both extant and emerging gas exporters. Over the next five years, the United States is likely to enter the small circle of key players in the global gas market. With most outlooks foreseeing less than 6.0 Bcf/d of demand growth, but nearly 18 Bcf/d of net supply growth, around 12.0 Bcf/d of new gas exports may be realized over the period. Of this, somewhere around 3 Bcf/d of the export increase is likely to be sent to Mexico via pipeline, while the remainder (8 - 10 Bcf/d) will be exported as LNG.
The U.S. has traditionally viewed its energy endowment as a commercial, rather than political, tool, to be magnified through its existing diplomatic and development architecture. The U.S. Trade and Development Agency (USTDA), for example, has been actively supporting the development of gas infrastructure in growing markets. To date, it has financed 349 gas sector projects across 75 countries, which the agency says has facilitated over $7 billion in U.S. exports. It recently launched a new “Gas Infrastructure Exports Initiative” to intensify these efforts in LNG-receiving countries.
The initiative could explore a more holistic, less purely commercial approach in Europe, where energy security concerns and less-than-optimal integration with continental gas markets may create opportunities for transatlantic cooperation on the financing of new LNG import facilities. There are whispers in Washington that the heretofore ambiguous “energy dominance” strategy of the Trump Administration may in time lead to a strategy for using the resources of multiple government agencies to develop energy infrastructure in countries both developed and developing that might benefit from reliable, secure supplies of American energy. It would be fortuitous for Europe’s long-term energy options - and climate goals - if this came in the form of co-financing of sensible LNG import infrastructure and high-efficiency gas technology, rather than excess coal supplies from a sunsetting American market.
If the American natural gas boom is already well into re-shaping the U.S. power and industrial sectors, then the coming years will be about testing the the American gas sector’s ability - in concert with an enthusiastic, pro-drilling policy apparatus - to capture LNG market share in order to allow a continued expansion of U.S. gas production. It is paradoxical, then, that despite a Trump Administration that has paid great lip service to coal at home, a growing market for U.S. LNG will likely only come to fruition amid an accelerated transition from coal to gas in emerging markets, particularly those choking on quickly-deteriorating local air pollution.
With low-cost LNG exporters such as Qatar also eyeing increased supplies for a growing global gas market, the next phase of prospective U.S. gas production growth will also be the more challenging. Some increase is possible, but for the kind of growth that provides genuine economic tailwinds, an embrace of shared, global objectives - from energy security to climate change to air pollution - must supercede narrow-minded mercantilism. On this front, the coming years will be telling.