US gas industry can be a victim or a leader

Tom Price, Jr., Senior Vice President-Corporate Development, Chesapeake Energy Corporation 

It is no secret that the onshore US gas industry is delivering impressive results in the discovery of enormous new unconventional shale reserves. In fact, the price for domestic gas is now almost half what it was only a few months ago, prompting some industry insiders to lament that we’ve become “victims of our own success.”

The truth is that we’ll only be victims if we choose to approach the supply additions as we have in the past. We really don’t need to do so. Never has the supply of domestic natural gas been so reliable. Advances in drilling and completion technologies, used in multiple geologic environments across the country, are discovering multiple-Tcf reserves that have changed the game. In fact, according to a recent study by Navigant Consulting conducted for the American Clean Skies Foundation, the US has more than 118 years of gas reserves at current consumption levels.

Frankly, we don’t have too much natural gas. What we have is too little demand. What we need more than ever is for industry leaders to work together to actively promote the verifiable benefits to consumers of this abundant, affordable, reliable, clean-burning fuel.

We’ll become victims if we ignore these facts:

• Because of today’s drilling technology, improved completion techniques and structurally higher natural gas prices, millions of acres of US leasehold once believed fallow or depleted can now produce this clean-burning fuel. In fact, the industry increased gas production last year by 8%, far outstripping the 3% demand growth.
• These vast new gas shale plays shatter the myth of scarcity, as demonstrated by the recent Navigant study - and that assumes, wrongly I believe, that our industry will not develop even greater efficiency and effectiveness.
• When oil prices peaked this year, Americans were spending $700 billion annually to buy foreign oil to be refined into fuel for our cars and trucks. The current dip in the crude price is widely believed to be a short-term aberration. In fact, OPEC wasted no time in determining that, even in spite of today’s economic malaise, it should reduce supply by 1.5 million bbl per day to help “balance” supply and demand.
• There appears to be support in the new Obama administration and the new US Congress to take greater steps to control air pollution, including regulation of CO₂ emissions for the first time.

Given these facts, would our industry be a “victim,” or a leader, if:

• Americans had access to an abundant, secure domestic supply of a vehicle fuel that was half the cost of gasoline and diesel, and 90% less polluting?
• American mineral owners were paid millions through lease bonuses and royalties on production?
• American service and supply companies were paid billions to drill and complete more natural gas wells?
• Americans could drive any size car or truck and, at the same time, knew they were benefiting both the environment and the economy simultaneously?

If we are to be leaders and not “victims,” we must realize these goals by advocating aggressively for meaningful public policy to convert a larger share of transportation fuel used in the US from gasoline and diesel to Compressed Natural Gas (CNG). Monumental challenges face America - energy security, economic vitality and environmental stewardship - and while there is no “magic bullet” for any one of these challenges, CNG can be a large part of the solution to each.

However, as an industry, we must use our collective productive capability to demonstrate to consumers and to US automakers how critical CNG is to the future security and economy of the United States, as well as how reliable the production stream can be. We have the ability to convert thousands of fleet cars and trucks used every day to run on natural gas, saving millions of dollars in fuel costs while also cleaning the air. The demand our own fleets will create will easily enable nearby retail stations to provide the fuel risk free. Without a clear roadmap, domestic automakers will not build CNG vehicles in the US, even though they have found it profitable to build dozens of CNG models for drivers in international markets.

There are a few incentives today at the federal and state level to encourage the use of alternative vehicle fuel, such as CNG. More must be done to provide responsible incentives before a much larger number of Americans can reap the benefits of this abundant American fuel.

What does the rest of the world know that America does not? Of the 8.7 million CNG vehicles in the world, fewer than 150,000 of them are in the US. Argentina, Pakistan, Brazil, Italy, India, Iran and Columbia all have more CNG vehicles and are increasing their usage at annual growth rates ranging from 12% to 82%. In fact, a major OPEC producer, Venezuela, has recently mandated the use of CNG vehicles, in part so the country will have more oil to sell to the US. The same is true in Iran.

Critics worry that the infrastructure challenges are too daunting, or that converting a large segment of our transportation fuel to CNG would drive up prices and hurt utilities, industrial consumers and farmers who rely on liquid fertilizer, of which natural gas is a primary feedstock.

Leaders, not “victims,” know that the US gas industry has already invested 90% or more of the infrastructure that is required to take a large chunk out of our demand for foreign oil; some 70% of America is served by a massive, 220,000-mile interstate pipeline grid that feeds an even more ubiquitous spider web of local utility distribution systems.

While the US telecommunications industry had to solve the “last mile” issue to bring digital technology to the home, the American auto and energy industries need only to solve the challenge of “the last 10 feet,” the distance from the pipeline and compressor to the nozzle.

As noted earlier, with adequate prices the American gas industry has demonstrated it can grow production by more than 8% per year. If the US increased CNG vehicles 100-fold, to 10-15 million vehicles (less than 5% of America’s cars and trucks), gas demand would increase by only 4%.

Strikingly, this would displace an estimated 8 billion gallons of gasoline and diesel, along with about 250 million barrels of imported oil per year it takes to make it. The savings to US consumers, at $100/bbl, would equal $25 billion.

This brings us full circle. The onshore US gas industry has been very successful in cracking the technical and engineering code to provide Americans with abundant, clean and affordable energy for generations to come. Even “major” oil companies have seen the long-term opportunity in gas shale, underscored by several recent significant investments alongside independents to develop massive US shale plays.

Instead of lamenting that we have become “victims of our own success” at finding and producing domestic gas, let’s leverage this tremendous new strategic asset for the benefit of our country.

We can do this by creating an ignition point for greater use of CNG as a vehicle fuel, and do it in a balanced way that keeps supply and demand in equilibrium, improves our country’s economy, its security and our environment.  

THE AUTHOR
	Thomas S. Price, Jr., is Senior Vice President-Corporate Development of Chesapeake Energy, having been with the company since 1992 and a consultant during the prior three years. He was previously employed by Kerr-McGee Corporation and by Flag-Redfern Oil Company, both in Oklahoma City. Mr. Price earned a BA degree with honors from the University of Central Oklahoma in 1983 and master’s degrees from the University of Oklahoma in 1989 and from Thunderbird, the American Graduate School of International Management, in 1992. He was recently named to the board of the Natural Gas Vehicles Association.