Latest EIA Estimates More Than Double U.S. Natural Gas Reserves

Enough Domestic U.S. Gas Supplies for Potentially 36 Years

In an early release of its 2011 Annual Energy Outlook, the Energy Information Administration (EIA) has significantly revised upwards its central estimate for U.S. technically recoverable unproved natural gas reserves from 353,000 bcf to 827,000 bcf. The new estimate is based on information derived from exploration activity in existing plays and areas that have been opened up for drilling activity this year. The forecast also suggests that this year's high shale gas production levels in the United States could be sustained at a price of less than US$5 per 1,000 cf for another 12 years and double this price level until 2035. While continued production growth is economically feasible at this price level, companies are actively exploring more viable options in the United States. Due to higher domestic gas production and generally rising fuel prices over the next two decades, the EIA projects the share of U.S. fuel imports will decline gradually. Nonetheless, the agency still sees the net import share of total U.S. energy consumption at 18% in 2035, compared with 24% in 2009.

Winners and Losers

Sustained high levels of domestic U.S. gas production are likely to have the biggest impact on the electricity sector. In light of the readily accessible fuel, natural gas has become a viable alternative to dirtier burning fuels and poses a threat to the development of more expensive renewable energy development. Despite an ongoing federal loan program for new nuclear development, high gas production has also weighed on final investment decisions to build new nuclear reactors in the United States, where only one project has secured a federal loan guarantee so far and is currently at the development stage (see United States: 12 October 2010: Problems Mount for EDF As Constellation Walks Away from U.S. Nuclear Project). The clear winners of the EIA's forecasted scenario are LNG export projects in Louisiana and Texas. LNG exporters will benefit from a competitive U.S. gas price and high production levels in the years ahead that will incentivise producers to sell natural gas abroad as the fuel sells at almost double the current U.S. price in Europe and Asia, two of the most prolific LNG markets. These projects are expected to become operational by 2015.

Rising Oil Prices

Given natural gas's increased competitiveness compared to other sources of power generation, the EIA expects the electricity price per kilowatt hour (kWh) to fall from 9.8 U.S. cents in 2009 to 8.9 cents in 2016. With regard to the oil price, the EIA reference case predicts that in 2035, the average real price of crude oil could rise gradually to US$125/b in 2009 U.S. dollars, or about US$200/b in nominal dollars, as the world economy recovers and global demand grows more rapidly than liquids supplies from producers outside OPEC. The EIA goes on to assume that the degree to which some non-OPEC countries could restrict access to potentially productive resources on account of environmental and safety concerns—particularly the United States in light of this year's oil spill disaster—as well as the as the yet unknown future economic viability of unconventional liquids will contribute further to oil price uncertainty in the United States and the rest of the world.

Outlook and Implications

Despite increased energy security stemming from domestic production, a natural gas price sustained at current levels could pose some challenges for the wider energy industry. With increased gas-fired power generation subsequently driving down the electricity price, the years ahead could see more consolidation in the U.S. power industry as smaller utilities are struggling with the current market economics. Moreover, gas has begun to cut into the renewables' market share and renewable power sources are struggling to compete with the less expensive fuel, even though the EIA still sees the highest growth rates in renewables over the next two decades. Only after intensive lobbying by investors has the administration of President Barack Obama included an extension of a renewables grant scheme first introduced in the 2009 American Recovery and Reinvestment Act (ARRA) in a recent tax incentive package that is intended to further help the economy out of last year's recession. The bill that passed Congress on Thursday (16 December) will extend a 30% tax credit on newly built renewable projects and at least support a steady level of investment in the sector in 2011, even if it might not result in accelerated growth as the United States also still lacks more comprehensive federal policies such as a nationwide renewable energy standard.