The National Petroleum Council notes much has changed in U.S. gas markets since its last study in 1999, especially in terms of demand. The earlier study assumed 144 gigawatts of new gas-fired power generation capacity would be built through 2015. Today, actual new capacity is expected to be 220 gigawatts by 2005. The NPC recently released a summary of its 2003 study findings. The unifying theme in the new report? Money. And lots of it. During the next 22 years, some $1.2 trillion needs to be spent on North American E&P, $47 billion on new and expanded pipeline and storage infrastructure, $73 billion to sustain the pipes that already exist, and nearly $70 billion for distribution facilities in the U.S. But that's not all. An Alaska gas pipeline would cost about $20 billion, and between $90- and $115 billion needs to be spent to make liquefied natural gas (LNG) a major contributor to U.S. supply. "To achieve this level of capital investment, industry must compete with other investment opportunities and deliver returns equal to or better than other S&P 500 companies. Some industry segments have not achieved this in the past and this presents a challenge for the future," the NPC reports. "However, the capital spending envisioned in this outlook provides opportunity for a wide range of companies including small, private companies and large multinationals. There is more than sufficient capital availability, liquidity and participation from credit-worthy companies to complete the projects with acceptable economic returns." Two scenarios The report discusses two cases that are possible between now and 2025. Under the "balanced future" scenario, the government passes supportive policies for supply development, and there is greater flexibility in fuel-switching and fuel choice on the demand side. Long-term prices under this scenario range from $3 to $5 per million Btu (MMBtu) in 2002 dollars. The "reactive path" assumes continued conflict between gas supply and government policies that support gas use, but discourage supply development. Long-term gas prices under this scenario range from $5 to more than $7. To achieve even the reactive path outcome, the NPC believes that several steps must occur, including enacting enabling legislation for an Alaska gas pipeline, overcoming local opposition to LNG terminals and streamlining the permitting process for drilling and development in the Rockies. However, the NPC assumes these goals would take more time to complete than they would under the balanced future scenario. The report does not fully develop a status quo scenario, in which no new sources of supply are developed. However, it does note that traditional North American producing areas are capable of providing just 75% of long-term U.S. gas needs. "Without the benefit of new drilling, indigenous supplies have reached a point at which U.S. production declines 25% to 30% each year....Eighty percent of gas production in 10 years will be from wells yet to be drilled." These resources will come from reservoirs that are smaller, deeper and lower in permeability, requiring advanced technology to be commercial. "Of the projected production in 2025, 14% is attributable to expected advances in technology." Also, the NPC notes that if only two new LNG regasification terminals are built by 2025-as opposed to the seven new ones recommended-average gas prices would increase 10% over projections. If there were no gas from Alaska, prices would increase another 8% from 2015 to 2025. Recommendations Government policy is a vital component of the report's findings. Specifically, the NPC recommends that the government: • Increase access to onshore reserves by reducing permitting costs and delays 50% during the next five years. Recommendations range from improving government land-use planning to formalizing the nomination of endangered species to funding staff that can handle the responsibilities. • Increase access to offshore reserves by lifting moratoria on selected areas of the federal OCS by 2005. "The NPC evaluated the effect of removing the OCS moratoria and of reducing the impact of conditions of approval on the Rocky Mountain areas. These changes could potentially add 3 billion cubic feet (Bcf) a day to production by 2020. "In addition, this increased production was found to reduce average price projections by $0.60 per MMBtu (nominal dollars), which translates into a reduction in the cost of natural gas to consumers of about $300 billion over a 20-year period." • Enact legislation in 2003 for an Alaska gas pipeline. The NPC believes that the Arctic regions of Alaska and Northwest Canada contain discovered gas resources with the potential to supply North America with 8% of projected demand in 2015. However, 2013 is the earliest an Alaska pipeline could come onstream. • Process LNG project permit applications within one year. LNG imports could grow to become 10% to 15% of the U.S. natural gas supply by 2020 (as opposed to 1% currently). This would require construction of seven new regasification terminals and the expansion of three existing terminals. Incentives What wasn't clear from the NPC report is the level of fiscal incentives the government should offer producers. Some in the study group supported such incentives; others preferred to rely strictly on market forces. "Two strongly held views of fiscal incentives emerged during the study team discussions. "Potential fiscal incentives such as tax credits for nonconventional resources development, low-Btu gas, stripper oil well and deep gas drilling incentives, and an Alaska pipeline fiscal package were discussed, but the NPC makes no recommendation in this regard." Supply was not the only area discussed by the NPC; demand encompassed a good deal of the report as well. Greater energy efficiency and conservation are vital near-term and long-term mechanisms for moderating price levels and reducing volatility. The NPC notes that since 1974, the industrial sector alone reduced energy use for fuel and power consumption per unit of output by nearly 40%. Residential consumers reduced gas use per customer 16% from 1980 to 2001, primarily as a result of more efficient space heating and improved housing characteristics. Between 1997 and 2001, there was a 15% increase in efficiency of gas consumed to produce power. However, there has not been similar progress when it comes to fuel switching. Power generators and industrial consumers are more dependent on gas-fired equipment and less able to respond to higher gas prices by utilizing alternative sources of energy. Currently, power and industrial users could switch or suppress demand of about 6 Bcf at gas prices up to $6.50 per MMBtu, and up to 10 Bcf a day at prices of $8 per MMBtu. -Jodi Wetuski