As the Waxman-Markey American Clean Energy and Security Act of 2009 (Waxman-Markey, or HR 2454) was voted out in the House Energy and Commerce Committee on May 21, we have continued to review the immediate and potential role of natural gas in our clean-energy future. The saga of this role just seems to go on, without any clear resolution.

Following the release of Navigant Consulting’s North American Natural Gas Supply Assessment for the American Clean Skies Foundation last year, many leading industry experts evolved to a perception of supply abundance. Additionally, of course, the industry produced a significant surplus of deliverability, even before the onset of the world’s economic turmoil.

As previously noted here, production from the major gas shale plays had increased on an exponential curve over the past ten years. Even with the rapid backing-off of new development that has been necessary to respond to the oversupply situation, the industry has merely succeeded in slowing the rate of growth, not in stopping it. The noteworthy estimates of recoverable shale gas included in the Navigant Consulting study have, to some extent, been overtaken and outdone by more recent releases. (For example, Dr. Terry Engelder, the preeminent expert on the Marcellus Shale, has moved his estimate of recoverable resource from twenty percent to almost 150 percent of Navigant Consulting’s high-end estimate.)

The bottom line is that we have a lot of domestic natural gas supply, both in terms of the deliverability that can be developed in the near term, and in terms of the ultimate resource that will define the life of that deliverability. The role natural gas could play in immediately reducing carbon dioxide by displacing older, less efficient coal power generation is clear, and the role natural gas could play to displace foreign oil use in vehicle fuel over the next decade is equally clear. However, none of this seems to be happening, or at least to be embraced by key policymakers.

There are three areas of questions/issues/misperceptions surrounding natural gas that could be keeping it from moving to the front of the policy queue. First is supply perception: Despite overwhelming evidence to the contrary, many policymakers still seem to perceive natural gas as a scarce resource. Second is environmental perception: Because natural gas is so frequently addressed in concert with oil (often through the industry’s own doing), the general resistance to domestic drilling creates a general resistance to relying on domestic natural gas. Third is new-solution trendiness: Natural gas is a longstanding resource that is cleaner than all other fossil fuels, but that does not fit the model of policymakers who want to go directly to the “final solution” of zero-carbon renewables.

It is worth analyzing each of these areas to try to determine what the nation needs to do to take advantage of this domestic resource that could address so many problems. The second and third areas -- the combination with oil in policymakers’ minds, and lack of trendiness as the final solution -- do not take a lot of discussion. Natural gas is fundamentally different from oil -- in its cost, environmental impact, and domestic abundance; and long-term zero-carbon solutions are a great idea, but if we have to wait a decade or two before much progress is made on them, that’s a decade or two of continued high carbon emissions that could have been mitigated with a switch to natural gas. It is really the first issue, the perception of current and future supply capabilities, that really underlies most debates around natural gas. So it is the issue that must, once again, be examined in detail.

Scarce Supply?

One of the most frustrating things about the “scarcity” argument is its ability to shape-shift. One minute the skeptics express concern that not enough natural gas can come forth quickly enough at a reasonable price to support large increases in demand. But then, when shown that it can and will come forth (and in fact is coming forth at record levels), they shift to concern that we are consuming a scarce resource faster than we should. Two excellent examples of this shifting focus are the comments of Energy Secretary Stephen Chu in April regarding natural gas, and the language that made it into the Administration’s budget proposals to increase taxes on the natural gas industry.

At April’s Energy Information Administration Annual Conference, Secretary Chu was asked where he stood on the use of natural gas as a vehicle fuel. Happily, he did not say it was a bad solution in terms of efficacy at displacing foreign oil, reducing pollution, and reducing costs at the pump. However, what he did say was that increased use of natural gas would cause “tension” in supplies for industrial and other users of natural gas, thus driving up prices. His statement only makes any sense if he believes that the daily and annual production of natural gas cannot and will not respond to demand increases to keep the supply-demand balance, and thus prices, stable.

