Last week’s announcement of the Early Release version of the US Energy Information’s Annual Energy Outlook for 2011 prompted a number of reactions along the lines of the NY Times’s Green Blog postingThe energy future ain’t what it used to be“.  Driving that reaction is the opening bullet of the Executive Summary, which highlights a significant increase from the 2010 report in estimates of domestic shale gas resources.  That leads in turn to a lower projected cost for gas and electricity in 2035 than in last year’s report (though still higher than today’s prices). 

Undoubtedly, that will be enough for some to cite the report as evidence that the development of US shale gas reserves are our energy silver bullet.  No more need to promote  renewable energy development,  take action on climate change, put a price on carbon, be concerned about energy independence and energy-related national security threats, increase energy efficiency and certainly no need to de-carbonize the economy.  That would be wrong, and a closer look at the report demonstrates why.

The projected increase in shale gas resources is in unproved resources, a much more speculative number that proven reserves. The 480 trillion cubic feet increase is dramatic, but tells us very little about how much will ultimately be delivered for use. Yet the model does assume a doubling in delivered supply over last year’s prediction.

Shale gas is a relatively new resource, and the techniques to extract it are also new and at the cutting edge.  The EIA only started tracking the production of shale gas in 2007.  The model’s projection of future supply and prices assumes that production of shale gas will grow four-fold from current levels by 2035. Most of that growth will be needed just to make up for an expected 30% decline in conventional production. Even if the technologies involved had no anticipated downside risk, that level of growth could be a stretch.

But there are potential concerns with the technologies involved with large-scale shale gas extraction – especially hydraulic fracturing (“fracking”). Fracking involves the injection of large quantities of water & chemicals into the ground to fracture rock and release the gas. Serious questions have been raised about potential damage to water supplies. Even if one believes that the concerns are overstated and any problems are surmountable, a significant element of risk has been added. That the claims of safety are being made by the same extraction industry that gave the world the Gulf Oil spill is not going to inspire a high level of trust.

Even if the extraction problems never materialize or are solved, all that additional gas barely moves the needle on reducing greenhouse gas emissions from electricity generation. Even with low gas prices and low cost of construction for gas-fired power plants, reliance on the existing fleet of coal-fired power plans means that the dirtiest fuel will go from generating 45% of 4 trillion kilowatthours of electricity each year in 2009 to generating 43% of 5 trillion kilowatthours of electricity in 2035. A more aggressive retirement of coal plants would improve that picture, but that would require significant market incentives and/or regulation. And, given the projected decline in conventional gas production, it would require an even greater increase in shale gas recovery.

Finally, there’s the global picture. Natural gas is a commodity in a global market. The technologies and infrastructure for using natural gas – power plants, heating and cooling systems for buildings – are global products. The supply and demand picture for natural gas looks very different for the rest of the world than for the US.

  • European import dependence – the US imports only about 10% of its natural gas today, and the projected increase in production from shale gas could eliminate virtually all those imports. Europe imports 50% of its needs today, and that number will increase as European gas production declines over the next twenty years.
  • Less stable sources of supply – Russia, Iran, Central Asia, North Africa and the Middle East produce 50% of the world’s supply of natural gas. Americans have not had to face the prospect of a mid-winter cutoff of the natural gas that heats their homes and offices, but Europeans have.
  • Significant growth in demand from emerging Asia – Over the forecast period, the demand for gas from China, India and other developing Asian countries is expected to increase two and a half times. From using about 1/2 the natural gas that the US does today, by 2035 those nations will slightly exceed total US demand.

So while the possibility of a significant increase in the domestic supply of a cleaner fossil fuel is welcome, it is not a panacea for our energy and climate challenges. Increasing energy efficiency, advancing renewables, reducing our reliance on oil and phasing out coal power are all important elements in our energy portfolio planning.

Large potential increase in domestic natural gas supply welcome, but not a panacea