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Summary Nobel laureate and workshop keynote speaker Richard Smalley believes that energy leads the list of humanity's most important issues, which include water, food, the environment, poverty, ter- rorism and war, disease, education, democracy, and population (Richard Smalley, Rice University, personal communication, 2003~. And although there is a very predictable and long-term decarbonization of the world's energy sources from coal, to oil, to natural gas, and eventually to hydro- gen the United States today, and for the foreseeable future, will remain dependent on fossil fuels to satisfy on the order of 85 percent of its energy demand (EIA, 2001a). Because natural gas represents a growing propor- tion of the global fossil energy mix, accurately projecting natural gas sup- ply and demand is critical. In this context, according to some workshop participants, key efforts in achieving the most efficient use of natural gas resources are (1) creating the proper mix of access and incentives to en- courage efficient and environmentally sound exploration and production activities, (2) designing a strategic private-public partnership to foster the innovative research and technology development that are fundamental to meet long-term U.S. energy demand, and (3) encouraging the infrastruc- ture development to create a global natural gas transportation network that will be required for increased use of natural gas. The National Research Council, under the auspices of the Committee on Earth Resources of the Board on Earth Sciences and Resources, was requested by the U.S. Department of Energy, the Minerals Management Service, and the U.S. Geological Survey (USGS) to host a workshop to address projections for the supply of and demand for natural gas over the 1

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2 U.S. NATURAL GAS DEMAND, SUPPLY, AND TECHNOLOGY next 10 to 20 years and methods of increasing reserves and production. The workshop, held on April 21, 2003, in Washington, D.C., addressed three questions: (1) What projections have been made by government agencies for the U.S. supply of and demand for natural gas over the next 10 to 20 years? (2) Where are the current natural gas reserves and re- sources? (3) By what means and by how much can future reserves, re- sources, and production be increased? The workshop included partici- pants from academia, industry, federal and state government agencies, and non-profit organizations. This workshop summary is not a comprehensive report on natural gas but rather a synopsis of the presentations and discussions at the work- shop. There are many important and timely topics related to natural gas supply and demand that were not discussed at the workshop. These in- clude but are not limited to (1) factors that influence private-sector invest- ment in natural gas, (2) natural gas transportation infrastructure and pipe- line capacity, (3) natural gas storage, (4) significant environmental benefits of natural gas over other fossil fuel energy sources, (5) the impact of U.S. policy on perturbing the global trends of decarbonization of energy sources, (6) the impact on the U.S. and global economies of a transition to a natural gas economy, (7) carbon sequestration, (8) the national security effects of a U.S. transition to natural gas, and (9) a review of the EIA mod- els. This summary does not contain any conclusions and recommenda- tions. By design the workshop focused on natural gas demand and factors that cause uncertainty in demand, North American supply estimates and variability in those estimates, natural gas resource and reserves, and ways to meet future U.S. natural gas demand especially through technology and liquefied natural gas (LNG) transportation. Several additional issues were brought forward during the workshop, including (1) the impact of tax incentives and royalties on the natural gas supply, (2) the growing need for research and technology as the natural gas resource base becomes increasingly unconventional, (3) the significant decrease in private-sector research and development funding, (4) the need for new federal-private research and technology models, and (5) the significant decline in the number of graduate students enrolled in geosciences and petroleum engi- neering who will be available to replace retiring workers over the next decade as the oil and gas industry faces the loss of well over half its tech- nical workforce. In terms of U.S. natural gas consumption, some workshop partici- pants projected an overall increase in the next 5 years, owing largely to an anticipated rebound in industrial production and continued growth in new natural gas-fired electric power plants. They also discussed the longer-term outlook for natural gas, which will depend on its affordability

