Steady supplies of natural gas – and more infrastructure to deliver it – are vital for the United States to meet steady domestic consumption and elevated global demand for LNG through this decade and beyond.
Such was the prevailing sentiment among industry leaders and analysts who presented last week at the LDC Gas Forums annual Rockies & West conference in Denver.
Several speakers said U.S. and state-level policymakers, eager to transition away from fossil fuels and toward renewable sources of energy, must accept the enduring role of natural gas in what, from a practical view, is bound to prove a decades-long energy transformation.
While wind, solar and other renewables are sure to play increasingly important roles, they are intermittent sources of energy and natural gas will long be needed to fill the voids they leave – if, that is, developed countries and emerging economies are to be assured of reliable sources of power.
“It’s clearer than ever that the world wants an energy system that works,” said BP plc’s Mark Aufmuth, managing director. He said that, with continued growth in the Western world and rapidly evolving economies in Asia and elsewhere, both fossil fuels and renewables are essential. “We need to do both.”
To make this happen, he said, the United States needs to play a leading role, drawing upon its vast reserves of natural gas to continue – and perhaps increase – its current level of production. Output this year has hovered near 100 Bcf/d, and at times above that threshold, reaching record levels.
But to increase production further, the industry needs to do two things: Better educate policymakers that natural gas is increasingly gathered with ultra-low methane emissions, and in doing so, encourage approval of more pipelines needed to deliver fuel to supply-depleted domestic regions such as Southern California. What’s more, several new liquefied natural gas plants are currently under construction along the Gulf Coast, and they will ramp up calls for supplies in order to ship more LNG abroad in coming years.
“Categorically dismissing natural gas in the energy mix is not the answer,” Aufmuth said. “It’s time to educate.”
BP’s U.S. onshore business, BPX Energy, in late 2021 earned third-party certification for its methane emissions profile in a portion of the Haynesville Shale. Aufmuth said such efforts now span the company’s gas operations and help to demonstrate that investments in a low-carbon energy future can responsibly include natural gas.
That point of view was echoed throughout the three-day event in Denver. Several attendees noted that the pipeline permitting process in particular must be reformed to speed up approval of needed projects. Flimsy legal challenges must also be ruled on more quickly, infrastructure advocates said.
“We understand the energy transition is coming,” yet “natural gas is here to stay,” said Adam Burg, vice president of government affairs for the Denver Metro Chamber of Commerce and a proponent of diverse energy sources. “Pragmatic policy is the best way.”
He said that, while an uphill battle endures, more policymakers are beginning to take constructive views on the future of natural gas. One big case in point: The Mountain Valley Pipeline (MVP) project, eight years in the making because of exhaustive regulatory and legal scrutiny, this year won the backing of the Biden Administration and Congress, finally paving a firm path to completion as soon as late this year.
California In Focus
NGI’s Leticia Gonzales, price and markets editor, noted in a presentation at the event multiple developments in California could signal a shift in sentiment as well.
She cited the California Energy Commission (CEC) vote this month to lengthen the lifespan of three natural gas power plants. The CEC vote would extend the deadline to shut down the plants from the end of this year to the close of 2026. The Southern California facilities — Ormond Beach Generating Station, AES Alamitos and AES Huntington Beach — would remain open to ensure ample power during emergencies and extreme weather conditions. The plan awaits final approval from the State Water Resources Control Board.
The natural gas power plants pegged for closure are part of a broader state effort to wean Californians off fossil fuels. But the commissioners determined gas may be needed for years to come if the state intends to maintain power stability during extreme heat events, when electricity consumption surges to crank air conditioners and renewable fuel supply falls short of demand.
Gonzales also pointed to a California Public Utilities Commission (CPUC) staff decision to recommend granting Southern California Gas Co. (SoCalGas) the ability to substantially increase its maximum gas storage level from 41.16 Bcf to 68.6 Bcf at the Aliso Canyon storage facility. Sempra’s SoCalGas argued increased storage at Aliso would ultimately result in less volatility and reasonable prices this winter. CPUC commissioners could vote on that recommendation as soon as Aug. 31.
Several long periods of exceptional weather-driven demand forced utilities to eat into storage supplies to avoid blackouts over the past year. National gas inventories in the Pacific region were 9% below the five-year average as of Aug. 11, according to the Energy Information Administration.
Should CPUC commissioners back the move to bolster storage capacity at Aliso Canyon, it could provide “a huge improvement to the supply outlook” in the nation’s most populous state, Gonzales said.
In the meantime, with supplies still precarious, natural gas spot prices in Southern California have consistently been among the highest in the country. In fact, the CPUC staff recommendation followed a punishing July heat wave that sent cash prices at SoCal Citygate above $12.00/MMBtu – nearly quadruple the national average, according to NGI data.
Weather ‘Huge Risk’
Gonzales said that, if summer conditions drag into September or beyond or if the coming winter proves particularly cold over prolonged periods, demand could again outstrip supply in Southern California. Weather-induced shocks to production such as late-season hurricanes impacting the Gulf Coast or widespread winter freeze-offs in the Rockies could also throw supply/demand imbalance askew, she said, as California largely relies on gas from other regions sent via an already constrained pipeline network.
Given that “weather is always a huge risk” and the potential for prolonged pipeline maintenance events also lurk as wildcards impacting the flow of supplies, prices could prove highly volatile in markets such as Southern California until more steady supplies are ensured. “Things can change on a dime,” Gonzales said of prices.
Utilities in California and other states made long-term commitments to natural gas as a principal energy source, minimizing their alternatives. Now, as the United States retires more coal plants every year amid an emphasis on cleaner energy, it is increasingly difficult to switch from gas to coal when prices for the former spike, as was the practice in the past. This effectively cements a degree of reliance on natural gas and adds a fixed demand element to the market.
“Natural Gas is an integral part of California’s power mix,” NGI Senior Energy Analyst Josten Mavez said.
Citing CEC data, he noted that gas still makes up about 34% of total electric generation in the state, despite “leaps” in renewable energy generation (about 17% of the mix as of 2021, the latest year for which data is available.)
Bigger picture, BP’s Aufmuth noted that oil and natural gas are used to produce steel, cement, plastics and fertilizer – materials that are vital for the world’s infrastructure and global agriculture production. So the continued production and delivery of fossil fuels extends far beyond heating and cooling needs, he said.
“Natural gas remains an important part of the long-term energy mix,” Aufmuth said. “Our commitment to the natural gas business has not changed.”
