I feel the need to mention this because the New York Times has published a series of articles authored by Ian Urbina over the past several months critical of natural gas, which have resulted in the back and forth of public debate. Even other NYT editorials from sources such as Times editor Arthur Brisbane have questioned Mr. Urbina’s articles.

Predictably, gas industry representatives such as Aubrey McClendon, CEO of Chesapeake Energy, have also written a response to one of Mr. Urbina’s earlier articles that I would encourage you to read.

With that said, it seems that Mr. Urbina has a bone to pick with natural gas and Marcellus shale (in general) and continues to do so. In his latest article, rather than reporting that the United States Geological Survey (USGS) technically recoverable resource estimate for the Marcellus went from 2 Tcf to 84 Tcf with billions of barrels of liquids, he compares it to another resource evaluation (apples to oranges) and promotes the idea of a huge cut. An interesting perspective to offer. I’m including some slides with this post to give an accurate picture of how domestic natural gas supply has increased.

In addition, does it really matter that the resource estimate for  Marcellus shale is 54 Tcf, 84 Tcf or 184 Tcf. The answer is no. Resource assessments are going to change and evolve with time, and are only part of a total resource base for the country that has grown more than 80 percent since 1990. In addition, the new Marcellus shale estimate published by the USGS will have virtually no impact on how companies evaluate their current activities.

It will change some of the outputs of the EIA model in out years – but are we trying to say that the EIA modeling outlook is irrevocably accurate. Of course not! EIA outlooks serve as a starting place for our evaluation of the market (and thank goodness for them) but they change with the tide of events.

Mr. Urbina is once again taking a stance to minimize the importance of market area gas supply and all of the benefits it brings to consumers and communities. The challenges with that opportunity still need to be dealt with, also, and the best way to do that is through meaningful discussion. Mr. Urbina’s take on the announcement does nothing to advance the crucial elements of the discussion.

I know AGA has reached out to Mr. Urbina to meet with him about his articles. We’d like to discuss the current natural gas supply situation with him or at least give him a different perspective than the one he currently seems to be following. We’d welcome a meaningful discussion on natural gas.

I’m told that invitation was refused.

On April 28, Dave McCurdy, president and CEO of the American Gas Association (AGA), was the guest speaker at the monthly Natural Gas Roundtable meeting.  He stressed that 2011 will prove to be a year of seismic change for the country’s energy priorities.

What will this mean for the natural gas industry?

“Geopolitical unrest in Africa and the Middle East will maintain upward pressure on the price of crude oil,” said McCurdy. “And I am not talking years, I am talking decades.”

While that will put pressure on our economy, he said, “there is a bright spot. That is natural gas. Natural gas has the potential to help move this country toward an environmentally sustainable, economically viable and domestic energy policy.”

McCurdy emphasized one shift within the industry that is not tangible, but it represents the new role natural gas is playing in our lives. Natural gas has been referred to as a bridge fuel that will sustain us until we can rely solely on renewable alternatives, but with more than 100 years of supply natural gas is more than a bridge, it is a foundation fuel.

It is our most powerful domestic asset, right beneath our feet, which will help lessen our dependence on foreign energy supplies, create American jobs, continue to help reduce greenhouse gas emissions, and provide consumers an affordable and reliable energy.

There will be challenges. “The challenges we will face are not physical or technical,” McCurdy said. “They are political.”

“There is a lot of energy being moved from wellhead to burner tip throughout the natural gas industry and that is why our industry is embedded in a safety culture,” said McCurdy. “We need responsible resource development, plain and simple.”

MIT found that natural gas usage will double—increasing from 20 to 40 percent—over the next several decades, and that the “versatility of natural gas and its environmental performance relative to other fossil fuels enhances its desirability in a carbon-constrained environment, particularly in the near to midterm.” The MIT team of researchers was led by Ernest Moniz, a physics professor and director of the MIT Energy Initiative.

This study has been two years in the making, but even before this research was deep underway, MIT was a proponent of natural gas, and they are currently working on developing new ways to employ natural gas to generate power.

We agree that there are a lot of great opportunities to put natural gas to greater use to more cleanly meet our country’s energy needs. We look forward to the final report.

