Testimony to the Senate Committee on Energy and Natural Resources by Energy Fellow Kenneth B. Medlock III
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This testimony was delivered before the U.S. Senate Committee on Energy and Natural Resources on November 8, 2011.
Introduction
During the past decade, innovative new techniques involving the use of horizontal drilling with hydraulic fracturing have resulted in production of natural gas from shale. Although geologists have long known about the existence of shale formations, accessing those resources was long held to be an issue of technology and cost, and recent innovations have yielded substantial cost reductions and made shale gas production a commercial reality. In fact, shale gas production in the United States has increased from virtually nothing in 2000 to over 10 billion cubic feet per day (bcfd) in 2010, and a recent Baker Institute analysis indicated it could reach over 50 percent of domestic natural gas production by the 2010s.
Without doubt, the natural gas supply picture in North America has changed substantially, and it has had a ripple effect around the globe, not only through displacement of supplies in global trade, but also by fostering a growing interest in shale resource potential in other parts of the world. Thus, North American shale gas developments are having effects far beyond the North American market, and these impacts are likely to expand over time. Prior to the innovations leading to the recent increases in shale gas production, huge declines were expected in domestic production in the United States and Canada which comprise an integrated North American market. This foretold an increasing reliance on foreign supplies at a time when natural gas was becoming more important as a source of energy.
Throughout the 1990s, natural gas producers in the Middle East and Africa, anticipating rising demand for liquefied natural gas (LNG) from the United States in particular, began investing heavily in expanding LNG export capability, concomitant with investments in regasification being made in the United States. At one point in the early 2000s there were over 47 regasification terminals with certification for construction, which was a clear signal regarding industry-wide expectations for the future of the US supply. But the rapid growth in shale gas production has since turned such expectations upside down and rendered many of those investments obsolete. Import terminals for LNG are now scarcely utilized, and the prospects that the United States will become highly dependent on LNG imports in the coming years have receded, with proposals now emerging for exports of LNG from North America.
Rising shale gas production has contributed to lower domestic natural gas prices. This, in turn, has led various interests to promote greater use of natural gas un power generation through substitution opportunities with coal, and renewal of industrial demands that had previously been fading. In addition, there has been interest in creating new demands, such as the use of natural gas in transportation particularly as the price of crude oil remains substantially higher than the price of natural gas on an energy equivalent basis. Finally, as noted above, there has been growing interest in developing LNG export capability to capture the arbitrage opportunity that currently exists with domestic natural gas prices substantially below prices in Europe and Asia.
On the point of LNG exports, there are several key factors that (a) determine whether or not they occur and (b) the impact, if exports do occur, on domestic prices. Critical factors addressed herein that determine the quantity of exports and the effect on domestic price are (i) the elasticity of domestic supply, (ii) the elasticity of foreign supply, (iii) the exchange rate, and (iv) the cost of exports. For the purpose of this discussion, we will assume the cost of exports is not prohibitive unless otherwise stated.
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