Natural Gas—Image vs. Reality

Eve S. Sprunt, 2006 SPE President • president@spe.org

We often lump oil and natural gas together, but in many ways they are very different products, which are used in different applications. While those of us in the petroleum industry view natural gas as an excellent, environmentally friendly energy alternative, our potential customers do not necessarily share that perspective. In some markets, natural gas has a bad image.

From our perspective, natural gas is the most environmentally friendly fossil fuel and as such an excellent source of energy for electric power generation. Combustion of natural gas emits almost 30% less carbon dioxide than oil and about 45% less carbon dioxide than coal; virtually no sulfur dioxide; and up to 80% fewer nitrogen oxides than coal. Emissions of particulates from natural gas combustion are negligible. With all these advantages, we believe that customers should have a strong preference for natural gas. Nevertheless, electric utilities often see natural gas as an interim fix, with the long-term solution being clean coal technology.

Many countries still depend on coal for power generation even though combustion of coal emits larger amounts of pollutants than alternatives. In the U.S., coal is used to generate 51% of the nation’s electrical power. Natural gas is a distant third at about 17%, behind nuclear power with a 21% market share. Some other nations are even more dependent on coal-fired electrical generation. Poland is 97% coal dependent, while India is 78%, China 76%, and Australia 70%.

Electrical generation facilities using efficient, natural gas-fired combustion turbine technology can be completed in far less time and with far less capital than other technologies. However, even as utilities are building gas-fired plants, they are looking to clean coal technologies as the preferred next-generation solution. This is reflected in the U.S. Energy Information Administration’s Annual Energy Outlook 2005,* which predicts that in the long term most new electric power plants will use clean coal technology rather than natural gas (Fig. 1).

Fig. 1—U.S. electric generation capacity additions by fuel type. (From Annual Energy Outlook 2005, Energy Information Administration, U.S. Dept. of Energy, Jan. 2005).

In a modern natural-gas-fired power plant, fuel accounts for almost 90% of the operating costs. In the last couple of years, U.S. natural gas prices have more than tripled (Fig. 2), reinforcing utilities’ concerns about price volatility.

Fig. 2—Natural gas price, dollars per million BTU, Henry Hub, LA. (Source: Dow Jones & Co. Data from 2005 Federal Reserve Bank of St. Louis, http://research.stlouisfed.org/fred2/series/GASPRICE/1.)

When we look at natural gas, we see opportunities in the high prices and regional scarcity. With rising natural gas prices in North America and increasing demand in China, LNG projects have become some of the hottest games in town. Everyone is competing to sell LNG and build LNG terminals. Unfortunately, like so many other aspects of the oil industry, what is viewed as good for us is viewed as bad by the general public and our customers.

Uninterrupted fuel supply is of paramount importance for electric power generators. Short-term security is a pile of coal in the plant yard. Long-term security is access to virtually unlimited fuel supplies within national boundaries. The U.S., China, India, and Australia have ample coal reserves, so they look to coal for energy security.

Natural gas, even when delivered by pipeline, has a less reliable track record with utilities than coal. Weather-related disruptions, including hurricanes and cold weather, can jeopardize the supply of natural gas. Dependence on LNG, with its long international supply chain, further exacerbates concerns about security of supply.

Despite LNG’s excellent, albeit not completely unblemished, safety record, the public incorrectly believes that LNG is very dangerous and opposes LNG facilities near population centers. LNG tankers have been falsely portrayed as having the destructive capability of multiple atomic bombs. LNG facilities and ships are viewed as attractive targets for terrorists.

Many members of the public do not realize how long they have been safely living with LNG. The first oceanic LNG cargo voyage was in 1959. There has never been a recorded incident of collision, grounding, fire, explosion, or hull failure that has caused a breach to a cargo tank of an LNG ship.

When making investment decisions about future electrical generating facilities, utilities also worry about escalating environmental restrictions and prefer to address CO2 emissions and criteria pollutants (nitrogen dioxide, sulfur oxides, carbon monoxide, lead, ozone and particulates) simultaneously. Although use of natural gas significantly reduces CO2 emissions, it does not eliminate them. Some advanced coal technologies, such as integrated gasification combined cycle, are attractive because they have the potential to reduce the cost of capturing CO2 for subsequent sequestration as well as satisfying criteria pollutant restrictions.

While it may not be pleasant to see ourselves as others see us (on either an individual or an industry basis), it is strategically important. If you know what your perceived weaknesses are, you can determine whether the weaknesses are real or perceived. You can then develop a plan to address your deficiencies and improve your image. Recognition and understanding of the gap between how you see yourself and how the world sees you can sometimes reveal new opportunities.

Worldwide society is thirsty for fuel and concerned about environmental impacts. Many different energy sources will be brought into service. With multiple fuels and multiple applications, we have an optimization problem. Although for the last 40 years, stranded natural gas has been commercialized in the form of LNG with power generation as one of the major uses, a better pairing may be found. Gas-to-liquids technology opens the door to monetizing stranded natural gas as a liquid transportation fuel. Natural gas may prove to be more valuable as a supplement to oil in the transportation market, which has been overwhelmingly dominated by oil. In any case, commercialization of vast quantities of stranded natural gas will provide exciting employment in our industry for many more years.

*Annual Energy Outlook 2005, Energy Information Administration, U.S. Dept. of Energy (Jan. 2005).