Meanwhile, the budget package’s underlying assumption about the resource base represents the long-term scarcity misperception. In a recent explanatory note as to why the Administration wants to eliminate an expense deduction for intangible drilling costs, it said, “To the extent expensing encourages overproduction of oil and gas, it is detrimental to long-term energy security. . .”

Once again, natural gas is wrapped up far too tightly with oil. But the more important aspect of this statement is that the reference to “long-term energy security” makes no sense unless it is assumed that the nation’s natural gas resource is not large enough to last until technology can deliver other energy answers.

Supplies Are Much More Abundant Than Policymakers Apparently Assume

Both of these perceptions of natural gas are simply incorrect. First, the Secretary’s assumption that the industry cannot or will not bring forth the deliverability needed to serve new, expanded markets is completely refuted by the remarkable growth of deliverability over the last several years—and by the fact that in the current economic downturn, the industry has virtually had to stop drilling in order for supply growth simply to flatten out. I am fond of pointing out that between 2005 and 2008, we added onshore domestic natural gas deliverability that exceeds the thermal content of all our imports from Saudi Arabia.

That is just the beginning. Producer estimates of shale deliverability within the next decade (assuming a healthy consuming market) indicate that it could increase U.S. gas supplies by some 30 percent. That is enough natural gas to displace either a large share of U.S. vehicle fuel, or more than half of the coal used to generate power—or, more likely, some more modest combination of both.

Second, what does happen if this increase in deliverability is encouraged by market forces and embraced by lawmakers (by refraining from doing things like raising taxes on natural gas producers)? Are we endangering the nation’s future energy security? The resource estimates, starting with last year’s Navigant Consulting study and running through every credible expert’s work since, certainly indicate that is not the case. Even if we use the sharp ramp-up in deliverability that producers indicate is feasible right now and over the next couple of decades, the known resource would still last over seventy years. And that recoverable resource base is a moving target, simply the share of the much-larger “gas in place” determined to be recoverable with current technology. Technology keeps improving, which means the recoverable resource can be expected to get bigger.

The magnitude of the deliverability that many in the industry believe can come forth is pretty stunning. Figure 1 shows four levels of potential shale production through 2030.

Starting from the Energy Information Administration’s 2008 estimates, we first see a significant increase in that curve, just in one year, with this year’s outlook. That change by itself was sufficient to minimize EIA’s estimate of LNG imports. But then we have the projection of what happens if the recent rate of increase continues, but flattens out from an exponential rate of change to a straight line. Then last, we have the recent estimates actually presented to investors by some of the top producers. The variation between EIA’s estimate and that top estimate is about 28 Bcf/day, around 50 percent of today’s total U.S. production.

The impact on total domestic supply is equally dramatic. Figure 2 shows total domestic production with the EIA 2009 estimate, layered with the “straight line” projection of recent history, then with the actual producer estimates.

Reflecting just the change in shale, without potential improvements in tight sands and other unconventional supplies, total domestic deliverability gets up close to 90 Bcf/day, an increase over current levels that could support major displacement of imported oil or low-efficiency coal plants without creating any “tension” in supply-demand. Obviously, a lot of things have to go right for this kind of unprecedented growth in production. But that is why the source of the projection is so important. It is not coming from a consultant, opining that this is what is possible. It is coming from the producers who have identified the resource with state-of-the-art geo-science, and who have successfully mastered the art of extracting it efficiently. They just need a market that will ask for the gas on a steady, growing basis, and a set of governmental policies that do not get in their way (and they don’t need stimulus money to do this). How long could this go on? Based on the resource potential identified in last year’s study, this kind of increased production/use could continue for over 70 years.

The bottom line is that when energy policy fails to seize on the U.S. natural gas resource as a primary tool to meet greenhouse gas and energy independence goals because of an implicit assumption that natural gas is in short supply, a mistake of monumental proportion is being made.

Rick Smead is a director in Navigant Consulting’s natural gas practice in Houston.