With optimism comes naysayers and thank goodness for them all. Contrary views cause us to examine our core beliefs and offer an opportunity to explain them in language citizens and policy makers can understand. For example, the Potential Gas Committee (PGC) noted in June that their most recent view of natural gas future supply in the United States exceeded 2,000 trillion cubic feet (tcf), including proved reserves (published by the Energy Information Administration). The assessment is the largest ever published by the group and founded on current technology and foreseeable economics and, in addition, comes from a non-political spectrum of experts that actually work in the areas they are evaluating.

The PGC as a group has been assessing natural gas resources for over 40 years. Much of the resource optimism is centered on onshore natural gas shales and comes because technology has allowed these low porosity, low permeability, unconventional reservoirs to be produced. The committee does not say how and when the resources will be developed but offers a snapshot of potential based on their knowledge and expertise.

Regarding the shales specifically, they become an easy target for naysayers that believe the resource potential is not real and that their productive characteristics cannot meet the future attributed to the resource optimism. So, what is true? Something between naysayer and optimist perhaps?

The problem with arguing these points based on current decline curves, innate biases or even the most objective opinion is that they miss the point of resource development in this country. The fact is that more natural gas has been produced in the United States during the past forty years at a lower cost than any person could have imagined. It has occurred because of new resource plays, evolving technology to extract the gas, changes in energy economics and most importantly – new ideas.

Focusing on a single element of the resource story is dangerous and it is inherently self-limiting. Natural gas abundance in North America is predicated on diversity – not a single resource element. To meet its full potential in our energy economy, natural gas needs to be developed responsibly from onshore conventional and unconventional reservoirs (including shales, tight sands and coal seams). Creating infrastructure to bring arctic gas to lower-48 markets is also crucial and continuing to develop offshore gas supplies responsibly must be a part of our energy future.

Shales are a part of that future but only one element of the whole. To say that shales or coal seams or any other source of natural gas will not meet current expectations is as speculative as the opposite bookend that shapes these arguments. Those arguments will be resolved with time but one fundamental remains.

The outlook for natural gas future supply in the United States has grown with time not precipitously declined. Sources of gas have been broadened and a partnership between private investment, government and creative ideas have prevailed and will continue to prevail as the primary factors responsible for delivering a low-carbon fuel to our homes, industries and businesses.

Based on numbers reported to the SEC, in 2009 it appears the “known reserves” of natural gas in the United States increased for the eleventh straight year, now approaching 250 trillion cubic feet– the highest level in more than 35 years.  This record number is good news for natural gas customers, signifying that our country can continue to rely on natural gas as a staple of its energy mix.

Interestingly, BP, the largest U.S. producer of natural gas in 2009, produced less than five percent of the national total for the year – meaning the natural gas production industry remains competitive.  Other large producers and reserves holders include household names such as ExxonMobil, yet, significant volumes of gas are produced by others such as Chesapeake Energy, Devon, Anadarko and EOG Resources. In fact, thousands of other large, mid-size and small producers provided the bulk of domestic natural gas to local distribution companies last year.

For a breakdown of the numbers and further analysis, take a look at the report.

Supply diversity is important both within and across fuels.  I often hear people advocate that we should generate electricity with: ___ (pick your source – wind, solar, fuel cells, nuclear, natural gas, etc.). But in my view, we need a diverse electric generation fleet that draws from ALL sources of supply in order to mitigate the impacts of price volatility in any one particular fuel source.  I think a large part of our concerns about the price of oil and our dependence on foreign sources of it stems from the fact that nearly all of our transportation needs are met by a single fuel source.  According to the Energy Information Administration’s 2008 Annual Energy Review, the transportation sector relies on petroleum products to supply 95 percent of its needs.