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SUMMARY 3 by the industrial sector, its competitive position for new power facilities, the energy conservation and efficiency response to higher gas prices, price volatility, and the creation of a global transportation and storage network. In addition, proposed and pending energy policies, such as the Bush Administration's Clear Skies Initiative, and international pressures for addressing carbon emissions and global climate change will further influ- ence the demand for and price of natural gas. Consumption of natural gas is projected by the Energy Information Administration (EIA, 2003a) to grow from 22.4 trillion cubic feet (Tcf) in 2002 to 27.1 Tcf in 2010 and to 34.9 Tcf in 2025. This rate equates to an average annual increase in natural gas consumption of 2 percent per year and is faster than the expected growth in overall primary energy consumption. The bulk of the increase is from electricity generation as the share of natural gas in this market, assuming natural gas is available at moderate prices, is expected to in- crease from 17 percent in 2001 to 29 percent in 2025 (EIA, 2003a). Committee members and participants noted that workshop assess- ments of the future supply of natural gas in North America sent some- what mixed signals. Some workshop participants believe (1) that the United States will continue to require increasing amounts of imported natural gas to meet projected demand; (2) that Canada will increase its domestic consumption, with little excess export capacity beyond that of the present day; and (3) that Mexico will most likely remain a net im- porter of natural gas. LNG imports and perhaps natural gas hydrates in the longer term will most likely be required to augment the North American natural gas supply. Participants also thought the accuracy of the supply assessment is limited by (1) perception and understanding of the origin and occurrence of the resource, (2) the quality and distribution of available data with which to conduct the estimates, and (3) the meth- ods used in the assessment. Owing to these variables, a range of assess- ment values as opposed to a single number could be expected. Total assessed gas resources for the United States have been increas- ing over the past 20 years owing to (1) an improved understanding of the phenomenon of reserve appreciation or reserve growth whereby gas (and oil) fields ultimately produce three to nine times the amounts initially estimated by standard engineering techniques; (2) an understanding of the potential for new "plays"; and (3) an evaluation of the role of current and advanced technologies in gas exploration and production (Thomas Ahlbrandt, USGS, personal communication, 2003~. A total of 1,289 Tcf of *A play is a group of prospects and any related fields having common oil or gas sources, migration relationships, reservoir formations, seals, and trap types. The prospects thus share any common elements of geological risks (White, 1992~.

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4 U.S. NATURAL GAS DEMAND, SUPPLY, AND TECHNOLOGY technically recoverable resources has been reported for the United States by the Energy Information Administration, using predominantly USGS and Minerals Management Service data, with proven reserves accounting for 14 percent of the remaining U.S. resource (Mary Hutzler, EIA, per- sonal communication, 2003~. Unconventional natural gas comprising tight (low-permeability) sands and carbonates, fractured shale gas, and coalbed gas accounts for 34 percent of remaining U.S. resources (Mary Hutzler, EIA, personal communication, 2003~. Controversy exists, how- ever, as to the size and geological nature of the tight sands gas resource in the U.S. Rocky Mountains region, where the bulk of the assessed uncon- ventional gas is thought to reside (Ben Law, Pangea Hydrocarbon Explo- ration, personal communication, 2003; Keith Shanley, Stone Energy, per- sonal communication, 2003~. The remaining potential global supply of natural gas is more than 13,000 Tcf according to USGS (2000) assessments. Undiscovered natural gas is concentrated in the former Soviet Union, the Middle East, and North Africa. Known reserves account for 35 percent of the remaining potential supply. Workshop discussion focused on ways to meet projected demands and to counter natural gas price increases and volatility in the United States, including the need for an educated and trained workforce; access to off-limits lands; increased natural gas storage capacity; a global trans- portation infrastructure, especially for offshore production and imports; more efficient and competitive fiscal and regulatory regimes; and rapid technological improvements with emphasis on the development of un- conventional reservoirs and conventional deepwater and frontier re- sources. Rapid technological improvements which in the past two de- cades have served to create unconventional gas reserves such as tight gas, shale gas, and coalbed gas have historically relied on large private-sec- tor investment. In terms of future unconventional natural gas resources, workshop participants also discussed the need for investment in research and development, including a greater proportion of federal investment than in the past. Until pipeline and LNG transportation projects are put in place and natural gas storage solutions are found, the interplay between factors such as wellhead price, weather, imports, domestic gas rig activity, deliver- ability of new wells, and availability and cost of external supplies (i.e., pipelines) will continue to result in price and storage volume volatility. New sources of natural gas from Canada via pipelines and globally via LNG appear to be competitive in a sustained $3.25 per thousand cubic feet (Mcf) or greater price environment. The workshop was designed to address projections for the supply of and demand for natural gas over the next 10 to 20 years and methods of increasing reserves and production. As noted at the workshop, it seems

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SUMMARY 5 relevant to recognize that in order to meet global demand all sources of energy will be critical over the next 50 to 100 years as the world transi- tions out of a fossil fuel energy-dominated economy, including continued (1) production and consumption of coal with positive impacts from ad- vances in "clean coal" technology, (2) renewable and nuclear energy pro- duction and associated research, (3) oil consumption and enhanced oil recovery research, and (4) natural gas consumption and associated re- search and technology development across the upstream-to-downstream natural gas spectrum. According to some workshop participants, because long-term global trends are toward a natural gas economy and away from coal and oil, the issue of meeting natural gas technology needs in the face of decreased private and federal spending on oil and gas research and technology, decreased geoscience and engineering enrollments in gradu- ate schools, and an aging energy company workforce provides a frame- work for future U.S. policy directions.