Even within a fuel type we need a diverse resource base.  As my colleague, Chris McGill, has said, when it comes to natural gas, North America is blessed with resource abundance.   And that abundance is diverse geographically and geologically.  Whether on-shore or off-shore, conventional or non-conventional, we are fortunate that we have many sources of natural gas supply to meet our energy needs.  And, that diversity has helped keep natural gas prices low for consumers.  For example, in 2005 when hurricanes shuttered much of our off-shore natural gas production, prices rose dramatically in response to the supply constriction. In 2008, however, when off-shore supply was again taken off-line due to hurricanes, natural gas prices fell.  What changed?  On-shore production from new shale plays as well as increased LNG imports more than made up the supply shortfall.  Indeed, according to Pan EurAsian Enterprices, Inc., increased LNG imports this winter helped stabilize natural gas prices in New England.  See AGA’s Natural Gas Market Indicators (Feb. 26, 2010).

I believe that our ability to import natural gas via LNG import terminals is an important element of our diverse natural gas resource base that helps keep natural gas prices affordable for consumers.  Several U.S. Senators have introduced legislation (S. 3056) that would remove from the Natural Gas Act provisions that make clear that the Federal Energy Regulatory Commission (FERC) has exclusive jurisdiction over the siting of LNG import terminals.  The Natural Gas Council, of which AGA is a member, opposes this legislation with good reason.  The legislation, if passed, would create uncertainty in the siting process and may ultimately lead to fewer import facilities being sited or built.  While some local interests might cheer at that result, in the long run we only hurt ourselves by chipping away at our natural gas supply diversity.

We should not put artificial limits on LNG imports.  The market should decide where and how many of these facilities should be built, with FERC ensuring that each facility is sited and constructed in an environmentally responsible manner.   For the benefit of all natural gas consumers, we should not remove one of the “baskets” that has contributed to our diverse natural gas resource base.

Written in Chris’ usual “cut to the chase” style, the report includes an informative Q&A section along with graphs to illustrate many of these points. It provides critical information about both conventional and unconventional sources of gas (deep-water!  subsalt! arctic sands!) and about the transmission and importation of gas (what about Canada & Mexico?).

I always find it interesting that there are a healthy number of misconceptions about U.S. natural gas supply, despite the fact that natural gas fuels over half of American homes comfortably and reliably.  Chris’ report addresses many of these unknowns.

Take a look and let us know what you think.

Maugeri was speaking at an MITEI-sponsored seminar when he said, “Because of its competitive price, availability, and clean-burning qualities natural gas is set to become the number-one energy source over the course of this century.”

It does look like it, doesn’t it?

Roger was writing about this month’s ago when he called natural gas a “nearly perfect fuel.” Mike just wrote a great article talking about source-based efficiency gains. Or you can read about the Potential Gas Committee’s report of unprecedented natural gas supply found in U.S. If you want to have a real conversation about our energy future, just read and comment on the articles you find here. It’s a good start and we’re glad to see others, like MIT, come along.

We think natural gas is going to be a big part of our energy future. What do you think?

Chris McGill is the Managing Director Policy Analysis at the American Gas Association (AGA), which represents 202 local energy companies that deliver natural gas throughout the United States. There are more than 70 million residential, commercial and industrial natural gas customers in the U.S., of which 92% – more than 65 million customers – receive their gas from AGA members.

During his 21 years at the association, he has served as Manager Gas Supply, Director of Gas Supply and Statistics and Director of AGA’s Houston Office – in addition to his current position.
McGill’s work is in the assessment of future supplies of natural gas, domestic production, underground storage, key pipeline transportation issues, winter heating season planning and other related topics. He is an active spokesperson on many natural gas supply topics, representing local gas utility perspectives to the industry, regulators, legislators and the public. He has authored numerous articles, energy analyses and issue briefs on these subjects, as well as having created and managed statistical time-series data focused on key industry benchmarks.

In these especially challenging times, McGill had much to say during an interview with P&GJ.

P&GJ: What issues are proving the most challenging for AGA members today?
McGill: Right now it’s the economy and its impact on our customers. Higher unemployment and reduced household incomes often translate into an increase in late payments by customers and a rise in uncollectibles. Other areas like residential building are also taking a toll. Consider that over half of new homes choose natural gas – but if new homes aren’t being built, gas utilities are not adding new customers which means our residential market base is shrinking. And shrinking markets and lower thermostats result in decreased natural gas throughput. But, there have been a few silver linings. Federal funding for the Low Income Home Energy Assistance Program (LIHEAP) has been at record high levels for the last couple of years and is on track to be fully funded at $5.1 billion for this upcoming fiscal year. Even fully funded, however, the program dollars are insufficient to help all those who would qualify for assistance in paying their utility heating bills.

An increasing number of natural gas utilities have had “decoupled” utility rates put in place in the last few years. These rates break the link between a utility’s earnings and its customers’ natural gas consumption. This approach allows the utility to be on the customer’s side in helping them reduce their energy consumption and bills. Today, 31 natural gas utilities in 18 states serving more than 20 million residential customers (almost one third of U.S. residential customers) have decoupled rates in place. Along with helping the utility help the customer, decoupled rates tend to protect utilities from earnings declines brought about by reduced natural gas throughput.

Also, as consumers recognize the economic and environmental benefits of natural gas, there has been an increase in homeowners converting from oil heat to natural gas heat.

While all businesses have found it more difficult to obtain credit, utilities generally have excellent credit ratings that have helped them better weather today’s financial turmoil.

P&GJ: What are some of the challenges that companies have faced in dealing with the price volatility over the past several years?
McGill: After a long period of relatively stable natural gas prices through the 1990s, the natural gas industry entered a period of price volatility beginning in the winter of 2000-01. During the past 18 months, the volatility has been particularly extreme, with spot natural gas prices exceeding $13 per MMBtu in early to mid 2008 and then falling to below $3 in August and September 2009.

Fortunately, most utilities have adopted programs to help mitigate the impact of this volatility on their customers. The most common practice to reduce volatility is for gas utilities to put natural gas into storage in the summer when prices are (usually) lower and then to deliver that gas to customers in the winter when spot prices are generally higher. In addition to doing this type of “physical” hedging, many companies engage in other price-hedging strategies, including financial swaps and call options, fixed pricing and advanced purchases at fixed prices.

It is hoped that the advent of natural gas shale production will help stabilize natural gas production, increase the production base and perhaps somewhat reduce price volatility over time. Price volatility is a normal characteristic of commodity markets in general — and certainly oil and natural gas markets over the past century. In a business where demand is largely driven by unpredictable weather and economic activity, price volatility will likely remain a fact of life.

P&GJ: Operators have recently curtailed production because of low natural gas prices. What impact does this have on the overall market?
McGill: To date, reductions in production have had almost no impact. Natural gas market fundamentals remain supply strong and demand weak among large-volume industrial users. Curtailment of production, which has been minimal, and reductions in rig count are rational supply-side responses to the current market. In the longer-term, price and other market signals will key producers to increasing their investments. It is likely, however, that demand recovery among large-volume customers is probably the most important factor in estimating when this may occur.

P&GJ: Is there an ideal price range that you think would actually satisfy most everyone in the natural gas industry?
McGill: Local gas utilities are more tuned to future price stability and health in the overall natural gas industry for all parties, including residential and small commercial customers. Producers must get a price that meets their production costs and investment requirements as should pipelines for creating transportation infrastructure. The absolute dollar value is something that AGA does not pretend to predict. It should be fair and competitive with other market alternatives.

P&G: What were your thoughts on Potential Gas Committee’s recently released report on the nation’s natural gas resource base?
McGill: The Potential Gas Committee (PGC) from the Colorado School of Mines reported on June 18, 2009 the results of its latest biennial assessment of the nation’s natural gas resources. The report indicates that the United States possesses a total undiscovered resource base of 1,836 Tcf. This is the highest resource evaluation in the Committee’s 44-year history and, when combined with current natural gas reserves reported by the Energy Information Administration, offers a total gas endowment of over 2,000 Tcf – more than 100 years of gas supply at current production levels – with the ever-present shale-gas representing more than 600 Tcf of the total. The increase from the prior assessment at year-end 2006 was more than 500 Tcf or 35%. Most of the increase from the previous assessment arose from re-evaluation of shale-gas plays in the Appalachian basin and in the Mid-Continent, Gulf Coast and Rocky Mountain areas.

With that said, the current assessment assumes neither a time schedule nor a specific market price for the discovery and production of future gas supply. Estimates of the PGC are ”base-line estimates” in that they attempt to provide a reasonable appraisal of what is considered to be the “technically recoverable” gas resource potential of the United States. From AGA’s perspective, the PGC view of natural gas resources in the United States is the real deal. A public policy of permitting development of these resources under appropriate environmental guidelines, however, must be in place for it to happen.

P&GJ: What about the Boone Pickens’ energy plan?
McGill: Mr. Pickens has spoken of using alternative energy forms such as wind to generate electricity in order to free up natural gas resources for transportation fuel, particularly for long-distance, high-mileage trucking. AGA is not opposed to either idea and, in fact, has been supportive of source alternatives for power generation and transportation for years. We aren’t bashing anybody’s good ideas for energy security and reliability. We do believe that natural gas has to be a key part of any energy plan that addresses long-term energy and carbon-reduction strategies.

P&GJ: What impact do you see the global recession having on new construction and infrastructure projects planned by the natural gas industry?
McGill: While U.S. construction generally has suffered over the last year, there are three relatively positive developments in the natural gas industry.

The first is the industry’s traditional focus on safe and reliable service. This means that ongoing maintenance and line-replacement programs tend to move forward. A number of progressive public utility commissions have approved various types of regulatory tracking programs that encourage utilities to move forward with these types of maintenance and line-replacement programs by assuring that the utilities will be able to recover these costs in a timely fashion.

The second is the federal stimulus legislation that Congress enacted in February. While the American Recovery and Reinvestment Act (ARRA) does not specifically target natural gas construction and infrastructure projects, it has made funds available to states that in turn have made funds available for gas distribution pipeline projects. In New Jersey, for example, the state made available funds for accelerated capital investment projects. This funding is expediting gas distribution projects that might not have moved forward until some later date.

A third development is the construction of new pipelines to move natural gas out of the rapidly expanding new natural gas plays. As long-term natural gas production continues to expand in the Intermountain West and as more natural gas shale plays are developed, we would expect to see continued expansion of the nation’s pipelines.

P&GJ: What role do you see LNG playing in the nation’s energy future?
McGill: Liquefied natural gas (LNG) will compete as a potential supply of natural gas in the United States just as domestic production, gas from Canada and even future arctic gas may, if infrastructure is built. Clearly, the LNG world market has demonstrated significant complexity in the past five years with short-term and long-term expectations changing on the vagaries of price, geopolitical unrest and even earthquakes. We have no way of predicting the future role of LNG in the United States, only to observe that import capacity in the U.S. and North America, in general, is increasing as is world supply. At this time, the actual utilization of that capacity is unpredictable.

P&GJ: Do you see any problems on the horizon that could negatively impact the industry?
McGill: The big game-changer in the works is climate change and energy-efficiency legislation. Not only will it have an enormous impact on the utility industry, but that impact is likely to play out over many decades. Naturally, any major change could negatively impact the natural gas industry.

It may be that we will look back at climate-change legislation and see it as something that had many positive impacts on the natural gas industry. As the lowest carbon domestic fossil fuel with more than a 100-year supply, natural gas may well be the nearly perfect fuel for a society that is looking to reduce carbon emissions.

• The year-end 2008 Potential Gas Committee (PGC) report of estimated natural gas resources in the United States points to more than 1,836 trillion cubic feet of potential resource evaluated. It is the largest aggregate estimate presented by the PGC in 44 years.

• The Energy Information Administration just published their accounting for known reserves of natural gas, yesterday, October 30. The 245 Tcf reported is the largest volume ever identified by EIA, since they began keeping the reserves statistics in 1977. In addition, the volume of domestic gas production recorded in 2008 (20.5 Tcf), according to EIA, was the largest annual production number since 1974.

• Combining PGC Resources and EIA Reserves results in a volume of future supply of over 2,000 Tcf – 100 years or more of supply at current production levels.

• In the shorter-term, natural gas storage is at record levels and, in fact, the ability to store gas underground has grown, also.

These are not short-term phenomena. They are indications that natural gas is poised to serve a growing market of low-carbon fuel requirements.

• Even the natural gas pipeline network is expanding.

America, this is the real deal.